I just finished watching “The Smartest Guys In The Room“. It’s a documentary about Enron, the once-revolutionary Texas energy trading company that famously collapsed in 2001. From the early 90’s right up to their downfall, Enron was a darling of Wall Street, ranking #7 on the Fortune 500 in the same year that news of its’ massive accounting fraud and unethical business practices swept the world. In the summer of 2000, Enron’s stock hit an all-time high of over $90 per share. In late 2001, Enron filed for Chapter 11 bankruptcy and is still known as one of the largest corporate scandals in American history. Not only was Enron a business titan on Wall Street, but they were also well-known on ‘Main Street’ too. Enron’s collapse led to nearly 30,000 lost jobs, thousands of evaporated retirement accounts and countless investors left with worthless stock. Enron was once a (mostly) legitimate energy company before it essentially became an energy stock market in the 90s. What the heck happened? The Enron story is complex yet simple at the same time, unpinned by human ego, greed, deceit and pride. As for the specifics of what happened, we’ll get into those too. Let’s discuss six project management lessons from Enron and their demise that came to me after watching the film.
Disclaimer: The information in the following sections is my interpretation of the events that transpired throughout Enron’s history, which is based on the film and my own research. I have no connection or affiliation with Enron or any of its’ former employees, nor am I an accountant or legal professional.
Useful Enron References
If you’re unfamiliar with the story of Enron, I’ve included a few links below that you may want to check out. Although the reasons why Enron collapsed will become obvious, there are also some financial terms involved in the explanation that are big factors behind the collapse. Feel free to check them out if you like, or just read on!
- How Did Enron Make Money?
- What Is ‘Mark-To-Market (MTM) Accounting?
- What Is A Shell Company?
- 2000-2001 California Energy Crisis
- How Insider Trading Works (Feat. Enron)
- Former Enron CFO Andy Fastow on the Problem of ‘Legal Fraud’
Now let’s get into the specific management lessons from Enron that managers of all kinds can benefit from.
1. Never Hide Major Problems
Enron collapsed for several reasons, but one of the biggest causes of the company’s downfall was their confusing, deceptive and ultimately illegal accounting practices. While accounting fraud is bad in any business, it’s even more insidious when it’s committed in a publicly traded company that produces financial statements on a regular basis – it must be actively hidden on public reports every time.
As far as investors and many employees were concerned, Enron was the greatest company to ever exist – how else would they be so consistently profitable? This is because Enron’s problems were not disclosed at all. Said another way, Enron’s losses were disguised and hid from the public eye every time they reported new figures.
Enron largely deceived the public by setting up private Shell Companies, also known as “Special Purpose Entities”, that were created for the sole purpose of hiding losses from the public. Given that these SPEs were private, they weren’t subject to any reporting or disclosure requirements like a public company. Essentially, Enron’s debts and losses were offloaded to Enron’s many SPEs (hundreds) while their revenue was reported more accurately, making them appear much more profitable than they really were.
Enron’s biggest concern was keeping their share price climbing, whatever it took. They’d simply off-load debt to artificially create “massive profits”. Of course, these losses were real in a cash-on-hand sense.
The illusory profits generated from this practice led nearly everyone to “drink Enron’s Kool Aid”. Employees held the majority of their retirement savings in Enron stock – they were even encouraged to invest more by top executives at the same time they were selling their own. Pensions and 401(k)s all over the world held billions of dollars in Enron’s stock. When the company and its’ stock price collapsed, this money was erased.
This massive fraud went on for years before the shoe finally dropped, but drop it did. Despite what the company said, Enron was in massive debt that could never be repaid, heading straight for bankruptcy.
The first of several management lessons from Enron that Project Managers can benefit from is to never hide issues from the people and the parties affected by them. While it’s always difficult to raise a reg flag while under pressure to perform, the alternative is much worse.
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2. Pride & Ego Kill
Appearances were everything at Enron. In addition to cooking the books to make the company seem more profitable, they were also excellent at maintaining their public image.
Fortune magazine gave Enron awards throughout several consecutive years and dubbed them “America’s most innovative company” at one point.
The documentary is called “The Smartest Guys In The Room” for a reason. It’s because Enron’s top executives were seen as visionaries by Wall Street, individual investors and employees alike; blazing the trail into the millennium as not just an energy leader, but a business leader. Ken Lay (Chairman) and Jeffrey Skilling (CEO) identified personally with Enron’s image of success, as did many of their executive team members. At one point, Skilling even publicly stated that he IS Enron. Losing this reputation was not an option.
What would it mean about them personally if the company failed? The ego began steering the proverbial ship years before it sank.
Thus, Enron saw to it that their reputation was never to be questioned. Only analysts with good things to say about Enron were welcome in their doors. No amount of risk in an endeavor was too high. The company was always “doing great” in all of its’ markets. Enron, to any outsider, never made a mistake. No matter what the company pursued it “succeeded”. As we discussed in section one, you know how they made it appear that way.
What began as a natural gas company turned into a marketplace for trading all sorts of commodities and derivatives, including some odd ones like bandwidth, broadcast time, insurance and even futures contracts for weather. You can imagine how well those ended up doing.
A core cause of Enron’s ultimate failure was their unwillingness to recognize and address their failures, ironically. Pride and ego ultimately led to Enron’s issues snowballing into an absolute meltdown. One of the most important management lessons from Enron that we can learn as Project Managers is to keep ego and pride far away from our decision making!
Read Next: Managing Egos At Work: How To Decipher The Hidden Messages
3. Don’t Trust Blindly, Think For Yourself
We’ve all been in situations where our instincts tell us something’s off, but no one else seems to feel the same. When a sizable majority of a group thinks a certain way, those who think the opposite are often criticized, ridiculed and even ostracized. While we may see signs of a disaster looming, many people around us maintain blind faith in what they believe in.
Enron was no exception. Several people interviewed in “The Smartest Guys In The Room” actually pointed out the cracks in Enron’s proverbial foundation long before the whole thing crumbled. This includes some financial analysts, investors and employees alike. It didn’t matter – as Enron’s share price climbed, so did the enthusiasm of countless supporters.
Enron even gave their independent auditor – “big 5” firm Arthur Anderson – office space inside their building in order to maintain complete and total transparency with all of their “complex transactions”. If the auditors say everything is fine, then surely any doubters are crazy…right?
Perhaps the most famous instance of a skeptic being criticized is when an investor asked Jeff Skilling why they can’t produce a balance sheet with their reports during an earnings call. A perfectly reasonable question, Skilling called him an asshole in return!
Of course, skeptics were correct all along. Enron’s financials were just about as sketchy as their business practices. Arthur Anderson went down alongside Enron; they were found to be complicit in the fraud, including shredding a ton of documents (literally) as news of scandal broke. Neither Enron’s leadership or their auditors could ultimately be trusted.
Yet nearly everyone did. You would’ve been correct to doubt Enron, but you would’ve been seen as crazy or the enemy prior to the truth finally coming out.
As Project Managers, we’re in a position of responsibility. If something goes wrong on our project, we’ll be responsible for dealing with it regardless of our involvement or prior knowledge. One of the more practical and quantitative management lessons from Enron to keep in mind is to think for yourself; don’t hesitate to ask questions or second-check something that doesn’t seem right, regardless of what anyone else thinks.
If a massive corporation and well-established accounting firm can deceive the world so easily, our projects can surely be affected by similar “dark forces”.
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4. Never Profit From Unethical Practices
As stated earlier, Enron’s primary concern at all times was to keep the share price rising – whatever it took. This included hiding billions in losses via SPEs, but it also included price-gouging of electricity during California’s 2000-2001 electricity crisis.
If you’re unfamiliar with the situation, millions of Californians experienced rolling blackouts throughout this period, only receiving electricity intermittently – even during the sweltering summer heat. Supposedly this was due to a shortage and California’s “poor policies”, but that’s not the whole story. Due to some of California’s regulations, providers of electricity (such as Enron) could charge more for power that’s they send in from out of state than what’s produced in state. As Enron demonstrated, they could charge a lot more.
Oddly enough, California’s infrastructure had plenty of power to give throughout this time purely in terms of capacity and demand. Why did so many go without power? Enron created artificial shortages and demanded huge sums for the remaining power while these shortages were happening.
Power plants were shut down strategically under the guise of “maintenance” or other made-up issues to effectively create shortages. Enron would then charge exorbitant amounts of money for sending power into California, which put a tremendous squeeze on both local suppliers buying the electricity from them and the suppliers’ end-user customers alike. Enron would do the same thing in reverse too; they’d buy power from California plants at their capped price (per California legislation) and sell it to adjacent states for a giant markup.
Electricity prices were even jacked up by several multiples during wildfires when affected power lines could only deliver electricity at limited capacity. The documentary features several conversation snippets from recorded phone calls between Enron’s traders – the greed and insensitivity are palpable.
The examples above speak for themselves. Making money through exploitation of clients, customers and loopholes is a purely evil thing to do. One of the biggest management lessons from Enron that Project Managers can heed is to focus on turning a profit legally and ethically. Enron’s actions should serve as an ethics case study of what not to do.
Read Next: 6 Things I learned While Working For A Failing Company
5. The Actions Of Some Affect All
In its’ final year, Enron paid out nearly $700 million to their top 140 managers (via The Guardian), including tens of millions to each of their C-level executives. Given that Enron’s collapse lead to nearly 30,000 lost jobs, it stands to reason that the vast majority of Enron’s pre-collapse wealth went to less than 1% of Enron’s employees.
While top dogs sold their shares, the majority of employees and many investors either continued to invest in the company or weren’t allowed to sell i.e. when employees’ shares were frozen during the collapse. To the best of most employees’ knowledge, Enron was in stable financial standing just before the collapse and was poised to keep growing in the years to come – they were even told so by Ken Lay. Most employees at Enron, including workers performing physical work in the field, had planned their career and retirement around the company’s continued success. All of it ended up being worth nothing.
Between employees getting screwed, end users being ripped off and investors receiving falsified financial data, the actions of a few Enron players affected so many people in a negative way.
When we’re not affected by a situation, it’s human nature to care less about it. While this aspect of our behavior can be problematic, it can also be incorrect. Just because we think we’re not affected by something taking place, doesn’t mean we’re in the clear.
One of the less-frequently mentioned management lessons from Enron that everyone can benefit from is to recognize the compounding effect that a handful of actions can have on a much larger outcome. Project Managers benefit greatly from putting multiple checks and balances into place on their projects, as well as from taking steps to mitigate risk and loss.
It’s tough to quantify this specific lesson; employees were surely deceived and were largely innocent – fault lies with those who received the lion’s share of cash and perpetuated the fraud. Unfortunately, those who put all of their eggs in “Enron’s basket” lost everything, whereas a more diverse approach would leave employees and investors less vulnerable to losing everything. Of course, I’m saying this twenty years after the fact with an awareness of what was really happening.
Read Next: 5 Things I Wish I Knew As A Young Project Manager
6. Managing Finances Is Extremely Important
As you’ve surely realized already, Enron’s troubles stemmed largely from their financial practices. Despite Enron having been in operation for many years before becoming an “energy stock market” of sorts, their inability to manage finances was a huge part of their downfall.
“Manage??!” you may be saying, “Enron’s finances were terrible because of their theft and lies! They intentionally mismanaged their finances.”
True. The level and scale of corruption makes this clear. But even so, it’s important to remember the timeline. Enron went down in 2001, but they adopted the ‘Mark-To-Market‘ accounting method in the early 90s. This accounting method allows business to carry an asset’s current market value on their books vs the value of what was actually paid for it or what the asset is worth right now. Most business use accounting strategies like the latter, known as ‘Historical Cost Accounting’.
While Mark-to-Market accounting isn’t bad in and of itself, it can be abused. It’s a more aggressive means of accounting that can quickly go sideways when market values are skewed too far from their true underlying value. Market values, such as the price of a commodity like oil or an asset like stock, can fluctuate wildly with speculation, the economy, execution of the deal and other factors.
Here’s an example of how Mark-to-Market accounting was used in Enron’s favor. Enron was a partner in the construction and implementation of the Dabhol Power Station in India. The deal was worth billions on paper, but it’s obviously not worth anything until construction is complete, power is being produced and profitable revenue is rolling in.
The construction would take time and money, and the deal was based on India paying for electricity at a set rate over a number of years. Despite the bulk of the power station’s actual profitability being years away, Mark-to-Market accounting allowed Enron to book the entire value of the deal NOW on their books as revenue. Yes, Enron recognized future profits on their books as profit coming in right now, and bonuses were given out in kind. Despite the deal being a giant failure and never profitable, Enron’s books temporarily appeared hugely profitable when accounting in this manner. Crazy, right?
It seems that on some level, Ken Lay, Jeffrey Skilling and other executives really believed that by signing big enough deals, venturing into new industries and outsmarting the competition, the bottom line will take care of itself over time. With enough funding, economic growth, a thriving bull market and forever-rising share price, any missteps could be glazed over. At least in the early years.
It also seems that executives thought of themselves as invincible; infallible. They could do no wrong. Ken Lay and Jeff Skilling mostly maintained their innocence throughout the years of legal proceedings that followed Enron’s downfall.
At the end of the day though, even if Enron’s executives did really think everything would work out eventually in some alternate reality, they clearly didn’t care if the company failed so long as they got their golden parachutes. Their actions speak for themselves.
As for lessons that Project Managers can take from this, it’s this: ALWAYS monitor project finances closely. No amount of optimism, effort and innovation will guarantee a project’s financial success – budgeting and cost control will.
Oh, and let’s not plan on embezzling cash from our projects either.
Read Next: Importance Of Finance In Project Management: Key Terms & Processes
Grey Area
The craziest part of the Enron story….ok, there’s really two parts.
The first crazy part of the Enron story is that a lot of what they did was not technically illegal. Many deals and transactions were done by taking advantage of loopholes and doing things that weren’t clearly defined by the rules. Laws and regulations weren’t broken in many cases – they were just skirted around or exploited. This makes certain parts of Enron’s story more complex – it speaks volumes about the striking the balance between capitalism and regulation. Both are surely important, yet each can be extremely damaging in the wrong dosage.
The second crazy part about Enron’s story is that they were not (are not) the only company taking advantage of loopholes – far from it. Had it not been for Enron’s cash flow issues and subsequent bankruptcy, how long could it have gone on for? Which other companies out there are using all kinds of creative accounting methods?
In the case of Enron, none of it ultimately matters. The intentions of traders, executives, auditors, lawyers and anyone else involved are irrelevant now – the damage is done.
The story of Enron may be over, but it leaves us with many questions about human psychology, crowd behavior, regulation, greed, pride and so much more. Hence, my strong desire to write this article!
Management Lessons From Enron: In Summary
Given the effects that the massive fallout had on so many people, the Enron story is a true tragedy. With this in mind, we can only hope to learn as much as we can from the situation and never repeat the same mistakes. I hope these six management lessons from Enron have been interesting and useful for you. If you’re still interested, I highly recommend watching The Smartest Guys In The Room – it’s truly an excellent documentary that tells the story so much better than I can. Thanks for reading.
