A study of Enron before the fall
With Enron's top executives, Kenneth Lay and Jeffrey Skilling, on trial for conspiracy and fraudand a third, Andrew Fastow, testifying against themthe nightmare of the biggest bankruptcy in history is back. So are the questions that have dogged business experts since Enron's collapse: What really happened at the energy giant, and what can be learned from its demise? In a popular case study of the company, Robert Bruner, dean of the Darden Graduate School of Business Administration at the University of Virginia, and his coauthor, Samuel Bodily, a professor of business administration, have tried to provide a few answers arguing, surprisingly, for a longer view of Enron's rise and fall. Bruner spoke with Senior Editor Justin Ewers:
Why did you decide to do a case study of Enron in 1999?
The thrust of the case was to look at the record of this company that Fortune magazine for seven years running had labeled as the most innovative company in the United States. We were interested in documenting what Enron had done to achieve that status.
You met with Enron execs the next year. What did they tell you?
We interviewed Lay, Skilling, Fastow, and [former Enron President] Greg Whalley, among others. What we received was a fair amount of detail on what I would call the company linewhich I think we've all heard.
When Enron collapsed, did you feel betrayed?
No one can study the case of Enron without a deep sense of sadness for the fate of all the employees, the pensioners, the loss of liquidity in important markets, the destruction of one of the most innovative companies in the United Statesand the loss of faith that these events spawned.
Still, you suggest Enron's demise was a mix of bad publicity and a rotten system. What went wrong?
At the core of Enron's collapse was what I'd call momentum thinking, which is the intense focus on delivering a steady percentage rate of increase in earnings per share, quarter by quarter, year after year. We can think of this almost as growth at any price. It resulted in a bet-the-farm kind of management of the company.
Could the company have saved itself?
The large debate is whether Enron was a fraud from the day it was founded in 1985. I would argue emphatically no. I would say Enron brought serious new value to the industries it serviced, particularly in the design of innovative contracts that offered its clients greater flexibility to hedge either price uncertainty or volume uncertainty or both. We as a society are better off because of the innovation and design of those contracts.
Still, Enron's collapse spooked many investors on energy contracts and financial securities. Have new regulations solved some of the problems revealed by the company's disintegration?
I would say that other than the major regulatory changes such as Sarbanes-Oxley, we see very few limitations yet placed on the design of these securities or their valuations.
What can other CEOs learn from Enron?
They need to avoid creating the psychological conditions of continuing to reach for higher and higher growth. Momentum thinking ultimately ends in tears. You can't grow very long in excess of the growth rate of the economy before you hit limits. Otherwise, you own the world economy.