“Sarbanes-Oxley is not a cure all,” according to former Enron in-house counsel Stephen Wallace (now general counsel of Westlake Chemical Corporation), “laws and regulations only get you so far.”

     For more about Wallace’s view that a corporate culture nurtured by strong leadership is more important in promoting ethical business practices than legislation read “Former Enron In-House Counsel Look Backward . . . and Forward,” Corporate Counsel, February 22, 2006.

     While I agree with Wallace, I would take his observation one step further.  Business leaders with good intentions alone but without grounding in the spirit of the law will nonetheless find themselves saddled with more unwanted and ill-fitting laws.  Good intentions are not enough in today’s complex business environment. 

     Effective leaders avoid such unintended consequences by being mindful of the relationship between law and ethics.

     Everything is relative.  Former Enron chairman Ken Lay’s net worth is now reported to be in the neighborhood of $650,000, yet it’s still a far cry from the $400 million fortune he had amassed at the height of his power.  Before Enron collapsed he owned $339 million in marketable securities, today it’s less than $1,500.  Of the $10.6 million in assets he still owns $9 million is encumbered by current liabilities and another $930,000 is encumbered by long-term liabilities.

      You might say the out-of-pocket cost associated with being personally embroiled in a corporate scandal is more than expensive.  It’s staggering.

     Lay is not alone in his reversal of fortune.  Convicted felons Bernie Ebbers (WorldCom) and John Rigas (Adelphia) also borrowed heavily from their companies only to be left holding a large IOU after their stock tanked.  Once criminal convictions were secured the pending civil cases against them became harder to defend.

     An acquittal would not necessarily guarantee a sweeter ending.  Richard M. Scrushy (HealthSouth) was acquitted of fraud last June but is still staring down the barrel of a civil case whose burden of proof is lower than a criminal one.

     As if the direct costs weren’t enough, Sean Coffey the lead lawyer in the civil case against the Enron executives points to another cost: the conscience factor.  “When you get caught up in a fraud the size and extent of Enron I don’t think as a CEO you can ever get rid of it.  It haunts you until the day you die.  For him, there is no way out.”

     Of course in hindsight it’s easy to see that better decision making processes could have avoided the decent down the slippery slope to ruin.  The more important question, however, is how can managers us the lessons of Enron, WorldCom, Adelphia, and HealthSouth to develop legal foresight?  Where could your company benefit from a legal risk tune-up?