Professor Mittelstaedt draws 38 insights from the incidents he studies, conveniently summarized at the end of the book. Some of these, such as “establish and enforce standard operating procedures” and “culture is powerful — what creates success may kill you,” fall into the true-but-not-very-helpful category, and it is difficult to see how a manager could integrate them into his or her daily activities. Many of his points, however, are valuable, such as the suggestion that every organization conduct an “economic business visioning” (EBV) exercise. This demands an in-depth understanding of the present and historical context in which the firm finds itself.
In EBV, the management team surfaces its often implicit assumptions about the business and examines which are valid and which are not. The exercise also gives managers a sense of what is possible and what might be very difficult in their industry and organizational contexts.
School of Scandal
The downfall of Enron is an enormous object lesson in the importance of context, but if we are to learn anything from its fate, we need to remember and understand what went wrong. Fortunately, we have financial journalist Kurt Eichenwald to help us. In Conspiracy of Fools, he reminds us that Enron did exist not so long ago, and shows us very clearly how its managers fooled so many people so comprehensively that they even fooled themselves.
Mr. Eichenwald, a writer for the New York Times, does a masterful job of weaving together the multiple characters and complicated deals that were Enron — and Conspiracy of Fools is my choice as the year’s best management book. The rich and complex picture that emerges reveals that the company’s collapse was rooted in America’s muddy standards of accounting and reporting, and in the environment of corner-cutting that had been rampant for nearly a decade. Abetted by fee-hungry bankers, lawyers, and accountants; lax government regulation; and booming stock markets, a small group of smart but arrogant executives in effect created a Ponzi scheme so complex that neither they nor their advisors understood its true dynamic.
Mark-to-market accounting, when applied to long-term contracts, allowed Enron to report profits earned over the lives of such contracts immediately, but left the company exposed to market risk for the contracts’ durations. The firm’s efforts to mitigate these risks led to attempts to create complex hedges using special-purpose entities that did not appear on Enron’s balance sheet.
Conspiracy of Fools shows that many of Enron’s vaunted new ventures were simply bad businesses, whose poor results had been disguised for a while by bogus accounting. The sheer incompetence of many of the company’s managers and their universal disdain for the nitty-gritty systems, disciplines, and accountability that underpin every successful organization are breathtaking. “Ultimately it was Enron’s tragedy,” writes Mr. Eichenwald, “to be filled with people smart enough to know how to maneuver around the rules, but not wise enough to understand why the rules had been written in the first place.”
Charles Gasparino, a senior writer at Newsweek, in Blood on the Street, illuminates the larger context in which the Enron debacle took place — and in which managers at countless other companies made unwise and costly decisions during the boom of the late 1990s. His book is a catalog of the pride, envy, anger, sloth, avarice, gluttony, and lust that lie behind Wall Street’s professional facade. He focuses on the actions of the major players: analysts Jack Grubman of Salomon Smith Barney, Henry Blodget (Merrill Lynch), and Mary Meeker (Morgan Stanley); Securities and Exchange Commission Chairman Arthur Levitt; Richard Grasso, chairman of the New York Stock Exchange; Citibank Chairman Sandy Weill; and New York Attorney General Eliot Spitzer.