When Smart Guys Go Bad
A new book about the Enron bankruptcy raises tough questions for leaders of industry—and the rest of us
During the past four years, we’ve published news and opinion items in Kentucky Living about the evils of the Enron energy corporation. According to a new book, it really wasn’t that bad.
It was worse.
The company described in The Smartest Guys in the Room—The Amazing Rise and Scandalous Fall of Enron goes beyond criminal and irresponsible. From 1985 to 2002, Enron became a virtual insane asylum, creating a world of rules where right became wrong. It was also one of the largest, fastest growing, and most widely praised companies in the world.
Written by Fortune magazine reporters Bethany McLean and Peter Elkind, the book does a stunningly good job of describing intricate financial schemes in understandable English. And the story line keeps you wanting to read to the next page.
It also raises soul-provoking questions about business and personal behavior. Questions like “What would I have done if I had been in the room?” can begin a valuable meditation on morality. An honest answer to that question could be troubling.
Enron began in the mid-1980s as a group of extremely ambitious high achievers with an idea. The idea was energy deregulation, starting with the natural gas pipeline industry. These intelligent, well-educated guys (and yes, some gals) rewrote the rules and made a lot of money by forcing the country’s natural gas distribution into a more efficient system.
Enron’s basic business was to make money through clever combinations of trading energy supply contracts, arranging long-term deals between natural gas users and suppliers, and speculating on the future price of oil and natural gas.
Pumped up by their initial success (and their huge egos), they seemed to think they could do anything. They thought they’d invented perpetual motion and found the philosophers’ stone that could turn lead into gold. They idolized the idea of making money by making deals, and declared it the economy of the future. Anyone who disagreed or got in their way was stupid, old-fashioned, or obstructionist.
Nearly everyone agreed that Enron was entitled to be arrogant. Wall Street investors, bankers, and politicians hailed Enron as a heroic corporate innovator. Enron blitzed its way into electricity, water supply, and the Internet. Success persuaded managers they didn’t need to manage or even have job descriptions—they just hired smart people and put them in offices.
And what offices they were. Money was no object. Expense account parties and trips around the world became routine.
Enron went international, buying and building power plants. And that created problems that even the most elaborate deal-making couldn’t hide forever.
Negotiating deals and arranging contracts was one thing. But Enron stumbled at anything real, like a building that had to create a product. And when it came to electricity, Enron never did figure out that they couldn’t defy a bit of fundamental physics: that electricity cannot be stored. It has to be used at the time it’s made.
So to make their company appear successful, the leaders of Enron put their intelligence to work changing the realities of accounting. As one venture after another lost money, they created new ways to make money out of nothing. They set up phony subsidiaries that funded each other. Loans were booked as assets that were then used as collateral for more loans. Decades worth of projected future income was entered in the ledgers for the year the deal was signed.
To keep the money flowing, Enron’s stock price needed to keep going up so the banks would continue to lend them money. Enron poured huge amounts of cash into public relations and lobbying efforts to maintain the image of a financially sound company.
Enron browbeat bankers into lending money or else. Or else what? Or else Enron wouldn’t borrow any more money from them. The threats worked. Similar tactics persuaded the huge, respected, international auditing firm Arthur Andersen to sign off on the financing shenanigans. As a result, Arthur Andersen no longer exists.
Even those of us in electric cooperatives here in Kentucky felt the pressures to join in the brighter new world that Enron described. Enron said if everyone could only choose who sold them their electricity, prices would fall and service would improve. Those of us who work for electric co-ops in Kentucky know something about electric utilities, and we couldn’t see how introducing another middleman between electric generators and consumers could make things cheaper. When we said so, we were called dinosaurs.
Fortunately, the Kentucky Legislature was willing to risk that label, and decided not to follow the crowd into deregulating the state’s electric utilities. Other states weren’t as wise. California is still recovering from its expensive experience with electricity deregulation—one made worse by profiteering by Enron traders.
Couldn’t anyone speak up to stop this madness? Those who did generally paid for it. Wall Street analysts or brokers who pointed out that the emperor had no clothes tended to get transferred or lose their jobs. For those who went along, bonuses could run into the millions of dollars.
What would you have done?
The Enron story shows the extreme power of rationalization. It seems that if the conditions are right, human beings can justify most any behavior.
What if Enron really had come up with a radically more efficient and effective way to organize a business and the nation’s industries? Wouldn’t that be worth a little bit of exaggeration to keep the stock price up until its ventures could start making money?
In the end, Enron collapsed under too much debt and too little income. Its bankruptcy in 2002 left thousands of employees suddenly without their retirements. Lawsuits continue to drag on and industries from utilities to accounting are still trying to learn the lessons of the scandal.
But as the Smartest Guys authors note in the final chapter, no one involved accepts any blame. The Enron board says the president kept them in the dark. The president says the CEO never told him what was really going on. The financial officer said he was doing what his superiors wanted. The auditors said Enron’s actions were technically legal. Bankers, regulators, and the news media said information was kept from them.
In that chapter, titled “Isn’t Anybody Sorry?” McLean and Elkind deliver a concise lecture that should be reviewed regularly by corporate leaders, and by anyone who works with other people. After listing everyone’s reasons why they weren’t responsible for Enron’s collapse, the authors write: “To accept these arguments is to embrace the notion that ethical behavior requires nothing more than avoiding the explicitly illegal, that refusing to see the bad things happening in front of you makes you innocent, and that telling the truth is the same thing as making sure that no one can prove you lied.”