How to prevent another Enron

Why do publicly traded companies lie about their financial positions? In most cases, to boost their stock price. Why would they want to do that? Because key employees hold many shares, that's why.

Most big, publicly traded companies have share schemes whereby employees are rewarded with shares for performance or can buy shares at discount rates. The rationale is that employees with a stake in the company will be more diligent than those just working for a pay check. This is most likely true. But the other side of the coin is that it will provide an incentive to manipulate share prices by lying about the company's financial position or prospects. Enron was the classical case. When the truth eventually comes out, like in the case of Enron, the consequences may be devastating, like in the case of Enron. It depends on how much money is involved and on the stakeholders affected.

So how can we prevent another Enron? Simple. Make it illegal for anybody working for a company to own shares in that company. What about incentives then? Financial performance bonuses have been around for a long time. Reward staff with extra holidays, a toaster, a new car, an expensive watch. The list is endless. But don't dangle the temptation to inflate the share price by lies in front of them.

Till next time.