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71 U. Cin. L. Rev. 1233 (2002-2003)
The Enron Board: The Perils of Groupthink

handle is hein.journals/ucinlr71 and id is 1243 raw text is: THE ENRON BOARD: THE PERILS OF GROUPTHINK Marleen A. O'Connor* One Enron director could have made a difference. -William Patterson, AFL-CIO' INTRODUCTION The Enron debacle is one of the United States' most disastrous business failures.2 One of the striking features of Enron's collapse was the firm's abrupt and dramatic transformation from what appeared to be a very prosperous company to a bankrupt enterprise in less than three months. Wall Street uniformly portrayed Enron as a successful corporation that had transitioned from an old-economy energy company to a high-tech global enterprise. Specifically, from 1998 to 2000, Enron's gross revenues rose from $31 billion to more than $100 billion, making it the seventh largest company by market capitalization of the Fortune 500.' In October 2001, however, Enron shocked Wall Street by revealing a $544 million charge to earnings and a $1.2 billion reduction of shareholder equity. Investor confidence plummeted when the media reported that the charge and write-down stemmed from transactions with partnerships that Enron's Chief Financial Officer controlled.4 One month later, market faith collapsed when Enron * Professor, Stetson University College of Law; Associate Director, International Institute for Corporate Governance and Accountability, George Washington University Law School; oconnor@law.stetson.edu. I would like to thank William Bratton, Stephen Bainbridge, Claire Dickerson, andJill Fisch for their insightful comments. I would also like to thank Sharon Giselair for her word prcessing support and Pam Burdett for her library assistance. 1. Matthew Benjamin, Cardboard Board, U.S. NEWS & W. RPT., Apr. 18, 2002, at 28, 30. 2. For a detailed history and examination of the causes of the fall of Enron, see, e.g., William W. Bratton, Enron and the Dark Side of Shareholder Value, 76 TUL. L. REV. 1275 (2002). For other articles on the corporate governance aspects of Enron, see SAMUEL BODILY & ROBERT F. BRUNER, ENRON, 2001 (Graduate School of Business Administration, University of Virginia 2002); Lawrence Cunningham,Sharing Accounting's Burden: Business Lawyers in Enron's Dark Shadows(Boston College Working Paper 2002); Jeffrey N. Gordon, I Vhat Enron Meansfor the Management and Control of the Modern Business Corporation: Some Initial Reflections, 69 U. CHI. L. REV. 1233 (2002); Faith Stevelman Kahn, Bombing Markets, Subverting the Rule of Law: Enron, Financial Fraud, and September 11, 2001, 76 TuL. L. REV. 1579 (2002); Panel Discussion: Enron: IWVhat Went Wrong?, 8 FORD.J. CORP. & FIN. L. SI (2002). 3. See, e.g., Bethany McLean, lt.y Enron Went Bust, FORTUNE, Dec. 24, 2001, at 32. 4. For a detailed description of how these related-party transactions worked, see Bratton, supra note 2; Kurt Eichenwald, Deal at Enron Gate Insiders Fast Fortunes, N.Y. TIMES, Feb. 5, 2002, at A l. In brief, Enron used many Special Purpose Entities (SPEs), through which the transferor transfers an asset to the SPE in exchange for payment other than SPE equity. The SPE usually raises the money to pay for the asset through outside borrowing or providing the transferor with its own note. Firms using SPEs are not required to consolidate these entities on their financial statements providing that (1) an outside 1233

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