Skilling's Appeal and Enron's Legacy

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Ethical Discipline

What Skilling and Lay failed to understand as leaders is that compliance with espoused ethical and legal standards is an organizational achievement. Or, to put it put slightly differently, despite the values and ethical guidelines published in Enron's Code of Ethics (available as a collectible on eBay (EBAY)), it was unreasonable to expect that a single individual at Enron, no matter how well-endowed with principled judgment, could be expected to remain untouched by dereliction or excessive gaming of accounting rules without positive, organized support. Skilling and Lay failed to provide that support.

Whatever the espoused intentions of Enron's leaders, the organization's commitment to the qualitative aspects of individual and group performance (such the protection of corporate integrity and reputation, respectful behavior, truth telling, legal compliance, and a host of other possible social goals) began to break down under pressures to maintain its meager profitability. This breakdown was hastened by Enron's turbocharged incentives, which offered executives enormous bonuses tied to estimated future profits and a very generous stock-option plan that paid out richly as Enron's stock became increasingly overvalued.

Creating an environment that supports ethical discipline requires precisely what Enron lacked in its governance practices:

• Sustained attention to the qualitative objectives and ethical standards of the organization;

• Balanced incentives that reward and penalize results other than economic performance;

• Systematic audits of decisions made by key executives in areas where the rules are ambiguous (as in structured finance transactions) and the risks to reputation high (as in opaque financial reporting); and

• Continuous monitoring of senior executives for evidence of what sociologist Philip Selznick has identified as two major sources of leadership failure—personal opportunism and utopianism.

Personal opportunism involves the pursuit of immediate, short-term individual advantage while ignoring considerations of principle and long-term consequence. In the end, unchecked personal opportunism and greed ruined Enron.

Utopianism enables leaders to avoid hard choices by a flight to abstractions. In Enron's case, the overgeneralization of purpose—at first, to be the best energy company in the world and, next, to be the best corporation in the world—provided few business-specific decision criteria for Enron executives. In their absence, personal preference tended to replace decision-making based upon the espoused ideals and distinctive competences of the company. In short, the utopianism of Enron's leaders created an environment where personal opportunism ran rampant.

Along the way Enron lost track of its ideals. This loss of ideals reveals the most important lessons of the Enron story—that financial success without an ethical foundation leads to disaster and that the governance of public companies requires relentless attention by elected directors to the ethical discipline of executives who are accountable to them.

Malcolm S. Salter is the James J Hill Professor, Emeritus, at the Graduate School of Business Administration Harvard University. From 1967 to 2006, Malcolm Salter was a member of the Harvard Business School faculty where, most recently, he served as a Senior Associate Dean. His latest book, Innovation Corrupted (Harvard University Press, 2008) is about the collapse of Enron. From 1986 to 2006 Professor Salter was president of Mars & Co., an international strategy-consulting firm. Professor Salter is a graduate of Harvard University where he received his AB, MBA, and DBA degrees.