76 Tul. L. Rev. 1275 (2001-2002)
Enron and the Dark Side of Shareholder Value

handle is hein.journals/tulr76 and id is 1299 raw text is: Enron and the Dark Side of Shareholder Value
William W Brattoff
This Arficle addresses the implications that the Enron collapse holds out for the self-
regulatory system of corporate governance. The case shows that the incentive structur that
motivates actors in the system generates much less powerful checks against abuse than many
observers have believed Even as academics have proclaimed rising governance standards,
some standards have decline4 particularly those addressed to the numerology of shareholder
value. The Articlež inquiry begins with Enronž business plan. The Article asserts that there
may be more to Enron r Wrtual frmstrategy than meets the eye beholding a firm in collapse.
TheArticle restates the strategy as an application ofthe incomplete contacts theory ofthe firm
that prevails in microeconomics today and assetts that Enmon failed because its pursuit of
immediate shareholder value caused it to misapply the economics, mistaking its owe inflated
stock market capitalizaion for fundamental value. The Article proceeds to Ehronž collapse,
telling four causation stories. This ex ante descrpdon draws on information available to the
actors iho forced Enron into banauptcy in December2001. The discussion accounts for the
behaviorofEnronkprincioals by reference to the shareholder value norm andEnron s corporate
culture. Finally the Article takes up the self-regulatory system of corporate governance,
asserting that the case justifies no fundamental reform. The costs of any significant new
regulaton can outweigh the compliance yield paticularlyin a system comrnittedto open a wide
field for entrepreneutial usk taling If we seek high returns, we must discount for the rsk that
radonaWh andreputadon will sometimesprove inadequate as constaints. At the same tine, we
should hold critical gatekeepers, particularly auditors, to high professional standards. The
Article argues that present reform discussions respecting the audit function do not adequately
confront the problem ofcapture demonstratedin this case.
I.    INTRODUCTION .......................................................................... 1276
II.   ENRON AND THE CONTRACTARiAN IDEAL ................................. 1288
A.     The Virtual Corporaton ................................................... 1288
B. Enron ' Virtual Corporation and the Theory of the
Fim    ................................................................................... 1294
III.  ACCOUNTING FORENRON'S COLLAPSE-FOUR STORIES .......... 1299
A.    Enron as Conventional MarketReversal ........................ 1299
B.    Enron as Derivative Speculaion Gone Wrong ............... 1302
C.    Enron as a Den of Theves ............................................... 1305
*     Samuel Tyler Research Professor of Law, The George Washington University
Law School; Visiting Professor of Law, Georgetown University Law Center (Spring 2002).
My thanks to Matt Barrett, Margaret Blair, Jill Fisch, Miriam Galston, Mitu Gulati, Shi Ling
Hsu, Lyman Johnson, Kim Krawiec, Don Langevoort, David Millon, Larry Mitchell, Ron
Pearlman, Richard Pierce, Warren Schwartz, Bill Vukowich, Andrew White, and participants
of workshops at the Georgetown, George Washington, and North Carolina Law Schools for
assisting in this project with comments and materials. This Article speaks as of April 11,
2002.
1275

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