Corporate Example – Enron

When Enron failed it was investigated thoroughly by the media. This investigation provides visibility into corporate behavior that is rarely available. For example:

  • Corporations spend extravagantly on their executives. “Enron filed documents in bankruptcy court that showed total cash payments of $309.8 million to a group of 144 top Enron executives during 2001. In addition, those same executives cashed in stock options worth $311.7 million.” [ref] That’s roughly $4 million per person in one year.
  • Corporations spend extravagantly on real estate and furnishings. For example, Enron spent $300 million on its Enron Center South building, and then began filling it with art. There were sculptures costing over half a million dollars each, a glass globe in the lobby costing $2 million, and paintings on every floor whose accumulated value totaled millions of dollars.
  • Corporations spend extravagantly on aircraft. Enron eventually had seven corporate jets with a total value of well over $100 million. The most popular jets in the fleet cost more than $5,000 per hour to operate, and executives used them constantly for personal travel.
  • Corporations spend extravagantly on executive girlfriends. For example, when Jeff Skilling of Enron began sleeping with a woman in accounting, she was promoted to senior vice president. In 2001 her total compensation rose to nearly a million dollars.
  • Corporations spend extravagantly on relatives. For example, Ken Lay’s sister, through her travel agency, received millions of dollars. Ken Lay’s son got the same sort of treatment. Ken Lay’s daughter and wife were able to use the company’s jets for personal trips at a moment’s notice, costing the company millions of dollars. One flight to pick up Ken Lay’s daughter in Europe cost the company $125,000.

[Source: Pipe Dreams]

Where does all of the money that corporations waste come from? It comes from you and me. This is the thing we fail to realize — when a CEO receives millions of dollars in salary and a $40 million private jet to use, or the executive team is flown to Cancun for a “corporate retreat” at a cost of millions of dollars…. that money does not materialize out of thin air. That money comes from consumers or from employees — you and me. In the case of Enron, we were paying far more for electricity and natural gas than we should have. Enron played a huge role in fabricating the California power crisis in 2001 and made billions of dollars from it. If it were not for this sort of abuse, prices would be much lower and we would all have more money to spend on the things we need.

It would be nice to think that Enron was a special case, but it is not. Hundreds of companies, including Worldcom, Tyco, Global Crossing, Qwest and Xerox, were caught in fraud, and when investigators looked inside they found amazing levels of abuse. When Jack Welch’s divorce forced his GE retirement package out into the open, it exceeded $10 million a year. If you were to probe into any large corporation you would find waste and extravagance.

With money a corporation accumulates power. While Enron was spending all that money to enrich its executives, it was also spending huge sums of money to buy influence inside the federal government. Two simple examples of the process include these:

  • Enron spent extravagantly on its board of directors. Outside board members received approximately $87,000 per year for a few days work, and they also received tens of millions of dollars in consulting fees and stock options. One of the board members was Wendy Gramm, wife of Senator Phil Gramm. With that money Enron bought access to a powerful Senate committee chairman.
  • Enron spent extravagantly on campaign contributions. Enron and its executives gave millions of dollars to political candidates. With that money Enron purchased access to the White House, and with that access Enron changed laws that hurt the entire nation.

Enron is not unusual.

On December 18, 2002 I was scheduled to fly on AirTran flight 112 from Atlanta to Raleigh-Durham International Airport. However, the flight was unexpectedly delayed and I had a couple of hours to kill before the plane would take off. I picked up a copy of USA Today to see what was happening in the world. There was nothing special about December 18 — it happened to be the day I was sitting idle in the Atlanta airport.

I turned to the business section and on page 1B here is what I found:

  • The lead headline was United Will Ask to Throw Out Labor Contracts. United Airlines, which had hired and fired four highly paid CEOs in four years, had managed to get to the point of declaring Chapter 11 bankruptcy the previous week. The current CEO (with a compensation package valued at up to $10 million), under pressure from discount airlines like Southwest, felt that one way to achieve his goal of decreasing worker wages was to throw out employee contracts. Having declared bankruptcy, it is possible (with bankruptcy court permission) to throw out existing contracts and “impose new pay and working conditions on employees.” The previous CEOs — the ones who led the company to the point of bankruptcy while making multi-million dollar salaries — were each dismissed not in disgrace, but with fat severance packages on the order of $5 million each.
  • The cover story was Former CEO of National Century: Man of Mystery. “Before his downfall last month, Lance Poulsen, former CEO of National Century Financial Enterprises, was flying high.” He had managed to find a way to extract $40 million in profit from struggling doctors’ offices by giving them loans. With the profit he bought a beautiful ocean-side home, a 60-foot yacht worth $2 million, a Porsche, and private jets. He and his wife hosted lavish fundraisers for Florida Governor Jeb Bush, lent Bush their jets for use in his campaign, and gave tens of thousands of dollars to the Republican party. But it turned out that $40 million was not enough and Lance was embezzling money on the side, causing the company’s collapse.
  • The next story was Wall Street Banks Near Reform Deal with Officials. Twelve Wall Street investment banks were getting ready to pay something on the order of $1 billion in fines for giving investors false information and fueling the stock market bubble in the 1990s. The fines are slaps on the wrist, and do nothing to reimburse investors for the billions of dollars they lost due to the fraud.
  • Next was Tyco Board Member Walsh Admits Hiding $20 Million Fee. “Leaving shareholders and other directors in the dark, Walsh said, former Tyco CEO Dennis Kozlowski and former CFO Mark Swartz — charged separately with illegally reaping $600 million from the firm — approved the payments.” One purpose of board members is to protect the investors from this sort of thing.
  • Next was McDonald’s to post first quarterly loss. Intrepid CEO Jack Greenberg had, on December 5, “unexpectedly announced that he would retire at the end of the year.” This is a CEO making $15 million while his employees are being crushed with minimum wage jobs and unbelievable schedules. It was the first loss for McDonald’s in 47 years. On his way out the door, Greenberg collected a severance package worth approximately $10 million.
  • Next was Debt-ridden Conseco files for bankruptcy. Debts totaling $6.5 billion overwhelmed the company, and a bankruptcy is a good way to dispose of many of those debts without paying for them. “Once a Wall Street darling, Censeco’s shares used to trade as high as $58. Now a share is worth less than a nickel.” The people who led the company to this point of failure were the highly compensated CEO, board and senior management team.
  • Finally there was this: IRA assets fall to $2.4T in bear market. All of the business collapses caused in 2001 by corrupt CEOs, as well as the subsequent fall of the market as a whole in reaction to the fraud and abuse, had a huge effect on the Individual Retirement Accounts of normal citizens in 2001. IRAs saw the largest drop in over 20 years.

This is the type of news that USA Today could fit on a single page of the paper on a single day in late 2002.

Page 3B had the headline 6 Worldcom board members to resign. Worldcom, led by its board of directors and billionaire CEO, is the company that in 2001 announced $9 billion in accounting irregularities — lies — that had artificially inflated its revenue numbers and fraudulently sent the stock price to amazing heights. Once the lies were exposed, the stock price fell toward zero and caused the company to declare bankruptcy. Tens of thousands of employees lost their jobs in one of the largest scandals of 2001. All of the fraud occurred, one would presume, through the CEO, the executive team and the board. The departing board members received fat severance packages. The CEO and executives cashed out with billions of dollars from the stock market before share prices fell.

In all of the cases listed in USA Today on December 18, CEOs with lucrative pay packages, as well as their highly compensated senior management teams and boards, led their companies toward failure in one way or another. In each of the cases listed above, we all paid the price. First, out of our own pockets, we funded the salaries and perks of these CEOs by paying inflated prices for all the items we buy everyday. Then we paid in the lost value of our IRAs and 401(k) plans when the stock market collapsed due to executive fraud and corruption. Many of us paid a huge price by losing our jobs in companies that failed or downsized. And then, because of the all the unemployed people in the job market, we paid with downward pressure on our wages. In many cases, however, the failed CEOs and managers walked away with fat severance packages and billions of dollars from the stock market.

That is the concentration of wealth at work. This is how our society is wired today.[See also The Concentration of Wealth Gallery]

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