STATEMENT
OF NORMAN P. BLAKE
Before the Permanent
Subcommittee on Investigations
Committee on Governmental
Affairs
United States Senate
May 7, 2002
Chairman Levin, Senator Collins, and Members of the
Subcommittee. Good morning, and thank
you for the opportunity to address the Subcommittee.
My name is Norman Blake. I am Interim Chairman of the Board of Enron Corporation. I have been a director of Enron since
1993. Since the outset of bankruptcy,
five members of the Board and I have been actively engaged in the development
of a newly constituted Board of Directors in cooperation with Enron’s Creditors
Committee. It is the intention of these
Board members and me to resign from the Board once an orderly and effective
transition of authority has taken place. We are serving now on a pro bono basis
and in recognition of our responsibility to serve the interests of Enron’s
stakeholders and employees.
My
background can essentially be characterized as having had extensive management
and leadership experience in a variety of different industries with significant
involvement in financial services. Over the last twelve years, I have been the
Chairman and CEO of three different Fortune 500 companies and held Board
membership positions in others. Much of my earlier business career was with the
General Electric Company, with my latest position in 1984 being Executive Vice
President of Financing Operations for the General Electric Credit Corporation.
My colleagues in their statements today will discuss
the Board’s and its Committees’ respective roles and involvement in the related
party transactions. I would like to
focus on certain issues that have been raised with respect to the Board and the
outside directors as a collective unit.
I begin by saying unequivocally that I am proud to
have served on a Board with such capable, hardworking, intelligent, and ethical
individuals. Personally, I believe that
while we may have begun initially as a collection of individuals, we evolved
into a cohesive and collegial group.
Moreover, in my view, this Board has remained diligent and dedicated to
its responsibilities throughout the process.
Although we, at the time, had much confidence and respect for the
abilities of the management of the Company, we did operate independently and
did exert our influence and, at times, contrary to the wishes of
management. For example, the decision
made by the majority of the Board to acquire Wessex and form Azurix was made
over the dissenting votes of two directors and the abstention of another. More recently, management’s intention to
acquire a pulp mill in October of last year was resisted by the Board to the
extent that decision was not made to make the acquisition.
Allow me to put Enron into perspective over the last
couple of years. By 2000, Enron was one
of the ten largest companies in the United States. Enron had begun to transform itself from a pipeline company with
substantial fixed assets to an innovative energy trading company that showed
tremendous potential, but required liquidity and creditworthiness. My personal focus, as a member of the Board
and its Finance Committee, had been Enron’s liquidity and financial leverage in
furtherance of this strategy. As a
Board, we were attentive on working with management and our outside experts to
realize this mission. We believed that
the Company was successfully moving in that direction. In late 2000 or early 2001, no one would
have predicted that by the end of 2001, Enron would file for bankruptcy. In fact, as late as October of 2001, we were
informed by management that we were ahead of plan in terms of earnings and that
creditworthiness and liquidity issues were manageable.
A central issue at hand involves Enron’s intentions in
establishing SPEs. Before I make any
comments regarding the financial structures that are of concern, I would like
to provide an opposing point of view to that held by many that the intention of
Enron in establishing these partnerships was to manufacture earnings. To the contrary, it is my opinion that the
primary purpose of these partnerships was to improve liquidity and get debt off
the balance sheet. The LJM partnerships
were specifically constituted for that purpose. And, by the way, I would
contend that many companies establish SPEs for exactly such a purpose.
Of course, now, with the benefit of hindsight,
Committees of Congress, the media, government officials, financial experts, and
others have tried to dissect and examine what went wrong at Enron. Over the past several months, several questions
have been raised with respect to the directors as a group. In particular, people ask if the Board
failed in its oversight duty, whether Enron was moving so quickly that the
independent directors could not keep up.
I think not.
We worked hard as a Board. We
came prepared, and we asked questions.
We were sent materials in advance of meetings, and it seemed that each
director reviewed them and came to the meetings prepared. Sometimes before a Board meeting, and after
spending many hours in preparation for the meeting, I would speak with Mr.
Skilling about balance sheet issues or with the Chief Risk Officer, Rick Buy,
about liquidity and leverage issues. I
know that my fellow director, Mr. Winokur, who is here today, spent time with
Enron’s Chief Financial Officer Andrew Fastow before meetings asking him
questions about various issues. And Dr.
LeMaistre, who is also appearing with us today, spent much of his time in
advance of upcoming Compensation Committee meetings with Enron’s human
resources and compensation staff, as well as external consultants, to ensure
himself that he understood all of the technical aspects of Enron’s compensation
plans and to be in a position to evaluate recommendations made by
management. He took his job very
seriously. In short, I believe that,
judged by any standard, this Board executed its duties to the Company and its
shareholders.
During Board and Committee meetings, we questioned
management. For example, during the
October 1999 Finance Committee meeting where the LJM2 partnership was
discussed, the Board material discloses that I specifically asked whether
Arthur Anderson had reviewed the partnership.
We were told by the Chief Accounting Officer that Arthur Andersen was
“fine with it.” If we had been told
that Arthur Andersen had not reviewed the structure, or that Arthur Andersen
had reservations, the Board would never have approved it.
The first Raptor was brought to the Finance Committee
on May 1, 2000. The minutes reflect
that the Chief Accounting Officer told us that “Arthur Andersen LLP had spent
considerable time analyzing the Talon structure and the governance structure of
LJM2 and was comfortable with the proposed transaction.” This advice was critical to our decision to
authorize this transaction. Some
commentators have since suggested that the structure of this transaction was
inappropriate on its face. That is not
the advice we received at the time. My
fellow directors asked questions pertaining to the propriety and oversight of
these transactions. We did not rubber
stamp their recommendations and requests.
Finally, media reports have cited
particular transactions as evidence of earnings improprieties. These transactions were either not disclosed
to the Board or, in fact, affirmatively misrepresented to us. I list a few of them here to illustrate the
point.
The media reports that the Raptor vehicles were set up
so that LJM2 would recoup its investment before any hedging took place. The directors were unaware of any such
arrangement.
Throughout the Board minutes and in the presentation
materials, the Board was assured that the projected return for this transaction
was 30%. In fact, at least one and
possibly other members of management knew that LJM2’s projected return was, in
fact, a minimum of 76%. Yet no one told
us the true rate of return they had projected.
The New Power hedge transaction was never disclosed to
the Board. This particular transaction
would and should have been avoided by simple adherence to the controls we put
into effect.
The credit problems with the Raptor entities, which
began in late 2000, were not disclosed to the Board. The decision in early 2001 to recapitalize the Raptor structure
with $800 million in equity was, likewise, concealed from us.
No director knew that
Chewco was, in fact, an affiliated transaction. The directors were not aware that an Enron employee, Michael
Kopper, had an ownership interest in Chewco.
The Board was not told that Mr. Kopper received a payment when Chewco
was closed out. We were similarly
unaware, until the fall of 2001, that Chewco was in violation of the 3% equity
rule.
This was the project with Blockbuster that would allow
customers to choose from thousands of movies sent via telephone lines to their
homes. Media reports state that Enron
inexplicably claimed over $110 million in profits in the fourth quarter of 2000
and first quarter of 2001. If Enron was
falsely claiming these profits, the directors were unaware of it.
The Board was not informed that Southampton was formed
with Enron employees, or that it was able to sell Enron shares back to Enron at
a huge windfall to Southampton. From
the media reports I have read about this, it seems that Southampton never would
have reaped such big profits if this deal had been negotiated at arms’
length.
We are now aware from the Powers Report of a pattern
of assets being sold to LJM in one quarter, only to be repurchased by Enron in
the following quarter. This, too, was
concealed from the Board.
Even with the benefit of hindsight, I cannot speculate
as to what else we could have done to ensure that our controls and procedures
were followed. We put the right
controls in place, and asked the right questions. These directors were a smart and talented group of people who
brought a diversity of experience and expertise to the Board. Unfortunately, I believe that we were
uninformed because management and outside experts who reported to us failed to
do their jobs and give us full, complete information.
I am prepared to respond to any questions from the
Subcommittee.
Thank you.