Ball in the woods

Another great Corporate Governance class last Thursday night. We had two speakers, first was the dean of the UT Law School William Powers who headed up the Enron special investigation, second was Bernard Rapoport one of the most distinguished Texas businessman in history.

Mr. Powers joined us because we were assigned some readings on the Enron case. He walked us through the case at a high level but my biggest takeaway was his summary of the case. It may seem from reading all of the press that this was a very complicated business that involved sophisticated accounting transactions and decisions. In reality, while some of the transactions were complex, the decisions of whether or not to use those transactions were not complex at all. They were clearly black & white, requiring nothing more than good character and the ethics to do the right thing.

The analogy Mr. Powers used was that of golf. If you hit a drive and it lands next to debris, you may need to ask your playing partners or an official to give you a ruling on whether or not the debris can be moved. On the other hand, if you hit a drive into the woods, it is clear what you should do (e.g. drop another ball and take the penalty). The actions taken at Enron were the equivalent of hitting the ball into the woods and kicking it back into the fairway. Once you understand the details of how Enron structured its transactions, the ethical judements involved were easy. It is also clear that the transactions were purposely structured for complexity to hide the fact that they were wrong. Once everything at Enron came to light it was revealed that for 5 quarters 73% of the companies income was manufactured (i.e. no basis in economic reality).

So what to do? Mr. Powers suggests, and I agree, that the challenge is for companies to build cultures that reward virtue and character. At Enron you were a chump for following the rules and doing the right thing. Here at Sun I am proud to be a member of a community of high integrity and character with clear values. Here is my favorite quote from a Scott McNealy WSUN radio address:

Your Integrity Is Our Biggest Asset. You know, our No. 1 asset is our reputation. The SEC shouldn't take us out. If anything ever kills Sun, I want the killer to be the Darwinistic nature of the computer industry, not bad ethics. It's just a shame when a couple of folks can take a company out that way. We're not going to let that happen here.

I think that speak volumes as to the character and culture of Sun.

This is already a pretty long post so I'll get to some of what B. Rapoport shared another time.



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