Everyone has heard about the demise of Enron on the news and names such as Kenneth Lay and Jeff Skilling have become synonymous with the greed of the late 90's, but few people actually understand what it was that Enron did wrong. The sharp documentary Enron: The Smartest Guys in the Room takes us on a journey of enlightenment and corruption, of greed and excess as we see the rise and fall of Enron from two truly talented people, Lay and Skilling. Unfortunately, both men appear to have put the accomplishment of their dreams above ethics or morality.What was Enron? A company that came up with idea to sell energy as a commodity. For Enron to be able to manage the energy business landscape they had to acquire gas companies, oil companies and electric companies. This was such an innovative idea that Enron, the Securities and Exchange Commission and Arthur Anderson auditing agreed to allow Enron to put in their financials projected incomes from the emerging markets. How does that work? Well, if they were to build an power plant in India, lets say, and they estimated it would generate $10 billion over 10 years, they would simply show that as income, even though they actually hadn't earned the money yet. In the end, the cost of electricity in India was too costly for the average person in India to afford, so the facility lost money, but on the books, it would show $10 billion.
As the company grew and entered other markets, they simply projected and announced income that was not actually being generated. Through this process the lines between right and wrong started to blur. Greed seeped into the company. Mismanagement and conflict of duties became acceptable as long as the value of the company grew. And this money was so enticing that every level of the industry, the levels that were supposed to provide logical checks and balances, fell prey to greed.
Faces of Enron Greed: Lay, Skilling, Fastow and Pai.For example, Andrew Fastow, the Chief Financial Officer of Enron, created a company that would sell stocks to banks for mutual fund usage... well, it only sold one stock, Enron. So, the CFO that controls Enron's value was making money by selling this one and only stock. All of the major banks went along because they were going to make money buying/selling Enron stocks through the CFO's company as well.
Arthur Anderson was getting paid $1 million a week to audit Enron, so they kept looking the other way as not to kill the golden goose. When all of the other areas of Enron's business began to falter, they company started falsely inflating the cost of power in California by shutting down power companies for "maintenance." Remember the rolling power outages in California that eventually cost Gray Davis the governorship and allowed Arnold Schwarzenegger to take over the state? They were a direct outcome of Enron's unethical abuse of managing the power infrastructure.
The demise of Enron truly began when a Fortune reporter asked Enron leadership a simple question... "How does Enron make money?" When she couldn't get a straight answer the house of cards began to collapse.
Enron: The Smartest Guys in the Room is an intriguing documentary that shows how an environment of corruption only breeds more corruption. Lay and Skilling are not evil men, but their actions, or inactions, allowed many lives to be destroyed and that, as a whole, is evil.
The documentary also reminded me just how false the "boom" of the 90's really was. Enron, Worldcom and Global Crossings were all cooking their books, so to speak. The internet boom was truly virtual, using falsely validated business models which eventually disintegrated under the weight of financial folly and went bust. The 90's boom that made so many people rich was truly "virtual" and something to which we should avoid trying to achieve in the future.
As for Enron, check out this film if you can. It is an excellent story of real dreams turned into a nightmarish reality.
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3 comments:
And all those smart men have been sentenced to some lengthy jail time. Kenneth Lay has died of a heart attack (supposedly). Two thoughts here: I'm reminded of the progress made by the American worker in the early 1900's after they joined together to form unions and forced the American business man to pay them a just wage and improve the work environment for all workers. Those men and women paved the way for many of the commonplace wage and workforce policies adopted by companies today, a benefit we take for granted. I believe we are seeing a requirement of executive accountability resulting from the excesses and impact on many lives from the boom of the 90's. Remember, Arthur Anderson no longer exist either and not all those hard working accountants were involved in those accounts. This will ultimately make the company’s true value in the marketplace more realistic to the investors so they can make sound decisions and reward good management, not crooked management. Sentencing these guys goes a long way to reinforcing that too.
Secondly, there needs to be a balance between government regulation and total deregulation. Reagan supported and encouraged deregulation expecting the competitive market to define the good and the bad, kind of like evolution, that is...the bad fall away. Sometimes that produces monopolies like Microsoft which just gobble up small companies that produce a quality product and incorporate it into their suite of products while eliminating the competition. That too is not good for the consumer. I believe there needs to be a balance between these two concepts. Less regulation but still regulate. The American consumer and those around the world still need watch dogs monitoring corporate behavior and severely penalizing the crooks. Only America has such a system in place, as flawed as it is, while in many other nations what gets accomplished depends on money passed under the table.
One of the outcomes of all of this is the institution of Sarbanes-Oxley regulations and audits, which are good because they try and prevent what Enron did, but they are painful to go through, practically speaking.
I like Steven's cynicism regarding Ken Lay. There's a man (steve) with years behind him, knowing that you cannot always believe what you hear.
I did watch this and it is a very good documentary although I must admit, I was thoroughly nauseated.
As a side note, speaking of Microsoft gobbling up companies, they just ate another one today.
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