Dysfunctional Deference and Board Composition : Lessons from Enron

It has been over seven years since the public was first made aware that Enron (or the quot;Companyquot;) was a troubled firm, ultimately doomed to bankruptcy and much litigation, both civil and criminal. Yet, the Enron debacle continues to fascinate researchers and the general population alike. Over a recent one year period, the Social Science Research Network posted 71 papers that referenced Enron in their abstracts. What appears most baffling to many observers, specifically those interested in corporate governance, was the inability of the Enron board of directors to get a handle on the massive fraud that occurred under its watch. For example, Charles M. Elson, director of the Center for Corporate Governance at the University of Delaware stated in regard to the repeated warning signs that the Enron board received during this time, quot;They should have inquired furtherquot; and quot;they were unwilling to ask and pursue tough questions.quot; Yet, for all the research done, a satisfactory explanation has yet to be provided that explains why the Enron board, a board that was considered one of the best in the United States just prior to the Company's downfall, failed to detect the fraud and stop it before it destroyed the company. Obviously, something was amiss at the top of the Enron pyramid and we think it had something very much to do with the composition of the Enron board, no matter how impressive the backgrounds of its individual members. We, of course, are not alone in this opinion as the Enron debacle led to enhanced independence requirements for board members. As a response to the facts of the Enron scandal, we certainly endorse the board member independence requirements of the stock exchanges and the enhanced independence guidelines as recommended by proxy advisory companies, but it is our position that corporate boards of publicly held firms would be better off and less prone to error if other rules or guidance were in place that required or strongly encouraged corporate board nominating committees to select members who were prominent and respected, but less prone to what we refer to as quot;dysfunctional deference.quot