For some time, I've been wondering whether Ken Lay (predominantly), Jeff Skilling, etc. are truly guilty of criminal acts or whether they were just REALLY bad and stupid managers. I've finally come to a decision (lawyers for the prosecution, I'm out here if you need me): They're all SO guilty, they might as well have Martha Stewart send some designs now to start coordinating their soon-to-be orange attire with their soon-to-be new prison cells.
I'll admit, at first I thought that Ken Lay was just very stupid and a very poor manager. I've seen such behavior before, and in each case, by no means was their any criminal intent; the executive in question just didn't seem to have a handle on how to successfully run his/her business and kept making mistake after mistake, supported by loyal sub-execs, until the company was in the proverbial shitter. But after watching the "Smartest Guys In The Room: documentary, the book version of which I had read previously, there's now no question in my mind that Lay et al were evil, cunning, manipulative SOBs who alternately cajoled, pressured, and convinced any number of other nitwits (i.e., accounting firms, investment banks, the government) to help them in their quest for dollars and power. Of course, that's also an indictment of the entire system surrounding Enron, but given Sarbanes-Oxley, SEC, and other regulations that have since been instituted, I think the outliers have been addressed in a fairly satisfactory fashion.
Here's the point that does it for me. When one asks the "were they stupid and oblivious or were they complicit and evil," one has to ask the next question: even if they were just oblivious or assumed that "boys will be boys" (or in this case, traders will be energy brokering magnates), do they have a responsibility to others to make sure the company does the right thing? As board members, don't Lay and Skilling, at least, have to ensure that the company acts appropriately for its shareholders (if not employees, who unfortunately, sort of get the short end of the stick on this one - but we'll address that when we talk 401K later)? Answer - THEY DO! It's called "fiduciary responsibility", and I'll insert a quote about just what that entails:
In the handling of money and when one acts as a corporate or individual trustee, there is a fiduciary responsibility owed to the principal party. It is defined as a relationship imposed by law where someone has voluntarily agreed to act in the capacity of a "caretaker" of another's rights, assets and/or well being. The fiduciary owes an obligation to carry out the responsibilities with the utmost degree of "good faith, honesty, integrity, loyalty and undivided service of the beneficiaries interest." The good faith has been interpreted to impose an obligation to act reasonably in order to avoid negligent handling of the beneficiary's interests as well the duty not to favor ANYONE ELSE'S INTEREST (INCLUDING THE TRUSTEES OWN INTEREST) over that of the beneficiary. Further, if the agent should find him/herself in a position of conflicting interests, the agent must disclose the dual agency (acting for two parties at the same time) or risk being accused of constructive fraud in regards to both or either principals.
I've taken this from a web site that discusses ethics related to financial planning and management. Admittedly, being a corporate executive isn't exactly the same as being a financial planner or manager - IT'S HARDER! And there are more rules that must be addressed, many of which existed prior to Sarbanes-Oxley legislationin 2002. These relate to insider trading and other SEC-oriented regulations that many might remember from the movie "Wall Street". Indeed, Ken Lay, Jeff Skilling, and Gordon Gecko might be the same person if one replaces the corporate raiding bidness with the awl bidness (for those needing a translation, please ask someone from the south).
Basically, Enron executives, in my mind, had a fiduciary responsibility to do the right thing by their stakeholders, primarily their shareholders. And since their employees were also shareholders, dutifully buying Enron stock (and being told what a gfreat investment it was) as the company rose up and spiraled down), they too are stakeholders. What differs between this debacle and the multitude of companies whose stocks went to zero as the dot com bubble burst (concomitantly with the Enron mess, by the way) was that the dot commers didn't deliberately do the following:
- Set up side companies, which, approved by Enron's board, removed nonperforming assets from Enron's books and paid Enron cash (dutifully contributed by numerous investing banks and by Enron itself) - from which Mr. Fastow skimmed off a nice chunk for himself - that Enron booked as revenue. Basically, Enron played a shell game with its earnings and assets that enabled it to hide humungous losses each quarter. Oh, and the collateral put up for the investors in these side companies was Enron's stock, so any downward movement in stock basically drove the company exponentially toward disaster, not just linearly.
- create artificial power outages within wholly owned energy company subsidiaries just so traders could arbitrage the resulting differences in energy pricing. Taking advantage of a deregulation system that was (is?) likely brain dead to begin with, Enron traders asked their power company cousins to turn power on and off in the grid and park it where it could sit until prices went up enough for them to profit heavily on its sale. Now I'm all for free markets, but not with a resource that is taken as a given by the public and certainly not when the markets are not exactly free.
- Create a whole essentially phony business - broadband trading, in this case - and lie about its success (technical, operational, financial, etc.) until it was plain that there was nothing there. OK, maybe this one does ring a bit of a bell with dot commers, but at least in the technology business, saying something works when it either doesn't quite or is still in alpha release is considered gamesmanship. And if you are a public company, well, you learn to tone it down a bit, I suppose.
All of these things - all of them - were done with the ongoing knowledge and blessing of the Enron board, or at least that of key Enron executives. And even if a small thing like the deliberate energy arbitrage stuff - which ultimately cost Gray Davis his job and California billions of dollars at the very least - wasn't explicity a board line item to discuss, one has to wonder what Ken Lay, who was a recognized energy expert and who had George W. on speed dial (he was also often thought to be the next Secretary of Energy), was doing when he could see California, the primary target and source of his deregulation philosophy and related business planning, going into the dumper because of rolling blackouts et al. Wouldn't he get on the phone to HIS power company (PGE) and find out what the hell was going on? How maintenance outages could mysteriously happen one after the other on a regular basis?
Enron executives would argue, and have argued, that they "weren't informed" and beyond that, the laws of the land basically permitted them to do what they did (for the most part). Further, their defense includes statements like "...but Andersen and our attorneys signed off on this - THEY said it was OK." Well, others were certainly complicit, and Andersen no longer exists, CSFB and others have paid steep fines, etc., but knowingly raping and pillaging the coffers of the federal government (Enron tax breaks, anyone? Looks aside as California slowly blacked out?), state governments, shareholders, employees, etc. sound to me like some fiduciary responsibility was ignored.
Yes, Enron executives were stupid. But their stupidity was underpinned by greed and malicious intent (or result) in the name of their own personal profit, and that is criminal.
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