Leadership and Integrity Challenges -- What I Learned from Enron --

John Bloomer

Who am I?

http://xfactorcom.com/

Ethical Challenges Common

Did you ever get backed into this corner?1. Watch performance results get fudged to meet a spec2. Watch performance reporting “corrected” to meet bonus goal3. Witness records surreptitiously retained to CYA4. Witness leadership overstating savings (e.g., outsourcing)5. … or make revenue forecasts you knew to be unachievable6. Were told to make budget, staff cuts without business impact7. Designed staffing around Warn Act, tax incentives or top down

mandates to manage perceptions8. Were told what to pitch to Board or market and you didn’t agree9. Hired or promote someone against your judgment

A storied career at industry leading companies producing profitable, innovative new technology products and services …..

Why Go To Enron?Worth Cover - May 2001 "The 50 Best CEOs" • Steve Ballmer - Microsoft • Jeffrey Skilling - Enron• Phillip Purcell - Morgan

Stanley

Fortune - "America's Most Innovative Company" for six consecutive years, 1996 to 2001.

Fortune - Enron ranked one of the "100 Best Companies to Work For."

Very Innovative – Marketplace for Bandwidth

• Bandwidth Commodity (YouTube)• Bandwidth Commodity (File)

But Inside Enron…A culture different from any place I had ever been:• Ego-centric over-confidence – offending suppliers, partners,

analysts, employees• Rife with narcissism, hubris, testosterone• Cut-throat competition - “What do I have to do to maximize

commission?” (M-M accounting, TCV terms)

• Market Infected - many large, high-pedigree industry players• Levering-up the business – pitching PPTs, unable to execute….

like• The India power plant failure – sucks in GE, AIG• A water business that sank immediately• High risk if not illegal structures involving top-shelf names• Selling and buying-back assets – barges, power plants,

pipelines, other investments, using Enron stock as collateral

When Liars Figure and Figures Lie

• Leveraged Arthur Anderson’s good reputation and avarice

• Exploited mark-to-market accounting, TCV schemes and faulty financial engineering

• Ill-prepared for move into technology– Overstated progress; technical risk management– Lethal gaps in development & operational wisdom

Biggest Impact - Move from “Energy” to “Tech” Sector

• New technology can elude analysis for a good long time and give higher multiples

• Enron – thought leaders in gas, electric dereg• Deregulation in telecom – fungibility required • transport problem be solved• mutual substitution or exchangeability

• Enter end to end QoS and metering (BOS)

Technology – Higher Multiples

• Application #1 – eMediaCast (YouTube)• Application #1 – eMediaCast (File)

• Pooling Points & Bandwidth Market (YouTube)• Pooling Points & Bandwidth Market (File)

Technology – Fortune 7 Pump & Dump2/

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6/28

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Series1

Jan. 20, 2000 -- Annual Analysts Meeting. Enron rolls out plan, Broadband Operating System. Scott McNealy Sun Microsystems shows up to offer his support. Stock rises 26% to new high of $67.25.

July 2000 -- Enron announces that its Broadband unit (EBS) has joined forces with Blockbuster to supply video-on-demand. Stock hits all-time high of $90.56. Market valuation of $70 billion.

Late 2001 -- Enron and 85,000 Arthur Andersen employees hit the street, some loose job, investments & pension.

To Follow -- other notorious technology-enabled failures: Global Crossings , Worldcom, Tyco

Regulators Respond….But

• Sarb-Ox, Dodd-Frank can’t substitute for integrity and trust – treats symptoms not disease, form not substance

• You can still:– Influence your auditors, partners, employees to

take risks– Use esoteric or aggressive (but legal) accounting

principals– Lever up TCV: max commission, incentives– Play the simple pump and dump game

History is Our Friend

• The principles that built our contemporary markets will always be under attack (Smith, 1700s, Theory of Moral Sentiments)

• Personal Observation – successful, sustainable business, thus careers, require truth telling and trust

Extending Your Expiration Date – 5 I’s1. Innovate - Fail early with speed & enthusiasm or

you’re not innovative, but know differences between innovation and unreasonable or immoral risks. Manage and learn from failure well and you can improve your success rate.

2. Inescapable - You promote what you permit; be the model in servant leadership and integrity. Make it pervasive. No exceptions.

3. Inform – Use rhythmic and emergent communication that doesn’t get stuck in an IM, SMS or SMTP queue. Face to face builds trust.

4. Instruct - Prop-up the collapse in technical education. It’s ruining your ability to run your business.

5. Irony – Avoid the company that paints walls and elevators with ethics, integrity or innovation slogans.

Your First (Next) 30 Days• Take stock in staff, policies, procedures, processes; document & circulate gaps

• Policy and procedure Triage (double check you ITIL shops)– Esp. data retention, back-up/restores & RTO/RPO, Acceptance Testing P&Ps

• Institute rhythmic reporting up, over and down• Make meeting agendas, time/priority management tools the norm• Become a RCA and Risk Mitigation fanatic (double check you PMO/PMP shops)• Peer Relations

– Protected or not, IT strategic or not, build political supporters as top priority .– Engage everyone in your findings – WIFM? Risks? Upside? Listen.

• Staff– W/o right people, you will fail. Collaborate - make hard decisions quickly but carefully. – Make screening & hiring another top time priority. Think succession planning. – Integrity, trust isn’t trainable. Recruit for it. Technology skills can be learned.

Down the Road to Integrity

Serve the Greater Good – many of us have kept our head down, knowing it’s best for company to live to fight another day.

Alternatives:1. Personally approach your boss with the dilemma; ask

for clarity & guidance2. Go on the record – message your boss and/or others

looking for clarity & guidance3. Reach out - to the Ombudsman, Investors, Board or

the outside

Thank You

Questions? Feedback?

High Pedigree Financial Engineering• 'Nigerian Barge Deal‘ - Enron transferred an interest in energy-producing barges located off the coast of Nigeria to

Merrill Lynch. The sale was fake, because of a side deal Enron made to repurchase the barges later at a profit of $12 million.

• JEDI and Chewco - Enron set up a joint venture in energy investments with CalPERS, the California state pension fund, called the Joint Energy Development Investments (JEDI). Skilling asked CalPERS to join Enron in a separate investment. Fastow avoids showing debt as CalPERS leaves JEDI with special purpose entity Chewco Investments L.P. which raised debt guaranteed by Enron, used to acquire CalPERS's joint venture stake for $383 million. Once discovered, this disqualification revealed that Enron's reported earnings from 1997 to mid-2001 would need to be reduced by $405 million and that the company's indebtedness would rise by $628 million.

• Whitewing - With funding of $579 million provided by Enron and $500 million by an outside investor, Whitewing Associates L.P. was formed. Two years later, the entity's arrangement was changed so that it would no longer be consolidated with Enron and be counted on the company's balance sheet. Whitewing was used to purchase $2B of Enron assets, including stakes in power plants, pipelines, stocks, and other investments, using Enron stock as collateral. Approved by the Enron board, the asset transfers were not true sales and should have been treated instead as loans.

• LJM and Raptors - Fastow formulated two more limited partnerships: LJM Cayman. L.P. (LJM1) and LJM2 Co-Investment L.P. (LJM2), for the purpose of buying Enron's poorly performing stocks and stakes to improve its financial statements. LJM 1 and 2 were created solely to serve as the outside equity investor needed for the special purpose entities that were being used by Enron.[29] Fastow had to go before the board of directors to receive an exemption from Enron's code of ethics (as he held the title of CFO) in order to run the companies.[33] The two partnerships were funded with around $390 million provided by Wachovia, J.P. Morgan Chase, Credit Suisse First Boston, Citigroup, and other investors. Merrill Lynch, which marketed the equity, also contributed $22 million to support the entities.[29]

When Liars Figure and Figures Lie

• Yale lecture vignette (YouTube)• Yale lecture vignette (File)