Saturday, May 27, 2006

“Guilty” Conscience

By any measure, last week’s convictions of former Enron executives Ken Lay and Jeff Skilling were a win for justice. Not because they perpetrated a fraud on the investing public, and not because that fraud cost a lot of people their life savings and their jobs – though all appear to be factual conclusions. Not because they cashed in their stock options while encouraging others to buy stock (doesn’t ANYONE know how stock options work in the real world?), and certainly not because they (perhaps more accurately, their appointees) timed a recordkeeping conversion at a particularly “sensitive” period in the demise of that stock’s value.

I’ve read a lot about the goings on there – via press coverage, a couple of books, and more than a little time spent with court documents related to their retirement plan lawsuits – and while I’m sure that the jury empanelled found the requisite amount of evidence to convict them on the charges presented, I’m not sure they shouldn’t be held guilty on another charge.

They were criminally stupid.

Now, don’t get me wrong. By all accounts, both Lay and Skilling were talented visionaries. Their transformation of a company whose bottom line was constantly exposed to the vagaries of the natural gas market and its inefficient distribution channels into a powerhouse (literally, in their case) that arbitraged those inefficiencies (both physical and intellectual) to their advantage was genius, IMHO. There is, of course, a difference between arbitraging identifiable inefficiencies in the market and actually creating them – and Enron, first driven, and then, apparently, blindly driven, by the need to keep “hitting its numbers,” demonstrated a willingness to do whatever it took to accomplish those goals.

They say that success breeds success – but in the case of Enron (and they weren’t alone), success seems simply to have bred the need for more success: success measured by earnings growth, rather than sustainable performance, and certainly not profitability. Earnings growth that, ultimately, apparently couldn’t be sustained any way other than the kind of financial hijinks with which the name Enron is now synonymous (not that they didn’t try; the list of “dry wells” – enormously expensive projects that had grand projections, but no actual return at all – is extensive). And - when all else failed, they simply made up the numbers they needed to make (their accounting contrivances to do so – even their ability to persuade the accounting community that it was rational to amortize the receipt of future income the way one typically amortizes large capital expenditures – are an incredible “achievement,” at least in hindsight).

Ultimately, the hubris of the Enron management team – their cocky, self-assuredness so much in evidence in earnings calls, the arrogance of their trading room, the names (and acronyms) they assigned to their self-dealing business ventures, their disdain for anyone who didn’t see things through their prism – couldn’t obfuscate the house of financial cards it was based on. And, whether they want to accept it or not, management, certainly senior management in any company, is – and IMHO, should be – responsible for the culture they foster, if not nurture.

Too often, still, firms are driven by the need to succeed “at all costs” (ironically, the responsibility for much of this push rests with the short-term emphasis imposed by accounting rules and an impatient investing public who ultimately pay the price when things implode). In their sometimes blind pursuit of those goals, they engage in questionable business practices, hire (and reward) individuals of dubious moral turpitude (frequently the ones engaging in the aforementioned questionable practices), and try to bully and/or bribe into submission any dissenting voice. One need look no further than the industry’s own mutual fund trading scandals – the recent issues about insurance commissions – or the most recent options back-dating inquiries to see the pervasive and corrosive effects of this kind of greed.

What we must continue to do is hold people accountable, not just for their actions – but for their inactions as well, for surely complicity in allowing bad people to do bad things is no less heinous in its consequence.

- Nevin Adams editors@plansponsor.com

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