From Boardroom to Courtroom to Newsroom: The Media and the Corporate Governance Scandals*

By Brickey, Kathleen F. | Journal of Corporation Law, April 1, 2008 | Go to article overview

From Boardroom to Courtroom to Newsroom: The Media and the Corporate Governance Scandals*


Brickey, Kathleen F., Journal of Corporation Law


The first trial is always in the court of public opinion.1

I. INTRODUCTION

Enron and its progeny spawned an unprecedented amount of press coverage. To their credit, the media comprehensively covered allegations of widespread accounting fraud as serious and important news. Major newspapers deserve special credit for the breadth and depth of their coverage.

While it was a safe assumption that the sagas of Enron and-to a lesser extent-media icon Martha Stewart would receive sustained media attention, the sheer magnitude of the corporate governance scandals fueled extraordinary coverage of massive frauds at WorldCom,2 Tyco,3 HealthSouth,4 and Adelphia,5 to name but a few. Before Enron collapsed into bankruptcy and became mired in a complex web of investigations, few would have predicted that the editors of the Wall Street Journal would devote significant resources-including prominent front page space-to criminal investigations and prosecutions over a prolonged period of time. But to the Journal's credit, it did.

Apart from the value that intensive press coverage provided their general readership, major papers also helped inform public debate about how such massive frauds could have gone undetected as long as they did. For elected officials, business executives, legal and accounting professionals, academicians, and corporate governance activists, the burning question was: Where were the gatekeepers? What went wrong and how can we fix it? The remarkable thing is that, thanks to media saturation, almost everyone knew something about it.

Yet despite all the spilled ink, the Enron fiasco came close to being one of the "biggest failures in financial journalism."6 One of the most perplexing questions is why the financial press was asleep at the switch when Enron collapsed. Why was the news so late? How could the seventh largest company in the country melt down in a mere 24 days with so little forewarning? And how could the Houston Chronicle-whose headquarters were only a stone's throw from Enron's-come so close to missing the biggest business story of the year?7

To be sure, there were clues to be found. In a March 2001 Fortune article Bethany McLean raised what, in retrospect, should have been a provocative question: How does Enron make money?8 At the time, her query might have seemed mildly out of sync. Enron was, after all, the corporation that Fortune had ranked as the most innovative company in the country9 and as one of the "100 Best Companies to Work For."10

But McLean's research unearthed some ominous warning signs about Enron's financial soundness. In the first nine months of 2000, for example, Enron's debt rose by nearly $4 billion, and almost all of its earnings in the previous two years had come from sales of assets that Enron inexplicably booked as recurring revenue. Yet despite the obvious implications of her article, neither Wall Street nor the financial press rose to the challenge.

Enron's fortunes took a turn for the worse when CEO Jeff Skilling abruptly resigned in August 2001 for unspecified "personal reasons" after just six months on the job. Skilling's sudden departure raised red flags for Wall Street Journal reporters John Emshwiller and Rebecca Smith. Why would Skilling-who described himself as "brilliant,"11 said he had never failed at anything,12 and had recently been featured in Worth magazine as one of the top 50 CEOs in the country13-suddenly walk away at the pinnacle of his career? Why would he abandon a $20 million severance package and become obligated to repay a $2 million loan that Enron would have forgiven had he stayed just another four months on the job?14

At about the same time that Skilling left, analysts reported what they described as "aggressive" insider selling of stock by Enron executives, who collectively sold 1.75 million shares in 2001 while the price of the stock was going down.15

Then came the bombshell. In October, as Emshwiller and Smith continued to dig deeper to find out why Skilling had suddenly left, Enron announced a $618 million third quarter loss and a $1. …

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