Enron Corporate Control Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan D1: What has the Enron case showed about the problems of corporate control? Presenters: Cary Cheung Christie Cheung Rita Chung Ryan Chan Date: Sept 30, 2002 Managerial Economics – Professor Howard DAVIES
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Enron Corporate Control Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan D1: What has the Enron case showed about the problems of corporate.
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Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
D1: What has the Enron case showed about the problems of corporate
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Outline
• Introduction to Corporate Control• Background of Enron Corporation• The Story of Bankruptcy• Reasons for Bankruptcy• Problems of Corporate Control • Reforms• Conclusion
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Nominal Corporate Structure
Senior Manager
Board of Director
CompanyStaff
ShareholdersShareholders AuditCommittee
Auditor
ExecutiveDirectors
Non-ExecutiveDirectors
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Ownership VS Control?
Shareholders SeniorManager
Senior managers seek for max profit?Looking for significant discretion?Is there any Control mechanism?
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Importance of Corporate Control
• Market Corporate Control is the market for voting shares, which give ultimate control
• value of a firm’s stock = value of the stream of future profits
Market Corporate Control should prevent managers from being lazy or pursuing objectives other than maximizing the organization’s profit
Important and powerful mechanisms
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Rise and Fall of an Energy Giant
Let’s see Enron case…
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Shareholders Structure Types
Family-ControlledSingle Shareholder hold >20%e.g Cheung Kong Holding Ltd.
managed by major shareholders
Management-ControlledNo Single shareholder hold >20%e.g. Enronmanaged by professional managers
Other shareholders:
Institutions
Corporations
Pension funds
Charities
foundations
Small individual
investors
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Background of Enron Corporation (1)
• Houston-based energy trading and distribution company
• Famous for advocacy of energy deregulation• In just 15 years, climb to be 7th largest
company in US (Fortune 500, 2000), with 21,000 staff
• 16th largest in the world• In 2000, stock has crested at $90 a share• Market capitalization: $80 billion• Revenue $139 billion
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Background of Enron Corporation (2)
• Arthur Andersen acts as accountant and consultant
• Board of director– 14 members, only 2 insiders– Most of the directors owned stock
• Employee stock ownership and retirement planning– Incentive purpose– Enhance company profit
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Enron’s Bankruptcy (1)
Enron announced a large loss in its quarter statement
• 3rd qtr loss of >$600 million (surprised Wall Street)
• Stock price fall from the mid-$30s to the low-
$20s (triggered a crisis of confidence in the company)
Overstated its profits by ~16%
Jul
Oct
Nov
Dec ………Bankruptcy
2001
< Year 2001Prosperous business performance…..
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Enron’s Bankruptcy (2)
Major reason of bankruptcy?
A substantial fraction of Enron’s reported profits over a 4
year period (1996-2000) had been the result of
accounting manipulations
--- investigation by special committee of the Enron board
Reported profit Actual profit
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Reason For Bankruptcy (1)
• Accounting gimmickry:– Unable to spot bad accounting practices and company’s
overstatement of profits
• Conflict of auditor:– The multiple conflicting roles of auditor– Automatic renewal of auditing contractsAffecting the independence of auditor
• Accounting and staff policy failure– Although a professor of accounting and a dean for
monitoring the company, but they all fail in their profession
– Disastrous loss in employees’ retirement fund, but the ex-CEO has cashed his own stock much earlier?
Source:Enron Posts Surprise 3rd Quarter Loss After Investment, Asset Write-Downs, Wall St. J, Oct 17, 2001
Enron
Corporate Control
Presented by: Cary Cheung, Christie Cheung, Rita Chung, Ryan Chan
Reason For Bankruptcy (2)
• Political confusion:– Ironical relationship between governmental