Thursday, February 19, 2004

The Lessons of Enron
This morning's big news was former Enron CEO Jeff Skilling turning himself in to the authorities in Houston. The prosecutors' strategy appears to have been to work their way up the chain of leadership, cut the deals to get at the next level up, then repeat. Will Mr. Skilling now do a deal to give up Ken Lay in turn for some kind of reduced charges? The courts will have their say in all this, and Enron will live on for years in our vocabulary as a prime example of ruthless, unethical business practices. But should that be the whole story?

With numerous books now available on the subject, the facts of Enron's rise, decline and fall are essentially a matter of public record. Where a lot of the commentary has gone wrong, however, is in seeing this case solely as a model of how not to run a company. Any other lessons have been shoved aside as either unimportant or invalidated by the larger picture of misbehavior.

Enron must also be viewed in the context of its times, in order to separate the chicanery from genuine innovation. It is easy now to forget that the Enron mystique of the late 1990s arose not just from its earnings and stock price growth--both now seen as the result of overly "sharp" financial engineering--but from a variety of genuinely novel and clever (in the best sense) approaches to an industry that was going through major changes, some of which were not readily apparent to its largest players.

It was one of the few firms in the energy industry during the Tech Bubble that did not have its stock price pummeled for being too traditional and asset-laden. For a few years, all the other energy players had to look at Enron and wonder what they themselves were doing wrong. It is too comforting and facile to now write off that whole period as an anomaly based only on legal and accounting transgressions.

We should also remember that Enron created markets and products for which there was genuine demand, and it appeared to possess the laudable knack of learning from its mistakes without becoming paralyzed by them. It would be fascinating to see someone reconstruct the financials of the real business, minus the swindles created to pump it up. The whole thing sank when Enron committed the cardinal sin that any trader can make--and Enron was fundamentally a trading company. A trader can never, ever do anything to make the people he is dealing with doubt his credibility. The moment their financial house of cards started to collapse, it became impossible for them to sustain their trading volumes, and the death-spiral began.

There is something seductive and reassuring about watching successive Enron executives do the "perp walk", as we endow them in our minds with all the Seven Deadly Sins. Beyond the headlines, though, is what I believe to be a much more interesting and complicated story of a company that went out of its way to hire smart and clever people, gave them their run, but then let them down badly by never learning (or bothering) to rein them in when their ideas went out of bounds.

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