Vanderbilt Law Review

First Page



The bankruptcy of the Enron Corporation in December of 2001 "sent shock waves throughout the country" that forced both Wall Street and the average investor to rethink our system of corporate governance. WorldCom, the second-largest long distance carrier in the United States, topped Enron by filing an even larger bankruptcy in 2002 with pre-petition assets estimated at a staggering $103,914,000,000. Although these were two of the largest bankruptcy filings in United States history, Enron and WorldCom were merely the tip of the iceberg. Similar scandals at Adelphia Communications, Arthur Andersen, Global Crossing, HealthSouth, Qwest, Rite Aid, Tyco, and Xerox represent "a national deluge of corporate malfeasance." "The particulars of each case are unique, but certain elements remain constant: massive accounting fraud, insider trading, influence-peddling, dubious tax avoidance schemes, outrageous perks for insiders, and complicity by overcompensated directors." "Over half of American families now invest directly or indirectly in the stock market." When companies such as Enron and WorldCom go bankrupt, it is the stockholders of these corporations who generally stand to lose the most as residual claimants of economically moribund corporations. "In the three years since the [Enron and Worldcom] scandals broke, nearly one thousand publicly held corporations restated their finances in order to stave off lawsuits, triggering a staggering seven trillion dollar devaluation in the stock markets."

How, then, can our system of corporate governance be reformed-a system that has allowed officers and directors of corporations to perpetrate fraud so pervasive as to send some of America's largest corporations into bankruptcy? Although the public has looked largely to lawmakers to achieve corporate reform, other entities have undertaken reform as well. These reforms include increased scrutiny of corporate directors' actions, bolstered requirements calling for boards of directors of companies listed on the NYSE and NASDAQ to be more independent, and a higher degree of scrutiny from state agencies. The reform has primarily focused on correcting loopholes exploited by companies like Enron and WorldCom to perpetuate fraud. What the reform has not done, however, is change our system of corporate governance in a way that allows corporate constituencies to monitor or address wrongdoing by management before damage is done to a corporation.