Volume 38, Issue 1, January 2003

ENRON
  ENRON Fallout
How Corporate Greed in Other Industries Changed Practices at Publicly Traded Glass Companies

by Tara Taffera

If you were asked to say the first word that pops into your mind to sum up the state of the economy in 2002, what would it be? Chances are many people would utter “recession,” “slump” or “uncertainty.” But, many laymen, citing one of the causes rather than the effect, may also blurt out “ENRON” and “Martha Stewart,” which then conjure up words such as “greed” and “dishonesty.” 

The Big “If” 
While corporate greed has touched industries such as energy and telecommunications, could a similar situation arise in the glass industry? Executives at many publicly traded glass companies say no … well, maybe yes and no. Executives to whom we spoke said that as long as organizations live by a strong set of values and ethics it won’t happen.

“It could certainly happen in any industry when an individual looks out for his own interests,” said Bob Tunmire, president of the Glass Doctor and executive vice president of the publicly traded though closely held Dwyer Group. “In the case of ENRON, allowing the chief executive officer (CEO) to do what he did proves that the board of directors was asleep at the switch. As long as a company has a good board these things won’t happen.”

Tunmire said his company has signed the Security and Exchange Commission’s (SEC) Code of Ethics. Additionally, a code of values was developed when the company was founded 23 years ago. Then six years ago, these guidelines were turned into a list of operational values. 

“When we have a meeting of three or more people we read the operational code of values,” said Tunmire. “This has helped us greatly to stay on track.”

Russ Huffer, CEO and president of Apogee Enterprises, which is traded on NASDAQ, said his company also has a code of conduct that ensures against such situations as conflict of interest, etc. He added that Apogee has many of the safeguards that ENRON didn’t including independent directors and auditors, a code of conduct, which is signed by each Apogee employee, and evaluations of the CEO. Huffer added that it all comes down to integrity. 

“We emphasize integrity in everything we do, from hiring to promoting employees,” he said. “We expect integrity from everyone. This keeps people from being tempted to be dishonest.”

St. Louis-based Solutia Inc. is another publicly traded glass company that has a code of ethics and a code of conduct in place which covers such topics as use of company funds, etc. Victoria Holt, vice president and general manager of performance films at Solutia, said the company has a very disciplined process regarding use of corporate funds and other financial matters. (Editor’s Note: In mid-December, after Holt was interviewed for this article, it was announced that beginning on February 1, 2003, Holt will leave Solutia to serve as president of PPG Industries’ fiberglass unit). 

“We are an extremely conservative, chemical-based company with strict policies and procedures,” said Holt. “People here are of very high integrity and would not cross those lines. Maybe they had these at ENRON but didn’t use them.” 
Incidentally, it seems that ENRON did have a code of values. On the company’s website is its 1999 annual report and in that report is a values statement, which include sections on communications, respect, integrity and excellence.
 
Is Pressure the Cooker?
According to Holt, she is displeased with statements made by corporate executives at ENRON who say there was a lot of pressure put on them by Wall Street. She added that she doesn’t have much sympathy for executives who use this to defend their actions. 

“Wall Street puts pressure on all companies to show quarter-on-quarter improvement, but this is no excuse to act unethically,” said Holt. 

So, although many companies in the glass industry have a code of ethics and values that they follow, could it still occur in our industry? Huffer warns that if you see people living beyond their means that’s a red flag. For example, in the case of Apogee and other publicly traded glass companies, Huffer said all someone has to do is pick up a proxy to see the company’s financial numbers. 

“If those numbers don’t correlate with a person’s lifestyle, as was the case with TYCO and MCI WorldCom, that could be a problem,” he said.

Huffer added that in the glass industry there are so few publicly traded companies that everyone knows everything about you. For example, he said employees from other glass companies, whether they are suppliers or competitors, own stock in Apogee and keep close tabs on the company’s financial statements and business dealings.

“Someone could try to be dishonest but it would be so visible so fast,” Huffer said. “Why would you be so stupid? You’d have to be awfully greedy to do that.”

Making Some Changes
While ENRON executives acted dishonestly when it came to their financial statements, the company’s auditors, Arthur Andersen, also acted dishonestly by covering up certain financial information. This caused the nation’s financial institutions, such as the New York Stock Exchange (NYSE) and the SEC, to get involved. Even Congress got in on the investigation.

The NYSE issued new guidelines intended to enhance the accountability and integrity and of NYSE-listed companies by strengthening the corporate governance and disclosure practices of those companies (for more information on these guidelines, go to www.nyse.com). This came at the request of then SEC chairperson Harvey Pitt who asked the NYSE to review its corporate governance listing standards. Congress also has passed the Sarbanes Corporate Accountability Bill. One of its main provisions includes the fact that the chief executive officer and chief financial officer now have to sign off on a company’s financial records and may assume criminal liability if they are wrong. 

However, executives at glass companies say this isn’t a big change for them, and it doesn’t make them look more closely at financial records because they were already doing this.

At Apogee, Huffer said there are eight businesses grouped in three segments and each segment is visited each quarter by Huffer, the CFO and his financial team, the executive vice president and the general counsel. The president of each of those businesses signs the code of conduct, etc. 

At Solutia, Holt said that in addition to the CEO and CFO signing off on financial results, division heads, such as she, also sign off on the results along with the controller. However, according to Holt, this isn’t a major change because she always looked at the results of her $600 million division, but now there is a formal letter in which she signs off on the financial statements. 

Alcoa Inc., parent company of Kawneer Co. Inc., in Norcross, Ga., said its executives did not have the time to speak to us for this article due to scheduling conflicts. (Incidentally, Pilkington and PPG were also contacted for the article but they opted not to be interviewed.) However, Kawneer directed us to its website where it provides information regarding financial matters. In fact, Alcoa chairperson and CEO Alain Belda posted a letter on Alcoa’s website on July 30, 2002, stating that he supports the recommendations from the different branches of government that require more transparency, more disclosure, better and stronger control of the accounting industry and better governance.

“Alcoa supports the drive for better governance across the corporate sector. We believe the New York Stock Exchange guidelines and requirements of the Sarbanes-Oxley Act offer opportunities to improve governance,” said Belda. “Alcoa already has a strong internal governance structure in place, and we anticipate no problem in fulfilling all of the new requirements.” 

Regarding what happened at Arthur Andersen, executives at glass companies say this didn’t have much of an effect on its audit process. 

“We know our numbers are accurate,” said Tunmire. “We have an outside auditing firm look at our numbers every quarter.” He added that because the Glass Doctor is composed of franchises each individual Glass Doctor franchise has to be audited as well. 

At Apogee, the company changed its auditing firm from Arthur Andersen to Deloitte & Touche because Arthur Andersen went out of business. At Solutia, Holt said one of Solutia’s locations was using Arthur Andersen and was transitioning away from using them prior to the ENRON scandal, so this really wasn’t an issue. 

We should note, however, that CEOs and CFOs should look closely at audit reports no matter what firm does the auditing. A study performed by Weiss Ratings said that of the 33 companies cited for accounting irregularities in 2002, approximately 94 percent of them were given a “clean bill of health” and none of these companies were warned of potential problems (see sidebar, below).

Keep a Close Watch on Auditors
According to research performed by Weiss Ratings, of the 33 companies that were cited for accounting irregularities in 2002, approximately 94 percent of them were given a “clean bill of health” by their auditors and none of these companies were warned of potential problems. This is according to the website Financial Planning Interactive.

Roderick Powell, a senior equity analyst at Weiss, blamed many of the problems on a lack of diligence by auditing companies to find errors. However, he added that this will change due to the scrutiny these firms are now under.
Interestingly enough, the report found that more than 42 percent of the 228 companies that filed for bankruptcy in the first half of 2002 were give clean audits.

The following chart shows results from the 33 audits:
Auditing Firm Total Audits Total Warnings Total Clean Audits
Arthur Andersen 11 0 11
Deloitte & Touche 5 0 5
Ernst & Young 4 0 4
KPMG 5 0 5
Price Waterhouse Coopers 7 2 5
Tullis Taylor 1 0 1
Total 33 2 31



Preventing Insider Trading
While publicly traded glass companies have a set of values and practices to ensure that what happened at ENRON doesn’t occur at their companies, they also have precautions in place to prevent insider trading.

At the Glass Doctor, Tunmire said this issue is covered in an orientation session given to all new employees.

At Apogee, Huffer said the company has very specific guidelines regarding the trading/selling of stock. For example, there are specific trading windows in place for senior employees and the board of directors. 

“These are narrowly defined windows of when they can buy and sell stock,” Huffer said. For example, there is a suitable waiting period to trade or sell stock after a company announcement has been made. 

“We watch that [insider trading] very closely,” said Huffer. “We are adamant about ensuring that people understand what that is all about.

“It is important to follow these guidelines to the letter,” said Huffer. “We’ve had that policy in place for years.”
At Solutia, Holt said there are also strict controls on information. 

“People who have that information can only trade during certain trading windows,” she said. “Any transactions by officers have to be approved by the chief counsel.”

Can Good Come of These Scandals? 
So will the downfalls of companies like ENRON and the controversy surrounding Martha Stewart have a positive impact on financial reporting as a whole? 

“Some things that should have been happening [at ENRON] were not happening, so that makes everyone more responsible,” said Tunmire. “Will good come out if it? Yes.”

Holt agreed, but added that bad can come of it as well.

“If it’s taken to the extent that all corporations are viewed in a negative light until proven to be not guilty that is negative,” she said. “People must understand that 99 percent of the financial community has solid practices in place. My concern is that people will assume that unethical behavior is practiced across the board.”

In fact, Holt said this skepticism has been proven earlier this year in the lower NASDAQ and NYSE numbers. 
In his letter on the Alcoa website, Belda agreed that these scandals have eroded public confidence not only in business but in regulators, auditors and the American capital market system in general.

“Here in this developed economy, people from all over the world have been willing to invest in ‘pieces of paper’ because of a basic trust that there are systems in place to make the ‘pieces of paper’ valuable,” he said. “What is happening is that the trust about investing in ‘pieces of paper’ is being eroded by the idea that there is not an oversight system that works to protect the investor. It is also being eroded by the actions and omissions of some of the people entrusted to run these companies and oversee their governance and reporting.

“There is no amount of laws or regulations that will force a company to behave with integrity,” added Belda. “Learning from these events, we are taking steps to further improve standards, controls and accountabilities. The best line of defense is for integrity to be a part of the living values of each individual member, each Alcoan.” 

“When morals are not in place, rules and laws don’t matter,” said Tunmire. “If someone doesn’t have basic morals there will be trouble.” 

 

the author
Tara Taffera is the editor of USGlass magazine.


USG

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