Enron - Corporate Governance
A great new movie has just been released - "Enron - the Smartest Guys in the Room". This movie's a must-see for all Economics, Business Studies, Law and Accounting students (that's just about everyone!)
In the 1980s, in the US and UK, all the great state utilities - water, has, telecoms etc - were privatised. Philosophically, this was justified as a step towards supply-side policies, breaking up 'inefficient' state monopolies and creating more competition. In practice, this often led to large private monopolies instead - particularly in the distribution of the service, the network infrastructure. Paradoxically, this then required the creation of strong state regulators to keep them under control.
In the US, regulation was weaker than the UK and Enron dominated electricity distribution, becoming the world's seventh biggest corporation. Then, in the early 90s, President Clinton made a big mistake, making share option schemes legal. A share option scheme works like this: In order to encourage your executives, you give them the option of buying shares in the company at a later date but at today's price. If the company is successful and the share price goes up, they make a big profit by buying the shares at the old price and then selling them at the new price. If the share price has gone down, they simply don't follow through on their option of buying the shares. It's a win-win situation for the executive.
The problem with Enron was that the executives (led by Chief Executive Ken Lay) simply focussed entirely on increasing the share value of the business - so they could maximise their own personal profit. They did this by manipulating the accounts - for example, recording revenue expenditure as capital expenditure, thus increasing the net profit and the asset value of the business at the same time - making the company look more successful than it was. Another trick was to transfer electricity out of California, reducing supply and thus pushing up prices. And there were many more tricks.
Watch the movie and find them all out!
This is not a difficult or dry movie - although a documentary, it's played as a drama - the actors are good and it's full of breathtaking exchanges and good direction. A really fun way to spend 90 minutes - and of course a warning as to what can happen if companies are allowed to get out of control.
In the 1980s, in the US and UK, all the great state utilities - water, has, telecoms etc - were privatised. Philosophically, this was justified as a step towards supply-side policies, breaking up 'inefficient' state monopolies and creating more competition. In practice, this often led to large private monopolies instead - particularly in the distribution of the service, the network infrastructure. Paradoxically, this then required the creation of strong state regulators to keep them under control.
In the US, regulation was weaker than the UK and Enron dominated electricity distribution, becoming the world's seventh biggest corporation. Then, in the early 90s, President Clinton made a big mistake, making share option schemes legal. A share option scheme works like this: In order to encourage your executives, you give them the option of buying shares in the company at a later date but at today's price. If the company is successful and the share price goes up, they make a big profit by buying the shares at the old price and then selling them at the new price. If the share price has gone down, they simply don't follow through on their option of buying the shares. It's a win-win situation for the executive.
The problem with Enron was that the executives (led by Chief Executive Ken Lay) simply focussed entirely on increasing the share value of the business - so they could maximise their own personal profit. They did this by manipulating the accounts - for example, recording revenue expenditure as capital expenditure, thus increasing the net profit and the asset value of the business at the same time - making the company look more successful than it was. Another trick was to transfer electricity out of California, reducing supply and thus pushing up prices. And there were many more tricks.
Watch the movie and find them all out!
This is not a difficult or dry movie - although a documentary, it's played as a drama - the actors are good and it's full of breathtaking exchanges and good direction. A really fun way to spend 90 minutes - and of course a warning as to what can happen if companies are allowed to get out of control.
posted by Economics 101 at
5:52 am
2 Comments:
Is it on Dvd or on Odeon? I'd love to see
By
Anonymous, at 10:37 pm
yeah, I have the same qustion as iliyas, can I download it from the internet?
By
Anonymous, at 6:20 pm
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