Monday Morning – Enron: A bitter pill could cure several ills

Congress, along with most commentators, has focused on the costs of the collapse of Houston’s Enron Corp.

Those include the loss of thousands of jobs at Enron and Arthur Andersen LLP, the devastation of the 401(k) savings of thousands of Enron employees, and the billions of dollars of wealth wiped out in the portfolios of pension funds, mutual funds and individuals. But maybe it’s time to look at the good that may come from the disaster.

Even without congressional action and even without enforcement by the Securities and Exchange Commission, companies are cleaning up their accounting. They are providing more disclosure about off-balance-sheet items and even restating earnings and taking write-offs.

Corporate managers have been reminded that their role is to build real companies for the benefit of all shareholders, not simply to pump up the stock price for a year or two.

Auditors are being less flexible and giving corporate executives less room to manipulate earnings within the accounting rules.

Securities analysts are getting back to doing what they are supposed to do – analyze companies. They no longer are functioning as the scouting arm of the investment banking department.

And those analysts, at least from anecdotal evidence, are being more hard-nosed about their research.

Instead of simply talking to management and reading executives’ body language for earnings guidance, the analysts are talking to suppliers, customers, competitors and employees for insight into a company’s prospects.

Investors of all kinds – from institutional investors for mutual funds, pension funds, endowments and foundations, to individuals – are being more skeptical and applying an “Enron discount” to the projected corporate earnings.

Judging by the current level of the market, that discount is not yet as large as it probably ought to be, but it at least brings projected earnings growth closer to reality.

Many companies are considering changing their rules about when employees may sell employer stock they receive as a matching contribution in a 401(k) plan. A few already have made such changes.

In addition, companies are likely to make greater efforts to provide quality investment education to their employees.

diversify, diversify

Meanwhile, the collapse of Enron stock and the publicity surrounding the loss of retirement savings by Enron employees have reinforced to millions of employees the importance of diversifying their investments, within a retirement plan or outside of it.

Most employees have been told they should diversify their investments. The Enron debacle has provided to these employees a case study in the dangers of not diversifying. The collapse also may temper the kind of employee loyalty to a company that has led many of them to buy large amounts of their employer’s stock with their own money.

The debacle also is likely to have suggested to many employees, especially those near retirement, that they need professional help with their investment and financial planning decisions.

The loss of $70 billion in shareholder value in the Enron disaster is a high price to pay for those lessons. But to a large extent they reinforce the lessons of the $4 trillion collapse of the Internet bubble.

And if such lessons prevent or at least delay another such bubble and collapse, it may well have been worth it.

Mike Clowes is the editorial director of InvestmentNews.