July 9, 2004
Prentice Discusses Ethics & Law in the Enron Era on NPR
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One day after former head of Enron Kenneth Lay surrendered to FBI agents in Houston, Robert A. Prentice, professor of business law at the McCombs School, joined Gordon Simon, host of the National Public Radio-syndicated show "The Connection," and Dr. Barbara Lay Toffler, former head of ethics and responsible business practices at Arthur Andersen, for a discussion of American business ethics in the post-Enron era.
An audio stream of the interview is available from The Connection's Web site:
- The Enron Era (The Connection, July 9, 2004)
Prentice enters the interview 15 minutes and 49 seconds in and continues to the end. A transcript of his major comments follows, with time code in parentheses.
Excerpts from Prentice's comments
(15:49)
On Ken Lay’s observation that American business
does not need new laws, just to make sure existing laws are enforced:
Prentice: “To some extent he is right, although I hate to take advice from Kenny
boy when he is telling us how incompetent he is, that he is running this
company, taking tens of millions of dollars out the door, and he had no idea
what was going on. I hate to take advice from him. However, to the extent that
he is talking about the securities fraud laws already on the books [he’s right],
because the penalties for securities fraud laws were already up to 10 years and if
you are thinking about that and that is in your frame of reference that would be
enough to encourage you to do the right thing.
“I think the problem at Enron was they completely lost track of that part of the
picture. They were looking at money, they were looking at profits, they were
looking at making the quarterly earnings. And the part of the business practice
that Barbara [fellow guest Dr. Barbara Lay Toffler] talked about—running an
environment where the employees can do things in an ethical way—I think they
totally lost track of that. In fact, I think their environment was ‘Push, push,
push,’ ‘Get the bonuses,’ etcetera, and everyone played fast and loose with the
rules.
“If you listen to any the transcripts of the energy traders who were bilking
California and Washington, it just makes your skin crawl, because doing what was
ethical was not in their frame of reference at all. If they had been thinking
about the potential penalties I think they would have acted differently.”
(21:50)
On whether military leadership has a better
record of taking responsibility for wrongdoing than civilian leadership:
Prentice: “That is in theory. There is a recent book just put out by a
professional who had been in the military for a long time. And the whole point
of his book was that in theory that is how it works in the military but all too
often it doesn’t. You look at Abu-Ghraib and you can see that is exactly what
happened. Nobody up the line is taking responsibility. Everyone is trying to pin
it on the little guys. And that is exactly what is happening at Enron. Nobody at the top is taking responsibility for the culture that they created. I
agree with the caller completely that that is the culture we have to have. It is
what we have to stimulate but we’ve got to actually pull it off. We can’t just
have it in theory like a code of ethics on the wall.”
(36:30)
On Europe’s principles-based accounting:
Prentice: “I think the academic literature on whether Europe’s principles-based
accounting is better than America’s rules-based accounting is decidedly mixed. I
do not think that there is a clear case one way or the other way. I do think
that the securities rules do say repeatedly and the case law says that when you
certify the financial statements you are supposed to step back and say does this
really give a clear picture.”
Dick Gordon, host: “[You] mold the students who are going to become the business
executives. I can’t imagine that at the McCombs School of Business in Texas that
there aren’t a number of your graduates who ended up at Enron. And I’m not
saying that those are bad kids, but how do you install in next year’s class, and
the classes after that, the kinds of ideas that you and Barbara are talking
about on the program?”
Prentice: “Well, Barbara and I agree so much that behavioral concepts have
everything to do with every type of decision making, including ethical decision
making. And you’re right, at the Mccombs School I think we sent a lot of freshly
minted MBAs into a meat grinder down there at Enron, because we all tend to take
our cues for what we are supposed to do from the people around us. Just like you
are at the fancy dinner and there’s one more fork there than you have ever seen
before—you look around to see who picks up which fork first. You walk in to a
new business like Enron and it’s your new employer, you tend to look around and
do what the people around you are doing. And so that is tricky. But
Sarbanes-Oxley sends a clear message that we need to do things differently than
we have done them in the past.
“You know, law can lead ethics.
“When we passed the Civil Rights Act in 1964 and said you can no longer
discriminate in employment and public accommodations on the basis of race and
gender and religion, polls were done as to, ‘Well, is it ethical to do that?’
both before and after the law was passed. And after the law was passed many more
people thought that it was unethical to act in that way.
“Insider trading—same thing. We had two laws passed by congress in the 1980s
saying insider trading is a bad thing. And business people decidedly more thought
that it was unethical to engage in insider trading after the laws were passed
than before.
“I think if you had done some polls in 1999 and asked corporate executives:
‘Earnings managements–big deal? Not a big deal?’ I think they’d say not a big
deal. But I think after Sarbanes-Oxley, they would tell you it is a big deal. We
can’t do it anymore—we’ve got to minimize it. I think that the law can help.
“I know that my students—and I teach a class in accounting ethics—my students
are intensely concerned with ethics more than I have ever seen in the 10 years
that I have taught this particular class.”
(40:57)
On the issue of "where was the SEC?" before Enron:
Prentice: “I'd like to jump in, because part of the reason was that the lobbying
of the big accounting firms and the lobbying of Silicon Valley caused Congress
to put pressure on the SEC. Every time the SEC tried to crack down on the
accounting profession and on Wall Street they had to back off, and they were
starved for resources throughout the 90s. One of the things Sarbanes-Oxley does,
although perhaps not enough, is increase the funding and the resources of the
SEC, which could help that. At the same time, the SEC’s job is to stop liars but
it's not to tell people this is a good company to invest in and this is not a
good company to invest in. A lot of people on Wall Street, the specialists, were
saying, “We look at these financial statements, we don't understand them. We
don't know how Enron is making money, but look at that stock price go up.” And
they told everybody they should go ahead and buy. Even though the experts said
they couldn't understand how Enron was doing it.
(45:52)
On whether current talk about business ethics is a mark of long-term change:
Prentice: “Well, I think it is and I think it's also a mark of change that the
academy that certifies business schools has reformulated their standards, and
now among the skill set that they want both undergraduate business students and
MBA business students to come out with the very first one they list is the
ability to operate a business legally and ethically. And Barbara is right. What
you reward and what you measure are the key things. We need to change that a
little bit.
“I do know that my students are more concerned with acting ethically than
they've ever been in the 24 years I've taught in business schools. At the same
time, as everyone else knows, things go in cycles. And we are now intensely
concerned with this because of Enron. 15 years from now it could fade away
quite a bit.”
Gordon: “Robert, thanks so much for being with us on the program.”
Prentice: “My pleasure.”
Gordon: “Robert Prentice is a professor of business law at the McCombs School at
The University of Texas.”
The Connection is a two-hour daily news program syndicated to National Public Radio stations nationwide.
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