Ask Why. What I Learned From Enron
By: James Bell
As some of you (fellow nerds) may recall, the documentary Enron: The Smartest Guys in the Room, focused on the toxic corporate culture of Enron and its corporate motto ‘Ask Why.’ To be clear, I am not a fan of former Enron CEO Jeff Skilling but I do like a catchy corporate slogan and a good road trip with the boys to ride dirt-bikes. I think that had Mr. Skilling held his moral compass a little further from his blackberry, he was onto something by imploring his employees to challenge their current business practices and continuously ‘Ask Why.’ So yes, I believe securities regulators in Canada could benefit from Enron’s slogan: ‘Ask Why.’
Why do we have securities laws? Are the current securities laws serving their intended purpose? Are securities laws achieving the desired balance of competing interests? These are the questions that our regulators need to continuously ask when drafting and implementing new rules.
I have always understood that securities laws are the scale on which we attempt to balance the need for capital and investor protection. Given the current regulatory framework, I do not believe securities laws are achieving a balance between these competing interests and are not effectively serving either of their intended purposes.
Securities laws must allow for capital to be raised on an efficient basis. Capital is the lifeblood of our economy and without it the economy and our markets would collapse. However, securities laws must also protect investors so that they maintain their confidence in the system (whereby they will continue to invest). Too much emphasis on the need for efficient capital may result in investor losses; thus resulting in an erosion of investor confidence. If investor confidence is eroded, capital will not flow into the system and the economy will be damaged. Conversely, too much emphasis on the need for investor protection may result in excessive costs for capital and the inability for issuers to access capital on an efficient basis and provide intended returns to investors. Therefore, securities laws need to find the right balance between these competing interests.
The current regulatory system does not allow for capital to be raised efficiently by issuers. The complex web of corporate legislation, differing securities laws in different provinces, national policies, multilateral instruments, orders and companion policies necessitates that all issuers engage a qualified securities practitioner and an auditor before raising any funds. Further, the current system requires issuers to prepare complex subscription agreements and offering documents (sometimes hundreds of pages). With all of this cost to access the capital, it is no wonder that many issuers fail to provide a return on investment to their investors.
Similarly, the system does not adequately protect investors and it is safe to say that investor confidence has been eroded in the last couple years. The current system mandates that issuers swamp investors with volumes of information and assumes that investors have the necessary legal and accounting knowledge to make meaningful decisions with respect to such complicated information. As a person that knocks down a couple good Grisham books a year, I don’t think it’s reasonable to assume that I’m going to read a 200 page document before making a $10,000 investment. Like many others, I choose simply to review the summary pages of the offering memorandum and then promptly return to my Grisham or sitcom. Therefore, when I lose money on investments, I accept that it is largely the result of my own failure to read the information provided but the question remains: Was it reasonable that I read all of that material? Even if it was reasonable to expect me to read the information, clearly I’m not going to and clearly my confidence in the market is still being eroded. So are securities laws really helping to increase investor confidence?
I don’t think so.
At this point, if we were all good Enron employees, Mr. Skilling would demand (after shutting off power to California) that we ‘Ask Why’ we continue with a regulatory system that isn’t serving our needs. Why do we have such a complicated system for accessing capital? Why does an issuer have to incur such significant costs to raise a small amount of capital? Why do we expect that investors will read 200 pages of technical data? Why do we assume that an investor’s loss will be easier to swallow if we have provided them with an overwhelming amount of information (that we all know they don’t read)? Why can’t we remodel the system from the ground up? Why can’t we create an easy to use system that allows even small issuers to get the capital they need at a reasonable rate?
I implore the securities regulators and industry participants in Canada to ‘Ask Why?’ Let’s not be afraid to build a better system that properly serves the intended purposes.
(For the record, I am aware of the irony of using Enron and Mr. Skilling as justification for a ‘less-is-more’ approach to regulation!)