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 / Spring 2003 / Issue 30(originally published by Booz & Company)


The Paradox of Corporate Entrepreneurship

Providing employees with more space than they need, in other words, can result in poorly planned or wasteful initiatives. But too little space can be constraining and frustrating. These guidelines can help senior executives achieve a better balance between openness and control:

  • First, distinguish between setting goals and deciding how those goals should be achieved. Goal setting should be a “low space” activity that is carefully managed and highly specific. It should include short-term deliverables as well as growth and innovation targets. Goal achievement should be a “high space” activity, in which the individual is given great freedom. Enron’s problem was that employees were given too much freedom in setting their own goals. Mr. Lay and Mr. Skilling were so keen to encourage entrepreneurship that rewards were focused on creating new businesses, not on managing existing businesses. In the world of R&D, a similar line of reasoning can be applied. Scientists need to be given objectives for project completion, papers written, and patents filed. Then they need the resources and the time to deliver on those objectives.
  • Second, allow individuals to learn from their own mistakes. Enron’s philosophy here was probably about right. Jeffrey Skilling’s attitude was that to maintain entrepreneurial spirit, the company had to give contract originators “enough rope to hang themselves with.” Fair enough, but Enron failed to react appropriately once mistakes had been made.

Charles Handy, the British management scholar, offers an interesting perspective on this point. In his most recent book, The Elephant and the Flea: Reflections of a Reluctant Capitalist (Harvard Business School Press, 2002), he recounts his experiences working for Shell Oil in Kuala Lumpur 40 years ago, and the pleasure of being so far away from the head office that he had plenty of time to correct mistakes before they were noticed. Today, he observes, he would not get that same freedom because of advances in communication technology. Technology adds value in many ways, but it also makes mistakes much more visible, which can provoke companies to restrict employees’ entrepreneurial space.

Too Few Boundaries. Boundaries are essential in any business organization, but even if a company explicitly identifies boundaries, it will still end up leaving many of them, such as those that concern legal, ethical, or moral behaviors, implicit. The result is that the committed entrepreneur (or worse, the committed rogue) can often find a way of getting around the system.

Surprisingly, Enron had a relatively sophisticated control system. The so-called Risk Assessment and Control unit was responsible for reviewing all investments of $5 million or more. Proposed investments were analyzed in terms of political, economic, and financial risk factors, and capital allocation decisions were carefully scrutinized. Unfortunately, this was not enough. Insiders have commented that Enron’s controls were far less strict than those in the banking sector, despite the fact that much of the company’s trading activity was directly comparable to that of banks.

Moreover, the explicit rules regarding capital allocation and risk did not stop many entrepreneurial individuals from breaking unstated rules, for example, by creating new subsidiary companies and financing activities off-balance-sheet. As is now widely known, ex-Enron CFO Andrew Fastow established a number of off-the-books operations between 1997 and 2000 as a way of hiding debt and overstating profits. Even though Arthur Andersen LLP, the company’s auditor, should have picked up on these dubious operations, the original problem clearly lay with Enron’s corporate governance practices and policing of its boundaries.

But the rules themselves are far less important than how those rules are interpreted and enforced. Here, too, Enron can be faulted. Many incidents were recorded in which Enron employees broke the rules, but, instead of being fired, were allowed a second chance. From Mr. Lay’s and Mr. Skilling’s perspectives, this was a deliberate policy, to avoid choking the entrepreneurial culture. But it also sent a very clear and dangerous message: It is OK to break the rules. In addition, arrogance among Enron executives led many of them to believe they were above the rules. One executive was quoted in U.S. News and World Report as saying about the company’s recruits from the top business schools, “These were privileged, smart, cocky kids. … We put them on pedestals so they would develop a sense of superiority.”

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  1. Julian M. Birkinshaw, “Entrepreneurship in Multinational Corporations: The Characteristics of Subsidiary Initiative,” Strategic Management Journal, Volume 18, Issue 2, 1997; Click here. 
  2. Robert A. Burgelman, “A Process Model of Internal Corporate Venturing in the Diversified Major Firm,” Administrative Science Quarterly, Volume 28, 1983; Click here. 
  3. Henry W. Chesbrough, “Making Sense of Corporate Venture Capital,” Harvard Business Review, March 2002; Click here. 
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  10. Richard N. Foster and Sarah Kaplan, Creative Destruction: Why Companies That Are Built to Last Underperform the Market — and How to Successfully Transform Them (Currency Doubleday, 2001)
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  12. Rosabeth Moss Kanter, When Giants Learn to Dance: Mastering the Challenge of Strategy, Management, and Careers in the 1990s (Simon & Schuster, 1989)
  13. Tom Peters and Robert Waterman, In Search of Excellence: Lessons from America’s Best-Run Companies (Harper & Row, 1982)
  14. Gifford Pinchot III, Intrapreneuring: Why You Don’t Have to Leave the Company to Become an Entrepreneur (Harper & Row, 1985)
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