Ten years ago, on Dec. 2, 2001, the Enron Corp. filed for Chapter 11 bankruptcy in what was then the largest corporate reorganization in U.S. history. Though just a decade ago, the Enron era in some ways seems to belong to another era—a time when failing companies met with bankruptcy rather than bailouts.
According to John Berlau, of the free-market-oriented Competitive Enterprise Institute (CEI), it was the Bear Stearns bailout in 2008 that “changed everything.” Berlau, who directs CEI’s Center for Investors and Entrepreneurs, told AdvisorOne the Enron failure “was of course devastating to employees, but it didn’t really hurt the larger economy.”
In today’s “culture of bailouts,” Enron might well have been seen as “too big to fail,” according to Berlau. Enron had a substantial $63 billion in assets at the time of its Chapter 11 filing. “With Enron,” he said, “you could make the case it was as systemically important as Bear.”
Though the damage of Enron’s dissolution had only a limited impact, Berlau argues the biggest economic damage to result from Enron was the Sarbanes-Oxley regulatory regime that came in its wake. Berlau said Sarbox compliance costs the average public company $2.3 million a year and he cited a 2005 study by former University of Rochester professor Ivy Zhang that tallies a loss in market value of $1.4 trillion as a result of its corporate governance rules.
That’s money that can’t be used to promote economic growth and employment, said Berlau, yet Sarbox was not effective in preventing the Lehman Brothers, Countrywide or MF Global scandals (nor any other frauds he could identify).
Sarbanes-Oxley’s chief effects, he said, have been to limit opportunities for investors and entrepreneurs while ensuring full employment for accountants. “There is an equity shortage in small- and mid-cap [stocks],” he said, which keeps “ordinary investors from the benefits of emerging growth companies. Only the hedge funds and private equity funds get access to these strong growth companies,” he added.
Berlau (left) cited the founder of Home Depot, who took the home improvement chain public with just four stores, as saying he could never have gone public under Sarbox. There are far fewer IPOs today than even during the early ’90s recession, yet those that come on the market, like LinkedIn, sport billion-dollar market caps. Berlau contrasted this to an earlier era when a company like Cisco launched at a $50 million market cap, affording ordinary investors the opportunity to see their portfolios ride along with the small company’s explosive growth.
A decade on, Enron’s bankruptcy has a mixed legacy, according to Berlau. “We unfortunately learned many of the wrong lessons. The good legacy is, it wasn’t bailed out. The bad legacy is, we overreacted. In haste we rushed through a law that didn’t notably improve corporate governnance; but hurt honest entrepeneurs and ordinary investors.”
Still, Berlau pointed to a coalescing of bipartisan support for removing the encumbrances of Sarbanes-Oxley compliance on smaller growth companies. Sens. Charles Schumer (D-NY) and Pat Toomey (R-PA) introduced legislation this week that would exempt smaller companies from costly regulations.
And fellow think tank scholar Michael Mandel of the center-left Progressive Policy Institute added his voice to the anti-Sarbox chorus in a comment on PBS’ Nightly Business Report earlier this week:
“Startups are especially hurt. If they want to go public, they have to divert millions to meeting Sarbox requirements much more complicated than a young company really needs. In effect, Sarbox is a hefty tax on creativity and innovation,” Mandel said.