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Enron: The Smartest Guys in the Room, by Kate Harrad
The story of Enron is a classic morality tale of pride before a fall. But as the excellent documentary Enron: The Smartest Guys in the Room demonstrates, it is also a story about leadership gone wrong, company culture gone wrong, and the dangers of arrogantly creating one’s own reality.
We often talk in this newsletter about motivation and performance. Enron’s employees and leaders had no shortage of either. The documentary shows the company’s people recollecting the atmosphere created in its heyday: an exhilarating belief in being part of a brilliant success story. Sadly, the foundations of this belief were completely unsound. Both motivation and performance became linked exclusively to the achievement of short-term moneymaking. The people who should have been forming long-term strategy were busy making money for themselves instead, and the business’s stated aim was simply to get bigger and bigger until it became the world’s leading company.
The organisation’s slogan was ‘Ask why’, but as one of the traders says, nobody did ask why, in case they got uncomfortable answers. This was particularly evident in the case of the California energy shortages, when it became clear that Enron had lost any sense of the big picture. Its traders organised the state’s blackouts themselves and profited hugely from the resultant increase in stock prices. Some of them were caught on tape, gloating when a power line caught fire and hoping for earthquakes to hit. The company culture had become one where nobody questioned such attitudes, and the leadership actively encouraged them. The policy was successful in purely financial terms – Enron made $1.6 billion from the shortages – and any other considerations were irrelevant.
Some would argue that a company’s focus should legitimately be on its own finances and nothing else. In which case, it is the job of the regulatory authorities to control its excesses and protect society from their consequences. However, the extent of US deregulation was such that Enron was neither controlled nor criticised by the government. Instead, Enron chairman Ken Lay was close friends with both Bushes and the company was effectively free to do whatever it could get away with, which soon spiralled from unethical but legal dealings to outright corruption.
This illustrates one of Enron’s biggest mistakes. Nelson Consulting emphasises that companies must consider the wider business context in which they operate. Enron gave the illusion of doing this, but in fact it had surrounded itself with yes-men, and yes-businesses: analysts, accountants and customers all had a direct or indirect stake in Enron’s success, and therefore did not enquire too closely into the nature of that success. This also allowed Enron to depend on what whistleblower Sherron Watkins accurately described as ‘diffusion of responsibility’: in fact, Enron was basically operating on a basis of power without responsibility, refusing to acknowledge any connection between the two. There was no outside force compelling it to be responsible, because the feedback process had become corrupted both inside and outside the organisation.
Enron felt validated by the applause of the market, despite the deeply biased nature of that applause. And it was able to dupe both itself and others into believing that it was far more profitable than it actually was. In fact, most of its sectors were doing badly, but thanks to imaginative ‘mark to market’ accounting methods, this was concealed. It was left to journalist Bethany McLean to dig through the books and ask the question nobody else was asking: where was the money coming from?
As Enron began to fall apart thanks to Bethany McLean and Sherron Watkins, it became clear that the management of the organisation itself, as well as the management of its finances, was hopelessly flawed, if not corrupt. Even during Enron’s peak, 15% of the workforce was ritually sacked twice a year, and a further 30% given a warning (1). When things began to go wrong, top executives began to sell their stock and protect their pensions, while the rank and file were told nothing was wrong. As a result, when the company finally went bankrupt, the people who lost everything were the people at the bottom.
The book we recommended in our last issue, John Adair’s The Inspirational Leader, discusses the importance of moral authority as a leadership quality – a quality that was notably lacking in Enron’s leaders. Although this was only one of several reasons for the company’s bankruptcy, it seems clear that the presence of morally authoritative leadership, had it existed, could have saved Enron from falling.
1 The Guardian, July 28, 2002