Featured interview Sherron Watkins, former Vice President for Corporate Development of Enron.

Sherron Watkins is the former Vice President for Corporate Development of the Enron Corporation, who alerted then-CEO Ken Lay in August 2001 to accounting irregularities within the company. Her warning signaled to Ken Lay that Enron 'might implode in a wave of accounting scandals,' predicting

that hidden "improper--possibly illegal-partnerships" would lead to the energy-trading giant's collapse. Enron's demise was being led by then-Chief Executive Officer Jeffrey Shilling and Chief Financial Officer Andrew Fastow and assisted by Enron's accounting firm Andersen and Vinson & Elkins, a law firm representing Enron. When the collapse began months later, Watkins told Lay that Enron should come clean about its massive financial losses--about $1 billion-that were being misrepresented to investors'. She testified before Congressional Committees from the House and Senate investigating Enron's business practices in February 2002.

Ms. Watkins is a former Arthur Andersen accountant who joined Enron in 1993, initially working for Andrew Fastow, managing Enron's $1 billion-plus portfolio of energy related investments held in Enron's various investment vehicles. She held the portfolio management position for just over 3 years, transferring at the start of 1997 to Enron's international group focusing primarily on mergers and acquisitions of energy assets around the world. In early 2000, Ms. Watkins transferred into Enron's broadband unit where she worked on various projects until late June of 2001 when she went back to work for Mr. Fastow in his new area of responsibility over the mergers and acquisitions group of the Enron Corporation. As a result of her memos to Ken Lay urging the company to change its accounting practices and restate its earnings, she has become known to the world as the Enron whistle-blower.

Sherron Watkins was named, along with two others, as one of Time magazine's 2002 Persons of the Year for "people who did right just by doing their jobs rightly" and for their courageous actions. The story of Enron's collapse can be found in the book, Power Failure: The Inside Story of the Collapse of Enron, by Mimi Swartz with Sherron Watkins. In recognition of her outstanding demonstration of ethics in the work place, Ms. Watkins has received numerous other awards, including the Court TV Scales of Justice Award and its Everyday Hero's Award, the Women Mean Business Award from the Business and Professional Women/USA Organization, and the 2003 Woman of the Year Award by Houston Baptist University.

Prior to joining Enron, Ms. Watkins worked for 3 years as the portfolio manager of MG Trade Finance Corp's commodity backed finance assets in New York City and for 8 years in the auditing group of both the New York and Houston offices of Arthur Andersen. Ms. Watkins is a Certified Public Accountant. She holds a Masters in Professional Accounting as well as a B.B.A. in accounting and business honors from the University of Texas at Austin.

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Nance Lucas and V. Scott Koerwer: The media and many others have referred to you as a hero for your courage. They also refer to you as a whistle-blower for doing the right thing. What enters your mind when you hear both of those attributes associated with your leadership?

Sherron Watkins: Whistle-blower is a word that generates a lot of negative feelings. There are people who view that term negatively and then there are those who view it heroically. Unfortunately, there just doesn't seem to be another one-word description that fits my actions. To explain why the press labeled me as such, you've got to re-visit the early stages of Enron's demise.

On October 16, 2001, Enron announced a large and rather questionable "non-recurring" write down. For the next three days, the Wall Street Journal hit Enron with front page expose articles about dubious accounting and related party transactions. Within a matter of days, the company began to spin out of control, creditors soon lost confidence in Enron's financial viability and within a matter of six weeks, Enron was forced to declare bankruptcy, filing on a Sunday, December 2, 2001.

Jeff McMahon, who had replaced Andy Fastow as Chief Financial Officer (CFO) in late October 2001, told creditors at a December bankruptcy meeting that there was no smoking gun. Enron had basically suffered from a loss of creditor confidence. He, as well as other Enron executives, conveyed the message that Andy Fastow, the former CFO, was the bad guy who misled all of them and who had stolen from Enron and LJM. McMahon stated that there was no other story here. Congress was not quite buying the company line, many were concerned that the country's 7th largest company (according to Fortune's listing) had just spiraled into bankruptcy in six short weeks were there other collapses looming? Over a dozen separate Congressional committees started investigations into Enron's demise. Nearly two dozen lawsuits were filed. Everyone at Enron seemed to be sticking to the same story, basically pointing fingers at Andy Fastow. The reality was that a majority of Enron's executives had used Fastow's LJM investment fund to fill holes in their business unit's financial goals. They had turned to Fastow to meet their numbers but after Enron's collapse they were all very busy trying to put the blame solely on him.

The company's responses weren't really satisfying people. A lot of suspicions remained. Then in mid-January 2002, one of the Congressional investigators found my August 2001 memos and released those seven pages to the press. Congress, the media and the financial community in general, came to the same conclusion--that something was rotten in Denmark and had been for a long time. Basically, here was a middle-level executive who had known something was wrong, and had alerted the Chairman in blunt detail. It was also obvious that Arthur Andersen knew it as well. Congress and the press realized that this was a bigger can of worms than Enron was trying to portray. As a result, the media (who had all of their villains already) made me into the hero for marking the investigative trail so to speak and for putting it in writing so that denials would not be possible.

For me, personally, the whistle-blower label generates nothing but negative responses. It is such a harsh word. I have had supporters tell me, "Oh Sherron, don't let them call you a whistle-blower. It's like being called a 'snitch', 'rat', or 'fink'. You were just a loyal employee trying to get your company to do the right thing. You took the shareholder fiduciary duty and you took it upon yourself to get the top leadership to do the right thing." On the flip side, people were saying, "How dare you call yourself a whistle-blower--you didn't go to the outside, you didn't go to the SEC. If you really were on the side of the shareholders, you would have gone to the press."

You can see the difficulty here. The term just doesn't seem to generate any positive vibes. I have explained why going to the outside was not a viable alternative for me in August of 2001. If I had gone to the press or the SEC and exposed Enron, it just would have died faster and no value would have been saved. The only people I would have saved were the people who bought stock from September to November. But shareholders still would have lost $60 billion in Enron during its last two years of existence with many probably blaming me for going to the outside and not first trying to get the company to do the right thing. When a company cooks the books, its best chance for survival is to come clean itself, not to get caught from the outside.

For my part, the Enron experience has changed my life forever. The changes are both good and bad, but frankly, I am not aware of any whistle-blower besides me who has a fairly positive story to tell. Usually the outcomes are very tragic, involving loss of job, home, marriage, and so forth. I kept my job at Enron longer than most, leaving by my own choice, and I am privileged to be in demand as a lecturer, speaking to business leadership conferences, graduate business schools, and Christian groups, using Enron as an example of failed leadership. But even still, I face criticism about whether my actions were enough, or worse, whether my actions were motivated to advance myself somehow. This seems to be the norm for people who take any form of whistleblower action. When we, as a society, pick apart the whistle-blowers, we actually discourage others from taking a stand in the future.

NL and SK: What were the factors that caused you to ultimately be the only person to speak out about Enron's fraudulent practices?

SW: I was not the only person to speak out within the company. Vince Kaminski, who was the head of Enron's research group, was an extremely bright and well-respected executive at Enron. Enron's most notorious accounting fraud relates to the income statement manipulation (loss avoidance) that occurred via the use of the "Raptor" structures. Vince Kaminski was actually in the room when the Raptors were hatched, in a manner of speaking. He could see right through them. He knew it was fuzzy math and not a legitimate structure, so he tried to jump in front of the train to stop the company from employing them. He went to his boss, Rick Buy, who was Enron's Chief Risk Officer, and said, "We just can't do this. This is ridiculous." Vince kept protesting and in the end, he had his duties reduced. That reverberated throughout his unit. It gave rise to the very real perception that Andy Fastow and his Raptor structures were untouchable. If Vince Kaminski couldn't stop them, no one else would be able to either.

Another failed attempt at preventing some of the problems actually came from Jeff McMahon when he was the treasurer of Enron. In early 2000, McMahon went to Jeff Skilling and said that the conflict of interest between Enron and Andy Fastow's LJM fund was getting out of hand. You had one Enron person negotiating for LJM, another one negotiating for Enron, and the person negotiating for LJM could decide the bonus of the Enron person. That was basically sending a message that Enron's interests were not being served. Skilling ended up moving McMahon to a different department. When Enron employees close to Kaminski or McMahon saw their efforts thwarted, they quickly got the message to not complain because it would not do them any good and it might actually harm them. I think that is why the people closest to Enron's accounting fraud stopped protesting.

Going back to why I think no one spoke up after I met with Ken Lay in August 2001, I'll use the 'emperor has no clothes' analogy. In effect, I was saying to Ken Lay that you have no clothes. In turning to the executives around him, Ken Lay was basically asking executives that had already told him he was wearing clothes, if in fact, he was naked. The executives, if truthful, would have been admitting that they'd been pressured to go along in the past. Also, Ken Lay was known among his executive group as a man who did not like to hear bad news, so his inclination was not to consider that I might be right. If he had been more open to the possibility, others like Jeff McMahon would have said, "Sir, I think she is right." But instead, Lay's reaction tended toward the aggressive, more along the lines of "our accounting better be OK, we are paying Andersen a million dollars a week, ($52 million a year) so I (and the company) better be wearing clothes for that much money." All the executives responded to Lay assuring him that indeed he was probably right--Andersen would not have signed off on something that was not on the up and up. Everyone backed away and threw up their arms claiming that they were not accountants and as such, didn't have the answers.

In the end, Enron is a story of failed leadership and even though Ken Lay likes to say that he was duped, he is the one who did not want to hear bad news, and in many ways, he enabled and nurtured the "dupers". In the October 27, 2003 issue of Fortune Magazine, an article on corporate governance listed the ten top questions every board member should ask. One of them was, 'How does bad news get to the top?' Ken Lay didn't want to hear bad news and everyone around him knew it.

NL and SK: As you were writing this opening sentence, "Has Enron become a risky place to work?" in your correspondence to CEO and Chairman Kenneth Lay, what outcome did you expect your memo to generate? What gave you the courage to write this memo?

SW: I was trying to get Ken Lay's attention. I wanted to use language that was somewhat alarming. I also thought that I had some very compelling evidence on my side. The strongest evidence was that Jeff Skilling, who had been with the company for ten years striving for the CEO spot, quit after seven months. That alone should have led someone to presume that I could be right--why else would this top-level executive leave his job? In hindsight, I was incredibly naive and optimistic. I really thought that I was handing Ken Lay his leadership moment.

Leadership experts frequently observe that leaders are made in times of crisis. If Ken Lay was a greater man and a greater leader, maybe he could have stepped up to this dilemma. He was the CEO when these structures were first created and he had been Chairman of the Board throughout. Even if Ken Lay accepted what I was saying, he would have to fall on his sword and concede, "I am only the interim chairman, I will be replacing myself because obviously I let horrible things happen under my watch." When you really judge human behavior, you can compare my actions to the aide who delivers the sword to the general and says, "Do the right thing, Sir, and fall on it." I didn't really comprehend that my memos, if accepted as a possibility, meant just that to Ken Lay back in August of 2001 ."

NL and SK: What was the critical tipping point that motivated you to draw attention to or to cause alarm about the various accounting scandals inside Enron?

SW: I had switched positions at Enron in the summer of 2001 and within a few weeks, I stumbled upon this horrible accounting fraud--the Raptors. I immediately began looking for another job, outside of Enron. I certainly didn't want to work at Enron knowing that the company was perpetrating an accounting fraud. Upon securing a new job, I intended to go to then-CEO, Jeff Skilling and confront him about these issues on my last day. Jeff Skilling beat me out the door and unexpectedly resigned on August 14, 2001. I knew I had to warn Key Lay, who I thought behaved more like a non-executive director than a CEO. I firmly believed he just didn't understand what had happened at Enron. I thought that a crisis management team would be formed to confront these issues. This approach could have resulted in coming up with the right plans, shoring up cash, and presenting a plan to Enron's creditors that might have prevented bankruptcy.

Most financial experts think Enron was too over leveraged to make it, that my warnings, even if heeded, were still too late. However, when you look at Enron's last few weeks, everyone tried their hardest to keep the company from bankruptcy. In bankruptcy, creditors usually get pennies to the dollar; it is a financially devastating event for nearly everyone. Enron had $4 billion of debt hinging on the company's investment grade rating, if it lost that rating, the $4 billion of debt was due and payable within 30 days. Enron would most certainly declare bankruptcy if it lost its investment grade status (which it did in the last week of November, thus filing on December 2, 200l). Enron actually should have lost its investment grade rating much earlier than it did. The banks were putting pressure on the rating agencies not to lower Enron's rating in an attempt to keep the company from bankruptcy.

Unfortunately in its last days, Enron's survival strategy was almost completely reactionary rather than proactive, which created major problems. On October 16, 2001, when Enron announced its third quarter results, it tried to cram these Raptor structures through as a non-recurring, current period write-off to hide from the facts. The company was hoping for the best (an incurious investing public), and did not plan for the worst. Everyone in the financial world, from the press, to the analysts, to the stockholders, began to speculate, with many assuming far worse circumstances than actually existed.

I envisioned one route and one route only for the company to have any chance of survival, which was to come clean about its accounting problems and restate the financial reports, but with a crisis management plan in place. Ken Lay actually had three choices. He could have chosen to perpetuate the fraud, prop up those structures, and keep the fraud going; or he could have restated with a crisis plan for the worst, or, the path he chose, he could have tried to sweep the issues under the rug and hope for the best. The problem with the sweep-it-under-the-rag choice is that if it didn't work, Enron was doomed. You can't then go back and say, "Never mind, we meant to do a restatement."

NL and SK: What factors led to an environment of corruption and fraud inside Enron? Was there anything unique about its culture?

SW: There were a host of things wrong with Enron's culture. Ken Lay had established a core set of values for the company--they were respect, integrity, communication, and excellence. In practice, communication could only be about good news and not bad. People who delivered bad news got pushed out. On the integrity issue, we all were directed to use his sister's travel agency. It was not a good travel agency from either a cost or service perspective. Forcing the employees to use his sister's agency told everyone that once you get to the executive suite, it's okay to take assets for you and your family. Andy Fastow heard that message loudly and clearly. Ken Lay excessively used the corporate jet for personal purposes. He probably comforted himself with the fact that he properly recorded that use in his W-2 forms and paid taxes on that perk, according to the tax rules which require an executive to recognize the price of a first class ticket to and from the particular destinations as the tax value of the perk. Unfortunately, there is a big disconnect between the price of a first-class ticket in your tax return and the real cost to the company for using the corporate jets. That was once again an example of imperial, dictator-type behavior.

Enron executives did not demonstrate that they valued integrity; it was way down the list. The only way an organization can sustain a value system is to let people go when they violate it and to reward those who live by it. When you have a poorly performing employee who violates your value system, the answer is pretty easy--you fire them. The trouble is always with the good performers; as soon as you retain and/or promote those good performers who either by accident or volition do not live by the company's value system, you send a clear message to all employees that the value system is secondary to making earnings or winning over new customers. Enron had been sending that message for a very long time. The business was morphing throughout the 1990s, moving from a stodgy regulated gas pipeline company into a state-of-the-art trading house. In 1997 Enron still had 60% of its earnings coming from the regulated gas pipeline group and from upstream oil and gas operations. By 1999, nearly 90% of Enron's earnings were generated from trading with only 10% from the regulated gas pipeline group.

Enron had sold its oil and gas unit, but the regulated gas pipeline group had not been sold or reduced in size the company had just grown very quickly, all from the trading group. Most business people would consider commodity traders as rather predatory and sometimes nasty folks. They are trying to get the best deal for their companies in every trade, so they don't consider themselves to be dealing with customers; they are dealing with nameless, faceless counterparties. The best-run trading houses place well-regarded, well-positioned, well-paid control people as supervisors over the traders. If there is any kind of violation or behavior that doesn't fit the value system, the trader is usually terminated. A well-run trading organization tends to keep their traders in rather tight cages, they earn very high salaries and bonuses, but rarely are they promoted off the trading floor and into management. In the mid to late 1990s, Enron was promoting traders to management quite often, letting the traders manage junior traders. To give you some idea of the disastrous results, just look to Enron's manipulation of the California energy market in 1999 and 2000. It is just not a good business practice to be so predatory that you bankrupt your primary customers. That's what Enron did in California. They manipulated that market and took advantage of the flaws in the deregulation process to the degree that they bankrupted Pacific Gas & Electric. You don't want to be that predatory. When you think about who was running Enron's business, it was all former traders. Those are the people Jeff Skilling promoted.

NL and SK: Did Enron have an explicitly clear code of ethics and how was it viewed by its employees?

SW: Enron had a code of ethics that everyone had to sign and it got updated nearly every year. It grew longer and longer with each revision. But at the end, it contained explicit rules against making inflammatory statements about Enron's executives. The code of ethics was starting to reflect that the wheels were coming off and they wanted to ensure that employees would keep quiet. Enron had all of the right procedures on paper. An organization can have a wonderful anonymous employee hotline and a great value system on paper but is the company getting the value system from the walls to the halls when the great performers can violate the values at will and go unpunished? The value system then means nothing and becomes trash. How the leader models those values and standards sets the tone for what's acceptable behavior in the organization.

I have encountered many CEOs of companies at leadership conferences where I have spoken and nearly every single one of these top leaders has a heartbreak story of some executive who they were grooming for great things, someone they just loved. And then that protege did something stupid one day. Sometimes the mistakes could have been avoided, if the person had just stopped, taken a breath, and thought about it. Most of the CEOs tell a similar story, basically of an extremely strong desire to give the executive a second chance, but deep down, they knew they couldn't because it would send the wrong message. They had to let them go and it broke their heart to do it. These CEOs had to put their organization and the organization's value systems above their feelings for that one particular person who made the error in judgment. I have actually heard executives of some of the companies that are currently suffering some sort of corporate scandal complain about the difficulties of instilling ethical activity in their organizations. The complaints sound similar: "There is just no silver bullet for ensuring an ethical value system exists in your organization." That statement is just not true. It actually means that the organization is unwilling to ensure an ethical value system is in place. There is a silver bullet and it's hard to implement when one of your good performers does something stupid. But when you dismiss that person, everyone else gets the message--the value system comes first.

NL and SK: What does Enron symbolize for corporate America?

SW: Enron is a scary beast. When I encounter some of Enron's competitors or other industry players who have dealt with Enron, they say that they tried to copycat Enron. They compliment Enron's government affairs/lobbying department that knew how to make the contributions, how to find the pressure points, and how to get the right access. They comment on Enron's public relations department that knew how to get their executives the right press coverage. Every single thing that Enron did had shades of dirty play associated with it. Enron, in hindsight, was incredibly good at figuring out how each game worked, the political game, the PR game, the trading game, the banking game, and how to play each game in a manner that benefited Enron. Ken Lay would say, "I always try to hire the best people for the job, and then give them plenty of room to maneuver." That's a bit like saying "Don't tell me how you make it happen, just make it happen." It was all about winning at all costs.

In the banking arena, Enron's CFO, Andy Fastow was able to get away with such aggressive off-balance-sheet debt deals because he knew how to play the bankers. His strategy was to look at banks that had not closed a lot of deals, particularly with Enron. He would call them up near the end of the quarter, ask them to participate in a deal he knew to be shaky, but also promise future investment banking deal flow. The banker needed the fees, needed the business to make his or her numbers that quarter, plus would salivate over the promised investment banking business. That strategy played to the greedy needs of each individual banker who knew the shaky deal was not necessarily good for their banks, but they did it anyway because they needed to make their numbers so they could get their bonuses--in the end, if the deal failed, if Enron failed, they had their bonus and their Hamptons house so they weren't the losers, but their banks were. For the ethical bankers who wouldn't go along, Fastow berated them, telling them they were stupid and the dumbest bankers he'd ever seen. "Every other bank was participating in Enron's deals, why weren't they?"

Enron executives looked for the baser motives with every industry player and pushed those buttons as hard as they could. It is why Enron earned the nickname, the Evil Empire.

NL and SK: What do your efforts symbolize for corporate America and for the general public?

SW: My efforts symbolize that individual actions matter and that you have to take ownership for your actions when you're in a leadership position. The story of Enron is the story of diffusion of responsibility. Arthur Andersen didn't have the courage to tell management they couldn't engage in certain practices so they directed Enron to seek approval from the company's board of directors. The board would then ask what Andersen thought of the issue and if it was OK by them. Enron management would reply that Andersen hasn't said no. Both groups did not take action to stop or restrain aggressive accounting, relying on the other to do it.

I encourage people to take responsibility for their organization and to try to right the wrongs when they see them. Employees should consider their actions as if judged by themselves; they should also take a step further and act as if they are the leader of the organization. I think one of the biggest organizational problems is that employees comfort themselves that a certain behavior does not reflect poorly on them, that they are being asked to do some particular task because it is behavior the corporation does itself. They still do it even though they would readily admit it's not what they would normally do on their own. Take that to its extreme and you have Nazi Germany.

NL and SK: Our models of leadership are shifting in this country. We see more women as prominent leaders who are admired for their ability to lead with integrity. Do you think that your role in Enron sends any signals to the American public as a woman?

SW: In one respect, women are not in the club so it's easier to critique activities if you're not in the club. If women have risen to the top, usually they have had to fight harder. Additionally, some people have been promoted above their skill level because they are part of that club. If that has happened, then usually those executives are not really confident about their abilities; they live with a certain level of fear of being discovered anyway, which combines to ensure that they will not rock the boat. Frankly, I don't think you will find any woman executive who fits that description. Usually, they had to wait too long to get the promotions they deserved. Women generally have more confidence about what they know when they stumble upon fraudulent behavior.

On another note, there are just as many male whistle-blowers in history and there are also examples of women committing various kinds of ethical breaches. For example, there are women involved in the Iraq torture matter. It is hard to say that we would be so much better if the roles were completely reversed. Of course, at current levels, I certainly think we need more diversity in executive suites and board rooms.

NL and SK: We have witnessed a rash of corporate scandals in the last several years. How do we reverse the climate of mistrust that now exists in corporate America?

SW: CEO pay is the acid test. I agree with Warren Buffet about how ridiculous CEO salary levels are today. Japan pays their CEOs ten times above the average worker and the United States CEO is paid on average 300- 500 times above the average worker. The next country that is the closest to us is Great Britain and they are just at 45 times above the average worker. You can't convince me that the CEOs of the big Japanese companies are less capable than the U.S. executives.

University researchers report that in the 1970s, the United States paid CEO's 20 times above average worker pay; in the 1980s we were 40 times above average worker pay; and as of 1990 we had gone to 85 times above average worker pay. There were some reforms in the early 1990s to try to curb this incline but it had the complete opposite effect. We shone a spotlight on CEO pay but none of us were looking because as long as our stock portfolios were rising, nobody was paying attention to the fine print. The only group looking was the CEO group. The comparisons seemed to drive them into a salary rising frenzy: CEO no. 1 is making $5 million and is running a smaller company than CEO no. 2 who is only making $3 million, so CEO no. 2 proposes an increase that he should be making $8 million. Now CEO no. 3 takes notice, he's been making $7 million, he's been perfectly happy with that level of pay, but his company is bigger than CEO no.2's, so now he proposes an increase that he should be making $10 million. The next thing you know, the average CEO in this country is making 300 to 500 times the average worker. The amount of money given to these executives is mind-boggling.

I like the article, "The Talent Myth" that was written about Enron in The New Yorker a few years ago. It mentions that there are great individual achievements from scientists, poets, and musicians, but when you really think about an organization, it comes together and functions better than the individuals because of its systems. It can't just be one person. It's like team sports--you need the whole team because one good star isn't enough to make it happen. I think CEOs compare themselves to athletes or Hollywood stars, except that for the CEO, it's not a bidding process to see what their pay is. The reality is that a successful executive in the pharmaceutical business cannot be a successful executive in the automotive business. You can have a good baseball player from one team who can be the same good baseball player for another team. The skills are interchangeable, but that's not the case in corporate America. Also, the pay for an athlete or movie star is usually in direct proportion to what they have done lately. As soon as the box office draw dies, the mega movie star stops pulling in the big bucks. For CEOs, the pay rarely seems to go down, even for poor performance. Investors don't trust the system of governance anymore.

There is a lot of distrust because corporate boards appear to operate using a rubber stamp approach. When the SEC had a proposal to increase shareholder access to boards, they had a record 14,000 responses. Overwhelmingly all of the responses, except from current CEOs and board members, indicated that they wanted even greater access because the proposal didn't go far enough. There is still this angry mob out there. Some regulators, particularly from the SEC, say that we'll see a Sarbanes-Oxley Act II, III, and IV if we don't see real reform soon. Nothing has changed much in the companies that were well behaved in the first place. The ones that are pushing the edge of the envelope are the ones fighting these changes.

NL and SK: Do you think the Sarbanes-Oxley Act fixes the problems and prevents another Enron? Is more legislation needed?

SW: Our system, up until the 1990s, was generally comprised of individuals owning company shares. I think CEO pay was kept in check because they knew there would be protests at the shareholder meetings if it reached excessive levels. In the 1980s, when I was auditing public companies, all of my clients geared up for these big annual shareholder meetings. That just doesn't happen anymore. In the 1990s we experienced a huge growth in mutual funds. Many people now own stock in mutual funds and they never look at what the mutual fund owns. They just look at whether or not it's going up and beating the market. If it isn't, they sell it and get something else. That keeps mutual funds looking for only the winners and looking at stock price and stock price only. Even Vanguard, up until this last year, said they rubberstamped nine out of ten proxies. No one is minding the store. There is no active shareholder voice with the very recent exception of the public pension funds. How far can CalPERS or the New York State public funds and all these others go? Can we rely solely on them and New York's Attorney General Eliot Spitzer to improve the whole system? I realize that the large public pension funds are well-motivated, they have to dance with every partner at the dance--they can't just pick and choose dance partners, so they are trying to improve the whole dance. But relying on this one group to effect change that is sorely needed is asking too much.

The recent corporate scandals, the pay issue at the New York Stock Exchange, and the mutual fund scandals all demonstrate one undeniable fact--the corporate board system in this country does not work, and has probably never worked.

Boards still act as if their top priority is the maintenance of a collegial atmosphere, where nobody questions the CEO, much less challenges. I think that if management is fine, ethical and upstanding and believes in applying the best of the best practices for corporate governance, then the board system works because management never gets them into any trouble. Show me a situation where the CEO proposed a pay increase and the board denied it. The board tends to acquiesce.

On the flip side of this, you have executives who cut their own pay just because they believe it is the right thing to do given certain circumstances (believe it or not, this has happened at IBM, at Southwest Airlines, at Charles Schwab, among a few others). It's never their board that suggests the pay cut. Ethical CEOs make their boards look good, but unfortunately a board of directors will never make an ethically challenged CEO look good. The amount of rubberstamping by corporate boards is astonishing. I don't think that people are facing the fact that boards are not operating as a fiduciary. We have to come up with a new system.

NL and SK: What impact, if any, is the Sarbanes-Oxley Act having on transforming corporate cultures, especially in complex and opaque companies like Enron and Tyco? Do we do enough, beyond this piece of legislation, to protect whistle-blowers and ethical heroes?

SW: Let's pretend that the Sarbanes-Oxley Act had already existed prior to all of these big scandals. Enron still could have happened because it's all about what you do with that information. People were trying to warn others that these structures were fraudulent but they got pushed aside. These standards are only good if the company really wants to hear the bad news and if they want to do things the right way. The legislation goes a long way in protecting individual rights. The employee won't be dumped on the street, which might encourage more people to come forward because they know that they won't be summarily dismissed.

The good companies have anonymous feedback systems. When they hear something alarming that seems credible, they know it's time to conduct an employee survey in that department or to interview several key people in that department. They try to find a half dozen people to support the same story and they do not conduct a search for the anonymous whistleblower. They try to rectify the problem and get to the bottom of it. Companies like Enron who don't want to hear the bad news are going to try to find the whistle- blower.

NL and SK: If you had to go back and do this all over again, what, if anything, would you do differently?

SW: I think I would have done some things differently--going instead to the audit committee as one example. I am the only whistle-blower I know who has a relatively good story. I have had to develop a thick skin because people still come out of the woodwork saying that I didn't do enough. Some resent the fact that my life appears to be doing well but they still lost everything. There are people who want to be contrarians who allege that I did this just to get whistle-blower protection. One person even printed in a book that I had been fired from Enron before and was about to be fired again, and strictly met with Lay to gain whistle-blower protections. I had never been fired from Enron, nor was I about to be dismissed--the truth was relatively easy to get to via sworn public statements or from the volume of publicly available documents. However, the lies are printed in a book, then later, some journalist reprints the comments in the newspaper, and so on. A lot of grief results from lies. I can certainly understand people who say that if they had to do it all over again, they wouldn't. There are a lot of Enron villains who will go unprosecuted because people who could testify against them don't want the headaches.

NL and SK: If you were going to send a message to education, whether to universities or even those in business schools at the graduate level, what message would you promote?

SW: I think that some universities are starting to perform checks on applications and if a student is exaggerating or lying on an application, they won't let them in. When you find cheating, kick those students out. I think you don't give them a second chance either. If schools don't send the right message that those behaviors won't be tolerated, then those behaviors will get perpetuated. The right message colleges and universities can send is that they're all about having ethical students.

Colleges are getting a high percentage of students from high schools who have admittedly cheated in school. It's starting much earlier than we realize. It's worsened by their parents who fight the school board for a second chance when their kids have cheated. The kids learn that cheating pays. It is getting harder to get into the good universities so parents are very concerned about any flaw on their child's record. They will fight to have teachers go easy on their children, which sends the wrong message.

NL and SK: Thinking back over the last couple of years from when you wrote that memo to Ken Lay and what has transpired since then, what lessons have you learned from this experience that you could share with aspiring corporate leaders?

SW: In terms of leaders, they have to realize that all of their actions are being watched. If they have any kind of slip up in their own ethics and value system, it's going to be mimicked by others. It will be much worse in the trenches. They have to let people go who violate the company's value system. The real lesson for me is that I should have left Enron in 1996 when I first saw behavior that I thought was over the line. If your own personal value system is not validated or if you are uncomfortable when your value system gets violated, leave that organization. Trouble will hit at some point.

There are a lot of innocent Enron employees who are having difficulty finding gainful employment because people say to them, "You have a great resume and great experience. I wish you would have come to me

sooner, but I already have three Enron people and I can't have more than that in my department because it will look bad, so I can't hire you." They are being hurt. Their former Enron positions had nothing to do with Enron's fraud, they personally never participated or knew of Enron's fraud, yet they are penalized with an Enron-label as undesirable. I have friends who are "unindicted co-conspirators", witnessing against bigger fish for the government. They are considered coconspirators because they succumbed to this "go along" behavior. They got themselves in a compromising position where all of a sudden they were being asked to commit fraud and they either had to go along with it or quit that very day. With family issues and bills to pay, most people acquiesce instead of walking out the door.

The one thing people try to use as an excuse is that it's hard to judge some of these dilemmas--it's not right or wrong but instead which is the better "right" answer. I think that is a cop out. I like the 3 M test where you judge an activity three ways: Would you feel comfortable discussing the activity or transaction with the manager you most admire and respect? If it doesn't pass that test, then don't do it. If you don't want this disclosed on the front page of The Wall Street Journal [media], then don't do it. Or if you don't want your mother to know about it, then don't do it. I think that the 3-M test makes ethics real.

Dr. Nance Lucas is co-editor of the special issues series of the Journal of Leadership & Organizational Studies and Special Assistant to the Provost at the University of Maryland. Dr. V. Scott Koerwer is Associate Dean of Executive Education & Marketing, Communications of the Robert H. Smith School of Business at the University of Maryland and a member of the Review Board for this issue on values, ethics, and leadership.