Directors ignore lessons from Enron

Friday 22nd March 2002

Lack of corporate governance factors behind the Enron collapse in the US are present in New Zealand, a survey by Ernst & Young and the Institute of Directors shows.

The survey, Corporate Governance Post Enron, finds many businesses have not considered the issues and do not have basic risk management practices in place.

"While few know the complete Enron 'story,' clearly the key drivers were a breakdown of corporate governance and ethics, lack of any transparency in how money was made or lost, the impact of executive behaviour relative to remuneration, confusion of roles and responsibilities, and overall a 'secret society' approach to information management and supply to decision-makers," Ernst &Young partner Ben Palmer says.

Only 20% of the 426 respondents indicated their boards had discussed issues arising from the Enron collapse. The survey asked respondents to rate the importance of some failings at Enron - 81% said they ranged from fairly important to most important.

The lack of it being on board agendas may be, as 78% believed, because the issues and risks were being addressed.

"Yet when asked what remedies they might have in place to overcome any shortcomings, 42% said they had no formal risk management identification or process in place, 37% said they had no internal audit function in place and 60% said that internal audit did not report to the audit committee," Mr Palmer said.

This pointed to New Zealand lacking some of the governance requirements of regulatory bodies overseas.

"Without transparent and inter-related practices and procedures we're open to the possibility of Enron type collapses continuing to happen here," he said.

Reacting to the survey, IOD chief executive David Newman said the first steps would be for New Zealand investors to become more demanding in assessing board and senior management independence, actions and accountability. They were left up to their own devices when it came to judging independence, actions and accountability.

"Healthy pressure and tension is important in maintaining corporate standards ... Only one group, the Small Shareholders' Association, seems to be showing any semblance of vigilance and action," he said.

Corporate Governance Post Enron is available from brc@nz.eyi.com

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