A Terrible Lay

The premature death of shamed Enron CEO/Chairman Kenneth Lay has robbed tens of thousands of former Enron employees, pensioners, and shareholders the chance to see justice fully served following surely the most grotesque misuse of corporate power in US history. On 25 May 2006, he was found guilty on ten cases of fraud, and he was expected to have been sentenced to 20 or 30 years in prison later this year.

The Enron story has always fascinated me and thankfully a superb documentary and an even better book provide incredible insights into an ultimately tragic company. It encompasses fine examples of how the US economy and way of life is both at once the best and worst in the world.

Lay was born dirt poor and worked his way up through predecessor companies of Enron, which at the time was a sleepy Houston-based pipeline company. It was (or so it seemed) a classic rags-to-riches story representing the 'American Dream' that so many millions aspire to. Indeed Enron, before it was revealed as a fraud, was seen as representing the very best example of the amazing dynamism of the US economy. Indeed it was voted 'America's Most Innovative Company' six times by the influential Fortune magazine.

Unfortunately Enron also revealed the inherent (yet often hidden) dangers of a society which showers such prestige on wealth and success above all other traits, and one in which corporations and politicians are dangerously entwined. Lay was considered 'asleep at the wheel' rather than inherently fraudulent by many experts on the case, but he loved to wallow in the enhanced social and political standing his lofty position gave him (George W Bush no less referred to him famously as 'Kenny Boy').

The principals of the company simply placed no value on the rights and interests of the various stakeholders in the business from employees to shareholders. Their only concern was meeting the expectations of Wall Street by hook or by crook, thus enabling them to cash out share options and stock at enhanced valuations. They were supported in this endeavour of course by the now defunct audit firm Arthur Andersen whose well-earned global reputation for probity was destroyed by just a handful of Houston-based partners. Right to the bitter end, the directors treated Enron like a personal piggy bank - after declaring the company bankrupt, they flew to New York for legal proceedings in a corporate jet and stayed at the Four Seasons.

Disgracefully the accounting shenanigans were signed off upon for years despite the actual substance of transactions clearly being far removed from the way they were presented (using a technique known as mark-to-market accounting). It is like Charlton selling 10-year season tickets and realising the profit thereon immediately instead of accruing it over the full period.

Lay is now dead of course (and was bankrupt by the end) whilst co-defendant Jeff Skilling faces life behind bars, their lives over or ruined. However some key executives, either by accident or design deserted the sinking ship and took with them hundreds of millions of dollars worth of ill-gotten gains. For example, the former CEO of Enron Energy Services, Lou Pai walked away with $270million and promptly became the 2nd largest landowner in the whole of Colorado.

It is easy to dismiss the Enron case as just being a lot of rich people falling from grace; certainly Lay and Skilling warrant little sympathy. However the size of the Enron collapse and its reverberations need to be put into some perspective.

At its peak in August 2000, Enron's market capitalisation was $66billion ranking it as the 7th largest company in the US. Today, Wal-Mart (owner of Asda, and the world's largest retailer) is the 7th largest company in the country - imagine if all of those giant superstores and 'always low prices' were revealed to have been built on the rocky foundations of decades of accounting fraud. It is perhaps because Enron's clients and customers were largely banks and other energy companies rather than consumers that many felt the fraud didn't concern them (but they were wrong).

Moreover, to put the loss of wealth into perspective, the valuation of Enron collapsed from that peak of $66billion to zero by November 2001. By my estimations, it is as if the entire housing stock of a city the size of Bristol or Sheffield became worthless in the space of a year. It is perhaps testament to the robustness of the US financial system that the direct effects of Enron were relatively well-contained.

The real loser as ever was the 'little man', the loyal low-level employees (many of whom chose ill-advisedly to put much of their pension into Enron stock), retail shareholders and the Houston economy in general that was laid low by the fraud, such was Enron's impact in the country's 4th largest city.

It is ironic that Lay died just a week after one of the country's true great capitalists, and world's 2nd richest man Warren Buffett revealed he intended to donate virtually his entire fortune to the charitable foundation of the richest, Bill Gates. Those who believe strongly in the American way of life and its resultant and unnerving inequality point to its well-earned reputation for private philanthropy as the 'flipside' of this implicit social contract. Unlike Lay, Buffett has been aware of the important role of good fortune in his career (he refers to himself as a member of the 'lucky sperm' club) and the societal responsibilities this bequeaths. Indeed Buffett's children have already been told they will only get "...enough to do anything, but not enough to do nothing." It is in this tricky balance between the vice of greed and the virtue of giving that the US continues to try to build on its unparalleled economic success, aware of course that the next Enron lurks in its shadow.