In 2001, Enron, then the seventh largest company in the world and the most innovative company in America, whose stock prices doubled every three years, imploded. The American energy company based in Houston, Texas went from $100 billion in revenues and $1 billion in profit to bankrupt, leaving thousands out of work and with no pension plans as many had invested these back into the company, at the request of management.
My friend Sherron Watkins, a former VP of Corporate Development at Enron, became the key whistleblower at ENRON, when she alerted then-CEO Ken Lay to accounting irregularities within Enron in August of 2001, warning him that the company “might implode in a wave of accounting scandals.” Incidentally, ENRON had a 64 plus page ethics manual and did implode two months later.
As a result of misappropriated investments, pension funds, stock options, and savings plans, investors losses exceeded $70 billion and the cost to both trustees and employees was upwards of $2 billion. The notoriously corrupt company has been featured in numerous books and films, including ENRON: The Smartest Guys in the Room.
It also led to the de facto dissolution of Arthur Andersen, which at the time was one of the five largest audit and accountancy partnerships in the world. Andersen’s partner in charge of the Enron audit admitted to an “error of judgment” in its treatment of the debt of one of Enron’s off-balance-sheet vehicles which led to an overstatement of profits by almost $600m over the years 1997-2000. According to Sherron, ”the #1 criteria at Arthur Anderson was bringing in customers. We were paying them $1 million a week to look at our books!”
Sherron, testified about her role in reporting the Enron fraud before committees of the U.S. House of Representatives and Senate at the beginning of 2002. The congressional hearings resulted in several Enron executives going to jail and the passage of Sarbanes-Oxley.
Sherron, who speaks on ethics and leadership around the globe, and how to prevent or spot the next Enron spoke this week at the Andrew R. Cecil Lecture Series at The Jindal School of Management, at the University of Texas Dallas. I had the privilege of introducing her and moderating the Q&A afterwards. Sherron spoke on the compelling story of what went wrong at Enron and the importance of ethical corporate leadership. She shared her views on how to spot the warning signs of erosion in values.
“The culture was fast -paced. It was all about what have you done for ENRON lately. At ENRON, your targets could not be missed. It was a company running without controls. The internal audit and risk functions had been emasculated and outsourced. All Jeff Skilling, then CEO, talked about was our stock price. And you know when you’ve invested your retirement money into the company you don’t want to hear bad news!”
Enron’s stock price had doubled in three years, and its executives and employees held large stock options. “When you feel very good about your company,” she remembered, “you can overlook things that have gone wrong, when the money is flowing like that. In 1996, when I first saw troubling accounting practices, I did not think about leaving Enron. I had not yet made vice president, and my own ego got in the way. Enron was the place to work in Houston, Texas.”
She quoted Aleksandra Solzhenitsyn: “We do not err because truth is difficult to see. It is visible at a glance. We err because this is more comfortable.” “Well, that quote would have gone right over my head before the Enron scandal,” Watkins said.
She also quoted Martin Luther King, “Our lives begin to end the day we remain silent about things that really matter.” This quote was given to all ENRON employees. It was on one out of four telephone message pads in the company to highlight one of ENRON’S core values, Communication. Enron’s other core values were Respect, Integrity, and Excellence.”
“When you’re faced with something that really matters,” she paraphrased, “if you’re silent, you’re starting on the wrong path.” “Be prepared to face an ethical challenge; an ethical challenge will appear in your lifetime.”
Thank you, Sherron, for reminding us to speak up, not be afraid, and that we must hold our leaders accountable.
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Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
