Is your company at risk? Lessons from Enron.

• Author: Zimmerman, John W.
• Position: Business & Finance

AS THE INVESTIGATIONS continue, many disgraceful specifics about the Enron implosion have surfaced, and the parade of frauds has rapidly grown--Tyco International, ImClone Systems, WorldCom, Adelphia Communications, CMS Energy, Global Crossing, and Qwest Communications, to name a few. Ample evidence exists on how not to behave to sustain an organization's survival. In broad terms, overaggressive strategies, combined with personal greed, led to flawed financial practices that drove the downfalls. A quote about Enron from Business Week (Feb. 4, 2002) makes the point: "... the word most people use to describe the company structure is arrogant. But [Andrew] Fastow [former Enron Chief Financial Officer who created the iffy partnerships] was one of those few whose aggressive tactics and overconfidence had the capacity to turn dangerous for the company."

What caused those strategic and operational decisions to stray beyond any reasonable level of risk and propriety? It started with the long period of sustained economic and business growth of the 1990s. Success came to excellent, as well as not-so-excellent, leaders. Encouraged by Wall Street, the unlimited flow of capital, and their own ego and importance, too many executives became enamored with the value of their stock holdings. Once in that frame of mind, pressures for quarter-by-quarter growth, regardless of cost and resulting stock appreciation, overwhelmed decisions that would produce balanced growth and profits over time. Then, it was an easy stretch to financial maneuvering that tugged at or exceeded prudent financial regulations. Entrepreneurs got in, took, and got out. With the need to keep up in the market, even some of the "good guys" followed the practices of the high fliers to a limited degree. That broadened the impact on employees and stockholders when the bubble burst. Honored values and beliefs went into the tank.

Reviewing the entire nasty scene reveals at least three conclusions. First, the breakdowns were internal and caused by ignored or flawed ethics and beliefs at the highest personal and corporate levels. Second, many parties beyond senior executives and their greed contributed to the mess. Boards of directors failed their governance and, in some instances, they shared in the gains; the giant accounting firm Arthur Andersen forgot what auditing and fiscal responsibility was all about and was found guilty; middle managers down through the financial and legal departments knew something serious was amiss, but remained silent; Wall Street became enamored with growth and stock value regardless of reality; and banks provided unlimited capital with little due diligence or even concern for repayment potential. Third, most of the corrective action is external--new Securities and Exchange Commission requirements, tougher standards by The American Institute of Certified Public Accountants, tighter criteria for board audit committee members, and potential Congressional legislation. These actions can be helpful, but ethical behavior can't be legislated. It has to come from within.

Taken together, all of this chicanery spelled ruin for promising companies, their employees, and investors. In its wake, I suspect many organizations are exploring their practices in light of their basic beliefs, ethics, values, and creeds. These no longer can be treated as "soft stuff"--nice to frame and display, prominent in the annual report and the employee newsletter, and included in every motivational address, but of little bottom-line value in a tough and competitive business world. They must become the "hard stuff" like product quality, cost reduction, and customer service. Business Week, in its Aug 19-26, 2002, cover story, said it well: "In the post-Enron world, there is a yearning for corporate values that reach higher than the size of the chief executive's paycheck or even the latest stock price. Trust, integrity, and fairness do matter and they are crucial to the bottom line. The corporate leaders and entrepreneurs (and all of us) are now paying the price in a downward market roiled by a loss of investor confidence.... But the first task of the post-Enron corporation is to...