Politicians of all stripes are rushing into the Enron fray, eager to use this event as the pretext for enacting new regulations and laws against “crime in the suites.” This would be a serious mistake.<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />
There are already laws against fraud. And if some at Enron were guilty of that crime, as now seems likely, then they should be prosecuted. To go further, to enact additional restrictive regulations would not only hinder many creative business innovations, but also weaken the market's ability to prevent future Enrons.
Indeed, while the politicians have only begun their Enron hearings, the marketplace has already rushed to address the problem.
Firms have announced that they will end the existing practice of allowing the auditor fox to advise the corporate henhouse. Firms are rushing to reassure the investment community that they're not cooking their books via off-budget gimmickry. And, indeed, any firm that can't explain clearly its internal operations can expect downgrading by investment analysts and rating agencies.
Moreover, given the potential liability of Enron board members, one can be sure that directors everywhere will take more seriously their corporate-governance responsibilities, will be less deferential and ask lots more questions. Boards will question the wisdom of rewarding executives via stock options until and unless they are convinced that the firm's accounting systems reflect economic reality.
Employees throughout America have learned from the Enron experience and are more likely to diversify their 401(k) plans. Finally, investors are less likely to invest in companies that can't explain what they're doing.
The Enron event is not unique, and it will not be the last economic disaster. From the tulip mania of the 17th century through the S&L crisis of the 1980s to the dot-com bubble of yesterday, investors do make mistakes; markets do go astray.
But while the Enron collapse has been painful, that private pain has triggered positive marketplace changes. Workers, investors and a host of professionals have been alerted to the risks of accepting too quickly something that seemed too good to be true.
As a result, markets are becoming more transparent, accounting rules and practices are becoming more realistic, corporate-governance practices are likely to improve, and a host of other positive changes that make future Enrons less likely is underway.
In the real world, the private investor is the best cop on the block.
Fred L. Smith Jr. is president of the Competitive Enterprise Institute, a Washington, D.C.- based think tank.