The Fine Line Between Good and Bad

Now that the dust has settled, Alistair Schofield looks back at the collapse of Enron to consider what lessons we have learned for employment policy.

Amongst the commotion surrounding the collapse of Enron, it is easy to see the company in a wholly negative light and forget that the organisation had many good aspects, as well and the catastrophically bad ones.

The company began as a humble natural gas pipeline company, but under the charismatic leadership of Kenneth Lay it transformed itself into an energy trading company, buying and selling energy on the open market in much the same way as investment brokers buy and sell stocks and shares.  At its peak it was known as “the Wall Street of energy trading”, it was the 7th largest company in America and was involved in the supply of more than a quarter of all energy consumed in the United States.

It was held up by respected analysts such as McKinsey and by business schools such as Harvard and Darden as being the new age company.  Fortune magazine voted it “the most innovative company in the US” 7 years in a row. 

It appeared that Enron could do nothing wrong until, in 2001, it collapsed in the largest corporate bankruptcy scandal in history, ruining the lives of its 20,000 employees and taking with it one of the world’s largest accounting firms, Arthur Anderson.

But let’s return to the positives as it is interesting that Sherron Watkins, the Enron “whistleblower”, cited many of these positives as reasons why the company failed in recent interviews.

As with many other companies, Enron’s focus was on corporate earnings.  It prided itself on being innovative and had a stated objective to “reinvent itself every 7 years” and its values were; Respect, Integrity, Communication and Excellence.

Nothing wrong with any of this.  Indeed from an employee’s perspective Enron sounded like a great place to work.  Wages and benefits were good and, as Sherron Watins said:

“No one was ever demoralised and stuck behind an uninspiring manager … If you had a good idea you could bring it up and go on to lead the new business line …   Budgets for new initiatives were readily approved and the organisation buzzed with a sense of excitement and invincibility.”

Again, it all sounds excellent.  So why did it all go so terribly wrong?

The problem was that the Directors and senior managers did not live by the values they espoused.  The focus on earnings and innovation led Enron to exploit imbalances in the market which flew in the face of its “integrity” value.  The rewards and recognition policies measured earnings contribution and innovation but not the stated company values and paid six-monthly bonuses to the top 25% of employees with everyone else receiving no bonus or being managed out of the organisation all together.

As a result, there was great pressures on everyone to succeed, to the point where people were hiding bad news.  It was against this background that the finance department established innovative accounting structures that were used to hide losses and artificially enhance earnings.

Following the collapse of Enron in 2001, the backlash was massive, with many countries introducing new corporate governance legislation in an attempt to prevent anything similar from ever happening again.  In the United States the Sarbanes-Oxley Act of 2002 means that a CEO who knowingly signs inaccurate quarterly accounts can be personally fined up to $5m and sentenced to up to 20 years in prison.

But what have we done in employment policy to prevent such events occurring again?

If Enron taught us anything, it is that you cannot manage results; you can only manage the effort and activities that lead to results.  So why is it that that most employee reward and recognition policies still focus exclusively on results?

To prevent another Enron, it is important that ethical values form an integral part of the culture of organisations and that employees are rewarded, recognised and retained as much for the way in which they go about their work as for the results they achieve.

About the Author
Alistair Schofield is Managing Director of Extensor Limited.