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Best Business Books 2003: Corporate Scandals

No Simple Tales of Thievery

(originally published by Booz & Company)

Many executives at Enron and other companies that ran aground in the recent wave of corporate scandals were fervent evangelists for the power of markets. It turns out that even their failure has created a market — one for business-scandal books. These have begun arriving in bookstores, and there are a lot of them. Whether the marketplace embraces these books, and whether it justifies the publication of so many, remains to be seen.

But a more interesting question should be asked in the context of the marketplace of ideas: Do these books go beyond simply rehashing the past to teach lessons that readers can put to use in the future? A valuable scandal book would offer a plausible explanation of why the scandal happened. Even now, this is not so easy to do.

Happily, a couple of this year’s offerings do have real value, drawing memorable insights from a period in business history that many would prefer to forget.

Speaking broadly, the recent scandal books offer three theories for what went wrong. The simplest (and the one that’s been the most widely embraced) might be referred to as Villain Theory: A handful of very bad people willfully perverted the system. Another could be called Wicked Synergy: Larger and more diverse companies were sucked into, and corrupted by, the failures and problems of unsound upstarts in the wider business world. Finally, there is a theory that could be summarized as Deadly Rationality. This suggests that certain individuals, or even entire company cultures, came to behave in ways they believed, by logic or by rationale, would lead to legitimate success — but instead ended in radical failure. This is the most subtle, but also the most useful, theory. Its central lesson is, in a sense, a warning.

Snake Oil
Villain Theory drives Om Malik’s Broadbandits: Inside the $750 Billion Telecom Heist (John Wiley & Sons, 2003), a spunky, noisy, and self-righteous book about the collapse of the telecom sector, filled with phrases like “Ponzi scheme,” “snake oil salesman,” and “partner in slime.” The organizing device is the rogues gallery, one chapter per disgraced company or fallen guru, which, if nothing else, makes the book a handy overview — and a test case for the utility of chalking up the scandal era to a handful of consistently bad actors.

To distinguish his story from an earlier clutch of books about the dot-com bubble, Malik tells us that the telecom bubble was much bigger — the biggest “in the history of the modern world.” In truth, the two were fundamentally intertwined. Malik, a former writer for Red Herring and now a writer for Business 2.0, points to the “myth,” widely circulated in the late 1990s, that Internet traffic was “doubling every 100 days” — a supposed trend that sparked the creation of what is today a massive oversupply of data-transporting “pipes.” Of the 105 million miles of optical fiber in the United States installed from 1980 through 2001, more than 80 million miles were built after 1995.

Time and again, the moment of reckoning comes when a firm realizes that demand is slowing and quarterly projections will not be met. Time and again, the problem is solved in the accounting department. Most of the time, Malik seems to believe that the “broadbandits” knew their promise was false but hyped their firms to drive up share prices. Gary Winnick, for instance, signed on as the CEO of Global Crossing not long before it went public in mid-1998. At the time, “demand for bandwidth had grown at breakneck speed,” Malik concedes, but would soon show signs of a glut; the firm forged ahead with an 85,000-mile fiber network that is today “largely unused,” and filed for bankruptcy protection in early 2002. Winnick had by then sold $735 million worth of stock. Variations of this tale play out in chapters on Qwest, WorldCom, and so on.

Malik’s zeal for slamming the bad guys often leads to contradictions that are never resolved. In his section on Enron, he first calls the company “clueless” and then asserts that it was perpetrating a “scam.” Which is it? Elsewhere, he quotes the former head of a company that sold out to Qwest, whose own CEO, Joe Nacchio, is one of the book’s villains. The seller claims that he knew the bandwidth market would crumble, and that Qwest was on a losing path, so he “knew it was time to get out,” Malik says with apparent approval. But who is the “bandit” in this scenario, and who is the rube?

The biggest of the telecom disasters was WorldCom; the most recent estimate for the amount by which it overstated its earnings is $9 billion. That company’s collapse is the subject of Disconnected: Deceit and Betrayal at WorldCom (John Wiley & Sons, 2003), by Lynne W. Jeter, a business journalist and native Mississippian. Like Malik’s book, it is mostly based on previously published information. Jeter makes more of an effort to be evenhanded, ultimately shrugging at the question of what motivated WorldCom’s chief financial officer, Scott Sullivan, and how much CEO Bernie Ebbers knew about the situation. Also like Broadbandits, Jeter’s book seems to have been written in a great hurry. It often feels padded, and occasionally confused. At one point she tells us that Sullivan is accused of trying to “artificially boost revenues by reducing expenses,” which is obviously impossible (she means “boost profits”).

Malik seems to have more of a handle on the material, despite his repetitiveness and a weakness for inexplicable exclamation points, which are distracting! But ultimately both of the books teach us little beyond the most basic facts. Villain Theory is too one-dimensional to satisfy.

Merger Fallout
Because these scandals unfolded in the age of “synergy,” it was inevitable that the fallout would spread in unexpected directions — touching both the most-discussed merger of the 21st century and the largest financial institution in the world.

Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner (Simon & Schuster, 2003), by Washington Post reporter Alec Klein, tells of AOL’s now-infamous purchase of Time Warner and the messy aftermath. Klein wrote a series of stories in the Post on AOL’s accounting, which is his book’s most compelling material. Again, quarterly projections turned out to be overly optimistic, and questionable steps were taken to make the problem go away. To make its numbers — which Klein says were weakening even before the company began its courtship of Time Warner — AOL resorted to such measures as converting the winnings from a lawsuit into advertising revenue and booking esoteric barter deals as though they involved cash.

Klein’s focus is tight, making his book mostly of interest to those who are interested in AOL in particular rather than business culture in general, but a couple of broadly applicable points emerge. One is that a lot of the questionable decision making seemed to be rooted deeper in the company, although this doesn’t let the executive suite off the hook. It was pressure from the top to make optimistic (and finally unrealistic) stretch goals that led to desperate tactics below. Also, AOL, the 800-pound gorilla of the Internet boom, extracted enormous sums from dot-coms desperate for advertising deals. “The bruising techniques and negotiations left a string of financially hobbled dot-coms that eventually couldn’t pay their bills,” writes Klein. “Many would soon die.” This points to two more valuable lessons in an endlessly interlinked business world. One is that negotiating one’s revenue sources out of existence is, in the long term, an extremely bad idea. The second is that it is not enough to look for positive synergies: In the modern economy, it is crucial to understand how quickly a bubble contagion can spread.

Tearing Down the Walls: How Sandy Weill Fought His Way to the Top of the Financial World … and Then Nearly Lost It All (Simon & Schuster, 2003), a lengthy account of the career of Sandy Weill by Wall Street Journal writer Monica Langley, is largely a tale of the by-the-bootstraps rise of the “pudgy deal maker” to the top of Citigroup. But the book opens with an evening of triumph — someone was anointing Weill “CEO of the year” — besmirched by scandal. Jack Grubman, star telecom analyst for Citigroup unit Salomon Smith Barney, has just spent the day testifying before a Congressional committee that was raising a ruckus about WorldCom, and the highlight reel is dominating the financial news.

Nearly 400 pages later (filled with all the details you could ever want about Weill’s deal-by-deal ascension), we come back around to the Grubman disaster. Salomon, Langley writes, was a “closed shop” within the Citigroup empire, and Weill called in powerhouse lawyer Marty Lipton to “find out how we are running our business.” Lipton later reports, in a scene Langley recounts, that it’s not that bad: “There have been industry excesses in which the firm participated.” Another executive questions him: “You’re saying Salomon Smith Barney did what the securities industry had been doing for years — that the problems are the product of an industrywide disease?” Lipton nods. Citigroup eventually pitches in $300 million (“only a week’s worth of profits”) to a global settlement with the New York attorney general’s office, which soon announces there will be no charges against Weill, who promptly gets back to work.

Tearing Down the Walls has value as a record of one remarkable business figure, but its message about the scandal era that nearly pulled Weill into its wake is ambivalent. Does it make sense to excuse Salomon’s behavior because “industry excesses” were widespread? Langley never quite says, and the reader is left feeling that perhaps Weill just dodged a bullet. Which is presumably not a strategy that the rest of us want to pursue.

Deadly Rationality
Enron had a kind of first-mover advantage in the scandal frenzy, making it the subject of more books than any other company. One of the earliest, Enron: The Rise and Fall (John Wiley & Sons, 2003), by journalist Loren Fox, covers the basics in workmanlike fashion: Enron was a transporter of natural gas that aimed to take advantage of deregulation by reinventing itself as a trader of natural gas. Then it sought to reinvent itself again as a trader of other kinds of energy, and, in the long run, of practically anything you could think of. But a reputation for innovation masked deep and fundamental problems.

Power Failure: The Inside Story of the Collapse of Enron (Doubleday, 2003), one of the two truly worthwhile books on the scandal period, is written by Mimi Swartz “with Sherron Watkins.” That billing suggests that the story will largely be told through the eyes of Watkins, the Enron auditor who became famous for her memo to CEO Kenneth Lay warning that the company could be dragged down in an accounting scandal. In fact, Swartz, an executive editor at Texas Monthly, has a wider narrative to offer, and Watkins pops up only on occasion. (Which is just as well, because the sections about her tend to be dull.)

What Swartz shows is that many of the characteristics that eventually got Enron in trouble were the same ones that led to its early success — namely a penchant for daringly bending the rules. “If the regulators didn’t expressly prohibit a transaction, Lay saw it through,” she writes. The company’s use of “mark to market” accounting, which allowed it to immediately recognize the profits from long-term energy contracts at current-market prices, dated back to the early 1990s. Its use of off-balance-sheet “special purpose entities” (SPEs) went back just about that far, too. These tactics were aggressive, but not illegal — and since they worked out, they also probably seemed clever and bold.

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.

In Power Failure and The Smartest Guys in the Room, Skilling, Lay, and Fastow emerge as human beings rather than as cartoon characters — and this is a strength. Because in the end it’s hard to believe that any of these executives went to the trouble of knowingly erecting a Ponzi scheme in the form of a gigantic company. And the alternative — that seemingly right-thinking citizens can end up wreaking great havoc without ever actually believing that they’ve done wrong — is in some ways more troubling. It calls to mind something that the author John Brooks once wrote about Richard Whitney, the president of the New York Stock Exchange in the 1930s, who had an impeccable public reputation until he was caught embezzling. “Whitney did not think of himself as a thief,” Brooks wrote in Once in Golconda: A True Drama of Wall Street 1920-1938 (John Wiley & Sons, 1999, originally published in 1969). “Rather, he thought of himself as one who would not be a thief no matter what he did; that is, as a moral superman.”

It’s both amusing and somewhat sad that an insight so useful to understanding the recent past should appear in a book published nearly 35 years ago about events that had taken place 30 to 50 years earlier. But Once in Golconda is still worth reading — and it might have been truly valuable to have read it five years ago before the recent bubble burst. But nobody was pushing books about scandals back then. After all, there wasn’t much of a market for them.

Author profiles:

Rob Walker ( is a freelance journalist, a columnist for Slate, and a contributing writer for Inc. He has worked as an editor for the New York Times Magazine, Money, and American Lawyer.


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