This is my own Big Picture full-scope analysis of the Enron debacle. It far transcends financial analysis made by other people.I have been carefully observing Enron with interest since 1984 and have seen the trouble coming for most of those years. The company cried ‘case study’ from the very beginning, when it segued from the former Houston Natural Gas moniker. I have been chagrined as to why people could not or would not see through the facade. But, human nature being what it is, people are more easily duped than they are taught to appreciate the attributes of quality and substance.
I once had a client who felt that he owed Ken Lay a favor. Thus, when Lay (CEO of Enron) was chairing a charity drive, Lay asked for 100% participation from the client’s firm, and the client reciprocated by edicting donations from his 200+ employees. This client was a prime example of a leading CEO who served his community, profession and firm well. Lay was the outsider who wanted status with the downtown CEO clique.
I thought that demanding participation in one person’s pet cause was too punitive to the company’s employees and told the client so. I further made recommendations that future charitable requests would go through committee and that the client’s partners and key executives were better suited by serving on community boards, thus polishing their own luster. The company’s emphasis shifted from making ad hoc contributions to chunks of time, whereby the firm got recognition, the partners became better leaders, and the community benefited from their expertise.
In the ensuing years, I saw Lay get lots of community credit, but his other executives and friends in different companies who aided the causes rarely got billing. For a period of time, Enron had an excellent foundation that steered it toward important community activities. Yet, when the company shifted from being an energy supplier to the hucksterish energy trader, the charitable activities were dispensed with. So were professional development programs, rewards for random acts of kindness and other empowerment initiatives.
Executives never stayed long. Enron routinely fired 10% of its top salaried people each year, fostering a lean-and-hungry spirit among producers of business.
The Enron scandals of 2001 and 2002 focused only upon cooked books audit committees and deal making. There was so much more to look at… from the perspective of learning from the trouble and inspiring other companies to more forward.
Enron’s debacle can serve all of us with lessons learned. Within that spirit and out of respect to many fine professionals who tried to save that company, I offer this analysis. These are my considered opinions, having conducted Performance Reviews, Strategic Planning and Visioning for other companies over 35+ years. I never worked for Enron… they never would have related to my Big Picture of business scope. I would have asked too many tough questions, and that was not what they wanted consultants for.
These observations are intended to contextualize the Enron case studies in broader terms than were reported in the news media:
- Conditions Which Allowed It to Occur. The pivotal event was the passage of the Securities Reform Act of 1995, also dubbed the ‘Securities Rip-off Act.’ Corporations lobbied for and got major loopholes and a relaxed posture on the part of the Securities & Exchange Commission. As a result of that act, the SEC is no longer a watchdog but is a sideline to brokerage houses and major financial institutions. In my opinion, deregulation, as a whole, has worked negatively upon business and society (banking, airlines, trucking, and broadcasting), and the SEC is no exception.
- Congressional Hearings. It was a public and media curiosity, though becoming a good opportunity for the public to understand business better. Many of those investigating Enron had received campaign contributions from the company, yet kept maximum objectivity. Several committees competed with each other for the spotlight. After the hearings, there was little follow-through. Granting immunity often sets dangerous precedents, making it hard to get the complete truth. While frying some fish, immunity lets other more culpable ones off the hook.
- Corporate Culture. At Enron, it was dictatorial and repressive to new ideas. It was very ‘old school’ (a management style that was 40 years obsolete), though it pretended to be ‘new school.’ It fostered a false sense of security for employees, paying higher salaries than the marketplace, thus keeping employees dependent upon the system via golden handcuffs. It demanded blind loyalty, hired ISTJ personality types for support and rewarded dogmatic sales types for trading deals. Employees were expected to live the same ways (even in the same neighborhoods) and have common outside interests, with little individuality.
- Core Business. Enron (like many other companies) got into areas beyond their core competencies. They got into business ventures on whims or for flashy reasons, utilizing concepts that were untried.
- The Deals. The company did more than 4,000 deals…most risky and without research, planning and benchmarking. Stock was transferred to partnerships simply to lock in gains on balance sheets. Many deals were put on the books in order to inflate the price of Enron stock, which the insiders sold at peak price levels. The audit committee of the board would not sign off on behalf of the deals, which just kept happening and developing secret lives of their own.
- Attitude with Suppliers and Vendors. They took posture that nobody could say ‘no’ to Enron and that suppliers and vendors work with Enron on their terms only. The attitude was non-collaborative, with business units acting as Lone Rangers and often in competition with each other. There were no checks and balances for members of the supply train. This archaic mindset flies in the face of progressive supply chain management, which successful companies now embrace.
- Communications. They were secretive and guarded from the beginning. The manner in which company and unit name changes were handled exemplified a non-communicative executive suite, with lack of media or public access to top management. Spokespersons were not media-trained, nor media-friendly. The company issued everything through written news releases. No on-camera interviews were sought or granted No pro-active corporate communications campaigns were ever waged. The Annual Reports carried and permeated this communications aloofness. The way the California energy crisis was handled speaks to Enron’s disdain for media openness.
- The News Media. Though it took a field day with the Enron story, the media itself had played a part in crowning Enron as the king in previous years. In absence of substantive business reporting and asking the tough questions, the media tends to pander to the hype and flash that the companies themselves dish out. Financial media indeed bought and published Enron’s version of the story without checking as far as journalists have recently.
- Concept of Examining the Company. Bean counters set the perimeters at Enron and ran the company. The term ‘audit’ is too micro-niche and limited. Companies should be doing full-scope Performance Reviews. Without Strategic Planning, there is no benchmarking of specific tactics. When goals are only in financial terms, the company is disproportionately lopsided.
- Accounting. Enron paid too much for outside auditing services. ($1 million per week) Every company should re-examine its major professional services relationships every five years, take competitive bids (especially from talented mid-sized firms) and look at options available from service providers. Enron did not demand enough accountability, fairness, ethics and operational autonomy from its outside auditor.
- The Auditing Firm Employed by Enron. In their marketing, accounting and auditing firms claim to be full-service business advisors, in order to get business. In reality, audit, tax and management consulting services rarely communicate and are, in fact, competing business profit centers within large firms. Enron’s auditor says its scope was limited, when, in fact, it should have been as full-scope as the company could have provided. The outside auditor took unfair advantage of not being watched. It charged too much money and got away with it (because mid-managers but brand names of firms). There was a conflict of interest in alliance with Enron…not objective enough. After the scandals hit, the auditor played the Blame Game, without admitting itself of wrong-doing. The CEO of the auditing firm tacitly dismissed the whole issue as, ‘A company failed because the economics did not work.’
- Lawyers. They too were privy to what was transpiring. Congressional investigations have so far avoided implicating lawyers.
- Executives. No executive development program was held at Enron. Ken Lay’s management style was that he sat in the tower and had people to filter the bad news out. Other executives were brash, exhibited poor management judgment and made windfall money by selling stock due to insider trading information, when employees could not cash-out. The roles of other executives were to keep quiet and look the other way.
- Bonuses. Doing deals was the mantra…quickly and with great flash. Exorbitant bonuses and side ‘consulting fees’ for executives were the goals…and what were most aggressively pursued.
- Employees, Morale, The Workforce. Employees pledged blind loyalty to Ken Lay, though few ever had access to him. They worshipped the emperor from a distance. Individuals blindly accepted the company’s 401k directives but could have managed their money alternately. Employees emulated corporate culturisms. Egos and working mannerisms did not produce the most productive workforce. Too many bought into the hype and lost objectivity. Employees were better paid than the marketplace, thus forcing many to stay or not question policies. They’ll find some rude awakenings in the outside job world. Training, empowerment and team-building programs were cut and never reinstated. Incentive and ‘random acts of kindness’ programs were deleted.
- Community Relations. The company was quite active in the Houston community for many of the right reasons…but took its controls and influence too far. The company pushed many of its own pet agendas upon an unsuspecting community. It made too many charities dependent upon the company…thus wielding more community control. By 2001, many charities that were still counting on pledged donations and found themselves left in a lurch (though it was also their fault for not casting other nets for funding and being too dependent upon Enron). This circumstance had occurred years before, when Enron diverted pledged charity and community funds into high-gloss events, such as the 1991 Economic Summit and the 1992 Republican convention.
- Customers. They could have asked more questions, could have demanded further accountability. The customers are being hurt the most by the collapse…and need to communicate their stories better to the public.
- Wall Street Analysts. They too could have asked more questions and could have demanded further accountability over the years of Enron’s growth and boom. Some analysts who asked the tough questions were scorned or scapegoated by Enron. One must question why one company could wield such control over the investment community and what powers Wall Street had acquiesced in order for such power to grow. One must also ask why weren’t regular reviews conducted by underwriters and why were not annual reports more properly screened.
- The SEC. The commission could have asked more questions, could have demanded further accountability. However, since deregulation, it has not been compelled to do so.
- The Government. Nobody knew or kept their eyes on Enron until the scandals hit the front pages. Bureaucratic agencies quickly distanced themselves from funding issues or responsibilities in letting such a catastrophe occur. The U.S. government had deregulated too many industries over the years…thus, having the effect of allowing loopholes and marketplace-unfriendly situations to occur. In my opinion, Congress should look at re-regulating certain industries (oil & gas, utilities, airlines, banking, trucking, broadcasting). Long before congressional hearings were held, the government could have asked more questions and could have demanded further accountability.
Techpitfalls.com – Roadblocks to growth, opportunities missed.
Companies come and go. Not every startup is destined to make it. Yet, in this era of super-hype about tech and dot.com companies, unrealistic expectations precluded most of their successes from the beginning.
The hype now is that the bubble burst. Former dot.com owners are crying that they were stripped of their entitled riches. Employees who were promised stock options came away without still knowing what it takes to build a real business.
The e-commerce and dot.com wars have more than their share of casualties because their players never had the artillery and mindset to play seriously in the first place. Overt marketing hype led to an unwatchful marketplace…which always wakes up to the realities of business eventually.
Technology companies must now learn the lessons that steady-growth companies in other industries absorbed. Actually, most companies still have not truly learned the lessons. Thus, most businesses are at frequent ‘crossroads,’ where turns have deep implications and far-reaching.
I advised several technology companies during their gravy years. I tried to warn them about the things that would get them into trouble:
- Focusing upon technology… not upon running a business.
- Maintaining too much of an entrepreneur and family business mindset
- Branding before being a real company
- Their system’s inability to deal with any kind of disruption
- Each side picks their favorite numbers for ‘success’ because they really do not know
- Not comprehending the business you’re really in
- Venturing too far from your areas of expertise
- Thinking that the rules of corporate protocol did not apply to them
- Misplaced priorities and timelines
- Making financial yardsticks the only barometers
- Wrong relationships with investors…letting angels call too many shots
- Getting bad advice from the wrong people, mainly other tech professionals
- Rationalizing excuses, ‘the rules have changed’
- Feeling entitled to success and exemptions from business realities
- Copycats of others’ perceived successes
- Working long and hard, but not necessarily smart
- Failure to contextualize the product, business, marketplace and bigger picture
- Inability to plan
- Refusal to change
Most of these pitfalls are common to so many industries. They simply were focused upon tech companies from 1994-2000 because they were the latest flavor. Some heeded the advice of myself and others… many did not avail themselves.
Reasons why some want to grow beyond their current boundaries:
- Prove to someone else that they can do it.
- Strong quest for revenue and profits.
- Corporate arrogance and ego, based upon power and influence (as well as money).
- Sincere desire to put expertise into new arena.
- Really have talents, resources and adaptabilities beyond what they’re known for.
- Diversifying as part of a plan of expansion, selling off and re-growing subsidiaries.
- The marketplace dictates change as part of the company’s global being.
Circumstances under which they expand include:
- Advantageous location became available.
- Someone wanted to sell out…a great deal was tough to pass up.
- Can’t sit still…must conquer new horizons.
- Think they can make more money, amass more power.
- Desire to edge out a competitor or dominate another industry.
- Create jobs for existing employees (new challenges, new opportunities).
- Part of their growth strategy to go public, offering stock as a diversified company.
This is what often happens as a result of unplanned growth:
- The original business gets shoved to the back burner.
- The new business thrust gets proportionately more than its share of attention.
- Capitalization is stretched beyond limits, and operations advance in a cash-poor mode.
- Morale wavers and becomes uneven, per operating unit and division.
- Attempts to bring consistency and uniformity drive further wedges into the operation.
- Something has to give: people, financial resources, competitive edge, company vision.
- The company expands and subsequently contracts without strategic planning.
7 Defeating Signs for Growth Companies:
- Systems are not in place to handle rapid growth…perhaps never were.
- Their only interest is in booking more new business, rather than taking care of what they’ve already got.
- Management is relying upon financial people as the primary source of advice, while ignoring the rest of the picture (90%).
- Team empowerment suffers. Morale is low or uneven. Commitment from workers drops because no corporate culture was created or sustained.
- Customer service suffers during fast-growth periods. They have to back-pedal and recover customer confidence by doing surveys. Even with results of deteriorating customer service, growth-track companies pay lip service to really fixing their own problems.
- People do not have the same Vision as the company founder…who has likely not taken enough time to fully develop a Vision and obtain buy-in from others.
- Company founder remains arrogant and complacent, losing touch with marketplace realities and changing conditions.
Everything we are in business stems from what we’ve been taught or not taught to date. A career is all about devoting resources to amplifying talents and abilities, with relevancy toward a viable end result.
Business evolution is an amalgamation of thoughts, technologies, approaches and commitment of the people, asking such tough questions as:
- What would you like for you and your organization to become?
- How important is it to build an organization well, rather than constantly spend time in managing conflict?
- Who are the customers?
- Do successful corporations operate without a strategy-vision?
- Do you and your organization presently have a strategy-vision?
- Are businesses really looking for creative ideas? Why?
- If no change occurs, is the research and self-reflection worth anything?
Failure to prepare for the future spells certain death for businesses and industries in which they function. The same analogies apply to personal lives, careers and Body of Work. Greater business awareness and heightened self-awareness are compatible and part of a holistic journey of growth.
About the Author
Hank Moore has advised 5,000+ client organizations worldwide (including 100 of the Fortune 500, public sector agencies, small businesses and non-profit organizations). He has advised two U.S. Presidents and spoke at five Economic Summits. He guides companies through growth strategies, visioning, strategic planning, executive leadership development, Futurism and Big Picture issues which profoundly affect the business climate. He conducts company evaluations, creates the big ideas and anchors the enterprise to its next tier. The Business Tree™ is his trademarked approach to growing, strengthening and evolving business, while mastering change. To read Hank’s complete biography, click here.