Company management - or mismanagement, as the case may be - is one of the key reasons behind Enron's fall from power, according to two UB researchers.
John Stephan, assistant professor in management science and systems (MSS), and Harold Star, visiting assistant professor of MSS, at UB's School of Management concluded that the "agency theory" or "agency problem" may be partly responsible for such mismanagement.
The "agency problem" deals with the relationship between a company's agents or managers and its owners or investors, a relationship that should be - but often is not - monitored closely by the board of directors.
"The board of directors is supposed to prevent managers from working in ways that squander shareholder interests," said Stephan.
Former Enron Chairman and CEO Kenneth L. Lay resigned from both his positions after the company's rapid descent from a listing in the Standard and Poor Fortune 500 index to filing for Chapter 11 bankruptcy Dec. 2 of last year. The slide was initiated by a drop in the company's share price from a 52-week high of $82.10 to just more than one cent when news that top Enron executives had raided the company's 401(k) fund was made public.
Friday, Enron stock was trading near 38 cents per share. Today, Lay is scheduled to testify before a Senate subcommittee investigating the company's dubious financial history.
Dysfunction within a board of directors may stem from too-intimate relationships between the board and the managerial executives of the company, according to Star.
"A board can't possibly do its job when the chairman of a board is also the head of the company," said Star. "The board is potentially castrated when you have CEOs as the chairman of the board."
Such relationships can lead a board to act in what Stephan described as an opportunistic fashion: managers may act to increase their own power and prestige without increasing the value of shareholder equity.
If a board is too independent from the managerial staff, however, the possibility of conflict between executives and the board becomes very real, a situation which could paralyze a company.
"Too much intervention is no good, not enough intervention is no good and we have no answers at this moment," Star said.
Successfully encouraging boards to act more efficiently may lie in involving them to a higher degree in company strategy. If board members have a greater role in steering a company, they would have more knowledge of what is going on in the company and may be more committed to the solution, said Stephan.
Another possibility would be to find a middle level of ownership within board members.
"The level of ownership should be such that you feel responsible to look after your investment," said Stephan. If investment is too high, however, "there is a potential that you'll avoid looking too deeply into the situation, because you don't want your investment to go down the tubes."
Stephan also said that limiting the number of boards on which a member sits may make it more likely that the person is devoted to only one company.
Although Star and Stephan explained some possible ways to increase board efficiency, the future is uncertain and a definite answer to the complex dilemma remains elusive.
"Nothing that anyone comes up with will prevent an Enron situation from happening again," said Stephan. "What you do is minimize the possibility that it happens again."
Photo: Meredith Forrest Kulwicki
