The Bailout – Enron End Run Revisited

I was going to write something on the bailout but when I started thinking about it, I realized I’d already written what I wanted to say.  This was originally published in 2002.  The situation is just more of the same (snafu, for the literary) so I’m going to recycle it here.  My submission was entitled Enron End Run.

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The media update us hourly on the Enron situation about courts and lawyers, documents and shredders. They ask a lot of quality journalist questions, but I have one. How did Enron make such bad decisions? After all, they could afford the best executives money (stock options, deferred income, perks, golden parachutes, etc.) could buy.

Rarely are decisions made alone. Even when the guy (and in the US, it’s usually a guy) in charge wants something, there’s usually a team that needs to agree to it.That’s called getting “buy-in,” a rather unfortunate term considering the price that Enron execs will likely pay at some time in the future. Within a series of decisions, you’ll find a series of interactions of the people who make them, of opportunities for correcting a runner who’s straying out of bounds.

Any executive team decision is just one stop on their problem-solving mission. But when you analyze the series of their decisions, you see patterns that repeat, patterns woven of the interactions of the key players on the team. And at Enron, as at so many corporations, that team was missing a few key players.

A good executive team is diverse. Not in the sense of political correctness, necessarily, but in the sense of recognizing the value of differences in people’s styles, what team theory refers to as their Roles, as opposed to the things they do on a day-to-day basis, their tasks. One simple way in which diversity serves a team is that of the ten team roles, there are three that serve to contain action, to stop and think of the consequences, to converge on the true path of the team’s mission. In other words, getting things done in a business environment requires power and control. Enron had plenty of power. What they lacked was effective control.

I’m not much of a football fan, but I have a good friend who explains what I want to know in language I can relate to. Today I asked him about end runs. Are they common, I asked, wanting to know if they are as performed as often on the field as apparently they are off the field. Enron is not the first, nor will it be the last, playing the game this way. He explained that there are maybe six or so end runs in a season and that many teams don’t even do one because once you’ve done one, you’ve bent the rules enough to cause others to wonder if you can ever straighten them out again. I was intrigued when he told me that sometimes it is only two or three people on the team who know that they will be attempting an end run. I wonder how they make this decision. Is it in the passion of needing to win at all costs or is it thought out? Are the pros and cons given voice? And does anyone know how many team members were involved in the decision and how many just went along with it because it was a winning play?

Regulation, de-regulation, re-regulation: none of it helps when the problem lies in management. FASB, GAAP, IRS: all just letters, as in “the letter of the law,” worthless without the spirit and intent of the law. The new rules to come will further regulate “balance sheet partnerships” but will do nothing to insure against the poor decisions made by an “end run” team.

According to team theory, certain roles serve to move the ball, to further the overall goals of the team. Others focus the effort to move the ball in such a way as to end up winning the game. Without focus, the ball moves out of bounds and while the referee might miss this occasionally, sooner or later it’s going to be caught. In a professional football game, this pattern is caught in practice before the game. A player who constantly and needlessly runs out of bounds is not going to do well. The idea is to move the ball within the boundaries required. The better someone is at that, the better the player. The better the players, the better the team.

Did Enron have someone there who could provide the control over the power that the key players had? CBS News reported that they did. Robin Hosea, a senior accountant, worked in the benefits department. She apparently reported that some Enron departments were spending employee benefits money without approval from her department. She said she reported this to her superiors and was told to keep quiet. She was soon laid off. If money was spent this way, it constitutes a criminal offense. Her job in the company was to work on the team as a control agent. She was, in part, there to focus the efforts of the management on moving the efforts of the organization forward while keeping within the boundaries required. When they ignored her, they lost that essential focus. They lost the containment they so sorely needed.

Capitalism is arguably the most effective economic system ever developed but unbridled capitalism is based on greed. Now there is nothing wrong with a little healthy greed. That’s what motivates for-profit companies. But greed is powerful. If it is allowed to range unchecked, it will eventually destroy everything around it.

Governments are supposed to place various constraints on what actions a company may take in order to protect the welfare of the rest of society. Sometimes they work, sometimes they don’t. Far more effective are the constraints that an ethical, diverse management team, with its interplay of forces of power and control, places on itself. Without control to balance it, a team with an excess of power almost inevitably sets up the kind of conflict that led to the Enron collapse.

Enron executives were simply trying to make money. Most of them probably believed they were abiding by the letter of the law. In the end though, the company collapsed. Just consider what would have happened with that same kind of power and drive under tight and disciplined control, constrained and focused not by broad laws that regulate all companies but by cooperation with team members who were also interested in the long term interests of the company. Instead of free-ranging action with an eye on the short-term, they would have been focused and directed, power under control, to accomplish what they wanted without paying such a high price. It might have taken longer but it would have cost them – and their victims – a lot less in the end.