On Feb. 19, the press's coverage of Enron suddenly turned serious. After weeks of fruitlessly trying to make Enron into a Watergate-style political scandal, it finally realized that the Enron mess raises important questions about corporate governance, accounting standards, transparency and other critical issues that affect all businesses. On Tuesday, major newspapers and representatives of the pundit class signaled a change in approach to Enron with several important articles the same day.
The first piece that caught my attention was by Richard Cohen, normally the Washington Post's most reflexively knee-jerk liberal columnist. So, it was surprising to see Mr. Cohen defend former Enron chairman Ken Lay from the "verbal mugging" he just received before a Senate committee. Since everyone on the committee knew in advance that Mr. Lay was going to assert his Fifth Amendment rights and say nothing, calling him as a witness served no substantive purpose. All it did was allow senators from both parties to posture shamelessly in front of the TV cameras, self-righteously denouncing Mr. Lay in sometimes vicious terms, while he was forced to endure silently. It was a disgraceful performance.
The second piece I found of interest was by E.J. Dionne, also in the Post. Resisting the temptation to just bash capitalism, Mr. Dionne correctly recognizes that the true conflict in business today is not between owners and workers, but between insiders and outsiders. Managers, who were on the inside, appear to have manipulated the system for their own enrichment, at the expense of outsiders, who included both workers and shareholders.
Following up on the Dionne article was a front-page news story in the New York Times by Leslie Wayne. It indicated that congressional investigators are moving away from a narrowly focused probe of Enron political donations to a broader inquiry of accounting and financial practices on Wall Street. While this could turn into a fishing expedition, I believe there are serious questions raised by Enron, and especially by the failure of its outsider auditor Arthur Andersen. Wall Street is terribly worried that there are other Enrons out there. It is important to find out if that is true and do something about it before there is another financial implosion of a major company.
Finally, there was an excellent series of articles in London's Financial Times newspaper. As has been the case throughout American history, having a foreign perspective can often provide insight missed by even the most perceptive domestic observers. (It is worth noting that British papers frequently publish essential news about the United States absent from their American counterparts.)
Cutting through the American press's obsession with campaign contributions as the principal Enron story, the FT correctly views Enron as a failure of the existing system of checks and balances. Part of this breakdown is related to globalization. With all major companies on earth becoming increasingly global and multinational, it is too easy for them to shop around for the most favorable tax and regulatory climate for their operations. One of the factors that led to Enron's downfall was its offshore financial dealings in small Caribbean nations, out of sight of shareholders, auditors, financial analysts and government regulators.
Thus, the FT notes that whatever reforms arise from the Enron wreckage need to be worldwide in scope. At the same time, governments need to resist the temptation to adopt tighter, more detailed regulations on companies. This can too easily lead to an emphasis on form over substance. Excessively detailed rules encourage complacency in financial markets, as managers observe the letter of the rules while circumventing their purpose.
As the FT put it, "As long as you have complied with the manual -- or persuaded some luckless auditor that you have done so -- your real actions and purpose can be as reckless or flagrant as you like. Since no set of regulations, no matter how detailed, can outmaneuver a really determined manipulator, the rules provide, in effect, a road map for abuse."
This insight stands in stark contrast to the shallow focus on campaign contributions that has been the main attention of Enron press coverage thus far. I think it is no coincidence that the change in focus follows House passage of campaign finance reform. In effect, the liberal media were hyping a non-story -- Enron's political donations -- for the purpose of aiding passage of campaign finance legislation, which it favors in order to enhance its own power. Once the need to do that passed, the press could finally report the Enron story as something other than a political scandal.