Examination of Witnesses (Questions 220-225)|
BOURN KCB, DR
CBE, MR RICHARD
TUESDAY 25 JUNE 2002
220. But you do not have sympathy with Bentham's
(Sir John Bourn) No, I do not, but I can understand
why they were made.
221. Sir John, finally, if I could just ask
maybe all of you, we mentioned Enron at the beginning and you
mentioned the Enron culture, in one of your answers, and also
the role of non-execs. The issue of corporate governance is extremely
important. But maybe if I could ask, if we could translate Enron
over here, as a company, and look at it, and it was a company
which experienced phenomenal growth in the nineties, annual turnover
grew from $7.9 billion, in 1993, to $100 billion seven years later,
in 2000; that was accompanied by steady, positive earnings and
a share price that ultimately stood at seventy times earnings.
Now, on the board and on the audit committee, the chairman was
a professor of accountancy at the local university, there was
a local judge on the board, and a ex-British Cabinet Minister
on that audit board, so I would assume you would take great comfort
from that. But when the house of cards was blown down, it was
revealed that the profits were overstated by $586 billion, the
debt was understated by $2.6 billion, there were $63 billion of
liabilities, and the share price, which traded in August 2000
at $90, in January 2002 was $1. Now, if I ask you to put yourselves
in a position as non-execs and look at the issue of corporate
governance, would any of you have been sniffing the air for some
foul smell before 15 January2002, when the house of cards blew
(Sir John Bourn) You put it to us like that, and the
answer is, yes, we would.
222. And where would you have sniffed?
(Sir John Bourn) Two areas that I would have sniffed.
I just would not have believed that a company could actually have
been that successful; so that would have made me suspicious. I
certainly would have been very suspicious about these bodies,
which were in some way connected but in other ways were not connected;
because my general experience of organisational life is that if
you have complexity you have confusion, and if you have confusion
you have chaos, and if you have chaos you have crime. And I would
have thought that that is very dicey and odd, and I would like
to think that, if I had been a non-executive director of Enron,
I would have asked for all this to be explained to me, so that
I would have understood it, and if I had not understood it I would
have wanted to say this and get out quickly, but to say it, as
to why I was going.
(Mr Fleck) Shall I comment, just briefly, from a different
perspective. I think, if you are a non-executive director of a
high-flying company, it is incumbent upon you to understand why
it is high-flying; and if there were at the time also those who
were calling into question the substance of that, as there were
two years beforehand, I would have been looking to be provided
with analysts' reports and comments.
223. It was Fortune magazine that was highlighting
that two years beforehand.
(Mr Fleck) And Barrons, about two years beforehand,
wrote a very perceptive analysis of Enron and commented on its
lack of substance. And I think, if you are a non-executive director
of a high-flying company, bluntly, Sir, it is incumbent on you
to be sensitive to the validity of that success and to look at
what third parties are looking at, as well; and the Barrons article
is interesting, in the amount of information that they deduced
from the available published information, and their intelligent
analysis of it, which was very prescient.
(Mr Grant) I think, if I could add just a few words,
Richard Fleck has got the key; understanding the business is,
I think, what non-executive directors need to do. It seems to
me, from what I have read about Enron, that it was an extremely
complex business. I do not know that I fully understand the way
they earned their revenues, I do not really understand the way
they structured themselves, and I do not know the way they made
their profits; but I needed to have done, if I was a non-executive
director, or indeed if I was an auditor. And so it is really getting
to the heart of the business fundamentals that was key.
224. What we have discovered, as we have been
on our inquiries, is that a lot of businesses in the UK as well
are very, very complex, too, and that is the issue that concerns
(Dr Reeves) It was not just the complexity either,
Chairman. I think Enron actually started off in manufacturing
and distribution and changed into marketing energy products, and
I just wonder, when it went into marketing, if it did not fully
understand it as well; just to put a balance to the whole picture.
And the second point I would make is that, you talked about the
auditor relationship with the audit client today, there seems
to be, in terms of the American situation, almost a deeper malaise
round the financial markets; it is also important to look at the
banking industry, insurance, pensions and financial analysts as
well, as well as just the relationship between the auditor and
225. Yes; we have got advice on that. Sir John,
we have wildly overrun our time, but it has been a fascinating
morning for us, and it has been very, very helpful to us in our
inquiry; and we would like to thank you and your colleagues for
your presentation this morning, it was very worthwhile. Thank
(Sir John Bourn) Thank you very much, Chairman, and
if there is any further assistance that I and my colleagues can
give you and your colleagues, please let us know and we shall
be glad to do so.
Chairman: Thank you; thank you, Sir John.