Amid today's consensus that everything that is so wrong in the corporate world can be summarized in a single five-letter word—E-N-R-O-N—it is worth remembering that Enron used to be a symbol of everything that was so right. It is also worth remembering that Enron, Worldcom, and others are only the latest in a long line of companies that have been worshipped and then disgraced in a boom/bust ritual that has played out since the dawn of time.
As John Kenneth Galbraith observed in A Short History of Financial Euphoria, the final phase of a speculative episode is "a time of anger and recrimination and profoundly unsubtle introspection. The anger will fix on those individuals who were previously most admired for their financial imagination and acuity." Back in the 1990s, Enron and its senior managers were nothing if not admired for their financial imagination and acuity. Enron's executives made mistakes—and some committed serious crimes—but today's near-universal depiction of the company as a gang of evil crooks obscures the most important lesson of the saga: The differences between Enron and today's corporate success stories are smaller and more complex than they seem.
Kurt Eichenwald's version of the Enron drama, Conspiracy of Fools, does not waste breath on unsubtle introspection. The painstakingly researched book is written in the popular (and gripping) fly-on-the-wall style, with recreated dialogue, actions, and scenes. For me, this style sets off warning bells—I unfortunately know firsthand how warped such accounts can be—but Eichenwald's admirable lack of editorializing leaves the reader to draw his or her own conclusions. Conspiracy is also mercifully light on the insipid class caricatures that often color such tales, in which private jets, expensive suits, boardroom struggles, hubris, and other facts of corporate life are ridiculed as symbols of "excess." (They may be excessive, but they aren't limited to companies that disintegrate.)
Like other such books, Conspiracy is a subjective view of a debatable reality, but Eichenwald's appreciation of Enron's complexity is refreshing and honest. For example, Sherron Watkins, the "whistleblower" beatified in the popular press for the letter she wrote to the company's chairman, Ken Lay ("I am incredibly nervous that we will implode in a wave of accounting scandals"), appears here more like many of her Enron brethren: foul-mouthed and self-promotional. After writing her letter, Watkins tried to parlay her admirable act of bravery into a promotion. With Enron collapsing, annoyed that others were jumping on the what's-wrong-with-the-company bandwagon, she rushed to toot her own horn: "Your new CFO spot and the job I want …" she wrote in an e-mail to a senior executive. "I'd like to talk to you about my role in the 'inner circle', because I firmly believe that I deserve it." Later, while negotiating a lucrative book deal, Watkins eagerly testified at the televised congressional hearings, where, Eichenwald says, she "ventured far beyond her actual knowledge"—an activity that some might describe as perjury.
The most startling suggestion in the book, one for which Eichenwald will probably be boiled alive, is that Lay and Jeff Skilling, Enron's former CEOs, may not have committed crimes. Not, as Skilling argues, that they did nothing wrong—the smoldering scrap pile that was once one of the world's largest corporations is proof that they did something wrong—but just that they may not have broken the law. Skilling's arrogance, emotional volatility, and inability to handle failure make it plausible that he did not "know something"when he suddenly quit less than a year after being appointed CEO, but that he simply couldn't take being blamed for a drop in the stock. Similarly, Lay's ambassadorial (reckless?) distance from the trenches make it possible that he believed what his people were telling him: Everything was OK.
Eichenwald's Enron, in other words, was neither a teeming hive of crooks, nor, equally ludicrous, a convent of gentle innocents mugged by senior management thieves. Rather, it was a Petri dish designed to nourish hyper-growth, for better and for worse. In Enron's fast and loose culture—engineered by Skilling, blessed by Lay—revenue producers were deified and managers stiffed. Finance and accounting were transformed from bean-counting functions to profit centers (a terrible idea). Business development executives were paid not on value created but on contracts signed, with execution left to dull managerial types. In the 1990s, with the economy and stock-market booming, this culture allowed the company to vault from being an obscure operator of gas pipelines to a global trading powerhouse. It also created a testosterone-charged, me-first atmosphere in which mistakes, risks, and early-warning signs were trampled in a hungry stampede.
But these problems affect other companies, too—especially during a boom. So even with this potent fuel, Enron needed a catalyst to become a fireball. As Eichenwald tells it, his name was Andy Fastow.
Eichenwald's Fastow is repellant: smarmy, manipulative, dishonest, and, most dangerous of all, incompetent. One must be wary of embracing the often absurd "a few bad apples" defense, but it does not seem a stretch to suggest that if someone else had been CFO of Enron, the company would probably exist today. Accounting rules are arbitrary and arcane, and many tactics that are legal shouldn't be (and vice versa). But even with extraordinary leeway to beautify Enron's results, Fastow crossed the line. He engineered the infamous partnerships that, while airbrushing Enron's performance, allowed him to profit at the company's expense, an outrageous conflict of interest; worse, he bullied his own employees when they dared negotiate for Enron and against him. Lastly, he took the tiny risk he faced in these rigged deals and passed it back to Enron, thus eliminating the company's legal justification for the accounting. Ultimately, it was the crisis of confidence triggered by these transactions, rather than the bogus numbers themselves, that brought Enron down.
Meanwhile, Fastow failed to attend to even the most basic CFO tasks, such as creating a debt maturity sheet (or even knowing how much debt the company had). One can always argue that corporations should have tighter controls, but CFOs have extraordinary power. If they also have the trust of superiors, a penchant for doing dazzlingly complex deals whose details are known to only a few disciples, and a willingness to break the law, the result will often be disaster.
Which isn't to say that Skilling, Lay, or dozens of others—including lower-level employees, board members, accountants, lawyers, bankers, investors, analysts, and even journalists—played no role in the proceedings. Of course they did. If nothing else, Skilling and Lay installed Fastow as CFO and trusted him—a catastrophic error of judgment (though not itself a crime). Most of the supporting players, meanwhile, cheered wildly during the years when Enron was, one way or another, making them rich.
The ritual period of "unsubtle introspection" after a bust serves a purpose. It allows all who participated in the slap-happy era to feel virtuous by comparison (which, relative to Fastow & Co., they probably are). It also allows us to believe that the problems are behind us, that we have learned something, that it will be different next time.
The real morals of Enron, however, are more subtle than today's dismissal of the company as a den of thieves or, even, a conspiracy of fools. For investors, the moral is that concentrated investment is always risky—so diversify that 401(k). For managers, it is that employee incentives should always be balanced between long-term and short-term goals (if employees believe that it is better for their company and themselves to cross a line rather than miss a target, some will). For board members and top executives, it is that the more controls and checks the better—because ruin is only one well-placed sleazebag away. For the public, it is that no new laws or enforcement will ever make jobs, pensions, or stocks "safe." The macro lesson, meanwhile, is that the Enron story is an embodiment of human nature, and human nature will never change. No matter what we learn, this is one story that will forever repeat itself.