The Smartest Guys with Spikes
We’re coming up on the 10th anniversary of the collapse of Enron. (I’ve recently been reading Bruce Bueno de Mesquita’s excellent book, The Predictioneer’s Game, which is what has me thinking about the scandal.)
I saw the documentary ‘The Smartest Guys in the Room’ a couple of years ago and thought it was fascinating. (If you ever get the chance to see the film, it’s well worth the time.) There’s too much to the Enron story for me to do the film justice here, but let me try to summarize this Wikipedia timeline.
In 1990, Jeffrey Skilling, a self-proclaimed ‘finance nerd’, joined the company and became central to Enron’s efforts over the next decade to transform the world of energy management by trading energy rights, the exchange of commodities like plastics and steel through EnronOnline, and even to “trade the weather” (that is, buy and sell insurance-like obligations for organizations to make payments to each other based on certain weather events, which can dramatically affect crop, energy and other commodity prices).
In league with other top executives like Chief Finance Officer Andrew Fastow, CEO Ken Lay, J. Clifford Baxter and Lou Pai (who with some other executives apparently were referred to internally as “the smartest guys in the room” and “the guys with spikes”), Enron proceeded to get involved in a series of fraudulent or questionable activities, like using subsidiary companies and ‘mark-to-market’ accounting to hide debts and filing false 10-K and 10-Q reports. Skilling apparently even consciously remade his nerdy personal appearance with expensive suits and laser eye surgery, prompting others in the company to do the same.
As the company was crumbling financially, these same top executives were touting how Enron was revolutionizing the energy market. Their showpiece was a ‘trading floor’ (based on stock-market trading rooms) which had no connections to the outside world. Visitors to the building were watching Enron “traders” literally just talking to each other.
The documentary made Enron’s trading floor and board room sound like the famous Stanford Prison Experiment except without the prisoners. Nothing but alpha males in a testosterone-filled echo chamber relentlessly punishing anyone who got out of line.
There’s no doubt serious crimes were committed. After the crash, top executives went to prison. More than 20,000 people lost their jobs. Many more lost fictitious fortunes in artificially overinflated stock. Lay died of a heart attack. Baxter committed suicide.
But why did these crimes happen in the first place? Perhaps the reason was simple greed and a willingness on the part of many of the top executives to lie, cheat and steal to get more money.
On the face of it, it seems unlikely to me that dozens of Enron’s top executives all happened to be crooks by nature. (I don’t know enough about the company or the scandal to know if this hypothesis has any merit – it’s just speculation on my part.) Personally, I find it hard to believe that a bunch of people were sitting around a table one day when Jeff Skilling piped up, “You know, folks, I have this idea. Why don’t we engage in massive accounting fraud? We can set up a fake trading floor. We’ll send false filings to the SEC. When it all comes crashing down in a few years, we’ll all be broke, disgraced, unemployed felons. We’ll lose our homes, our futures and our families. All that we’ve worked for our entire lives – our educations, our careers, our savings – will all be worthless overnight. Cliff, you might even just kill yourself. It’ll be fun while it lasts!”
The book The Five Dysfunctions of a Team claims that Enron is a great example of team breakdown. The five problems they identify when a team goes horribly wrong are:
- Absence of Trust
- Fear of Conflict
- Lack of Commitment
- Avoidance of Accountability
- Inattention to Results
But I wonder: What if the Enron scandal did not happen because the executives were just greedy crooks? What if it was not because of a ‘lack of commitment’ or ‘inattention to results’, but instead, because of the exact opposite?
What if the Enron frauds happened because the executives were committed, trusting of each other, focused on long-term results, and truly believed in what they were doing? Maybe Lay wouldn’t have filed those false claims if he doubted for a second the loyalty of any of his top lieutenants. Maybe they all believed a little too fervently in what they were doing.
Imagine you have this idea, I don’t care how crazy it is, but you become convinced that the entire world would be better off if you made it happen – like a stock market for trading energy rights. You manage to convince some folks around you that it’s a good idea. You try to implement it, but it turns out to be more difficult to get working right than you think. Everyone outside your group tells you that you’re crazy.
Do you quit? Sure, the system has problems, but they can be fixed, right? You just need more time. Maybe more money. Maybe one big win to get the attention of everyone and silence all of your critics.
If you make a deal that will bring you $1 billion in revenue over the next 10 years, it can make sense to record (at least some that) revenue on this quarter’s books, doesn’t it? After all, you did the deal today.
Sure, the traders are only talking to each other right now, but that’s only temporary. When the rest of the world see how well our system works, everyone in the world will want to plug in, and our trading floor will be the center of it all.
It makes sense to keep expenses related to non-core business functions in separate subsidiary companies – After all, they are non-core businesses, so their activities shouldn’t be reflected in Enron’s bottom line.
Again, I’m not claiming that the Enron executives who are in prison are innocent in any way. Andrew Fastow apparently got monetary kickbacks from one of Enron’s subsidiaries. Pai spent gobs of corporate money on strippers. Many executives sold Enron shares for millions of dollars while simultaneously telling Enron’s own employees what a great deal the company’s stock was.
All I’m saying is: Maybe the people who ran Enron were able to cheat and steal because they first convinced themselves it was in Enron’s long-term best interest to do so. And it’s easy to lie to other people once you’ve learned to lie to yourself.