The Whistle-Blower

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Does your credit union take comfort in having a code of conduct in place? So did Enron.

In remarks before the World Council's World Conference here, at which the group unveiled its first set of operating principles, former Enron executive and whistleblower Sherron Watkins told credit unions from around the globe that codes of conduct, while laudatory, are only paper, and that ethics must be exemplified and demonstrated by any organization's leadership.

Enron, whose code of conduct was waived by the board on two occasions to permit questionable accounting procedures, has become a euphemism for corporate misconduct. Watkins rose to prominence when memos she had written to Enron CEO Ken Lay regarding fraudulent accounting practices were discovered by congressional investigators. In 2002 she was named with two other women who also blew the whistle on respective fraud as Time Magazine's Persons of the Year, and she later authored a book on the scandal at Enron. Today she acknowledges she is probably the only ex-Enron employee whose life is now better, and she continues to make a living speaking to organizations about how a fraud as large as that of one-time energy giant Enron could come about.

The Heart of the Problem

"Diffusion of responsibility was at the heart of Enron's problems," Watkins said. People just assumed that someone else would catch the bad behavior. The sense that you don't have to take a stand, that you don't have to take an uncomfortable position or have that uncomfortable conversation is what allowed Enron to happen."

Watkins said research has shown that more than 50% of white collar criminals go to prison able to pass a lie detector test that they did nothing wrong, rationalizing to themselves that their behavior was proper.

"That's what happened at Enron," she said. "People took a look at accounting rules and never focused on accounting principles. When Enron declared bankruptcy in December 2001, it had $13 billion in debt on its balance sheet. When the company met with creditors, the company's true long-term debt was $38 billion. Twenty-five billion dollars was disguised from shareholders and investors. That's an enormous amount of rationalization. A lot of people took comfort that they just saw one (accounting) structure of maybe $1 billion, and assumed they were the only one doing it."

Watkins discovered the fraud at Enron somewhat by accident. She was 42, an eight-year Enron veteran, and the mother of a two-year old seeking better life/family balance when she took what she thought would be a career limiting move working in the back office for Enron's Andy Fastow.

What Watkins said she has come to learn is that "leadership is tough. There's a reason there are whole sections in the bookstore on leadership. You have to motivate people. You have to have a passion. But also it's really hard to fathom the fact that in the same way a child learns to behave in this world by looking at your parent, every single employee has their eye on you and every minute action you take. It's incredibly important to realize how the tiniest actions you take magnify in the organization."

Watkins said that when she first discovered fraud-to the tune of $500 million-her first thought was to leave the job, feeling it was fruitless to warn Fastow or then CEO Jeffrey Skilling. But when Skilling resigned, claiming the decline in the stock price to about $45 from $80 was causing him stress, Watkins wrote her long memos outlining her suspiciouns to new CEO Ken Lay, who returned to the job from the chairman's post. (Watkins noted, incidentally, that helping Skilling deal with his stress was the cashing in of $66-million in stock options. "He didn't call in sick; he called in rich," said Watkins.)

Acknowledging she was perhaps na?ve, Watkins said she thought Lay really didn't know what was occurring, although she believes he did. "He pretty much ignored my warnings. He didn't look into any of my concerns. He instead turned to his executives and said I want all of you to tell me that these are not problems. He wanted to be told the ship was unsinkable."

Among those reassuring Lay was accounting/auditing firm Arthur Anderson, which was being paid $1 million per week.

Watkins marvels that she now knows so many people (30) who have either been charged with crimes or have plead guility.

"I wrote the book wanting people to know I came out of this labeled a hero, but that I really began seeing things that bothered me as early as 1996," Watkins admitted. "It alarms me that I was blind to the corruption."

That corruption would lead to Watkins witnessing what she said continues to bother her enormously. In large meeting rooms, just prior to Christmas in 2002, 5,000 Enron employees were informed by members of management that they had received their last paycheck, and they had no news of what might happen to health insurance or any severance pay. Those same 25 executives announcing the layoffs had just one week earlier paid themselves "retention bonuses" of $55 milion.

"In my mind those executives were just as crooked as Andy Fastow. They found some way to call this a retention bonus, and they just stuck their hand in the company cash drawer one week before bankruptcy," said Watkins. "These people are not indicted, but to me they are just as morally corrupt."

How does an Enron (which has now become a adverb) occur? Not overnight, suggested Watkins. "It's like you are walking down a slope that looks like an egg, Each step looks like the last, until that next step is too far. I never did anything fraudulent, but I observed fraudulent behavior. When questioned about it, most employees can say 'I saw something way back here.'"

What Would Mother Say?

Each individual must apply the "Three M" rule, said Watkins.

* Manager or Mentor. "How would this be viewed by someone who is a manager or mentor?"

* Media. Would you like to see what you're doing on the front page?

* Mother. What would your mother say about what you're doing?

Returning to her opening remarks, Watkins noted Enron certainly preached ethical behavior. It emblazoned various media with the words "Respect. Integrity. Communication. Excellence. You saw those words everywhere in Enron."

Watkins said she believes Enron is symptomatic of a larger problem, which is that "we don't ask enough of our leaders. In corporate America boards are supposed to represent the interests of the shareholders. Well, shareholders are nameless and faceless and are often mutual funds."

Watkins noted she agrees with famed investor Warren Buffett who said, "Corporate governance is here when we see CEO pay go down."

Pointing to statistics that drew murmurs from an audience with a large number from outside the U.S., Watkins noted that in 1970 CEO pay at the average U.S. company was 26 times that of the average worker. By 1980 that had grown to 42 times pay, and by 2000 it was 531 times the average worker's pay.

"There is just not enough outrage," said Watkins.

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