The Enron Collapse

Case Analysis: The Enron Collapse

Objective: Analyze the reasons behind the collapse of the energy giant Enron.

Background:

Founded in 1985 by the merger of Houston Natural Gas and Inter North, Enron grew rapidly to become the seventh largest company by revenues in the United States. Enron employed 25,000 people worldwide. Its performance had  been lauded in the media as a glowing example of the transformation of a conservative and domestic energy company into a global player. Enron was a particular favorite of the consulting firm McKinsey who had frequently cited Enron as an example of how innovative companies can outperform their more traditional rivals. After a slew of investigations and allegations of accounting foul play against the firm, the share prices of Enron declined quickly and the firm filed for bankruptcy protection on December 2, 2001.

Analysis:

The story of Enron is intertwined with the story of its executives. It is a tale of using the firm to further one's personal greed to the extent of putting the entire firm at risk for the sake of personal gains.

The key personnel in the Enron saga were:

• Kenneth Lay: Founding Chairman and CEO, he was at the helm of Enron from 1985 to Feb, 2001, and then again for a few brief months at the end of 2001; a self professed 'free marketeer'.
• Richard Kinder: Founding COO, a lawyer by training and an oil & gas veteran, he was a no nonsense man, and was seen as a fair but tough manager. He left Enron in 1996 after the Republican candidate Bob Dole lost the US Presidential elections to Bill Clinton. His departure was seen as a major blow to Enron.
• Jeffrey Skilling: a Harvard MBA, and partner in charge of McKinsey's energy practice in Houston, he was close to Lay, and he grew into prominence after Kinder's departure. He was the main proponent of energy trading business. Skilling rose to become COO and then eventually became the CEO of the company in 2001. He resigned after a 6-months stint as the CEO.
• Rebecca Mark: Joined Enron in 1985 and was the figure behind Enron's international business forays including the $3B Dabhol Power Project in India, and the major business ventures in UK, Brazil, Bolivia and Argentina. She was in Skilling's rival camp.
• Andrew Fastow: Skilling's right hand man; was promoted as CFO of the organization by Skilling even though he was not a CPA. Fastow is seen as one of the major contributors to Enron's decline with his dodgy accounting deals. Ironically, he was voted as the 'most creative financial officer of the year ' in US by the CFO magazine.

As we analyze the key events in the lifeline of Enron as an organization, it becomes apparent that conflicts and less than stellar ethical practices had always been a part of the company's way of working.

To start with, the company was divided between Skilling's idea of 'asset light' strategy where he favored going into energy trading (as he felt Enron could make more money that way) against Rebecca Mark's idea of investing in traditional power generating assets both in the US and overseas. Failing to resolve this conflict, Enron kept investing in both the ideas, but with a conflict between the powers that were.

Secondly, the company had a history of using influential people to win important deals (Lord Wakeham, UK) as well as using people in their organizations to open 'front' transactions (Dodson and Kopper) raising serious questions on 'conflicts of interest' to which the Board seemed oblivious.

Another issue was the organizational culture of 'rank or yank'. Employees were put under heavy pressures to meet target, and those who could not, had to go. The emphasis was on doing deals and not how they were being done or how they would be managed in the future.