It's Legal but It Ain't Right: Harmful Social Consequences of Legal Industries

10. Titans of the Enron Economy: The Ten Habits of Highly Defective Corporations

; 10 Titans of the Enron Economy The Ten Habits of Highly Defective Corporations Scott Klinger and Holly Sklar Introduction The pivotal lessons from the Enron debacle do not stem from any criminal wrongdoing. Most of the maneuvers leading to Enron’s meltdown not only are legal but are widely practiced. Many of the problems dramatically revealed by the Enron scandal are woven tightly into the fabric of American business. This part of the story is widely understood: the cold betrayal of employees by rapacious executives amassing personal fortunes as the company’s fortunes unraveled. The images of loyal employees suddenly losing their jobs, homes, and life savings are etched into our minds. The negative externalities associated with the Enron scandal are clear. Reaching far beyond its employees, the long list of Enron casualties includes a wide array of individual and institutional investors and the broader taxpaying public. Shareholders have lost tens of billions of dollars in share value. State and municipal pension funds lost more than $1.5 billion on Enron stock. The state of Florida alone lost $335 million; Georgia lost $127 million, Ohio $115 million, and New York City $109 million on Enron investments.1 This money ultimately will have to be made up by increased taxpayer contributions to state pension coffers. Diverting tax money to make up for Enron losses means that less funding is available for other vital public services. Before Enron imploded, it was embroiled in another scandal—pro‹teer230 ing from the deregulation of energy markets at great consumer expense and hardship. During the 2000 California electricity crisis, consumers faced blackouts and were overcharged an estimated $40 to $70 billion.2 As the Consumer Federation of America reported, the California Independent System Operator, manager of the state’s power grid, documented energy supplier “price gouging (economic withholding) or hoarding (physical withholding) in virtually every hour of every day for almost a year.” California was not alone. New York, Massachusetts, Montana, and other states have also suffered huge price increases and service problems.3 Enron engaged in legalized piracy in many parts of the world. In India, the company made millions of dollars in “educational payments” to government of‹cials in exchange for a power contract that Enron expected would generate more than $30 billion over the next twenty years. The Indian public, which engaged in massive protests against the plant, ended up paying twice the rate charged by the next-most-expensive power producer and more than seven times the cheapest power rate in the region before the plant was shut down by the Indian government. Enron turned to Vice President Dick Cheney and other U.S. government of‹cials to try to bully the Indian government into making payments to the company.4 The Stock Option Scam American taxpayers subsidized Enron’s pro‹teering at home and abroad. When Enron executives received multimillion-dollar stock option payoffs, taxpayers were unwitting contributors. This is because corporations maintain two sets of accounting books, one for shareholders and the other for the government. In the income statement shown to shareholders, stock options are invisible. Unlike cash salaries and bonuses, stock options are not counted as an expense. But when executives cash in their stock options, reaping fortunes, the set of corporate books shown to governmental regulatory agencies re›ects a full deduction of the engorged value of the option, not its much smaller worth at the time it was granted. Thus, stock options represent a powerful tool for keeping corporate earnings arti‹cially high and taxes legally (but arti‹cially) low. Although excluded from the pro‹t calculations, corporations are required to report the latest three years’ stock option activities in a footnote to their ‹nancial statement. Using the option data contained in Titans of the Enron Economy 231 ; the footnotes to ‹nancial reports, a [March 18, 2002] Tax Notes article . . . estimated the impact of options on the corporate tax base. According to those estimates, exercised stock options may have reduced corporate taxes [for all U.S. corporations] by as much as $28 billion in 1998, $42 billion in 1999, and $56 billion in 2000.5 According to a study by the Institute on Taxation and Economic Policy of the 1996–98 taxes paid by 250 of the nation’s largest and most pro‹table companies, the top 10 ‹rms avoided $10.4 billion on taxes as a result of stock option deductions. The...