“In the end, Enron was at the center of a truly delinquent society,” says Malcolm S. Salter, talking about his new book in Harvard Business School’s Working Knowledge. “Once Enron’s ethical drift took hold, its collapse was only a matter of time.”
Mr. Salter’s book, Innovation Corrupted: The Origins and Legacy of Enron’s Collapse (Harvard University Press), takes advantage of court documents and other public information not available to earlier writers and may be the best informed treatment of Enron so far.
A few nuggets from Salter’s conversation with Martha Lagace from Working Knowledge:
Enron was an innovative company, and its downfall can be traced to supreme arrogance bred by considerable success, some extremely poor diversification decisions, and poorly conceived and implemented administrative practices that led, over time, to reckless gambling and ethical drift. This drift was facilitated by Enron’s bankers and advisors and largely missed by its board of directors and other watchdogs.
[S]upreme overconfidence and perverse financial incentives led to a gladiator culture in which executives proposed—and risk managers and the board of directors approved—a growing number of risky gambles with high expected returns. Meanwhile, building on intense lobbying to encourage further domestic deregulation and limit federal oversight of the energy industry, Skilling encouraged Enron executives to exploit to the hilt recent Securities and Exchange Commission rule changes as well as then-current tax rules.
To help disguise the company’s deteriorating financial position, many outside advisors and bankers either colluded in or acquiesced to these questionable transactions. Enron’s sophisticated risk analysis and control system also experienced serious breakdowns. These breakdowns, along with management’s increasing aversion to truth telling, isolated the board from many evolving realities. In addition, Enron’s supernormal growth and skyrocketing stock price made it difficult for most directors to challenge management’s strategy and tactics.
At Enron there were many opportunities for enormous personal gain that distracted top executives from the essential tasks of maintaining institutional integrity and building stable relationships with shareholders and employees.
In this vacuum, abstract definitions of purpose unrelated to corporate ideals, distinctive competences, and organizational opportunities easily gave way to uncontrolled criteria such as personal preference and opportunism.
Perverse incentives are legion throughout our system today. For example, perverse incentives for both mortgage brokers and investment bankers helped create the subprime crisis that we are now living through.
Mr. Salter concludes with a series of questions about Jeffrey Skilling, Ken Lay and the Enron Board. worth pondering and discussing in all our companies:
- According to what logic did Skilling and Lay, and ultimately the board, approve using the company’s own stock to capitalize its own hedging counterparties? (This was an extremely risky hedging arrangement that required Enron to issue more stock if either the current value of its stock or the future value of its commodity contracts declined and that, in addition, left Enron with no effective hedge on its contracts if both values declined at the same time—which they did.)
- Why did Skilling, at critical moments, treat differences of opinion, pushback, and penetrating questions from both insiders and outsiders as either stupid comments or narcissistic insults rather than opportunities for constructive dialogue?
- Why did Skilling, Lay, and Enron’s board of directors fail to understand and act decisively upon increasing internal evidence that Enron was financially distressed and heading toward insolvency?
- Why did Lay’s espoused faith and Christian values fail to guarantee his moral leadership and protect the enterprise from increasing immoral behavior?
- How did Skilling and Lay imagine that their personal conduct could influence the behavior of others within the company?
- What internal images of personal leadership and stewardship did their behavior reflect?
- How did they reassure themselves that they were doing “the right things” all along?
