Wednesday, January 11, 2006

Enron & the MBA Witchhunt

Shortly after the Enron collapse had run its course, Jennifer Merritt in a commentary in Business Week (Why Ethics Is Also B-School Business, January 27, 2003) made a rather astonishing appeal for business schools to "sift for bad apples." Her proposal is all the more amazing given the positive press that it received. Here is what she said:

"Top MBA programs accept fewer than 15% to 20% of applicants, a high bar for entry. Even so, more schools than you might think end up expelling students, often for cheating, lying on their application, or other ethical infractions. Kellogg and Wharton say they dismiss up to five students yearly for such behavior. If five are caught, how many squeak by? These borderline-types head straight for Corporate America.

"So here's a thought: Find the bad apples before they come to campus. Application essays can be coached or plagiarized. A résumé can be stretched to the edge of truth. Even interviews can be misleading, with best behavior on display.

"It wouldn't be cheap, and privacy shouldn't be trashed, but B-schools could act more like investigators to get at the character of an MBA-wannabe. First, staff up to check every credential. Use interviews to probe whether applicants really believe--and stay on track with--what they write in their essays. Or throw complex business problems at interviewees to measure not just acumen, but also behavior. Sure, not every future scoundrel will be obvious. But with the degree--and a school's brand name--at risk of being cheapened, weeding out a few ethically challenged applicants helps."

Ms. Merritt's suggestion hearkens back to a simpler time where witch hunts were de rigueur and the 'guilty' were summarily burned at the stake. Try that approach with Hong Kong MBAs and you'd quickly run out of firewood.

Ms. Merritt might learn a lesson or two from Oliver Cromwell and his tireless Witchfinder General, Matthew Hopkins. Hopkins spent the decade doing "The Lord's work - a noble thing," rooting out evildoers caught "worshipping Satan and calling him lord". Being the witch-finder general was financially lucrative. In a time when daily wages were as little as 2.5 pence, Hopkins was raking in £15 to £23 per town cleansed of witches. Hopkins dressed fashionably in Puritan tunic and cloak, and was able to employ two assistants to help him with his work which brought about the death of perhaps 400 ‘witches.’ Hopkins guaranteed satisfaction: "I will find out the truth for you, have no fear."

Just for fun, let's apply Ms. Merritt's suggestions to one of the greatest 'villians' if the 21st century corporate world. Enron's director and chair of the audit committee, the one that a US Senate investigation declared eminently culpable in the what became the greatest corporate scandal of the decade.

Who is Robert K Jaedicke (besides Enron's director and chair of its audit committe)? He has been named one of the five best academic accountants in the US. He was awarded in 1985 the Distinguished Professor Award for outstanding service to accounting education by the California Certified Public Accountants Foundation for Education and Research. He also won awards in 1961 and 1962 for outstanding research from the National Association of Accountants. He was the sixth dean of the Graduate School of Business at Stanford University from 1983-1990 and served as acting dean before that in 1979-80 and as associate dean for academic affairs from 1969 to 1981. In 1988-89, Jaedicke served as president of the American Academy of Collegiate Schools of Business, which is the national accrediting agency for U.S. business schools. It is academics like Robert Jaedicke that would be responsible for implementing Ms. Merritt’s suggestions.

So let’s see what Jaedicke has to say about the Enron scandal? Oddly, he seems more than happy to let David Duncan and accounting firm Arthur Andersen take all the blame for Enron’s shenanigans. Jaedicke points the finger at Enron's management and auditors for giving his six-person audit committee bad information on Enron's financial health. he says of the Audit Committee:

"The oversight function of the committee depends on the full and complete reporting of information to it. Without full and accurate information, an audit committee cannot function."

Mind you, Robert Jaedicke didn't do all that badly as chairman. The inside track he had on Enron goings-on allowed him to dump the Enron stock he had received as compensation long before the company's abuses became public. And on his pre-crash sale of his 13,360 shares (!!) of Enron netting him $841,438, Jaedicke has been remarkably quiet.

Robert Jaedicke is in an embarrassing predicament. Such perquisites were not unusual in the 1990s in rewarding directors. Nor in the 1990s was it unusual for directors to accept there position as a sort of honorary seat in exchange for the goodwill they bring to the company. Jaedicke, though he certainly knew better, could simply say he was following precedent.
Unfortunately, this is not what the investing public expected. They expected a vigilant group of outside directors who would actively use their access to confidential information to protect shareholder rights. Boy were they surprised.

So was Robert Jaedicke any of the following?:

1. “a borderline-type headed straight for Corporate America”;
2. “a bad apple” ;
3. “someone who doesn’t really believe what they write in their essays”;
4. “a future scoundrel”;
5. “ethically challenged”
6. All of the above

Or is all that matters the fact that he got caught. Or that he had enough influence and powerful friends that he was able to deflect all the blame to other 'little guys' (not unlike Jeff Skilling). And his shenanigans as an chair of the Audit Committee cost Enron’s employees and stockholders dearly, brought down one of the great names in accounting, and destroyed the career and reputation of David Duncan, who actually did more than anything the Audit Committee ever did to try to bring Enron’s misdealing to light. Stanford Dean Robert Jaedicke's answer to Ms. Merritt's suggestions was to 'round up the usual suspects!'

You might be interested in knowing what happened to Cromwell’s own Witchfinder General. In 1646, Puritan minister Reverend John Gaule of Great Staughton, wrote a pamphlet called "Select Cases of Conscience towards Witches and Witchcraft, an exposé of Matthew Hopkins' trickery." Gaule also hinted that Hopkins himself was a witch, leading to Hopkins himself ultimately being tried and declared a witch, upon which he was then hanged.


Blogger k said...

Enron: The Smartest Guys in the Room is a must see. It truly is a great film. It uncovers the timeline and players in one of the worst scandals in history with great detail. No stone is left unturned in their investigation.

2:35 AM  
Anonymous Anonymous said...

Can you refresh your footnotes so your citation sources can be read?
Thanking you in advance.

12:15 AM  

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