Crimes Against Reality - Page 4

 
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Now there were enough revolutionary successes to wet Lay’s appetite.  The wholesale trading function that came really out of nowhere, where the pipelines had two profit centers rather than one.    And again mandatory open access with gas and electricity had to do with once in a generation regulatory change.  The hiring of Horace Hoagland in 1987 which added so much value to Enron  and how a very innovative compensation package could create stockholder wealth.   The highly successful construction of the T-Side power plant in England in 1993, the largest gas fired co-generation plant in the world.  The plant was a first mover in England’s liberalized gas and electricity market.  There were some big hits - but the question is, can you sustain this?  And of course, Ken Lay’s revolutionary model found it’s persona in the unique Jeff Skilling.  Jeff Skilling devised a number of new products in the wholesale natural gas and later electricity market.  And Skilling through the platform of Enron online sought to universalize a trading model for all commodities and it was Skilling's model Lay thought that could take Enron from being the world’s leading energy company to being the world’s leading company period. 

Here’s a slide we used to use that talks about Skilling’s model that on the internet with the internet online, the integrated companies no longer needed to be integrated.  They no longer needed to do everything in-house.  They should do what they are the very best at and then turn to the Internet to repackage - to reintegrate, as they needed.    And Jeff Skilling in November 2000 just a year before Enron’s bankruptcy stunned an audience of energy professionals when he said “you will see the collapse and demise of the integrated energy companies around the world.  They are going to break up into thousands and thousands of pieces”.    In other words, Exxon, you pick what’s your best out and come on to Enron online and we can match up what you need in the integrated structure. 

But the Lay and Skilling model had a lot of problems in retrospect.  A revolution always models - puts tremendous lot of pressure on a firm.   You have to have very tight systems to know what’s working and not working.  You need a total devotion to underlying reality - beginning with the firm’s accounting system to know what’s working and not working and continuing with your internal risk systems.  There must be a religious underlying devotion to reality and a willingness to confront problems openly to make a lot of mid-course corrections.  But Enron in the Skilling-Lay era disabled it’s checks and balances in numerous ways to keep the music playing.   And this story has been told very well in the books

Jeff Skilling's Enron online model had flaws too.   Enron needed to provide hard assets - backstop services in many of the trading markets that lacked liquidity. If Enron needed to be a market maker in steel, it needed warehouse space for certain types of steel etc. etc. Enron’s asset lite model was to asset heavy for it’s balance sheet. 

Now, problems are developing at Enron at the core.  In the non-core, at the core - if Enron is making first-mover profits, others are coming in the market - replicating Enron services and the extraordinary profits at the beginning go down to more and more normal levels.  There is new entry by the Dynergies and Dukes on one side.  And then you have the traders demanding bigger and bigger bonuses on the other.  Things are shrinking at the core.  In the non-core there is failure after failure - Energy Services, Zurich’s water company, the broadband company, international asset development - lots and lots of setbacks.  But rather than making the mid-course corrections, Ken Lay is doing something very different. He is out on more or less out on the Charm Offensive.  Key Lay is convinced that his ‘Revolution Always’ model and Jeff Skilling's ability to put it into action is working.  But Ken’s job is to make sure that Enron is everyone’s favorite company outside of the numbers.  In the process, Lay however unintentionally, becomes a master in creating conflicts of interest. Because when you are trying to become the world’s leading company in a very fast timeframe, you need friends in high places and on many issues.  And this story is all about the mighty dollar, getting people to do what they otherwise would not do in the course of their everyday business - to go along to satisfy legal technicalities rather than giving the old reality check to what you’re doing. 

Ken Lay is everywhere trying to be all good things to all people.  Lay and Enron’s PR department are selling Lay as not only the industry visionary building on past successes but the Horatio Alger story; the man of deep religious conviction; the sweeping philanthropist; the civic leader; the friend of minorities and U.S. presidents.  Ken Lay meanwhile, all in the name of making Enron into the world’s leading company contorts Enron into being all good things to all people, a company for Republicans, Democrats; deregulation proponents, environmentalists, minorities, charities, high society, Generation-X, deists, non-conformists sports fans, and more.   

And Ken Lay is everywhere.  He leaves to give 5 talks at the World Economic forum at Davos in early 2001.    And I remember that well because I was working on the speeches and I only had 4 speeches - that’s another story.   A month before Enron’s collapse-bankruptcy, here’s Ken Lay was meeting with Jesse Jackson.  Ken Lay enjoyed doing this type thing much more than staying in the office and scrubbing the numbers.   This is the way he was. But by choosing his vision of what Enron should be - over what Enron really was, Ken Lay is engaging in massive philosophical fraud.  By trying to be all things to all people - a form of deceit and philosophical fraud a person becomes a ‘second-hander’ - a person whose self-worth and aspirations are based not on what is believed to be - but the values and preferences of others.  A philosopher once explained, “ second-handers don’t ask:   ‘Is this true?’  They ask, ‘Is this what others think is true?’   ‘Not to judge, but to repeat’.  ‘Not to do, but to give the impression of doing’.  ‘Not creation, but show’. ‘Not ability, but friendship’.   ‘Not merit, but pull’.  Second-handers have no sense of reality.  Their reality is not within them but somewhere in that space which divides one human body from another.  Not an entity - but a relation, anchored to nothing.  And of course, a second-hander usually meets a tragic end because when the perception based outer core disintegrates, there is little or no inner core and Jesse Jackson would be back after Enron collapsed.

41:02

So what has happened however unintentionally is that Ken Lay has set a giant smokescreen of goodness and trust that misdirects many constituencies from looking closely at what Jeff Skilling and his team in particular are doing within Enron with or without Ken Lay’s knowledge.  In retrospect, Enron got away with way too much for too long because of the Great Man - and this is why management consultant Jim Collins - in his book, ‘Good to Great’, talks about: that we all must beware of the charismatic executive.  The charismatic CEO’s underperforms compared to their number crunching, lower profile counterparts.    You’ve got to trust processes - not individuals and you’ve got to keep your emotions out of it.

 

 
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