Transcript Doing the Right Thing: Leadership Lessons from Enron

Doing the Right Thing:
Introduction and
Lessons in Ethics and
Leadership from Enron
and Worldcom
MGT 5531, Class 1
January, 2011
Agenda
 Course introduction
– Topics, readings
– Activities
 Team Class Assignments
 Ethics Revisited: Enron & Worldcom
– What have we learned already?
– Is there any more to learn?
• About how the world works?
• About how we think?
• About ourselves?
Course Highlights
 Topics
– Thinking like a senior executive
– Aligning:
• structure, strategy and environment
• people, purpose and culture
– Doing the right thing
 Books
– Bolman & Deal, Reframing Organizations
– Collins, J. Beyond Entrepreneurship: Turning Your Business into
an Enduring Great Company.
– Gallos, Business Leadership
 Activities
– Class leadership
– Case memos
– Final paper
Case Opportunities
February 5
February 19
March 5
March 19
Columbia
Team: T3
Philips/Matsushita
Team:
Cypress Semiconductor
Team: Countdown
Big/small: Starbucks
Team: Resilience
Meg Whitman @ eBay
Team: Team One
Paul Levy @ BDMC
Team:
GE’s Talent Machine: the
Making of a CEO
Team: Carl
Zappos.com 2009
Team: Chhart
Paul Levy at Beth Israel
Deaconness
 Multimedia and print cases. Basically, this tells a
story about organizational change as viewed from
the perspective of the change agent – in this case
Paul Levy, the new CEO of a large Boston
teaching hospital that provided quality care but
was going broke. The multimedia case includes
substantial interview material with Levy, and
assorted auxiliary material.
Philips vs. Matsushita
 Written case and brief video. The written case is
a big picture story of two firms – Philips in the
Netherlands, and Matsushita in Japan – who
evolved to become global competitors. The case
provides a multi-decade historical sweep of how
each firm evolved its leadership, strategy, and
structure. The video clip shows one of the
Philips CEOs talking to an executive class at
Harvard.
Zappos.com 2009
 The case chronicles Zappos rise from dot
com startup to the net’s dominant player in
shoe retailing, with a particular emphasis
on how the company manages people and
culture. The case ends as Zappos faces the
possibility of being acquired by Amazon.
Team Meetings
 Syllabus: questions, suggestions
 Class leadership: decide on your
preferences
Roles for Columbia Case
& Day 8 MMT Meeting
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
Ron Dittemore – Space Shuttle Program Manager
Linda Ham – Mission Manager
Don McCormack – Mission Evaluation Room Manager
Rodney Rocha – Debris Assessment Team Co-Chair,
NASA Engineer
 Pamela Madera – Debris Assessment Team Co-Chair,
United Space Alliance Engineer
 Calvin Schomburg – Thermal Protection System expert,
NASA Engineer
What are the characteristics of
an effective manager?
What are the characteristics of
an ethical manager?
Enron and Worldcom
 What went wrong at Enron and
Worldcom?
 Could it happen to you?
O’Toole: Realist or Rushmorean?
Realist/Contingency:
Rushmorean
 Leader’s job is to do
what’s necessary to
achieve leader’s ends and
move organization
forward
 What’s necessary “all
depends”
 Values-based
 Respect followers:
expressed through
“listening to them,
faithfully representing
them, pursuing their
noblest aspirations, keep
promises made to them,
and never doing harm to
them or their cause”
– In a crisis, tough, even
tyrannical leadership may
be necessary
Realist or Rushmorean?
 Which are you?
–
–
–
–
Realist?
Rushmorean?
Some of each
A pretending to be B?
 Which do you want to be?
 Which do you think you need to be?
Just do the right thing?
“If everyone will follow their own best instincts –
do their own jobs ethically and legally –
businesses and business people will be known for
what the vast majority truly are: honest,
productive, constructive, competent, and
deserving of the country’s trust.
----Dick Thornburgh, Former U. S. Attorney
General
A Manager Who Agrees:
Andrew Fastow, former Chief
Financial Officer, Enron
A Manager Who Agrees
“We’re
going to make money without
having to do anything but the right
thing.”
--Andy Fastow, Chief Financial Officer, Enron
[Fastow was indicted in October, 2002, on 98
counts of conspiracy, fraud, money laundering,
insider trading and other charges. In a plea bargain
this month, he pleaded guilty to two counts of wire
and securities fraud, in return for two five-year
prison terms.]
What was the right thing?
 CEO Jeff Skilling describes Enron’s values
Enron’s Values
Enron’s Values
Communication
Respect
Integrity
Excellence
Espoused vs. Real Values
 Skilling was described by subordinates as a
“Darth Vader” who created an environment of
fear and cut-throat competition while turning a
deaf ear to anyone who offered input he didn’t
want to hear. “After Enron’s collapse in late
2001, one of the interviewers, Professor Robert
F. Bruner of the University of Virginia, said that
Skilling was ‘very smooth, very, very smooth.’
But, he added, it later became clear that Skilling
was not doing what he said he was doing”
(Dewan, 2002, p. C7).
How Did Enron Get Off Track?
Enron 1985
 Born in merger of Houston Natural Gas and
Internorth (Omaha) – changed name to Enron
 Ken Lay – born in Tyrone, Missouri, son of a
Baptist preacher, with a Ph.D. in economics,
became Enron’s first CEO
 Largest gas pipeline business in U.S.
 Low-cost producer with economies of scale
 Slow growth and cyclical profitability dependent
on price of gas
As Ken Lay in 1985…
 What do you see ahead of you?
 What options would you consider for
where to take the company?
 Would you
– Play it safe?
– Reach for the stars?
Enron 1985 - 2000
1985
2000
Revenue
$10.2 billion $100 billion
Net income
$125 million $979 million
Market cap
$2 billion
$96.0 billion
Changing Vision
 Gene Humphrey
 Ken Lay
 Jeff Skilling
Changing Vision
(Gene Humphreys, Ken Lay, Jeff
Skilling)
Two Directions
In the late 80s and early 90s, Enron was evolving in
two distinct directions at once:
 Merchant (Skilling): buying, selling, making
markets
– Exploit deregulation and overbuilt existing domestic
infrastructure
– “Asset light”
 International (Rebecca Mark): big capital
investments in energy assets (primarily abroad)
– Power plant in India
– Water in Latin America
Merchant Model
 Jeff Skilling
Merchant Model
(Jeffrey Skilling)
Weather
Fruits of Enron’s Labors
 In September, 2001, a month before the collapse,
Enron came in at the 30th position on Fortune’s
list of the 50 fastest growing companies – it was
by far the largest company on the list
 For six consecutive years through 2000, Enron
was voted the most innovative of Fortune’s
“most admired companies” – and it was duly
hailed by analysts, reporters, and business school
professors
Aggressive?
PBS Interviewer: A general comment that I've heard about
Enron, and to a certain extent about you, [is] that you're
very, very smart, very aggressive. You'll lay out your
argument, "The rules in California are terrible," but then
once you see what the rules are, you guys push those
rules to the edge in an effort to make a buck.
Skilling: That's probably fair, yes. Once you set
the rules to a marketplace, we adhere to the
rules. If that's what you're saying, that's what
we do.
Improving Earnings: Enron and
California Electricity
 “Death Star” and “Load Shift” – create
appearance of overload on the power grid, and
then get paid to relieve the congestion
 Buy capped power ($250 megawatt) in
California, sell it outside California (at up to
$1200 megawatt
 “Ricochet” – buy capped power in CA, sell it to
3rd party, then buy it back and resell it in CA at a
much higher market price
Energy Trading
Improving Earnings: Enron’s
Creativity at Work
 “Mark to market”Accounting
Improving Earnings: Enron’s
Creativity at Work
 Selling the dogs
– Sell underperforming assets to an “independent”
partnership controlled by Fastow
– Partnership borrows the money from banks (or other
financial institution)
– Enron books a profit on the sale and guarantees the
loans
– Or: sell to a financial institution (e.g., power barges
off Nigeria sold to Merrill Lynch) with a promise to
buy back at a premium in 6 months
Improving Earnings: Enron’s
Creativity at Work (II)
 “Pre-pay”
– Enron is paid up-front for promise of future delivery
of gas or oil to an “independent entity” controlled by a
lender, such as Chase’s “Mahonia”
– Mahonia promises to deliver gas to Chase
– Chase promises to deliver gas to Enron
– No one has to deliver any gas, but Enron gets money
now which it books as operating income, and the
lender gets its money back later – along with a profit
on its energy “sale”
Improving Earnings:
Worldcom’s Creativity at Work
 Accrual releases
 Capitalize line costs
Kotter: What Leaders Really Do
 Managers cope with complexity through:
– Planning and budgeting
– Organizing and staffing
– Controlling and problem-solving
 Leaders cope with change through:
– Setting a direction
– Aligning people
– Motivating
Enablers: A, B, C, D, E
 Enron & Worlcom got a lot of help – from
all the best people
A is for Accountants
 Arthur Andersen, until the 1990s, a highly
successful and respected gold standard in the
accounting business “stamped its approval on the
dirty books of Sunbeam, Waste Management,
Enron, Global Crossing, Qwest, and WorldCom.
The scandals that enveloped those corporations
alone have cost investors more than $300 billion
and have put tens of thousands of people out of
work.” (Business Week, August 12, 2002)
Accountants (II)
 1980: Andersen and other “Big 5” firms derived
most of their income from auditing, where
professional standards and ethics were central
 “Slowly, auditing went from being the soul of the
firm to a loss leader used to attract and retain the
consulting contracts. Just as the vast riches
represented by stock options helped corrupt
ethics at some corporations, consulting helped
push Andersen and its rivals off course.”
(Business Week, August 12, 2002)
B is for Banks and Brokers
 “One of the most sordid aspects of the Enron scandal is
the complicity of so many highly regarded Wall Street
firms—a complicity that is stunningly documented in
internal presentations and e-mails….They show banks
helping Enron mask debt as cash flow from operations
and create phony profits at the end of a quarter. They also
show how almost all of them put money into Fastow's
partnerships because of—not in spite of—their potential
for abuse. Most of all, the documents show that the banks
weren't merely enablers; they were truly Enron's partners
in crime.” (McLean & Elkind, The Smartest Guys in the
Room: The Amazing Rise and Scandalous Fall of Enron)
Banks and Brokers (II)
 J.P. Morgan, Citigroup, and Merrill Lynch
originally cast themselves as Enron’s
victims, but later admitted abetting fraud,
paid a total of $366 million in fines, and
promised internal reforms
Banks and Brokers (III)
 The 1933 Glass-Steagall act mandated
separation of banks, brokers, and insurers
 The walls of separation gradually
crumbled, particularly in the 1980s as the
Federal Reserve carved out growing
loopholes
 After repeated attempts, Glass-Steagall
was finally repealed in 1999
C is for Consultants
 McKinsey & Co., “the high priest of high-level
consulting” worked so closely with Enron that
managing partner Rajat Gupta sent his chief
lawyer down to Houston after Enron’s collapse to
see if the consulting company might be in legal
trouble. The lawyer reported that McKinsey was
safe, and Gupta insisted bravely,” We stand by
all the work we did. Beyond that, we can only
empathize with the trouble they are going
through. It’s a sad thing to see.” (Business Week,
July 8, 2002)
Consultants (II)
 When Rajat Gupta became McKinsey’s
managing partner in 1994, “some colleagues
argued for keeping McKinsey small, to safeguard
its culture and quality. Gupta was of another
mind: He aggressively expanded abroad, opening
up far-flung branches throughout Asia and
Eastern Europe. In all, he expanded McKinsey's
network to 84 worldwide locations from 58,
boosted the consulting staff to 7,700 from 2,900,
and lifted revenues to $3.4 billion from $1.2
billion in 1993.” (Business Week, July, 2002)
D is for Directors
 “[Worldcom’s] board played far too small a role in the
life, direction and culture of the company. The Audit
Committee did not engage to the extent necessary to
understand and address the financial issues presented by
this large and extremely complex business….The
compensation committee dispensed extraordinarily
generous awards without adequate attention to the
incentives they created, and presided over enormous
loans to Ebbers that we believe were antithetical to
shareholder interests and unjustifiable on any
basis.[Worldcom Special Investigative Committee.]
D is for Directors II
 Enron’s Board of Directors allowed the company “to
engage in high risk accounting, inappropriate conflict of
interest transactions, extensive, undisclosed off-the-books
activity, and excessive executive compensation” and “was
compromised by financial ties between the company and
certain Board members.” (Report of U.S. Senate
investigating committee, July, 2002)
 “In 2000, over several meetings, the board's
compensation committee approved $750 million in cash
bonuses to Enron executives [$253 million to top five] in
a year when the Houston-based company reported net
income of $975 million.” (Business Week, July 29, 2002)
Directors III
 "Whatever else their failings, Enron's non-executive
directors were as well qualified as almost any group of
outsiders could have been to judge the regulatory and
business risks which arose from the company's business.
That they failed to do so is testimony to the complexity of
the monitoring task." “(Deakin and Konzelmann,
“Learning from Enron.” Centre for Business Research,
Cambridge University, 2003.)
 Yes, they’d been warned about high-risk accounting
practices, and they’d voted to waive the ethics policy so
Andy Fastow could manage the off-books partnerships,
but wasn’t that what made Enron successful: innovation,
risk-taking, “new-economy?”
E is for Everyone Else
 In September, 2001, a month before the collapse,
Enron came in at the 30th position on Fortune’s
list of the 50 fastest growing companies – it was
by far the largest company on the list
 For six consecutive years through 2000, Enron
was voted the most innovative of Fortune’s
“most admired companies” – and it was duly
hailed by analysts, reporters, and business school
professors
Incentives
 Keeping the stock price high and rising was vital
to both Enron and Worldcom – but as they grew,
that became harder and harder
 “Enron is laser-focused on earnings per share and
we expect to continue strong earnings
performance.” (Enron Annual Report, 2000)
 Enron’s target was 15% growth year-over-year in
E.P.S
Incentives (II): Trained and
Expected to Lie?
 CEOs and CFOs, at Enron, Worldcom and everywhere
else, live in a world of turbulence and uncertainty, but
they’re rewarded for providing steady growth (in Enron’s
case, 15% a year, in Worldcom’s the 42% expense ratio)
 “ One bad quarterly earnings report these days and a
company’s stock gets hammered. This quarterly vision
practically forces senior managers to look for short-cuts
that will inflate short-term results at the expense of longterm sustainability.” (David Batstone)
 Enron and Worldcom’s dilemma: they couldn’t afford to
miss targets, but dug themselves into ever deeper
financial holes in massaging the numbers
To leave, or not to
leave [home] – that
is the dilemma
Staying Home
 Staying home is safe and we’re protected
by the anchors of familiar people,
surroundings, and expectations
 But..it’s also stultifying – it blocks
learning, development, learning who we
can become and what we can do
Going to the Frontier
 The frontier challenges us, forces us to learn, and
breeds innovation
 But…we leave behind many of the social and
ethical anchors that provide direction
 The rules are often fuzzy, and there may be no
sheriff in town
 So…we’re thrown back on our individual or
group moral compass (inculcated by family and
culture) to guide us – if that fails, we’re in
trouble
What are the qualities of good
leadership?
What are the qualities of good
leadership? – Two answers
Jim Collins, Beyond
Entrepreneurship
Bolman and Gallos, Reframing
Academic Leadership
Authenticity
Focus
Decisiveness
Passion
Focus
Courage
Personal touch
Wisdom
Hard/soft people skills
Integrity
Communication
Ever forward
Leadership…
 Is about change and possibility
 So it requires willingness to innovate,
create, take the risks of going to the
frontier
 But, how do we know if we’re ready? Do
we have the intellectual, personal and
ethical capacities that tilt the odds in our
favor?
Edgar Schein
 “Leadership is intertwined with culture
formation, evolution, transformation, and
destruction. Culture is created in the first
instance by the actions of leaders; culture is also
embedded and strengthened by leaders. When
culture becomes dysfunctional, leadership is
needed to help the group unlearn some of its
cultural assumptions and learn new assumptions.
The leader of the future must be a perpetual
learner.”
David Batstone
 “The person who lives his or her life in
pursuit of success – be that measured by
wealth, fame, or social status – will be
sorely disenchanted with the pot of gold at
the end of the rainbow. Success alone
cannot satisfy our deepest longings for
significance.”
Andre Delbecq
A good company:
 Motivated by strong sense of calling
 Driven by deep sense of mission
 Embraces subsidiarity
 Sensitive to human dignity
 Committed to stewardship of resources
 Is attentive to the common good, justice,
needs of the poor