©  Copyright 2002 Rogers Media. The following article first appeared in the March 2002 edition of BENEFITS CANADA magazine.

The Enron Corp. scandal has raised a number of legal and capital market issues for institutional investors. Here are some of them.

> The markets. Enron has promoted skepticism in reported financial results across a range of industries and companies. Accounting restatements and irregularities occurred before Enron. But now, investors and markets are more skittish than ever.

Without a restoration of confidence in the financial disclosure of publicly traded companies, there is every possibility that the markets will, at a minimum, build a discount into the prices of these securities to reflect uncertainty over accounting practices. Large pension funds will turn increasingly towards direct investments after they have reviewed the books and records, relying less on transactions in the public markets.

> Insider trading. Although securities statutes have rules against insider trading, Enron reportedly promoted its limited partnerships partly on the basis that investors would benefit through privileged access to valuable information. The apparent openness with which Enron promoted the economic benefits of privileged access to inside information suggests that respect for regulatory authorities does not run as deep as it might, and that the oversight role of securities regulators needs to be strengthened.

> Stock options. Stock options are increasingly dominating executive compensation arrangements. In principle, stock options can effectively align management's interest with those of shareholders. All stockholders have an interest in stock price appreciation. However, the Enron case makes us consider whether stock options have gone too far, and whether they create such a powerful incentive to manipulate prices in the short term that a company's very existence can be put in peril.

> Accounting firms. Audits by professional accountants were supposed to be the seal of approval on corporate financial statements. Leaders in the pension community have long argued that auditing firms which also provide consulting services to management are not independent. They say auditing and consulting services should be provided by different firms, and a firm should not provide both internal and external audits to the same client.

Institutional investors have also raised questions about how accountants are professionally regulated and the kinds of incentives their compensation arrangements create. Until now, the movement to separate audit and consulting functions has been resisted by management, and, of course, by the accounting firms themselves. In the wake of Enron's collapse, reform is urgently needed, but its extent remains unclear.

> Corporate governance. The Enron case highlights the costs of bad corporate governance. Plan administrators and money managers need to pay closer attention to corporate governance structures. In recent years, the industry has not focused enough attention on corporate governance concerns. Yet, due to their size and sophistication, pension funds are well suited to play this role.

> The role of large funds. The U.S. media has reported that the California Public Employees' Retirement System (CalPERS) rejected the opportunity to participate in one of Enron's limited partnerships. CalPERS protected its own interests by refusing to make the investment. But questions have been raised as to whether it had a broader obligation to disclose what was learned about Enron to the investing public and regulatory authorities. Such questions probably would not be asked of private investors. But institutional investors may find themselves under greater pressure to act in the public interest.

Enron is a massive scandal, and there is no reason to think it could not occur in Canada. Institutional investors cannot simply allow others to address the issues at hand. Their fiduciary obligations compel them to become involved in the solutions. BC

Murray Gold is a partner with Koskie Minsky in Toronto. mgold@koskieminsky.com.

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."