The smartest guys in the room” of Alex Gibney, describes the path of the American’s
energy trading company, Enron, from being praised as a new business model to its
appealing fall through bankruptcy.
Founded in 1895 by Ken Lay, Enron had been
boosting its profits for years, concealing losses through accounting tactics,
that consequently also caused the fall of one of its accomplices, the estimated
accounting firm Arthur Anderson.
But how did Enron achieve that?
Mainly, through an accounting technique
called “mark-to-market” (actually, Enron’s COO Jeff Skilling, joined under the
condition of using it).
This technique was used to make it so that
Enron’s stock price kept on rising.
The company bought an asset and
immediately claimed the projected profit, even when the project was a failure
and it actually resulted in losses. In the movie, there is an example about a
failed investment in India, that showed profits in the balance sheet, even
though the project had to be abandoned.
Another example of its usage is given by
the BlockBuster’s deal.
Skilling decided to bring Enron into
cyberspace, teaming up with Blockbuster to deliver movies on demand. The stock
soared, but Jeff was actually lying about Enron’s performances regarding the
technology and the deal was a BIG fail. However, the mark-to-market technique
worked its magic again and Enron still made “profits”.
When Skilling was asked by a market
analyst, during a conference call, about Enron’s P&L statements, he
responded by calling him an “asshole”. This statement surely didn’t prove Enron’s
Moreover, in the movie there are videos where
Lay and Skilling address in an optimistic manner their employees and
shareholders. One of them in particular, shows how Enron encourages its
employees to invest their 401K in the company, while Skilling himself is selling
$200 millions of his own Enron stock.
However, after a while, he suddenly resigns
from CEO and is substituted by Lay.
But he should have done so sooner, if he
didn’t want to be blamed about the fall of the company.
In fact, on December 2nd 2001,
less than 4 months after Skilling’s resignation, Enron declares bankruptcy and
both him and Lay have to face trials regarding Enron.
But let’s return to the matter treated
above on what made Enron’s success! Another important contributor was Andy
Fastow (Enron’s chief financial officer) who created hundreds of “puppet”
companies where he stashed Enron’s debt, making sure that investors couldn’t
see it. One of those was LJM, that allowed Fastow to conjure $45M for himself.
Moreover, LJM also bought assets from Enron. So, this clear indicates a
conflict of interests.
Enron also brought forth a reign of terror
for analysts who, either believed virtually anything Enron told them and put
‘buy’ or ‘strong buy’ ratings on Enron’s stocks that kept growing their price,
or who didn’t believe the company and, therefore, became its enemy and lost any
chance to do business with it.
Another appalling fact is represented by
the energy crisis in California, who Enron purposely created, using the state
to experiment with the new concept of deregulated electricity.
The movie shows actual tapes about Enron’s
traders who were playing with human lives and did not feel guilty about it.
They decided when to shut
down the energy’s plants for “repairs” in order to create artificial blackouts
that would make the price of energy raise enormously. This was an actual
strategy, one of many, created by Tim Belden (Enron’s trading head) to game the
California’s market, arbitraging it. Its name was Ricochet.
It involved exporting
power out of the state and, when prices soared, bringing it back in.
It is eerie how they influenced
California’s economy by flipping a switch, turning the industry in a casino.
Because Enron actually made the real money
by betting on when the price of energy would go up.
After a while, California tried to appeal
for federal price controls and, of course, that was a big no for Enron.
Luckily, Lay had an important friend
George.W.Bush, who was at the time running for the Presidency of the United
States, along with Gray Davis, the Governor of California.
This fact played a big role in Enron’s
chess game, since it was the perfect political reason to make Bush oppose to
the California’s appeals.
It was a game orchestrated so finely that
Davis became the scapegoat for the energy crisis and was then replaced by
Arnold Schawarzenegger who (coincidentally!) also had contact with Enron.
An interesting aspect that
I would like to analyse in depth is the PRC policy adopted by Enron, that was strictly
related to ethics.
was based on Darwin’s survival of the fittest
principle, and allowed the company to fire 15% of the employees who were
“last” in performance evaluation. Therefore, it could have driven Enron’s employees to deliver results no matter how
they obtained them.
So, following this policy,
any opportunity to make money was fair, even if it involved immorality.
Therefore, corporate values became stronger than individual standards: “…break the rules, you can cheat, you can lie, but as long
as you make money, it’s all right” (Jeff Skilling).
Referring to Milgram’s
experiment: “50% of the people were willing to shock to death if the command
came from a seemingly legitimate source.”
How did this unethical policy
affect Enron’s stakeholders in the California energy crisis? Employees and top
management made unethical decisions (ie. the traders), California’s state lost
billions, the community could not afford to pay electrical bills, California’s
governor lost his job.
This could have been prevented or, at least, mitigated if
more people were closely scrutinizing board’s behaviour. As a result, directors
would have been encouraged to be more responsible.
The board should also have had the responsibility of getting
the right CEO, for sure Enron would have been better off without Lay and
Moreover, at the time in America, board
members were expected
to approve what management proposes-or to resign. Referring to the Smith v.Van
Gorkom (Delaware,1985) case, the board breached the duty of care, relying
blindly on the company reports without doing an independent valuation.
In Enron’s case, the board members should have been fiduciary
agents, making decision based on the duty of care and loyalty, instead of profit.
In conclusion, making a
reference to ancient Greek’s mythology, Enron was a mere human who challenged
the gods by committing an act of hubris, and thus brought forth upon itself its