Sherron Watkins is famous for her memo about Enron’s questionable accounting. Her whistleblower status in helping call out the Enron bad boys is part of the legendary fall of the firm. This morning she spoke on a corporate governance panel at InsideCounsel’s Super Conference being held in Chicago. After her panel - in which she ended her remarks stating that if your CEO doesn’t love the company product, workers, business or industry, leave the firm - we sat down to discuss some thoughts on Enron, the markets and why she brings a healthy skepticism to the business.
I asked her first if she thought former Enron CEO Jeff Skilling was guilty, which to this day he contends he is not. Without skipping a beat she said “Oh yes.” Her Enron (and even prior to that, Metallgesellschaft) experience has provided her some clear views and opinions of human nature. Perhaps her harshest view was “Traders can’t be put into management; they need to be controlled and put in a cage. They can be paid well, but they need to be caged.”
No doubt that sounds harsh to our audience, but here’s her reasoning: When traders are paid so exhorbitantly, they don’t care about the firm or its destruction, they only care about themselves. “To this day, Enron traders have found jobs elsewhere, but Enron doesn’t exist.” To her point: when traders are paid that “legacy wealth,” why worry about the ramifications that could destroy the company? She says the justification of the Enron traders who gamed the system with California was that they were “teaching other states a lesson.” California made stupid choices with its deregulation endeavor. Enron traders, seeing those holes, took advantage of them. “It’s a mentality,” she said.
So her uneasiness about the May 6 “flash crash” comes from watching traders and markets over the years. We discussed the impact of electronic trading, high frequency traders, circuit breakers and the like, but her thoughts are May 6 was a warning that some firm (perhaps a hedge fund or funds, which she believes should be regulated) was testing for weaknesses and trying to determine how they can use their speed, market confusion and regulatory lag to “game the system.”
What worries her is these events that destroy so much wealth (at least for the bulk of us) will continue to destroy trust in the markets, and then, “What, we go back to a 1960s mentality in investing?”
She also believes not enough has been done in stemming “Enron problems,” which include corporate governance conflict of interest issues. Mainly, she says corporate boards are still too beholden to the CEO. She cited a model in Europe in which there is the management board, like boards in the United States today, and advisory boards, which play devil’s advocate, questioning executive pay, etc. She believes U.S. CEOs are paid exorbitantly, especially when compared to the rest of the world, and its mainly because of the too cozy relationship between boards and the CEOs.
But her best comment was on trader compensation. She says within the offices of Enron, there were several conversations on how much traders were paid. “Enron handled so much business, we often discussed how much did we make because we were Enron, or because the trader was so good. Could we have put a monkey in his place and gotten the same results?”