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 / Winter 2003 / Issue 33(originally published by Booz & Company)


Best Business Books 2003: Corporate Scandals

Enron’s office culture is described as cutthroat, smug, and ultimately mercenary. As those “special purpose entities” grew increasingly exotic and opaque, they saved Enron’s share price — but they also were gradually structured in ways that rewarded CFO Andrew Fastow and his cronies with fantastic payouts for conjuring the magic they seemed to work on the bottom line. Even when Sherron Watkins had her epiphany about the accounting problems in Enron’s SPEs, her first thought was neither to alert the authorities nor to save the firm, but rather: “I’ve got to get out of here.”

The other valuable scandal book is The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Portfolio, 2003), by Bethany McLean and Peter Elkind of Fortune. (And here I should disclose my bias, which is that both are former colleagues of mine.) They are forthright in arguing that the Enron story is no simple tale of thievery. They even concede that the company was smart — “in many ways, too smart, as it turned out” — and that its story is partly one of “smart people who believed their next gamble would cover their last disaster — and who couldn’t admit they were wrong.”

Their account is extremely detailed and offers a barrage of specifics on Enron’s accounting acrobatics that can be overwhelming at times. But of course the real lessons of Enron are not in the mechanics of the SPEs — you don’t have to know much about them to know that whoever concocted them was concerned with something other than giving outsiders a clear picture of the company’s numbers.

The book’s most compelling broader point has nothing to do with numbers, but rather with bad management. The authors paint Ken Lay as a man who simply refused to confront negative situations. This is a terrible trait in a leader, but it was exacerbated by the management style of Lay’s protégé and successor, Jeffrey Skilling: He was a believer in hiring smart people and giving them a huge amount of latitude. This method of managing — or no-managing — is often praised for the creativity it unlocks. But in this case, running unchecked, it unlocked those mercenary tendencies and let them run amok. If your company is made up of ferociously smart and competitive people, that may be good; but if they care about themselves more than the company, you’re in trouble.

One other book, Anatomy of Greed: The Unshredded Truth from an Enron Insider (Carroll & Graf, 2002), describes Enron’s meltdown from the point of view of a rank-and-file employee, Brian Cruver. Cruver is billed as “an Enron insider,” which is both true and misleading (sort of like some balance sheets). The 29-year-old was a new hire in a fledgling division designed to buy and sell “credit risk as a commodity.” He had no interaction with Enron’s key players and knows no more about their motivations than anyone reading the newspaper might.

Still, his perspective holds some interest because from the moment he arrived, Enron’s bets were starting to go bad. He describes walking into the company headquarters in downtown Houston on his first day, in March 2001, and thinking, “This place is badass!” Within months, he writes, he had learned enough about certain Enron practices to “feel sick.” Cruver is definitely a Villain Theorist, placing blame squarely at the top. And yet he tells how, as Enron spiraled into bankruptcy, one group tried to make off with proprietary trading data, and adds that he procured a free laptop, racked up overseas calls on his Enron cell phone, and kept quiet when a clerical error kept his paychecks coming for several weeks after he was laid off. “Justification for accepting the payments was easy — ‘Enron owes me!’” There is an irony here that Cruver seems unaware of: Precisely this attitude pervaded the company, top to bottom, and probably did a lot to bring it down.

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