Being brilliant does not mean you are right.
Listener: 23 September, 2006.
Keywords: Business & Finance;
Like most senior executives, Enron’s Jeffrey Skilling could be charming, creative, inspiring and playful; he could also be moody, arrogant and intolerant. Described by some as “incandescently brilliant”, and “the smartest person I ever met”, he saw intelligence as a supreme virtue, often hiring staff for only that talent and ending up with a bunch of clever misfits in a dysfunctional management team.
They divided the world into those that “got it” and those that didn’t.
Enron’s staff were tyrannised. There was no room for dissent. If you didn’t get it, it was common to pretend you had. After all, if your colleagues were “the smartest guys in the room” (the title of an excellent book on Enron by Bethany McLean and Peter Elkind, and that of a film based on it) you could convince yourself that it was true even if you did not quite understand. If you did not get it, you were out.
But suppose the smarties were wrong. Suppose the outcast could see the fault in the theory, or perhaps only that the theory was not as robust as everyone said. The insiders would not know because they thought it not worth listening to any doubters. So Enron ended up a house of cards, tenuously glued together by an unquestioned belief in deeply faulty theories. The cards collapsed spectacularly, and Skilling is due to be sentenced for fraud and other convictions in October.
I had the same problem with Rogernomics when it was being implemented in the 1980s. It was based on a theory that I just did not get. Not that it was propounded by world-class minds; but they were not fools, either. And they believed. So many people believed it (not all of whom can recall their enthusiasm 20 years later) that I thought they knew something I did not. I went over and over the theory trying to make sense of it. I waited for a year before criticising it publicly. But the economic logic was that it could not succeed or, if it did, it would involve an extraordinary combination of coincidences.
Of course we should have liberalised our markets. That bit I got – even advocated it when it was politically unpopular. It was the extreme application of the liberalisation I did not get.
Because the policies of the Rogernomes did not add up, it’s not surprising that they engendered our longest postwar recession. (Some Rogernomes still haven’t got that fact.) Similarly, because its theories were not rigorous, Enron bankrupted itself. (New Zealand was not bankrupt in 1984. I never got that one, either. Those who say it was don’t understand the concept and did not know the situation.)
Certainly Enron experienced fraud, but the chicanery was forced on the company as it sought to deal with the failure of the theory. The favourable performance in the accounts simply did not reflect the underlying reality. Ultimately, a lack of cash flow, not fraud, brought the company down.
McLean and Elkind say that Skilling had dangerous blind spots, also not brooking dissent, for he was “often too slow – even unwilling – to recognise the reality did not match the theory”. Skilling still thinks Enron was a success, undermined by those who did not get it. A harsher judgment is in the title of Kurt Eichenwald’s (also excellent) book Conspiracy of Fools.
Eichenwald tells the story of Jim Bouillion, the executive in charge of purchasing Enron’s insurance. In the world of the smarties his job was seen as a routine activity – they said a monkey could handle insurance – and he was not considered worthy of annual bonuses. When the company collapsed, the high-flyers found themselves deep in civil litigation. Fortunately, Bouillion had done a superb job. Long after Enron’s financial structures and machinations had fallen over, the insurance he had organised was ironclad; it covered the executives for the hundreds of lawsuits they found themselves involved in. Whether they had been the smartest guys in the room or fools, they depended on craftsmen like the underpaid Bouillion.