The Role of CEOs in Large Corporations: Evidence from Ken Lay at Enron

Abstract

Internal documents released through the Enron litigation allow for a more detailed examination of the activities of top executives than is typically possible. This clinical study of Enron's Ken Lay highlights the difference between popular opinion on the role and knowledge of CEOs with that suggested by economic theory and evidence. In contrast to popular opinion, the evidence is consistent with the following three hypotheses: 1) Lay performed a role at Enron that is consistent with existing economic theory and evidence, 2) he performed this role with reasonable diligence, and 3) while he was relatively well informed about Enron at a high level, it is unlikely that he would have had detailed information on many of Enron's transactions - including deals with Fastow's partnerships. News analysts assert that a positive feature of Lay's legacy is that CEOs are now spending more time monitoring the details of financial reports and internal controls. This study suggests that the opportunity costs of this change in CEO behavior are higher than these analysts suggest.

Keywords: CEOs, Enron, Arthur Andersen, internal controls, corporate governance, financial accounting, fraud

JEL Classification: G30, G34, G38, L20, M41, M43