Introduction

Early last week, I completed listening to the documentary “The Smartest Guys in the Room”. This documentary was about the Enron Scandal.

What was the Enron Scandal?

Let me acquaint you with the Enron affair if you are unaware of it. Enron was an energy and commodity business based in the United States of America, Houston. However, in late 2001, it became apparent that Enron executives had intentionally hid the financial health of the company.

As a result of the Senate Commerce Committee hearings in 2002, it gained prominence in business news.

The peak

Enron had a period when it was soaring high and untouchable. At its summit, it had over 30,000 workers and ranked as the seventh-largest firm in the USA. By the year 2000, Enron’s profits were 979 million dollars. ( This is almost 1 billion dollars of net profit! )

With profit margins like these investors were falling over themselves to buy Enron stock. However, it came crashing down in a big way.

The fall

This is how the fall happened.

• The share price of the company fell from a peak of $90 to 26 cents.
• On December 2, 2001, Enron filed for bankruptcy protection.
• Life savings and employment were lost by thousands of workers.

Their partners were not let off the hook either. Companies like Citigroup and JP Morgan Chase were sued by shareholders for doing business with Enron.

Formerly, Arthur Andersen was regarded as one of the “big five” auditing firms. It was at the same level with KPMG, Deloitte, PWC, and EY. Sadly, Arthur Andersen’s auditing license was suspended due to damage to the company’s reputation.

Everyone associated with Enron felt the brunt of the scandal.

The principal actors

There were three key persons most spoken about whenever the Enron scandal is brought up. And from each of them, I picked up key lessons which I would love to share.

1. Kenneth Lay – Former Founder and Chairman

Lesson: Do not be ignorant

I consider the founder and chairman to be a paradox. On one hand, he is the most blameless and, on the other hand, he is the guiltiest of them all. He sat at the top of the pyramid and basked in the glory times of Enron. Hence, it is hard to imagine that he did not have a clue what went on in his own company. After all, the buck stopped with him.

If his claims are true, then he was aloof to the company’s operations. The documentary even seems to point to that. That is he was detached from the business as the chairman. This is evidenced by when he was more concerned about picking the fabrics for the interior of the new plane than with the complaints of his CEO on the financial woes of the company.

At the very start, like all startups, for which Enron once was, Mr. Kenneth Lay was heavily involved. However, with the increased business operations and growth, he had to delegate. He could still be counted on to help open doors for Enron to well-connected politicians and individuals. Unfortunately, he left the minor details of running a company to the management team.

When the house of cards finally fell, he was the target of finger-pointing. For his part, he blamed Andrew Fastow, the CFO. He persisted in claiming ignorance of the wrongdoings of the firm throughout interviews and legal proceedings.

How does it apply to us

As we raise in rank, we believe that some activities should be taken off our schedule. We have already played our parts. It is now someone else’s turn.

For instance, let me share a very simplified African example. Let us say that there are two sisters. The first sister used to do a specific kind of chore. However, she grows up and goes to the university. When she returns, she expects her younger sister to now do those chores. She has grown out of those chores.

The point here is we should still be able to get our feet wet or hands dirty, occasionally. This is just so that we do not lose touch with our businesses.

Did you know that: Kenneth Lay made significant financial contributions to Republican party candidates. Among them was George W. Bush

2. Jeffrey Skilling – Former COO, President and CEO

Lesson – Understand the business inside out

“I am not an accountant” – Jeffrey Skilling in the Senate hearings

Know everything about the business like a child of four years. I learned this advice from Jeffrey Skilling’s story. He was seated slightly lower in the pyramid as compared to Kenneth Lay. He joined Enron in the late 1980s.

Jeffrey Skilling suggested starting a branch of the company that would guarantee natural gas prices. Kenneth Lay was so impressed that proposed that Jeffrey become the head of the gas bank, seeing it as a new avenue for growth. Enron Capital and Trade would be this new branch of the company.

With time Enron grew into trading not just natural gas but many other commodities. These included.

• Electricity
• Bandwidth
• Coal
• Lumber
• Metals
• Video on demand
• and even the weather!

Jeffrey Skilling was at the helm of making Enron a marketplace where you could trade never before traded assets just like you would trade stocks at the stock exchange. This was innovative for its time.

With the rapid growth of Enron, He naturally had to lean on others to make the diverse Enron businesses work out.

As he often stated at podiums and in interviews, he did not, however, truly understand the inner workings of how Enron functioned. It is surprising considering it is sine qua non for a CEO and President to understand how his company makes money.

He mostly depended on the company’s accountants, Arthur Andersen, and the CFO, Andrew Fastow, for this. He depended on them to defend the specifics of Enron’s revenue-generating processes to reporters and more enquiring minds.

Hence in the hearings after the scandal he kept saying that he did not know what was going on. During one of the senate hearings, he said;

“If the focus of this hearing, is a game of dualling accountants, I have to say right now that I am not an accountant and probably have nothing to add to that debate between experts.” – Jeffrey Skilling

This is a surprising comment coming from one who loudly and continually lauded Enron.

How does it apply to us

Do you have a leadership position in a company where you are oblivious to the inner workings? If you are in the dark, then I implore you to spend a few minutes to sit down with your key staff and find out what goes on daily.

Re-acquaint yourself with those essential business facets. To sum up, stay in touch.

Did you know that: Jeffrey Skilling was one of the consultants who came with McKinsey and Company to suggest new growth opportunities for Enron ? He ended up implementing what he proposed.

3. Andrew Fastow – Former CFO

Lesson – Raise doubts about the dubious directives you receive from above

He was largely held responsible for the incident, according to many. You hear him tell it another way, though. He claims that he merely followed orders. He was not the only one who unintentionally helped to expand and maintain the Enron deception.

In his eyes, he was given targets to meet. Targets that may have been unsustainable. He was to ensure that profits grew quarter after quarter. This had to happen without fail. And there were already precedents which he came to meet on how such targets could be achieved.

He only did what he was told. That is show growth and profit on the Enron quarterly statements. To him, these were innovative techniques for achieving the said targets.

Undoubtedly, he grew the web of lies with innovation. He set up Special Purpose Vehicles (SPVs). These he asserts were created with the knowledge and consent of both Jeffrey Skilling and Kenneth Lay.

How does it apply to us?

Andrew Fastow should have asked more questions of the hierarchy. He should have asked if what was being done was ethical. There were very few who did. And at the time, they were dismissed for asking such questions. In essence, Ask Why.

The message here is not to follow the crowd. Be an inquiring mind and know if what you do does not undercut the spirit of the law. This may be either explicit or implicit. If you are fully aware that what you do does not go against any regulation or rule, then by all means your conscience is clear.

Did you know that: Ask Why was the Enron tagline

Legacy

It became recognized as the biggest and most intricate fraud scheme the financial world had ever seen. The Sarbanes-Oxley Act of 2002 was subsequently signed by George Bush to demand corporate responsibility from companies. One of these rules required that every executive was to sign off on all financial reports.

Conclusion

All the key players started out with the best of intentions. Which was to have the best, and most innovative company. Indeed, they changed their slogan from “The World’s leading Energy Company” to “The World’s leading Company”.

However small decisions, missteps, lies, and oversights led to an avoidable scandal. We are not smarter than they are. Hence, we should endeavor to learn from what they took for granted.

To summarize,

• Ask questions about the commands being given to you.
• Do not separate yourself totally from the details once you rise up.
• Understand the business like a four-year-old.

I like history and this one taught me a lot. Hence, I hope you learned as much as I did.
Thank you for taking a few minutes to read this article. I look forward to your comments.

Enjoy your day.