© The Financial Times Ltd 2014 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
I have been most inspired in recent years by an unlikely source. He is a man who was regarded as a hero for much of the 1990s but who turned out to have feet of clay, and by 2002 was one of the most vilified men in corporate America. I speak, of course, of Jeff Skilling.
Those who claim not to have admired Skilling during Enron’s halcyon years are probably in denial. In 1996, he was described in a Fortune magazine article as, “the most intellectually brilliant executive in the natural-gas business”. In two years he had taken Enron Capital & Trade Resources, a subsidiary focusing on energy trading and marketing, from nowhere to become the third-largest electricity wholesaler in the US. He drove the company to a position where it was viewed by analysts and competitors alike as the most innovative in the US.
What contributed to his success during that period was a belief that anything could be challenged and improved. The clue to the energy engendered by Skilling was contained in the company logo. Below the “crooked E” were the words: “Ask why”. His genius was to question constantly: why couldn’t the company trade gas instead of simply transporting it? Why couldn’t it become a one-stop energy supermarket providing services to the industry as well as the commercial and retail sectors? Why couldn’t it develop Enron Online, an idea for an internet-based trading operation eventually used by almost every energy company in the US?
Having asked such questions meant that when US states started to deregulate the energy sector and the New York Mercantile Exchange introduced gas futures contracts in 1992, Enron was perfectly placed.
Skilling created an innovation machine. He hired young, smart and entrepreneurial traders and managed them creatively. He let them structure deals up to $5m without approval from above. He designed an appraisal system in which more than 20 peers would offer views on traders’ performance. The appraisal criteria were laudable: “ability to learn”, “leadership of self and others” and “innovation”. Skilling argued: “There’s too much conventionality and too little risk taking when people have to answer to a single boss.”
He made Enron such a success story that a Fortune headline read: “Enron has shaken up the sleepy gas pipeline and power businesses by aggressively embracing risk and continually remaking itself. So, what’s not to like?” That headline encapsulates the Skilling that inspired us – we learnt that embracing risk and reinvention could drive innovation. Sadly, what was not to like about Enron and Skilling soon became obvious and led to his conviction in 2006 on 19 counts of conspiracy, securities fraud, insider trading and making false statements. (Following a Supreme Court ruling that 14 of these convictions were based on an invalid legal theory, Skilling is awaiting the outcome of an appeal hearing in November that will decide whether he should face a retrial on those counts.)
The plaudits of the Wall Street analysts soon took on the menace of the witches’ predictions in Macbeth. Like Macbeth, with the assurances of success in his ears, Skilling believed he “[bore] a charmed life”. Anyone who sees the documentary The Smartest Guys in the Room or the play Enron: the Musical will be struck by the levels of hubris on display. All the classic signs were apparent.
Any criticism was dismissed as “Enron envy”. Skilling was impervious to potential damage to the company. His outburst against Richard Grubman, the Wall Street analyst, whom he called an “asshole” for asking why Enron was unable to provide a balance sheet and a statement of earnings at a particular time, was a prime example.
Still more revealing was Skilling’s infamous joke during the California energy crisis: “What’s the difference between California and the Titanic?” Answer: “When the Titanic went down it still had its lights on.” To make such a comment, in public, was a signal of his detachment from reality.
Also, a deep cognitive dissonance had set in. For example, as early as 1995, analysts had identified Enron’s “mark to market” accounting practice as questionable. Such concerns went unheeded. A further indicator was the grandiose nature of Enron’s Houston offices, with sweeping staircases leading up to the huge offices of Skilling and Kenneth Lay, chief executive and chairman.
Finally, Skilling exhibited the classic gambler’s curse – he chased his money. What is often referred to as the sunk cost fallacy draws its victims into an ever more vicious cycle as they try to make good their losses.
Skilling had become a man to despise rather than idolise, and his Shakespearean fall from grace is the most valuable business lesson anyone can learn. It is only to be hoped that as business school deans we can enable others to learn from the Jeff Skilling story and not have to learn the hard way. Beware hubris – it’s a killer.
The writer is dean of BPP Business School, London
Copyright The Financial Times Limited 2014. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.