The Failed Corporate Culture Of Enron
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The Failed Corporate Culture of Enron
High risk accounting, inappropriate conflicts of interest, extensive undisclosed off-the-books activity, excessive compensation – these are some of the headings of the report prepared by the U.S. Senates Permanent Subcommittee on Investigations titled “The Role of the Board of Directors in Enrons Collapse.” (Permanent Subcommittee on Investigations, 2002) In February, 2002, Enrons former Chief Executive Officer Jeffery Skilling had testified before members of the Senate Commerce, Science and Transportation Committee that Enron was a financially sound company the day he resigned in August 2001, just months before the companys financial implosion. But the Enron debacle has, as the Houston Chronicle put it, “all the earmarks of classic tragic drama in which hubris causes the fall of the mighty,” (Ivanovich, 2002) and, Mr. Skillings sworn testimony to the contrary, the decisive role that Skilling and the companys other top executives played in the bankruptcy of this $63 billion company now seems incontrovertible. Indeed, from the point of view that the business culture at Enron contributed importantly to the companys demise, the blame for this financial tragedy can be pretty squarely placed on Skillings shoulders, and the values he promoted among top and mid-level management during his five year stewardship of the company from 1996 to 2001.
What was it about the ethos Skilling created among Enrons employees, particularly upper management, that made, in hindsight, the demise of the company nearly inevitable? Skilling, who in Senate testimony has described the reason for Enrons collapse as a “classic run on the bank,” had for years focused on “taking profits now and worrying about the details later,” as one former employee claimed. (Fowler, 2002) Whereas former Chief Operating Officer Rich Kinder from 1990 to 1996 had demanded his managers focus on cash flow and meeting earnings targets, another former employee and a longtime lobbyist for Enron, George Strong, said, “It was a well-known fact that Skilling didnt care what the expenses were so long as the margins looked good. When Kinder left and Skilling took over the presidency, I started feeling that people were not looking at the longer-term perspective.” (Fowler, 2002) In their indictment in January, 2004 of Andrew Fastow, the chief financial officer of Enron, prosecutors characterized the top management of Enron as “single-mindedly and at any cost” intent on “meeting or exceeding analysts earnings estimates without fail and “producing 15 percent to 20 percent earnings growth every year.” (Seba, 2004) Although it may have been possible to achieve such lofty earnings goals in the short term, as a long term strategy pursuing such goals was bound to fail.
Throughout the 1990s, Enrons corporate prospects had seemed bright. Fortune magazine named Enron “Americas Most Innovative Company” for six years running. In a little over 15 years, Enron had gone from being the largest natural gas distribution company in the United States in 1985 to a major trader in both gas and electricity, as well a number of other unrelated businesses. For example, having conducted its first electricity trade in 1994, Enron was just six years later the largest trader in electricity in the country. From 1990 to 2001, the price of a share of Enron grew from around $10 to as high as $90, and the companys market value rose from around $3 billion to almost $80 billion. In becoming such a dominant force in the market in electricity, Enron had pioneered the idea that market competition in energy in the deregulated environment of the 1990s could lead, not just to high profitability for firms able to take advantage of such a market, but also to lower prices for consumers who could take advantage of the new-found competition in the energy market:
Enron envisioned gas and electric power industries in the U.S. where prices are set in an open market of bidding by customers, and where suppliers can freely choose to enter or exit. Enron was the leader in pioneering this business. The winners have been consumers, who have paid lower prices, and investors, who have seen competition force the power suppliers to become much more efficient…. Under the old regulated model of delivering gas and electricity, customers were offered a one-size-fits-all contract…. Enron pioneered contracts that could be tailored to the exact needs of the customer. To do this, Enron unbundled the classic power contract into its constituent parts, starting with price and volume, location, time, etc., and offered customers choices on each one. Again, consumers won. Enrons investors did too, because Enron earned the surplus typically reaped by inventors. Arguably, Enron is the embodiment of what economist Joseph Schumpeter called the “process of Creative Destruction.” But creative destroyers are not necessarily likable, pleasant folks, which may be part of Enrons problem today. (Bodily and Bruner, 2001)
Skilling has been described as Enrons “chief visionary, head cheerleader, and internal compass,” a “brilliant strategist” and creator of the “in-your-face Enron culture.” At the same time, many inside the corporation thought him a “terrible manager,” “impulsive” and “immature.” Touting the value of “intellectual capital” over “solid assets,” Skilling sought to imbue the 250 or so young MBAs Enron hired each year with “the belief that they were the best and that they were on a mission to open markets across the globe in the face of entrenched, lumbering monopolies.” (Zeller, Palmeri, France, Weber and Carney, 2002) The strategy Skilling envisioned for Enron was one of a company which was “asset light,” which owned few hard assets such as pipelines or fiber optic cables but instead made the majority of its profits from trading and services. (Fowler, 2002) The Senate Subcommittee report characterized this “asset light” strategy as “aimed at shedding, or increasing immediate returns on, the companys capital-intensive energy projects like power plants that had traditionally been associated with low returns and persistent debt…. The goal was either to sell these assets outright or to sell interests in them to investors, and record the income as earning which top Enron officials called monetizing or syndicating the assets.” (Permanent Subcommittee on Investigations, 2002, p. 7)
A further aspect of Skillings corporate strategy involved what Enron executives called “mark-to-market”