The dissenting voice of the “tenth man” in the boardroom could potentially curb unethical behaviour in business, former Enron CFO Andrew Fastow said to a group of students, professors and businesspeople on 18 May during his lecture ”Rules versus Principles,” organised by RSM Nederland and in cooperation with the Maastricht University (UM) School of Business and Economics (SBE).
The tenth man refers to a “member on every board designated to take the opposite position,” said Fastow. “Even if he agrees with the board members, it is his job to come up with every reason why they’re wrong.”
Like many boards susceptible to groupthink, the Enron board voted unanimously on every decision, Fastow continued. It was this approval, along with the approval of the accountants, attorneys, banks and fellow executives, that convinced Fastow of the legitimacy of the deals he made—deals that eventually led to the company’s downfall.
Enron scandal revisited: “No ethics involved” in decision-making
Since Enron’s epic fall from grace 15 years ago, the scandal has become one of the most cited case studies in business ethics. Its legacy now reflects the damage it caused: the bankruptcy of America’s seventh-largest company, the incarceration of numerous high-profile executives and a huge financial loss to thousands of people. Fastow joined Enron in 1990 and became chief financial officer in 1998; during that time, he said, he never added ethics into the equation.
His efforts actually earned him a CFO Excellence Award from CFO Magazine just about a year after he assumed the role. The award, which Fastow presented during the lecture alongside his prison ID card, highlights the ethical issues he faced at Enron: he was given the award for the same activities that landed him in prison, he said.
Fastow’s ability to find loopholes in accounting laws wasn’t seen as fraudulent; it was approved. Using off-balance sheet financing, Fastow hid Enron’s debts to put forth the image of a rich and healthy company when, in fact, the opposite was true. Fastow never set out to commit fraud, he explained. He followed the rulebook, but ignored the principles behind the rules.
It was the sudden and unexpected resignation of CEO Jeffrey Skilling six months after his appointment that piqued the curiosity of journalists. They began to investigate the peculiar state of Enron’s finances, followed swiftly by the Securities and Exchange Commission. It took only four months for the business to collapse.
The Enrons of today still engage in “egregious” practices
Enron’s widely publicised scandal and resulting fallout would make it seem that no other business would dare engage in such financial misrepresentation. Unfortunately, Fastow demonstrated, that is not the case.
“I see new types of structured finance deals, new versions of deals I was doing back at Enron, that are occurring in the marketplace,” he said. “I would argue that some are at least, if not more, egregious as the stuff we did back at Enron.”
But following the rules and the principles behind them, while offering full transparency, also impacts a company or individual negatively. When asked if it was possible to be successful as a CFO or company without exploiting these grey areas—adhering to the rules but not necessarily the principles—Fastow said it is possible, “but you will not stay CFO.”
By not exploiting grey areas, “the market is saying that you are leaving value on the table. You’ve got a rulebook, but you’re not taking advantage of the rules sufficiently,” Fastow said. “The market is telling us they want us to go into the grey area, but they’re also telling us they don’t want us to go too far.”
Fastow presented a number of case studies to the audience to illustrate current “grey-area” practices and how they manage to persist. One such case took place at an American university’s ethics institute, where Fastow teaches a class each year. Fastow presented the students with the financials of an undisclosed company to perform a basic credit analysis. The students’ proposed debt ratio was initially 43 percent; after a two-week examination of the footnotes, however, the students recalculated the debt ratio to be 91 percent.
Fastow then revealed that the financials belonged to the American university itself, sending the students into an uproar. They voted to send a letter to the university’s president and board of trustees demanding more transparency—until Fastow said that more transparency, in terms of financing on balance sheet rather than off balance sheet, would raise the students’ tuition and fees by ten percent. The second vote from the students killed the letter to the university.
It demonstrated how people will find a way to rationalise their decisions in the grey area based on what they want—navigating from point A to point B, Fastow said. When point B was to be a more ethical institution, transparency was the answer. When the students realised transparency wasn’t in their financial interest, they were more willing to go with the rule rather than the principle of the rule.
Preparing students to identify grey areas
Business ethics courses are generally not required for business students. According to Fastow, however, providing real-life, current and past ethics case studies can help students identify the grey area.
“The mistake I made, and what [students] ought to consider, is not just the rule but the principle as well,” Fastow said in an interview before the lecture. “It is very difficult to figure out where to draw that line. Each person has to do that individually. I don’t think you could teach that in an ethics class, but what I think you can teach… is enough of an understanding that students, when they start their careers, will recognise when they’re in one of those situations. While those black-and-white situations do occur, they are very infrequent. It’s much more likely that these students, future businesspeople, are going to encounter decisions in the grey area very quickly after graduating.”