I watched on Thursday as government lawyers, news commentators, and former Enron employees celebrated the guilty verdict against Lay and Skilling. Judging by the general celebratory atmosphere that attended the jury’s announcement, it appears that virtually the entire American public believes that the two corporate executives had it coming. Many are proclaiming that beyond justice, the verdict was just what the markets need. It sends a clear message to corporate America that no one and no company is so powerful that it need not play by the rules, rules that are intended to protect investors and employees from unscrupulous CEO’s and executives. The result will be increased investor confidence in markets and increased confidence on the part of American citizens in big business and Wall Street. All of this is good for business, economic growth, and jobs.
Leaving aside the issue of whether the jurors in fact constituted Mr. Lay’s and Mr. Skilling’s peers (and were therefore qualified to pronounce a judgment based on an accurate understanding of the responsibilities, span of control, and limitations that come with being a corporate executive), I am nonetheless not so sanguine about the effect of the verdict. I admit that very little information is yet available, but early indications are that the jury did not find Lay and Skilling guilty based on the evidence that they knew about Enron’s true financial situation, rather they were convicted on the notion that they _should_ have known. If that is the case, then just what might an ambitious and aspiring corporate executive conclude?
Here is what I would conclude. First, the risks involved in being a corporate executive have just been made a lot higher. Maybe it’s not worth it, unless the salary on offer is higher. So much for helping to lower executive compensation. Second, if one accepts the risk (and the higher salary), one still needs to protect oneself. Since the standard is no longer what one does (or did) know but what one should know, me thinks that many new executives are likely to opt for a more hands-on management style (read micro-management). The last I checked that is a recipe for corporate stagnation, and that is not good for business, growth, jobs, or investor confidence. Third, many will calculate that no salary is high enough to compensate for the increased risk involved in corporate management. Consequently, the best and brightest will increasingly opt for other than careers in business.
Just some thoughts from a skeptic.