After Enron, Bracing for a Backlash

Business may be subjected to a new wave of regulation

During the 1990s boom, Americans had mixed views about the world of business. Most applauded the bounty produced by the U.S. economy, support for deregulation was on the upswing, and many rushed to grab a slice of the pie by investing in the rising stock market. For many, business simply became cool. Yet even with the bull market and the New Economy in full swing, a backlash began to build as many also grew angry at the perceived high-handedness of big corporations: the uncaring HMOs, the lousy airline and telephone service, the price-gouging drugmakers, and the sweatshops run by shoe and garment makers.

Now the Enron Corp. (ENE ) scandal--coming on the heels of a sharp recession, a tumbling market, and an extended stretch during which many of the most vaunted business success stories of the late 1990s proved to be chimeras--threatens to push the anticorporate button all over again. True, two-thirds of Americans still think corporations make good products and compete well in the global economy, according to a BusinessWeek/Harris poll taken Jan. 16-21. Only a third, however, feel large companies have ethical business practices and just 26% believe they are straightforward and honest in their dealings with consumers and employees. "The backlash is beginning," warned General Electric Co. (GE ) Chief Executive Jeffrey R. Immelt at a talk with BusinessWeek Editor-in-Chief Stephen B. Shepard in New York on Jan. 15. "Credibility and trust is everything [in business]. And because of the recession, because of Enron, that trust has evaporated."

Will the public mood become increasingly at odds with big business and the culture of investing? Certainly, what's emerging is a political climate that appears much more open to government regulation than has been the case for years. A crackdown on the accounting industry seems likely. Board directors may get hit with new rules about conflict of interest, as well as new responsibilities to oversee corporate audits. Companies also could face restrictions on the ability to fund 401(k)s with their own stock. "I worry that Enron will unleash a welter of restrictive new regulations," frets Steven A. Raymund, CEO of Tech Data Corp. (TECD ), a Clearwater (Fla.)-based computer distributor.

Even campaign-finance reform could get a lift. After all, Enron's largesse with elected officials has left a widespread impression that it paid the cops on its beat to take a nap. "The Enron scandal clearly shows that legislators were influenced by campaign donations and didn't live up to their watchdog duties," says David Clay, a veteran factory hand at Boeing Co.'s (BA ) aircraft plant in Everett, Wash.

Of course, public anger and political furor often have a way of fading quickly in Washington. Gun control looked like a no-brainer after the Columbine shootings, but wound up blocked by powerful groups such as the National Rifle Assn. Corporate lobbyists are already working hard to head off Enron-related regulation. The heat also is unlikely to affect many of the broader deregulatory efforts that have brought sweeping change to industries such as banking and telecommunications.

Clearly there are signs of a growing disenchantment with business. While the BusinessWeek/Harris poll shows that a core 16% of Americans have "a great deal of confidence" in people running major companies--up slightly from the 15% who felt that way in 1999--the percentage who have "hardly any" confidence in business leaders nearly doubled to 24%, from 13% in 1999.

Although there is no concrete evidence yet that Enron is adding to that disenchantment, many fear that the sordid tale will feed suspicions about self-dealing by executives and the nexus of influence between companies and politicians. The BusinessWeek/Harris poll finds that some 79% of Americans believe corporate executives put their own personal interests ahead of workers' and shareholders', as Enron officials are alleged to have done. Other polls find similar results. For example, a Gallup Organization poll released on Jan. 16 shows that 61% of those closely following the Enron story believe its executives did something illegal. Says Governor John G. Rowland (R-Conn.), head of the Republican Governors Assn.: "The average guy on the street sees the Enron mess and says, `Oh, another corrupt corporation."'

Reformers are moving to capitalize on such attitudes. Reacting to the pension losses suffered by Enron employees, for example, pension-rights and labor groups have ambitious goals to give workers more control over 401(k) plans. Limiting the amount of employer stock in such plans is only the first step. The AFL-CIO also argues that 401(k)s should be governed like union pension funds, with boards comprising employees as well as company officials. Such independent oversight could resonate widely. "There should be outside management of retirement funds," says Carol Otten, an assistant vice-president in the Chicago branch of Commerzbank, a Frankfurt-based bank. "With the CEO not involved and no company stock in the fund, there wouldn't be this question of accountability" raised by the Enron case.

Other groups cite Enron as evidence of the need for new regulatory scrutiny of the big accounting firms. They argue that Andersen was lax because it got larger fees from consulting for Enron than from auditing the company's books. This is the rule in the industry, not an exception. In fact, the large accounting firms last year received just 28% of their aggregate fees from accounting, according to a study by the Investor Responsibility Research Center Inc., a nonprofit group in Washington that represents institutional investors.

To remedy the problem, some investors want to limit or ban auditors from consulting for the companies they audit, although the SEC appears little inclined to go along. Others want to require corporations to change their accountants every seven years. "Enron has given investors the weapon they've been waiting for to really make something happen," says Carol Bowie, the IRRC's head of governance research.

In addition to reform groups, the pressure from skittish stock investors is having at least a short-term effect on some companies. For example, Kmart Corp.'s (KM ) Jan. 22 bankruptcy filing was triggered in part by Enron-inspired fears. So was Tyco International Ltd.'s (TYC ) decision that day to split into four business units. Tyco CEO L. Dennis Kozlowski says he took the step to reassure the fast-growing conglomerate's investors that its complex financial reporting scheme involved no risky accounting--a move that wouldn't have been needed if the Enron meltdown hadn't renewed investor skepticism about its bookkeeping.

The biggest political question is whether the Enron backlash will suffice to push through campaign-finance legislation. Substantial curbs on campaign contributions could have a big impact on the way Washington is run. However, that's exactly why opponents are likely to stall any key votes until the scandal has died down.

The outcome of that battle could feed into the November elections as well. So far, there's no evidence that close ties to Enron executives led to any unethical actions by the Bush Administration on the company's behalf. But Democrats may try to use the opportunity to taint the President for his close association with Enron Chairman Kenneth L. Lay. More broadly, they may tap the antiregulatory mood to paint the GOP as captive supporters of unregulated corporate power. "Obviously, that's the bigger political game here--to tie the Enron albatross around the necks of Republicans who believe that government should be less involved in markets," says Jerry Taylor, an environmental expert at the Cato Institute, a free-market think tank in Washington.

Of course, 10 months is an eternity in politics. Events may simply push Enron out of the public consciousness long before autumn. Still, many average Americans were suspicious of both corporations and politicians before Enron came along. The company's collapse, and the open question as to whether the government will take steps to guard against future corporate meltdowns, can only add to the public's growing sense of cynicism and mistrust.

By Aaron Bernstein in Washington, with Brian Grow in Atlanta, Darnell Little in Chicago, Stanley Holmes in Seattle, Diane Brady in New York and bureau reports

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