Business

Once ranked the seventh largest company in the world, energy trading giant Enron filed for bankruptcy in 2001 after investigators discovered illegal schemes by some of its executives to inflate profits and enrich themselves at the expense of shareholders and employees. Enron's CFO Andrew Fastow drew a 10-year prison sentence. Enron may be the poster child for corporate corruption, but it's far from alone in a modern maelstrom of malfeasance. Others indicted or convicted include bosses at Tyco International, Adelphia Communications, Martha Stewart Living Omnimedia, WorldCom and HealthSouth.

Why did Enron crash? How did a company almost universally perceived as one of the best run, most innovative, most profitable operations in the world collapse so suddenly? It's a question that has almost as many answers as there are jail terms for the executives.

The most popular answer explaining Enron's demise is that it wasn't actually making money -- that it was all a lie, that a combination of bad accounting schemes and fraud covered up for the fact that the company made a series of very bad business decisions over the years, and eventually all the mistakes caught up with it. Enron spent billions purchasing and building power plants all over the world that never earned out. It made an ambitious move into the water business that proved to be a financial disaster. It had no internal controls on expenses -- or even any clear idea of how much it was spending, or how much it owed, on a given day.From this perspective, Enron's collapse was inevitable -- the only mystery is how long it managed to pull the wool over everyone's eyes.

The bad business decisions made by Enron presented many "traps" in the decision making process. Ignorance traps, the negative consequences of behavior are not understood or foreseen at the outset. The Enron executives must not have put much thought into the consequences of their actions. Or if they did, they must have not cared very much, which is unbelieveable to even try and comprehend, given the scale of their crimes.

In time delay traps, momentary gratification clashes with long-term consequences. With time delay traps, relatively small problems and pleasures in the short run are sufficient to produce behavior that is devastating or potentially lethal in the long run. As with Enron, their days of living high on the hog did not last long, at least not as long as their jail sentences will. But they were not putting much thought into this when they were stealing money to live the good life.

Collective traps involve more than one party. In collective traps, the pursuit of individual self-interest results in adverse consequences for the whole group. The bad decisions made by the Enron executives not only had negative consequences for them, but their employees and shareholders as well.

The real issue of Enron's and every other corporate board is a moral one. Those who accept public responsibility for oversight must be diligent in their tasks no matter if they are paid or volunteer.. The public is reliant on a variety of people in whom they have placed their trust. All sorts of organizations represent the citizens and do for them what

they are not able or willing to do for themselves. Police, fire fighters, politicians, teachers, and many other government and non-government groups take upon themselves certain public responsibilities. And they are expected to take their duties seriously. Failure to do so can cause loss of employment and credibility, and in Enron's case, prison terms.

A board of directors is no different. It is supposed to act