The sudden and spectacular collapse of Enron, the seventh largest corporation in America, has exposed the culture of greed that permeates most major corporations, often in wanton disregard of workers' and investors' rights and interests. While top Enron executives and insiders made fortunes, workers lost their jobs, their health care and their lifetime savings for retirement. Other investors lost virtually everything.
The Enron bankruptcy has exposed major vulnerabilities in working families' retirement security. It has raised public questions about defined contribution pension plans. And it has focused attention on the threat posed by proposals to privatize Social Security, which would trade in the system's guaranteed benefits for individual accounts like those held by the employees of Enron.
The company's calamitous and scandalous downfall has also lifted the boulder of corporate governance to reveal a wriggling mass of deception, self-dealing, conflicts of interest, influence-peddling and manipulation of laws and regulations that imperil our entire economic system.
At the same time, the Enron debacle has raised significant questions and heightened concerns about the motivations and trustworthiness of the corporate interests that appear to be driving energy policy, especially deregulation, at the national and state levels. It has raised, once again, questions of equity and wisdom in national tax policy, which allows major corporations such as Enron to shield earnings from taxation. And, it has focused attention on the unseemliness of giving companies major infusions of taxpayer dollars through federal contracts, with those companies all the while violating public laws and breaching public trust with impunity.
Although the scandal's fallout is particularly evident in Houston and Washington, its effects touch almost every family in America, many of them very dramatically. Union members are among the Enron workers who were hit hard as were all Enron employees who were heavily invested in company stock. But the pension investments of nearly all workers have been affected since most mutual funds held Enron shares. All working families, investors and communities stand to lose even more if the schemes and the culture that Enron represented and promoted continue to go unchecked.
The AFL-CIO and unions representing workers employed by Enron and its subsidiaries have mobilized in response to the Enron scandal. We have provided direct assistance to workers, including legal assistance to many who were seeking full and fair severance payments in bankruptcy court. Even before Enron was a household word, we filed petitions with the SEC calling for greater independence of auditors and company boards. We have testified before congressional committees and brought Enron workers to Congress to share their experiences at the hands of a company they trusted. AFL-CIO affiliates are engaged in discussions about bargaining for greater protections of worker savings accounts in other companies with similar problems. We have been taking the lead in demanding that members of the Enron board resign from the two dozen other companies where they sit in positions of fiduciary responsibility.
But we recognize that the wrongdoing and fall-out from Enron and the criminal acts of its managers, egregious though they are, are not the whole story, and our efforts cannot stop with it. Enron is not simply a case of a single company gone bad: it is a broader story about risks and losses for workers who play by the rules while their employers breach their trust; about a system of corporate governance that insulates executives and corporate insiders while exposing investors, workers and the public at large to enormous - and frequently unknown - risks; and about other laws and regulations that shield wrongdoers from real accountability for their conduct.
The lessons from Enron are stark and clear: the public policy agenda promoted by Enron and like companies is bad for all Americans; investors, workers and communities are all stakeholders in these corporations, with interests that need and deserve protection; and regulation of corporations and changing their governance is the only way to ensure the protections and transparency stakeholders deserve.
For that reason, the AFL-CIO calls on Congress, the President and federal regulators to enact and enforce broad, specific reforms to strengthen and protect workers' retirement security, to hold corporate executives and directors to higher standards in governing corporations' affairs, and to make them accountable for their malfeasance and breach of trust.
Strengthening and protecting workers' retirement security: The Enron scandal underscores the importance of the labor movement's longstanding commitment to maintaining "a strong national retirement system that is built on a foundation of guaranteed Social Security benefits supplemented by employment-based pensions and private savings," a position reaffirmed in December by delegates to the AFL-CIO convention. Defined benefit plans remain the best and soundest vehicles for building and safeguarding retirement income and security. Defined contribution plans such as 401(k) plans are not substitutes for pensions but to the extent they provide additional savings for retirement, our laws and regulations must include at least the following minimal safeguards to enhance protections for workers and stop corporate abuses.
1. Congress and regulators must put into place significant and meaningful reforms that give workers a real voice in running their 401(k) plans and real choice in managing their investments. Giving workers real voice and real choice means ensuring their active participation in overall plan management; providing them with the information they need to make reasoned decisions; and empowering them to make and act on decisions promptly. Congress and, where appropriate, state legislatures must require equal representation of workers and employers on boards and bodies that oversee administration of plans, including corporate and public employee pension plans and 401(k) plans. Congress or, as appropriate, the Securities and Exchange Commission (SEC) must require employers to share with plan participants all material investment information regarding company stock, similar to disclosures the securities laws already require for investors. Company executives must be ordered to share with 401(k) plan administrators any adverse conditions or information that might affect the value of company stock and employees' investment choices. The SEC must close regulatory loopholes so that corporate insiders must immediately disclose their sale of company stock, rather than waiting as long as 13 months as current law allows. And Congress must prohibit abusive lockdown periods, which prevent employees from selling their shares of employer stock. Lockdowns should be no longer than reasonably necessary to effect administrative transitions, and workers must receive notice of lockdowns at least 90 days in advance.
2. Congress must enact new safeguards to prevent employer manipulation of employees' investment choices. Workers should have a broad right to sell company stock held in their defined contribution retirement accounts in favor of diversified investment options. This right should extend to their own contributions and to employer matching contributions to their 401(k) accounts and should take effect as soon as the contributions are made, regardless of whether the 401(k) is also an ESOP. Where a company does not maintain an adequate defined benefit plan, it should be barred from making 401(k) matching contributions in company stock and offering company stock as an investment option for workers, thereby discouraging diversification. The law should require companies to give workers notice when their account holdings in company stock reach 10 percent of total assets in their accounts and workers to acknowledge their awareness of the risks of excessive company stock before they can acquire additional shares, reflecting guidelines for sound investment practices through diversification in defined benefit plans under ERISA. Workers must have an unqualified right to get independent investment advice through their 401(k) plans; employers, insurance companies, banks and mutual funds should be barred from providing investment advice on their own investment products. Workers responsible for managing their 401(k) accounts should receive basic financial education paid for by their employers.
Reforming corporate governance and behavior: Congress and the Securities and Exchange Commission must promptly consider and enact proposals for reform of corporate regulation and governance and disclosure requirements to eliminate conflicts of interest and to enhance protections for investors.
1. Corporate directors must be truly independent of the CEO and corporate management they are overseeing, and boards of directors should be broadly representative and fully accountable. The practice of having "Enron-style" independent directors who are in fact financially and personally dependent on company executives should end. Boards should be selected from a diverse pool of qualified candidates, not a narrow group of corporate insiders; workers' representation is appropriate for some corporate boards. Directors must be provided the training, resources and independent staffing to understand their companies and business environments and carry out their responsibilities as directors. The SEC should undertake rulemaking to enact these principles for corporate governance, and Congress should mandate rulemaking if the SEC fails to take the initiative to act.
2. The accountants who audit a company must also be truly independent, and there must be meaningful public oversight and accountability of the accounting industry as well as legal advisors. Auditors who receive large consulting fees from the company they audit cannot be independent. Congress must legislate a ban on consulting by audit firms or mandate rulemaking that does so. As shareholders and employees, workers need a strong public body with full investigative powers to protect the integrity of company financial statements - not a body dominated by the accounting industry that lacks real investigative authority, as proposed by former accounting industry lobbyist and current SEC Chairman Harvey Pitt. Shareholders must have a right to sue accountants and lawyers for aiding and abetting corporate lawbreaking, and victims of Enron-like conspiracies must have access to meaningful civil remedies. A single national standard of recklessness should determine liability in securities fraud cases, and joint and several liability should be restored so victims have access to a real remedy in the most harmful cases in which the company ends up in bankruptcy.
3. Wall Street investment analysts must be independent from investment banking operations, and investment managers must vote shareholder proxies in the interests of worker beneficiaries. Stock analysts from the big Wall Street firms rated Enron a "buy" even as the company slid into bankruptcy; meanwhile, the analysts' firms looked to pocket millions in investment banking fees from Enron. The SEC should adopt strong rules prohibiting analysts from being paid based on the performance of the analysts' firms' investment banking division. And the managers of workers' retirement assets must make independent judgments concerning shareholder issues on which they vote. They must vote against directors and proposals involving conflicts of interest, self-dealing and self-enrichment.
4. Congress must change bankruptcy laws to give workers' claims for severance and pension fraud parity with the claims of other creditors and to prevent companies from hiding assets in bankruptcy proceedings. While Enron executives took out hundreds of millions of dollars in "retention bonuses" and other extraordinary payments on the eve of bankruptcy and large banks that did extensive business with Enron are dominating the bankruptcy proceeding, Enron workers have had their immediate recovery in bankruptcy capped at $4,500 (despite losses well over $100,000 in many cases). Last year's anti-worker bankruptcy "reform" bill that would have allowed companies like Enron to hide assets in special purpose entities from the bankruptcy process is currently hung up in conference committee. In the wake of Enron, it is clearer than ever that Congress must go back to the drawing board with the bankruptcy bill now in conference and increase - rather than further diminish - protections for workers.
5. The rules governing executive compensation must be changed so that company executives cannot continue to cash in, regardless of their performance, the health of the company or employees' job and economic security. Congress, regulators and the accounting industry must change the accounting treatment of stock options held by corporate insiders and put meaningful restrictions on how those options may be exercised and sold. Corporate executives should not be allowed to insulate themselves from the downside risks of stock options, or to shield millions in retirement benefits from the reach of bankruptcy courts.
Going forward: an action agenda in the wake of Enron: In response to Enron and the opportunities and challenges it presents, the AFL-CIO and its affiliates will:
- Educate our members and other workers about retirement security and corporate governance issues, in order to empower workers and their families to make informed judgments about their economic future and to enlist them in a variety of advocacy campaigns (corporate, bargaining and legislative, for example) designed to increase protections for workers while ending corporate excess and abuse;
- Aggressively promote a comprehensive retirement security reform agenda, which includes pension law changes to promote the creation and expansion of defined benefit plans, as the safest and best way to build retirement security for working families, and to provide greater protections for workers and other investors who seek to supplement their retirement nest eggs through contributions to defined contribution plans; and measures to strengthen and protect Social Security, while resisting efforts to privatize the program;
- Undertake campaigns (such as the Enron Director and the Motorola campaigns) and rulemaking or other regulatory initiatives to raise public and policy-maker awareness of how corporations are organized, governed and operated; create an environment favorable to change; and win major corporate accountability reforms;
- Hold policy-makers and elected officials accountable for the actions they take or refuse to take on retirement security and corporate governance issues when assessing their working family voting records and making decisions about endorsements or other support.