As noted earlier here, I was able to attend the Lay-Skilling trial for several hours on a couple of afternoons this past week. As I watched Jeff Skilling defend himself against criminal charges amidst the overwhelming societal bias that exists today regarding anything having to do with Enron, one thought kept knawing at me — the enormous waste caused by the government’s policy of criminalizing corporate agency costs.
As noted in this earlier post on the high price of asserting innocence, the known direct costs of the Lay-Skilling trial are sizable. The defense costs are currently in the $75 million range and the cost of the prosecution is at least that high, probably more. Skilling’s remaining net worth — around $50 million — has been frozen by the government, so that wealth has been stagnant for almost three years now. Defending themselves against criminal charges that could put them in prison for the remainder of their lives has been a full-time job for Skilling and Lay, so another cost is that neither of these undeniably-talented businessmen has been in a position to create wealth or jobs for well over three years now. Add in the horrific cost attributable to the Enron Task Force’s dubious decision to prosecute Arthur Andersen out of business and you have quite a direct expense ledger.
However, as enormous as those direct costs are, the indirect costs of criminalizing bad business judgments dwarfs the direct ones. Whether management makes such judgments correctly is a fundamental risk of business ownership. Criminalizing that risk — through the prism of hindsight bias — will simply make executives in the future less likely to take the risks necessary to build wealth and create jobs while not deterring in the slightest the Andy Fastows of the world from embezzling money. Business owners deserve protection from theft, but not from risk taking, and it’s not clear that government prosecutors know — or even care about — the difference.

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