The Things That We Could Have Learned from Enron.
In October 2008, just as I was releasing my book "The Whole Truth....So Help Me God" I watch in horror as I saw the same scene unfolding at Lehman Brothers that had been captured on numerous newscasts in 2001 when Enron filed for bankruptcy and employees lost their livihoods. Here were were 7 years later and had not learned a thing.......So, I wrote the following Op Ed that was published in the Houston Chronicle that next weekend.
I couldn't help but watch with interest as multitudes of employees departed the Lehman building last Monday carrying their possessions in bankers' boxes. It wasn't but 7 seven short years ago that the world watched as employees of Enron departed under similar circumstances. The government regulators are "stunned" at what transpired last week in the financial market. These are the same government regulators who, instead of finding out what really happened at Enron, created a "lynch mob mentality," and no one was willing to hear the truth from those of us who could explain what happened. I can speak from experience because I voluntarily "testified" in front of both the U.S. House of Representatives and the U.S. Senate. If the hearings had been conducted with the goal of getting to the truth of what caused Enron's downfall, there could have been actions put in place that would have prevented what is happening today and saved the taxpayers billions of dollars.
The only difference between Bear Stearns, Lehman and, soon, AIG is that Enron had a first-mover position. My guess is that the culture rewarded risky behavior that potentially lacked personal integrity by some who saw the warning signs but failed to say anything because of the money they were making. In these recent cases, no one seems to be calling foul play but rather labeling it simply a "liquidity crisis" for the same reasons. This is the very same thing that brought Enron to its knees. There is currently a world financial crisis that makes what happened at Enron seem like child's play. Unfortunately, this current crisis is simply a replay of things that should have been learned from Enron's downfall. Here are the lessons that we did not learn from Enron:
• Integrity in individuals is important. The concept of "integrity" was a cornerstone of the written values that Enron professed. Ken Lay wrote those values and, quite frankly, he lived them. Unfortunately, not everyone in the organization did. The culture that we thought we had at Enron was not the culture that existed in the entire organization. If the written values had been used in performance reviews consistently for everyone in the organization, the criminal acts that occurred at Enron probably would not have happened.
Those people who might have committed the criminal acts would have been fired before they could have done the damage. The issue that has to be addressed is: If people in the organization, at all levels, are not living the values that are supposed to be inherent in the culture, they should be fired. Even if those people are the same ones making lots of money for the company, they have to go in order to secure the integrity of the culture for the entire organization.
I know that Lay questioned whether everyone in the organization was living the values, including integrity, but because Enron continued to make money and do well, the values were ignored in some executives and employees. Jeff Skilling once was quoted as saying, "Sure, Enron has a Vision and Values statement. ... Ninety percent of the companies with V&V statements make more money."
Unfortunately, he didn't believe that actually living those values was what made more money.
• Personal gain drives personal behavior. There is a saying, "You have to incent people to behave the way you want them to behave." This is inherent in most human resource philosophy.
Enron distributed generous stock options to many levels of the organization. The more Enron's stock was worth, obviously, the more each employee gained personally. The stock price was central to our compensation system. That alone was not bad. What should have been learned by the Enron downfall was that the stock options were issued with too short of a vesting period. In other words, if you could make the stock price go up, immediately you could see an immediate gain from your options and you could exercise them for cash. What that encouraged was short-term behavior without consideration for what you might be doing for a company's longer-term growth.
I can remember, just two years ago, hearing about the incredible bonuses that the Wall Street companies that are in trouble today were paying. I would imagine that many of those bonuses were directly related to the off-balance sheet risk that was being accumulated in the mortgage industry that has led to their downfall today.
• Politics provides a dangerous element in business decisions. Any of us at Enron who testified in front of numerous government agencies after the Enron downfall would attest to the same thing I found. Because Enron was so tied to George W. Bush, the calls from Ken Lay to help Enron in the days leading up to its downfall were ignored by the Bush administration. When Enron fell, the Democrats saw it as a way to put a notch in their belt by tying Enron to the current Republican administration. If politics had been completely removed from the situation, there would have been an honest acknowledgment that Enron also might have been too big to fail, and the testimony from all of us would have been handled differently. We would have been able to tell the whole truth about the events that transpired at Enron, and the truth would have most likely revealed the reasons Enron really failed.
Many of the things I mention here could potentially have been corrected. As it was, the lists of Enron defendants were threatened and no one wanted to talk. When we did try to help with our testimony, we were told we were evil and nothing we said was believed. I personally experienced that as I sat in front of two congressional hearings and was not given the opportunity to voice my knowledge of what happened. During my testimony, it was clear that I had made too much money to be taken seriously, and I was presumed guilty before I even opened my mouth.
That makes no sense. Many of us truly wanted to tell the truth and, just maybe if we had been allowed to do that, some of the current crises might have been avoided.
• Bankruptcy is a lucrative business. What we found out at Enron was even though we had more assets than liabilities, we had a cash crisis when our stock price declined and the banks called for all of the money they had loaned Enron. This is why Ken Lay always called the Enron bankruptcy a "run on the bank." I have heard the same description used as we have seen Lehman and Bear Sterns fall and AIG in trouble. They had or have a "cash crisis." It doesn't mean that their liabilities were larger than their assets. In fact, Lay said several times to me, in retrospect, that he may not have filed for bankruptcy if he had known he had other options.
What happened at Enron was that numerous bankruptcy lawyers and work out people that came in to run Enron milked the Enron creditors, including employees, for millions if not billions of dollars by their enormous fees. In the current political environment, I have been hearing the candidates say they would make sure that the CEOs of these companies did not get their big bonuses but, in the Enron case, Lay gave up his $60 million bonus. Lay was not the problem. It was the bankruptcy work out people and attorneys that were the problem. They should not get this kind of compensation. It should go to employees losing their jobs or to their 401(k)s.
More government rules in place don't fix the problems. After Enron, the government answered the issues by putting in place the Sarbanes Oxley Rule. That rule put many of the ex-Enron accountants right back to work, but it did not solve the problem, obviously.
People find ways around the rules. Obviously, these rules did nothing to monitor off-balance-sheet debt, as we have seen from this recent crisis. Even in the latest political conventions, ABC News pointed out that the campaign rules for entertaining by lobbyists were being "broken." A rule had been put in place that the campaigns could not be entertained with food on a plate, so both campaigns were being entertained with food on oversized spoons and martini glasses.
My point: Rules can be broken, or creative people can always find a way around them. This is the case with Sarbanes Oxley — and oh, by the way, these new government rules cost the taxpayers millions, if not billions, of dollars to implement and verify.
What needed to happen as a result of the Enron downfall was to engineer a way to quantify the magnitude of risk held by companies that are "trust based," as Enron was with its large trading operation. The current financial institutions are also "trust-based" businesses, and once that trust is lost, they are out of business in a matter of days. It is not a matter of a crooked CEO but rather a lack of understanding of the risk their companies have taken on.
Lynn Brewer, who is an ex Enron employee and wrote the foreword for my current book, is speaking to CEOs of major companies at many conferences with a message that seems to ring true. She tells her audiences:
"Look to Enron to foretell the future." Anyone who thinks that the situation that brought Enron to an end is not occurring throughout Wall Street today is gravely mistaken. As we recently heard in the current political campaign: "You can put lipstick on a pig, but it is still a pig."
The current economic crisis is a repeat of Enron, only on a bigger scale. Employees and investors and the taxpayers are the losers.
The lawyers, bankruptcy work out people and the politicians are the winners. The money will go to the first two, and the current situation gives the politicians something to pontificate about to attract votes.
I would urge someone to take the current situation seriously and really find out the truth. Maybe, just maybe, if we do that, and we learn the lessons from Enron, we can stop this from happening again.
Olson is a former Enron Executive Committee Member and Human Resource Executive Vice President. She is the author of "The Whole Truth So Help Me God -- an Enlightened Testimony from Inside Enron's Executive Office." Visit her online at www.cindykayolson.com.