What Worries You Most
When a company says, “help me grow 2.5x in 3 years,” usually followed by, “with a modest budget and within a tightly defined marketing area,” what they're really saying is, “change my inputs,” except what they mean is, “change my outputs.”
Capital Thinking • Issue #610 • View online
In 2000, Enron claimed revenues of nearly $101 billion and employed approximately 29,000 people.
The darling of the stock market set its sights on innovation with visionary plans for broadband. Fortune named Enron “America's Most Innovative Company” for six consecutive years.
“We were building a—what I thought was a fantastic company. We had great people. We were changing—we were changing the way the marketplace operated. We were creating a market for natural gas and electricity that had never existed before,” said Jeffrey Skilling.
What Worries you the Most that is Not Getting Enough Attention?
Valeria Maltoni | Conversation Agent:
A major electricity, natural gas, communications and pulp and paper company, it started shifting parts of its business from producing energy to trading it and diversified overseas.
In the 1990s, Skilling hired Andrew Fastow as Enron's CFO, who got to work to make executive team dreams come true. Just few changes to the company's business plan greatly improved its perceived profitability.
On December 3, 2001, Enron filed for bankruptcy.
Skilling seemed dumbfound, “I spent probably most of my professional life helping to build Enron Corporation. I don't think there was anyone that was as shocked by the—by the collapse of the company as I was.” Under the pressure to produce results, often executives rationalize their actions.
Analysts and the media had missed the gap between what they knew and what they didn't know about the company. The gap made a big difference on the economics of the business.
“When I was initially charged I still thought I was not guilty because I had followed the rules,” said Andrew Fastow.
Today, businesses are under increased pressure to deliver aggressive results.
Along with “unprecedented,” the word “growth” is the most used in professional circles.
Yet, while the bottom line ideology is satisfying, as it provides tremendous clarity, companies are under increased social pressure to do the right things, along with doing things right.
The business shift
How did a company with such a massive following and promise unravel? It started with a question nobody had thought of asking. At least, nobody outside the company.
On March 5, 2001, Bethany McLean wrote a simple question in article on Enron for Fortune, “How exactly does Enron make its money?”
Nobody else seemed to have thought of it.
In “Is Enron Overpriced?” McLean noted that the company's financial statements were “nearly impenetrable. So why is Enron trading at such a huge multiple?”
McLean's precise reporting was meant to peel back the onion layers and get to the core of a complex business.
What she found was confusing—the small gaps in confidence between analysts and company executives should have been troubling. Yet, everyone was willing to rationalize the complexity away.
Enron's promise to hit a certain number of home runs in order to please investors created tremendous pressure to produce profits.
While the company might have followed the letter of the law, it misrepresented the economics of the business. McLean noted:
What's clear is that Enron isn't the company it was a decade ago. In 1990 around 80% of its revenues came from the regulated gas-pipeline business. But Enron has been steadily selling off its old-economy iron and steel assets and expanding into new areas.
In 2000, 95% of its revenues and more than 80% of its operating profits came from “wholesale energy operations and services.” This business, which Enron pioneered, is usually described in vague, grandiose terms like the “financialization of energy”—but also, more simply, as “buying and selling gas and electricity.”
In fact, Enron's view is that it can create a market for just about anything; as if to underscore that point, the company announced last year that it would begin trading excess broadband capacity.
Enron was very focused on the what of business: building products it could trade and a company brand. What seemed to make sense on the surface resisted a simple explanation one level down.
The business shifted over years. But the market never saw its complexity. It was tucked into easy to digest promises to hit certain milestones. Until someone thought of asking whether it made sense.
You may be sitting there thinking Enron was the exception and not the rule. That the executives got exceedingly greedy and saw profits above everything else.
But that's not entirely what happened.
*Featured post photo by Grant Jacobson on Unsplash