Two Lessons To Take From the Enron Debacle

Just about everyone was fooled by the company’s shiny, polished exterior. But with the business now in ruins, a few points are worth noting.

Just over a year ago, I had breakfast with Jeff Skilling, president and CEO-designate of Enron (ENE). The occasion was a Fortune magazine conference celebrating America’s most admired companies. Enron was ranked high on that list, and Skilling had come to share some of the company’s secrets for managing people.

What a cool guy! Smart, confident, and vibrant, he confessed that he really shouldn’t be eating eggs and bacon for breakfast, then laughed when I told him how I justify doing the same: As you age, the walls of your arteries become thin, I said, so you need a diet that hardens them. Later that day he wowed the audience with the story about how the fabled Enron Online operation, which would later handle a quarter of the world’s energy trades, began almost surreptitiously in London, without top management being aware of it until it was ready to roll out in a big way. Top Management Consulting Firm while in stealth mode, Enron Online staffers were so desperate for computing equipment that they went into stockrooms to borrow servers destined for other divisions, replacing them later — “kiting servers,” I joked with Skilling. I’d bought 100 shares of the stock a couple of years before and had never been so glad I did.

I was less glad at the beginning of August, when I met Enron chairman Ken Lay, who had been CEO until Skilling took over. We were at another Fortune conference, one to which the editors invited “the smartest people we know,” in an atmosphere made headier by the fact that we met in Aspen, Colo., elevation 8,000 feet. Enron stock was about $45 then, way down from its $84 high, and a few people, including Fortune’s Bethany McLean, had started asking tough questions about the company. But no one seemed to doubt that this was a brilliantly managed company. My colleague David Kirkpatrick introduced Lay effusively.

What a cool guy! Smart, confident, thoughtful, the very model of a senior business statesman. Lay said he’d considered speaking about the need for ethical responsibility from politicians. (He had a well-known distaste for President Clinton, and his company had been vilified by California politicos during the state’s energy crisis earlier in the year.) Instead, Lay chose to advocate strong measures against global warming. Later he told me that he’d called together a brain trust of econometricians to work up models for addressing the problem, and that he planned to bring those solutions to Washington.

I started working on a story about the global warming initiative, and then Lay abruptly became hard to reach. Not even his assistant returned calls. Three weeks later, a few days after CEO Skilling resigned abruptly, giving no reason, Lay finally called me, saying, “You understand why I couldn’t talk to you before.” Indeed I did. Lay needed to avoid any contact with the press until the news was out. If I’d asked a simple question like “How’s business?,” any answer he gave, or even declined to give, could get him and the company in hot water.

Now Enron isn’t merely in hot water: It and its auditors, Arthur Andersen, are being blasted by scalding steam. A month ago Enron restated its earnings since 1997, reducing profits by nearly $600 million. Over the weekend the company filed for bankruptcy. My 100 shares won’t even buy a decent dinner. During the next few years, forensic accountants and lawyers will pore over Enron’s now notoriously opaque books to figure out whether these smart, attractive, confident people were dupes or crooks or merely reckless. I’ve got my suspicions, but given my exquisitely inaccurate past judgments, I’ll keep them to myself. The misjudgments weren’t just mine, though, and in that lies a mystery. In Fortune’s list of most admired companies for 2000, Enron ranked first in quality of management — ahead of even GE. That ranking came from the votes of its peers. Just before Skilling bit the dust, Business 2.0 put him on the cover as a symbol of the lasting power of new management ideas. Until late last week — last week! — several Wall Street analysts rated the company a strong buy.

It’s too soon to know what to make of all this, but a couple of management lessons stand out. First of all, accounting really matters. Enron was doing all kinds of stuff — perhaps legally — to take assets off its books. In some cases those assets were parked with partnerships controlled by Enron executives. That stinks, especially because it turned out that the performance of those partnerships could and did have an enormous effect on Enron’s business. Fundamentally, it’s a question of honesty — and not merely honesty to shareholders, but honesty to yourself. Fast-growing companies can be tempted to do with their bookkeeping what Enron Online did with IT equipment: borrow revenue from the future, figuring that it can be replaced before the quarter closes.

Hip, hot companies want to be hip and hot throughout. An aggressive CEO — or his board — ought to have the sense to insist on hiring a counter-culturally fuddy-duddy CFO. That’s not to say that the accounting needs more quill pens. To the contrary. The profession has largely failed to adapt to changes in the economy (such as the growing importance of intangible assets and the increasing prevalence of service businesses and build-to-order manufacturing). The fact that “conservative” accounting is less and less realistic opened the door for “pro forma” bookkeeping by quacks and naifs.

Second, when the shit hits the fan, don’t pretend you smell zinnias. If Enron had lined up the financial help it needed and made some public disclosures early and fully, it probably could have called on its reservoir of admiration to survive. This is corporate-crisis management lesson numbers one, two, and three: You can’t manage bad news. You can only face up to it. When things go wrong, get it all out — and get it all out fast. Enron seems to have hoped to get away with disclosing as little as possible. Maybe the company figured it could keep its secrets locked up like a mad aunt in a tower. More likely it hoped to get her out of the house, or at least sedated, before analysts and auditors showed up to inspect the premises, or before the next quarterly earnings statement — kiting the truth. Now, needing real help, Enron executives will be lucky to find anyone who doesn’t tell them to go fly a kite.

Posted by on December 5, 2001