Titans of the Enron Economy
The Ten Habits of Highly Defective Corporations
by Scott Klinger and Holly Sklar
The Nation magazine, August 5 /12, 2002
The pivotal lessons from the Enron debacle do not stem from
any criminal wrongdoing Most of the maneuvers leading to Enron
s meltdown are not only legal, they are widely practiced. Many
of the problems dramatically revealed by the Enron scandal are
woven lightly into the fabric of American business. Outside the
spotlight on Enron s rise and fall, government policies and accounting
practices continue to reward and shelter many firms with harmful
habits just like those of Enron. We've ranked the 100 worst companies
for each habit and awarded "Ennys " for outstanding
Enron-like performance. We've also given a Lifetime Achievement
Award to the corporation with the highest combined score for Enron-like
performance in an ten categories (a hint: Enron placed second).
HABIT 1: Tie employee retirement funds heavily to company
stock and let misled employees take the fall when the stock tanks-while
executives diversify their holdings and cash out before bad news
goes public. Winner: Coca-Cola.
Once upon a time the upward slope of Coca-Cola's stock price
was as smooth as a cold Coke on a warm afternoon. Over the past
couple of years, however, the venerable soft drink maker's stock
fizzled like New Coke. Employees saw their 401(k) retirement assets
evaporate, with the stock down more than 31 percent in the three
years ending November 2001. Eighty-one percent of Coke's 401(k)
was invested in company stock. Not all employees fared poorly.
Former CEO M. Douglas Ivester left Coke under a cloud of controversy
but received a severance package valued at more than $17 million;
it included maintenance of his home security system and payment
of his country club dues.
HABIT 2: Excessively compensate executives. Winner: Citigroup.
CEO Sanford Weill took home more than $482 million between
1998 and 2000. In 2001 he made another $42 million. Weill's stock
compensation plan was amazingly equipped with a "reload"
feature: Each time Weill cashed in his options, he automatically
received new options to replace them. Imagine if Citigroup customers
had a reload ATM machine that automatically added replacement
money to the accounts after withdrawals! While throwing money
at its executives, Citigroup rips off low income Americans with
predatory lending practices. The Federal Trade Commission has
brought suit against Citigroup, alleging abusive lending practices;
if all charges are proven, Citigroup's liabilities could reach
HABIT 3: Lay off employees to reduce costs and distract from
management mistakes. Increase executive pay for implementing this
cost-cutting strategy. Winner: Lucent Technologies.
Last year Lucent axed at least 42,000 jobs. While these layoffs
occurred during the tech-industry tumble, Wall Street critics
lay much of the responsibility for Lucent's misfortune at management's
door. Lucent was the only company to end up on both the Fortune
and Chief Executive 2001 "worst boards of directors"
list Though the board took action and fired CEO Richard McGinn
in October 2000, it gave him a golden parachute of more than $12
million as a parting gift.
HABIT 4: Stack the board with insiders and friends who will
support lavish compensation and not ask difficult questions about
the business. Winner: EMC Corporation.
Only two years ago this leading producer of computer storage
media could have held Thanksgiving dinner in its boardroom: The
chairman, Richard Egan, his wife and son all sat on EMC's board.
As a member of the board Junior got to help set Dad's allowance
(and help determine his own inheritance). How many kids wouldn't
love that? Of course, Dad might not have needed much help, since
he also sat on EMC's compensation committee, which determined
his and other executives' pay. Since winning this award, EMC has
added an independent director to its board.
HABIT 5: Pay board members excessively for their part-time
service; pay them heavily in stock so they have a disincentive
to blow the whistle on bad business practices that keep the stock
price up. Winner: AOL Time Warner.
AOL Time Warner is one of a growing number of companies to
compensate directors solely in stock options. In 2000, according
to an Investor Responsibility Research Center study, the potential
value of these stock options (using SEC-specified formulas for
computing the present value) was $843,200 per director-not bad
for a part-time job. Each member of AOL Time Warner's board is
annually granted 40,000 stock options. Directors make money for
each dollar increase in the stock price. If AOL Time Warner's
stock price rose $10 a share, the options would gain $400,000
HABIT 6: Give your independent auditor generous non-audit
consultant work, creating conflicts of interest for those charged
with assuring that the company follows the rules and protects
shareholder interests. Winner: Raytheon.
When it comes to shooting down auditor independence, military
giant Raytheon is a proven winner. According to an IRRC study,
in 2000 Raytheon had the highest percentage of non-audit fees
for companies with revenue of more than $20 billion. Raytheon
paid just $3 million to Pricewaterhouse-Coopers for audit services
and an additional $48 million for consulting services. That Raytheon's
independent auditor receives such large non-audit fees creates
a substantial conflict of interest and continues a pattern of
board and management disregard for shareholder interests.
HABIT 7: Give campaign contributions to gain access to decision-makers;
diversify your political investments in a portfolio of candidates
from both major parties. Winner: Financial Services Industry.
Accepting for the group, Citigroup and MBNA.
After heavy lobbying and campaign contributions from the banking
and credit card industry, Congress passed the Bankruptcy Reform
Act in 2001 by wide margins. Credit-card giants Citigroup and
MBNA were among the largest campaign contributors during the 2000-02
period. On the very day the House voted on the bankruptcy bill,
MBNA contributed $200,000 to the National Republican Senatorial
Committee, according to a Time expose. If it becomes law, the
bill will make filing for personal bankruptcy considerably more
difficult; it will also put credit-card companies in a more favorable
position, allowing them equal standing to claims for child support,
HABIT 8: Lobby lawmakers and regulators to eliminate pesky
oversight, safety, environmental and other rules, and pass favorable
regulations, subsidies, tax breaks and other items on the company
wish list. Winner: Boeing.
Using its famed stealth technology in Congress, Boeing circumvented
military procurement practices when the Secretary of the Air Force
directly submitted a controversial contract under which the Air
Force would lease 100 large tanker aircraft from Boeing. Senator
John McCain challenged both the process and the terms of the deal,
which he said would cause the government to pay much more for
the lease than if it purchased the planes outright. He added,
"It's pork, and we shouldn't be paying for it." Boeing
has paid for plenty of pork and prime rib, as the nation's fifth-largest
lobbyist over the three years ending in 1999.
HABIT 9: Get the government to finance and insure dubious
overseas investments, especially those opposed by the local citizenry.
While Vice President Dick Cheney was CEO of Halliburton, a
leading global energy services and engineering/construction company,
Halliburton received $1.5 billion in government financing and
loan guarantees, a fifteen-fold increase from the pre-Cheney days.
The company also garnered $2.3 billion in direct government contracts,
more than double the amount received in the five years preceding
Cheney's half-decade tenure. Over the 1992-2000 period, in which
Enron received $7.2 billion in government financing and loan guarantees,
Halliburton was close behind at $6 billion. Not surprisingly,
Halliburton doubled both its campaign finance and lobbying expenditures,
to $1.2 million and $600,000 respectively, during Cheney's tenure.
Habit 10: Avoid taxes. Use tax deductions, credits and clever
accounting to pay little or no tax, and hopefully even get tax
rebates. Winner: WorldCom.
When you send or receive e-mail from an AOL account, fly on
a commercial airliner or make long-distance calls on MCI, you
are consuming services provided by WorldCom, the nation's largest
operator of fiber-optics networks. WorldCom-now in serious financial
trouble-has grown over the years through a series of dramatic
acquisitions. These acquisitions, and the write-offs associated
with them, are the principal force behind WorldCom's tax avoidance
Enny. Though the company reported net income of $3.5 billion between
1996 and 1998, it received a tax rebate of $112.6 million. Another
piece of the $1.3 billion of tax breaks WorldCom enjoyed over
the three-year period came from stock options. Stock option deductions
shaved $265 million off WorldCom's tax bill between 1996 and 1998.
LIFETIME ACHIEVEMENT: GENERAL ELECTRIC
No company demonstrated greater leadership in "Bringing
10 Bad Habits to Life" than General Electric.
* Between 1995 and 2000 (the last full year of Jack Welch's
employment as CEO at GE), Welch ranked in the lowest 10 percent
of CEOs for delivering shareholder returns commensurate with his
pay level, according to BusinessWeek.
* General Electric is the largest US company to lack an independent
* Seventy-seven percent of GE's 401(k) was invested in General
Electric stock as of November 2001.
* In 2000 GE paid its independent auditor three times as much
for non-audit work as it did for audit-oriented fees.
* In 2000 GE's non-employee directors received average pay
of $430,300. Meanwhile, many GE veterans no longer get a paycheck:
Between 1981 and 2001, GE's US work force shrank more than 45
percent, from 285,000 to 158,000.
* For the two years ending in 1999 GE spent $23.4 million
on lobbying activities, ranking tenth among large companies. The
lobbying paid off: GE received $806 million in Export-Import Bank
loans and loan guarantees between 1998 and 2001. And between 1996
and 1998, GE got $6.9 billion in tax breaks.
Scott Klinger is co-director of Responsible Wealth, a project
of United for a Fair Economy. Holly Sklar's latest book is Raise
the Floor Wages and Policies That Work for All of Us (South End).
Titans of the Enron Economy is available free atwww.faireconomy.organd
can be ordered by calling (877) 564-6833. For more reform ideas,
go to www.thenation.com.