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Role of Enron Board of directors in Enron's collapse and bankruptcy: Failed to safeguard Enron shareholders and contributed to the collapes of the 7th largest public company in the U.S. by allowing Enron to engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off the books activities, and excessive executive compensation. Witnessed numberous indications of questionable practices and chose to ignore them.
Role of Enron Board of directors in Enron's collapse and bankruptcy: despite clear conflicts of interest, approvied an unprecendented arrangement allowing Enron's CFO to establish and operate the LJM private equity funds which transacted business with Enron and profited at Enron's expense.
Inappropriate conflicts of interest
Role of Enron Board of directors in Enron's collapse and bankruptcy: allowed Enron to conduct billions of dollars in off-the-books activity to make its financial condition appear better than it was and failed to ensure adequate public disclosure of material off the books liabilities that contributed to Enron's collapse.
Extensive Undisclosed Off the Books Activity
Role of Enron Board of directors in Enron's collapse and bankruptcy: approved excessive compensation for company executives, failed to monitor the cumulative cash drain caused by Enron's 2000 annual bonus and performance unit plans, and failed to monitor or halt abuse by Board Chairman and CEO Kenneth Lay of a company financied, multi million dollar, personal credit line
Role of Enron Board of directors in Enron's collapse and bankruptcy: The independence of the Board of Directors was compromised by financial ties between the company and certain Board members. Also failed to ensure the independence of the company's auditor
Lack of Independence
The findings with respect to the role of the Enron Board of Directors in Enron's collapse and Bankruptcy (6)
- 1. Fiduciary Failure
- 2. High Risk Accounting
- 3. Inappropriate Conflicts of Interest
- 4. Extensive Undisclosed Off-the-Books Activity
- 5. Excessive Compensation
- 6. Lack of Independence
Because of the findings of the Senate Subcomittee against the Enron Board of Directors they suggested
- 1. Strengthening the oversight of directors
- 2. stregthening the independence of directors, the audit committee, and auditors of publicly traded companies
reviewing the company's overall business strategy, selecting and compensating the company's senior executives, evaluating the company's outside auditor, overseeing the company's financial statements, and monitoring overall company performance.
Typical duties of the Board of Directors
The board of directors "paramount duty is to
safeguard the interests of the company's shareholders
Three duties stem from the fiduciary status of corporate directors:
a director must act in good faith and must not allow his personal interest to prevail over the interests of the corporation
the duty of loyalty
requires a director to be diligent and prudent in managing the corporations affairs
duty of care
requires a director to avoid committing...acts beyond the scope of the powers of a corporation as defined by its charter or the laws of the state of incorporation
duty of obedience
provides directors with borad discretion, absent evidence of fraud, gross negligence or other misconduct, to make good faith business decisions.
business judgment rule
The enron board was organized into five committees:
- 1. Executive
- 2. Finance
- 3. Audit and Compliance
- 4. Compensation
- 5. Nominating