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 / Second Quarter 2002 / Issue 27(originally published by Booz & Company)


Core Group Therapy

In every company, an insider set of managers influences decision making. In some cases, that’s healthy, in others (witness Enron), it’s a nightmare.

Illustration by Lars Leetaru
Midway through 2001, a passionate young vice president at an oil company showed me a chart of energy-company stock prices making the rounds in his office. Most of the companies showed nearly horizontal performance over the past few years, tottering gloomily toward stasis or decline. Only one line ascended, dizzyingly, from a market capitalization below the others to a peak high above them. “How can we ever get our top management,” asked the VP, “to think more like Enron’s?”

That same question was being asked in at least two other energy companies that I know of — and at the Harvard Business School, where researcher David Lane and Professor Pankaj Ghemawat had just published a glowing case study of the company, titled “Enron: Entrepreneurial Energy.” Why, Professor Ghemawat asked from his lectern, weren’t the established oil companies emulating the Enron Corporation? They were all beefing up their commodities and derivatives trading operations and trying to recruit brilliant, aggressive MBAs to run them, but they still couldn’t match Enron’s stock price growth or its competitive edginess. Nor — fortunately for them — its stunning collapse.

Why not? Asking around the energy industry, I’ve heard many people blame Enron’s ruthless, take-no-prisoners, everything-for-an-advantage corporate culture. It has become fashionable in some circles to argue that all corporations are ruthless in their business practices these days because of the short-term pressure to boost share price and performance. According to this reasoning, all companies are likely to end up like Enron unless they are tightly regulated.

Yet plenty of companies never succumb to “short-termism.” And some that do, like the Exxon Mobil Corporation and the Intel Corporation, remain at the top of their industries for decades.

March of Folly
So why do things go wrong in good companies? The more people I talk to from different workplaces, the more I’ve observed different and complicated cultural forces — both inside and outside companies — that undermine business performance. It’s as if each company is culturally predisposed to fall victim to its own potential forms of folly and its own way of self-destructing, whether the cause is illegal actions or just bad judgment.

Such cultural predilections are certainly true of political institutions: Historian Barbara Tuchman wrote one of her best books, The March of Folly: From Troy to Vietnam (Alfred A. Knopf, 1984), about the tendency of governments from the Trojans to the Americans in Vietnam to pursue, as she put it, “policies contrary to their own interests.”

In business, there are many discernible flavors of folly. There is the one-big-ad-campaign-to-build-mind-share flavor of folly; the let-quality-slip-to-save-costs flavor; the protect-the-executives-from-bad-news flavor; the expand-and-merge-beyond-our-capabilities flavor; the not-invented-here flavor; the jump-on-the-industry-bandwagon flavor; the perennial hide-losses-by-borrowing-from-future-profits flavor; and the ever-popular addiction-to-downsizing flavor. Wayne Cascio, a professor of management and international business at the University of Colorado, identifies the organizationally debilitating spiral in which downsizing cuts back a company’s capability, which leads to lower profits, which leads to a perceived need to downsize again.

It’s not always easy to see a company’s cultural predispositions, from either outside or inside. Enron’s folly is visible to all now, but if you wanted to find it, say, in that two-year-old Harvard case study, you’d have to read closely between the lines. Jeffrey K. Skilling, interviewed in January 2000 just before he became CEO (and 19 months before his departure), described Enron’s policy of paying traders based on performance evaluations, and not automatically giving them a percentage of the value of the trades they closed: “Almost everyone else in the industry [pays traders a percentage]. I absolutely refuse to because it puts the interests of Enron and the individual at odds…. People who are getting a percentage of the book would make risky bets to get big numbers.” He concluded by saying, “I’m not going to subject the company to agency risk.”

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