Are There More Enron’s Out There?

Ken and Jeff’s not-so excellent adventure is entering a new phase. Both are headed to a jumpsuit jamboree courtesy of the U.S. Federal Government. It took nearly four years but the ex-heads of Enron – Ken Lay and Jeff Skilling - were found guilty as charged last week by a thoroughly non-gullible jury of their fellow Houstonians. The duo will soon be sentenced before heading off to prison to serve time for their crimes.

When Creative Becomes Criminal

It is easy to get caught up in the flawed personalities and ethical shortcomings of Skilling, Lay and Fastow - the main players in this American business tragedy. But the company they led was once highly regarded by academic researchers and the business media for its “out of the box” thinking, deal-making acumen, game changing strategies, intense internal competition, and a performance culture that gave outsized rewards for over-the-top performance. Enron may now be kaput, but these principles and practices are not only still prevalent but remain at the ideological and emotional core of American business. Proponents argue they fuel the innovation and growth that keeps the US economy on top. Critics point to Enron and dozens of other scandals as well as to over-the-top CEO pay as evidence that these principles and practices are leading to the wrong kinds of outcomes.

What changed Enron from a company of full of innovators to a cell-block’s worth of inmates? Did its demise result solely from the moral and ethical failures of its leaders? Or was its collapse also caused by a defect in the corporate American business system which causes some organizations to push the ethos of individual achievement and financial self-interest too far?

What Path to Profit?

A significant body of sociological research shows that groups and communities that are long lasting actively enforce rules against selfish behavior in their members. These studies show that punishment is a key to a group’s ability to profit - groups of people engaged in cooperative endeavors fail and go out of existence unless they have clear methods of punishing people who become selfish or exploitive.

In one of these studies, researchers at the University of Erfurt enrolled 84 students in an investment game. Each were given 20 tokens (redeemable in real money) to start. The object of the game was to maximize profit. This could be done either by pooling and investing the group’s tokens collectively which would yield everyone a guaranteed level of profit or by opting out of the group pool and acting alone to maximize one’s individual profit. Players were free to switch groups after each round of play. In the beginning, many players joined groups where individualistic strategies could be pursued without punishment. But by the fifth round, half of the players switched to groups in which players were penalized for not participating in the collective investment strategy. By the 20^th round the vast majority of players were in these groups. In the end, the groups in which members acted cooperatively instead of individualistically made the most profit.

Enron illustrates what happens when selfish individualistic behavior is not properly sanctioned and controlled within organizations. Its demise was spectacularly tragic, but everyday smaller implosions and meltdowns occur in businesses caused by many of the same forces that spiraled out of control at Enron.

Is Your Organization a Little Enron?

Here’s a test to help you gauge whether your organization is heading down the wrong path. How many of these seven Enron-like characteristics reflect your culture and environment?

Gonzo for Growth – Growth is a vital piece of any business equation – but constantly pushing for unsustainable levels of growth is a recipe for disaster over the long run. Ambition and stretch are good – obsession and overstretch eventually destroy empires whether national or commercial.

Deal Makers are Deified - The ‘bigger is better’ mentality rules in your organization and the rock stars are people who bring in the most revenue or sign the biggest deals. Your organization is fixated on size and gets easily caught up in large numbers and ‘big deals’.

Rationalizing Reigns – There is no room for straight talk – problems and deficiencies are never openly acknowledged or discussed. Questioning leadership only provokes censure or dismissal. Reality is what the top executives say it is. Certain questions and ideas are not talked about publicly. Dissenters are vilified and driven out. Leavers are devalued.

Only the Numbers Matter – Compensation and careers hinge in huge proportions on “making the numbers”, be they stock price, cost or sales targets. “Gaming the system” and accounting chicanery are common.

Inequity Abounds - The spin from the top is meritocracy but the on-the-ground reality is a caste system. Those who “perform” best are seen as deserving of preferential treatment and the lion’s share of rewards. After all they “add the most value”.

Intramural Warfare Rages - Competition among internal groups and individuals is often more fierce than with competitors - whether it’s Marketing and Engineering going at it; Sales thumbing their noses at Finance; one business unit competing against another for the same customer; or executives jockeying for positions of power and status.

Ethics Taught By the Book Not by Example – Ethics are something that employees need to have instilled in them through training and courses rather than the real deeply held values and natural behaviors of the organization.

How does your organization rate? Even if it strongly exhibits only a few of these traits, it could be headed for some trouble.

So, are there more Enron’s out there? My guess is that there are – and hopefully laws such as Sarbanes-Oxley and the regulators enforcing them will expose anymore of the Enrons in our midst before they do the kind of damage done by Mssrs. Lay, Skilling, Fastow and company.