Why There was No Accountability at Enron

Ethical Leader Analysis: Enron

Introduction

Enron is the story of prideful, arrogant, greedy leadership. From CEOs Ken Lay and Jeff Skilling to CFO Andy Fastow, these leaders managed to turn a modest energy company into a financialized house of cards that collapsed spectacularly in a matter of days after seeing its company share price rise into the stratosphere over the course of a few years. That rise was due to fraud, manipulation, and a failure of leadership. Lay was responsible for putting Skilling into power and for turning a blind eye on the questionable tactics Skilling sought to employ at the company. Skilling turned a blind eye on what Fastow was doing to mislead investors. They were all guilty of hiding the company’s debt and losses through shell company partnerships—but in this they were supported by the prestigious auditing firm of Arthur Andersen, which blew up just as spectacularly as Enron did in the wake of the scandal. In fact, this was a story of a failure of leadership at just about every level of administrative oversight. Numerous big banks invested in Fastow’s shell company set up to do business solely with Enron. All of them should have known better—and they, too, bore some responsibility for what happened at Enron. Thus, to suggest that it is only Enron’s leaders who are to blame is to miss the wider conspiracy: the eagerness with which so many stakeholders were willing to enter into the fraud that was Enron is staggering. But for the purposes of this paper, discussion will be limited to some of the specific behaviors Enron’s leaders engaged in that precipitated its downfall, how Enron’s employees reacted to senior leadership’s behaviors and attitudes, and whether the leaders could have been stopped and how.

Behaviors of Enron’s Leaders

In spite of their bad actions, Enron’s leaders were actually likable individuals: they were popular at the company and exuded charm and charisma. The problem was not their likability; rather it was that they manifested the wrong kind of appeal—they appealed to something devious in their followers. There was a sort of rebellious, cavalier spirit among Enron’s senior leadership: they were going to do things that no one had ever done before, and they were going to celebrate all the way to bank—and no one was going to stop them.

Enron’s leaders—particularly Skilling and Fastow—were full of energy and life; they were ambitious and driven, playful, and fun; but they did not ground their energy in an ethical foundation. Fastow had a “Cheshire cat smile” that beguiled investors. Their authentic selves were not full of virtue but rather of pride and a willingness to engage in deceptive practices that Skilling to this day believes were honorable; Fastow, on the other hand, knew that his tricks were trouble, and he paid a heavy price for cooking the company’s books.

Whether Skilling ever believed his lies to be truth is unclear—but after Bethany McLean’s article critiquing Enron’s value hit the stands, he noted that the journalist called the company a “black box,” and then he said, “I’m sorry, it’s true; it’s just difficult for us to show people the specifics of how money flows through, particularly the wholesale business.” What he was doing was engaging in limited hangout—he was willing to acknowledge that Enron’s lack of transparency was in fact an issue, but he never made it seem as though this were anything to worry about. Was it incompetence on his part? Negligence? Unwillingness to accept the facts? Or was it outright dishonesty? Regardless, Skilling should have been more disturbed by what he himself was saying: when transparency is missing it is a giant red flag and usually an indication of fraud. And when there is fraud, there is reason to worry: Enron’s stock was overvalued for the company was massively in debt.

But Lay chose not to see it or to listen to whistleblowers like Watkins who came forward with concerns. Skilling played the part of captain going down with the ship, adamant to the last that he had guided the ship nobly and fairly. Fastow played the part of the scapegoat—but after all he did help to engineer the fraud. But really they all did. It was just that they did so with such unabashed shamelessness. Skilling, Lay and the Board all signed off on Fastow’s deals with his own shell companies because they thought it made sense for the company, given the fact that the accounting seemed to be permissible under the law. The banks bought in. Fastow argued that the deals with the shell companies that he himself set up would provide capital for the company—but that was really only half-true: he was playing games with accounting; the capital was never really there but on paper in columns of hypothetical math.

How Employees Reacted

Employees reacted in mixed ways: some leaned into the happy arrogance of the senior leaders and followed in their reckless, rambunctious ways. This was especially true of the energy traders, who conspired to crash energy grids in order to create greater returns for themselves on their trades. They were motivated by an unapologetic culture of ruthlessness at Enron that was promoted by the behavior of the company’s senior leaders: it was a get-rich-quick-by-whatever-means-you-can kind of culture. Those who liked it and bought into it displayed the same manner and spirit as the company’s senior leaders.

Not all employees bought into it, though. Some pushed back and tried to get the attention of Lay and the Board. They feared reprisal, however. They did not really know what to do. They sensed that something was wrong in Fastow’s department, and they could feel that Enron was lying to its shareholders—but as lower level employees they did not have the authority to put a stop to it or even to fix the situation. Lay and the Board ultimately bore the most responsibility since they approved the transition of the company’s core focus from energy to financialization of products—but the company’s employees were mostly in the dark about the true nature of what was going on behind the scenes under Fastow.

Could They Have Been Stopped?

Enron could have been stopped if anyone had stepped in at any time to end the gimmicks. Lay was the first culprit: he brought in Skilling and put him into a position of senior leadership because he thought his tricks clever. The Board was the next culprit. The Board could have refused to sign off on Enron’s new direction as it was so foreign to its core values and core focus—but the Board bought into the vision of profits that Lay and Skilling promoted. They went with greed instead of principles. Arthur Andersen was the next culprit. It should have been more diligent in identifying the red flags and calling the company to account—but even Arthur Andersen believed the company could do what it was doing because new regulations on fair value (mark to market) accounting essentially made it all okay. The banks were the next culprits: they invested in Fastow’s schemes even though it should have been evident to all of them what Fastow was doing constituted not only a clear conflict of interest but also fraud. The journalists—like McLean—and their editors were next: although McLean helped break the story, she herself doubted her own good sense when reporting on Enron and assumed naively that if what appeared to be fraud to her was really fraud the Board would have done something about it—so she did not bring it up in her initial report on Enron for Fortune magazine. The regulators were next: they had essentially deregulated the industry and basically no one was doing their job. The employees who did blow the whistle on the Enron were too little and too late. The bandits who could get away did so; others were not so quick. But the fact is that at any stage of developments, leadership within or without Enron could have stepped up and called the company to account—but it just never happened. It never happened from Lay to the Board to the banks to the audit firm of Arthur Andersen to the regulatory agencies: no one was quick to do anything—which should make one wonder how many other companies are out there just like Enron that have never been brought to account and that are still in operation today. At the end of the day, ethical leadership is about accountability, transparency, and taking action. Too many senior leaders did nothing and thus enabled the opaque system set up by Fastow and approved by Lay, Skilling, and the Board to operate under the radar.