Enron Leadership, Corporate Fraud, and Ethics Reform

Introduction: The Collapse of Enron

Enron collapsed very quickly in November 2001, and its failure should have served as a warning about serious dysfunctions in the entire corporate and financial system — but it did not. Its executives admitted that they had falsified company records going back at least five years, although in reality they had been doing so since the 1980s. When the company filed for Chapter 11 bankruptcy, it laid off over 20,000 workers and at least $24 billion in pension assets, stocks, and mutual funds vanished (McLean and Elkind, 2003). In addition, the Arthur Andersen accounting firm, which had been complicit in covering up the fraud and embezzlement at Enron for many years, also went out of business.

This catastrophe demonstrated that Wall Street banks, stock analysts, and ratings agencies had either been deceived or allowed themselves to be deceived by Enron, as they continually painted a positive picture of the company and its future prospects. Later in the decade, the exact same problem would occur with the banks and investment firms that were marking "assets" of dubious value — such as subprime mortgages. They too collapsed and ended up receiving trillions of dollars in bailouts from Congress and the Federal Reserve, which was yet another indication that Wall Street and corporate America had essentially purchased the government and both political parties. Enron had certainly done so through donations to politicians of both parties, and was especially close to both Presidents Bush, who helped the company obtain the deregulation it desired and billions in government subsidies.

The Criminality of Enron's Leadership

In Criminology Today, Gene Stephens predicted that the Internet would make white-collar crimes like those of Enron far more common, since companies find it easier to conceal bogus transactions, clients, and traders using new technologies. Advancements in copying technology, instantaneous financial transactions, and rampant corruption in the U.S. all facilitated the white-collar crime epidemic (Schmalleger, 2008, p. 508). As Joseph F. Coates asserted, "the crimes that have the widest negative effects in the advanced nations will be increasingly economic and computer based," including electronic theft and fraud, manipulation and disruption of records, and tampering with security systems (Schmalleger, 2008, p. 504).

Enron was a house of cards that should have collapsed years earlier, except that the accountants and analysts who concealed the fraud were in fact ordered to do so by their superiors. Its profits were all smoke and mirrors, yet Wall Street promoted the company as though it had invented a new business model. None of the analysts and accountants went to prison, unlike Ken Lay, Jeff Skilling, and Andrew Fastow, and they all denied any wrongdoing. Cliff Baxter, another executive who had been very close to Skilling, committed suicide after the scandal became public, although his history of manic depression may also have been a factor.

Arthur Andersen had been misrepresenting Enron's finances since 1987, when it already knew that the company was making fictional trades, setting up offshore accounts under the names of persons who did not exist, and engaging in dishonest financial reporting (McLean and Elkind, 2003). All of these constitute felonies under federal law, but at Enron they continued for years until the company finally crumbled like the pyramid scheme it truly was.

Ken Lay imagined that his close connections with the Bush family would ensure that Enron never sank, apparently not realizing that the Bushes were quite adept at distancing themselves from awkward situations. Lay was a Baptist minister's son from a much lower social standing than the Bushes, and had eagerly worked for deregulation of the energy markets during the Reagan years with the goal of becoming rich and powerful (McLean and Elkind, 2003). Although the Bushes eagerly accepted his donations, they distanced themselves immediately once Enron collapsed. They also denied doing the company any favors, either in Austin or Washington, and the media never pursued this angle very seriously. As the company sank, Lay and other executives cashed in over $1 billion in stocks and stock options while publicly claiming that Enron was one of the most profitable companies in the world. To cover their fraud and corruption, they attempted to shred all company records — itself a crime under federal law (Enron, 2005).

Jeff Skilling had been influenced by the book The Selfish Gene, which offered a defense of Social Darwinism that had made a comeback in the 1980s and 1990s. He believed in the survival of the fittest and insisted that human beings were motivated solely by money — a worldview common in an America governed by Ronald Reagan and the Bush family (McLean and Elkind, 2003). All Enron employees were expected to accept this aggressive, competitive philosophy or they did not remain long at the company. Skilling was also highly insecure — a former nerd who rebranded himself as a corporate executive and global adventurer, and who frequently proclaimed, "I am Enron" (Enron, 2005).

Even with billions of dollars appearing, disappearing, or simply going unaccounted for, Enron could generate apparent profits during the great bull market of the 1980s and 1990s, as long as it maintained an image of tremendous profitability and innovation and no one examined the books too closely. Ken Lay promised that Enron's stock price would double every year, and all the executives engaged in "pump and dump" — artificially inflating the value of the stock and then selling it for personal profit. None of the company's profits had ever been real, yet stock values always rose, while Lay and Skilling were "fixated on the stock price" (Enron, 2005). Through skilled manipulation, intimidation, and bribery, they presented an image of being the "smartest guys in the room."

That image was based entirely on lies, since all the alleged profits were bogus and massive losses were concealed by accounting tricks. Enron had large energy projects around the world that were actually losing money, though none of these losses were ever reported. It had lost over a billion dollars on a massive power plant in India, for example, because Indian customers were unable to pay. It bought Portland General in Oregon in order to gain access to the newly deregulated energy market in California, and then lied about the high earnings from that acquisition (McLean and Elkind, 2003). Wall Street analysts generally believed the press releases put out by Lay and Skilling and rarely looked beneath the surface. Enron was also extremely hostile and vindictive toward the few skeptical analysts and arranged to have them fired if they did not praise the company sufficiently. For the most part, "never was heard a discouraging word" when it came to Enron — right up to the day it went out of business (Enron, 2005).

Until the dot-com bubble burst in 2000–01, Enron had been treated not only as a star performer but almost like a religious cult that was all-knowing, all-powerful, and infallible. In 2000, the company's stock had risen by 90%, and the company announced new strategies for bandwidth trading and even betting on the weather through options. As usual, its executives concealed the fact that it had lost money on these schemes by using accounting tricks such as mark-to-market accounting to conjure up "profits" that never existed (McLean and Elkind, 2003). By that point, it had concealed at least $30 billion in debt in bogus entities with names like Jedi, LJM, and Raptor. As soon as a few financial analysts and journalists began asking serious questions, however, Enron simply collapsed.

Energy Policy, Lobbying, and Corruption

In 2000–08, the energy and natural resource sector spent $304 million on federal elections, 72% of which went to Republican candidates. Of this total, $141 million came from the oil and gas industry alone, and overall these industries ranked as the fifth largest contributors to elections, with finance, insurance, and real estate (FIRE) consistently in first place. More importantly, energy and natural resource companies spent $2 billion on lobbying during the same period. They had allies in control of the Energy Task Force chaired by former Halliburton CEO Dick Cheney, as well as in key House and Senate committees. In George W. Bush, they also had a Texas president whose family had been closely connected to the oil and gas industry for decades and who had himself headed an independent oil company (Gevi and McNabb, 2009, p. 93).

Under these highly favorable circumstances in 2005, the real question is not whether the energy industries were in control of the entire legislative process — they obviously were at every level — but rather how Democrats and environmental groups were able to obtain any tax breaks and subsidies at all for conservation, renewable energy, hybrid vehicles, and energy-efficient appliances. Since the bill passed with bipartisan support in both houses of Congress and was overwhelmingly favorable to the oil, coal, and nuclear industries, Democrats and their allies were only able to secure limited concessions for their own constituencies (Sherman, 2009, p. 36).

Under a Republican administration and Congress, any energy policy bill is going to be overwhelmingly favorable to the oil, gas, nuclear, and coal industries, which direct most of their campaign donations and lobbying efforts toward that party. This is simply a matter of public record and not in dispute, although Democratic senators from oil and coal states — such as Jay Rockefeller of West Virginia and Mary Landrieu of Louisiana — will also fall in line behind traditional energy industries. No Democratic administration has ever been able to eliminate the subsidies and tax breaks that regularly flow to this sector, or to shift the focus of energy policy toward greener alternative fuels and renewable energy. In 2009–11, the Obama administration attempted to do so and failed because enough Democrats joined with Republicans to block any such change.

At the time of writing, the U.S. still imported 58% of its oil and obtained most of its domestic electricity from coal-fired power plants. The Energy Policy Act of 2005 demonstrated exactly how effective the lobbying efforts of traditional energy companies could be in Congress (Sherman, 2009, pp. 37–38). Nothing in the bill was directed at improving the fuel efficiency of automobiles — which would be the single most effective known method for reducing oil consumption — while it subsidized offshore drilling and the construction of new coal and nuclear plants. In contrast to the giant oil, coal, and nuclear industries, alternative energy companies spent only $3.8 million in federal campaign contributions in 2000–08, or just 1.5% of the total for the entire energy and natural resource sector (Gevi and McNabb, 2009, p. 93). Given the realities of how Congress functions, that relatively small amount of money buys very little influence, and this is reflected in every energy bill that has ever passed.

Conclusion

That massive fraud at Enron had continued for so many years without any real auditing, regulation, or public scrutiny should have served as an object lesson that something had gone seriously wrong with corporate America. Lay and Skilling eventually went to prison and Congress passed the more stringent Sarbanes-Oxley Act in order to prevent such fraud in the future, but in the end this was not sufficient to prevent the larger collapse that occurred on Wall Street in 2008–09. In that case, the entire global financial system came close to the kind of crash the world had not seen since 1929, and ultimately the fiasco cost the United States trillions of dollars.

Enron is a testament to the deregulated, out-of-control capitalism that was revived in the United States by the Reagan administration. None of this was new in American history — such massive fraud, corruption, and speculative bubbles had all occurred before — but evidently every generation must learn the same lessons again. New regulations like Sarbanes-Oxley and Dodd-Frank have been put in place to prevent a repetition of these scandals, despite considerable resistance from the business community over implementation costs. Such changes were essential in order to restore some semblance of public trust and confidence in corporate capitalism after a decade of scandals. Very few large companies seemed to be living up to even basic standards of ethics and social responsibility, though Gap stood as a notable exception. In many ways, the criminality of Enron's leadership has become a symbol of a scandalous era in American history that bears a striking resemblance to the Gilded Age.

References

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