“Buy Enron stock today!” A Tale of Two Cities…

“Buy Enron stock today!”  These were Jeff Skilling’s ending words to the group of civic and business leaders assembled at Southern Methodist University in Dallas in 2001.

We had just finished interviewing him for an upcoming McCuistion TV program on the energy situation in California. (Under Skilling, Enron adopted market-to-market accounting, in which anticipated future profits from any deal were accounted at their present market value rather than any historic or future value.) Skilling joked about the California energy crisis at one meeting of Enron employees by asking, “What is the difference between California and the Titanic? At least when the Titanic went down, the lights were on.” Skilling later attributed the remark to frayed relations between Enron and California. His employees, meanwhile, plotted to keep the price of energy high in California.

Off the record I had asked about Enron’s ethics policy- as I was writing a paper on corporate ethics for an MBA class. “Solid,” he said. “We have an ethics policy that covers everything you can conceive of.  Not that it’s needed, you either follow an ethics policy or you have one on the shelf.”  I kid you not! Honest… that was the gist of the conversation.

We then ran to set up the camera to catch his speech. Jeff Skilling instantly captured our attention with, “Enron got hammered last week.” He proceeded to tell a joke about what you would want someone to say about you at your funeral. The punch line, “Look, he’s still moving!” got laughs. He added, “After the equity markets last week, I hope they say that about us too.”  In hindsight – rather ironic.

Jeff Skilling addressed Enron’s pioneering spirit, the changes in the energy business and a tale of two cities, telecom and the efficiency of communications and the gas and oil industry.  He made an argument for vertical integration and the breaking down of the monolithic corporations that have for so long dominated the landscape in these fields.

With obvious pride he told us that Enron is the Toyota of the energy industry; delivering a package of energy cheaply. He warned us of California’s deregulation issues, yet stated, “California is the most regulated market in the US right now.” Throughout his speech and the TV interview he’d held with us earlier, he was composed, cordial and gracious as he became the head of the then most innovative company in the world- according to Fortune magazine- lauding it for 6 years in a row. And at its Houston headquarters- on a can’t miss it banner- Enron self-proclaimed itself, “The World’s Leading Company.”

So what went wrong?  It wasn’t supposed to happen this way? How did this successful giant topple so quickly? What did we miss? Or did we just not question their, “Anyone who doesn’t understand our business just doesn’t get it” inference? Yet even Goldman Sachs, at the top of the heap back then, would admit they had to take the company’s [Enron’s] word on its numbers. Who really cared about its convoluted finances, its numbers, as long as Enron delivered? What Wall Street most cared about was smoothly growing earnings.

Enron may have been the world’s leading company and that may have contributed to the culture of arrogance and hubris. Here was a company that encouraged flouting of rules. Yes, a pioneer, generating more than 80% of its earnings from wholesale energy operations and services. Reports increasingly warned, “they predict earnings practically to the penny;” and, “they have Wall Street beaten into submission.” In early 2001, Jim Chanos of Kynikos Associates commented that no-one could explain how Enron made money. Doug Millet, COO of Kynikos said, “they’re a giant hedge fund sitting on top of a pipe line.” And one with low returns at that.

On February 12, 2001, Skilling was named CEO of Enron, receiving $132 million in a single year.  On March 28, 2001, PBS’s Frontline interviewed Skilling, where he claimed Enron was one of “the good guys”.  In August of 2001, Jeff Skilling stepped down as CEO of Enron.  A former employee, one of the many left financially decimated, said, “He saw what was coming and didn’t have the emotional fortitude to deal with it.”

Was it greed? Compensation was geared toward enriching executives rather than generating profits for shareholders. And hubris, not only did Jeff Skilling not give a reasonable explanation for leaving, but the company itself dismissed any suggestions that his departure was related to any problems within the company. Conjecture had it that Skilling knew the falling stock prices would wreak havoc on the various partnerships and cause Enron’s eventual exposure.

Stepping back into his role as CEO, Ken Lay said,”There was no accounting, trading or reserve issues.” Really Mr. Lay? While admitting Enron’s disclosure practices were less than adequate, Lay continued burying important information. In an October 16th press release, perhaps the one contributing to the beginning of the end, Enron reported a $618 million dollar loss, writing down shareholder equity by $1.2 billion. The big question remains; f Enron had ceased its game playing could the company had survived? Instead, a public company with thousands of employees were left unemployed, without retirement funds, investors lost billions in unsecured loans and derivative exposure; JP Morgan with $500 million; Citi, the same, Dynergy, $75 million; and the list goes on.

And so, a $100 billion dollar company, with 30,000 miles of pipeline in 44 countries, the leading electricity, natural gas provider in the world… a public company whose employees and shareholders counted on management, the Board and auditors to look out for their hard earned interest- fell- hard!  A senior Wall Street executive said of Enron’s debacle, “It disgusts me and frightens me.”

Yet, ten years later, we haven’t learned our Enron lesson and so to some degree, similar situations keep happening, over and over and over. Kind of reminds me of the movie Ground Hog Day.

And speaking of Ground Hog Day- this February 12th– we present you another recurring corporate story of greed and hubris- as told by Citigroup whistle blower, Dick Bowen. who tried over and over to call attention to the quality of its mortgage portfolio.

Join us as we continue talking about things that matter… with people who care.

Niki Nicastro McCuistion
Executive Producer/ Producer McCuistion
Speaker/ Author on leadership and governance inspiring transformational change, through conversations that matter.