Doing the Right Thing: Introduction and Lessons in Ethics and Leadership from Enron and Worldcom

1. Doing the Right Thing: Introduction and Lessons in Ethics and Leadership from Enron and Worldcom MGT 5531, Class 1 January, 2011

2. Agenda • Course introduction • Topics, readings • Activities • Team Class Assignments • Ethics Revisited: Enron & Worldcom • What have we learned already? • Is there any more to learn? • About how the world works? • About how we think? • About ourselves?

3. Course Highlights • Topics • Thinking like a senior executive • Aligning: • structure, strategy and environment • people, purpose and culture • Doing the right thing • Books • Bolman & Deal, Reframing Organizations • Collins, J. Beyond Entrepreneurship: Turning Your Business into an Enduring Great Company. • Gallos, Business Leadership • Activities • Class leadership • Case memos • Final paper

4. Case Opportunities

5. Paul Levy at Beth Israel Deaconness Multimedia and print cases. Basically, this tells a story about organizational change as viewed from the perspective of the change agent – in this case Paul Levy, the new CEO of a large Boston teaching hospital that provided quality care but was going broke. The multimedia case includes substantial interview material with Levy, and assorted auxiliary material.

6. Philips vs. Matsushita Written case and brief video. The written case is a big picture story of two firms – Philips in the Netherlands, and Matsushita in Japan – who evolved to become global competitors. The case provides a multi-decade historical sweep of how each firm evolved its leadership, strategy, and structure. The video clip shows one of the Philips CEOs talking to an executive class at Harvard.

7. Zappos.com 2009 The case chronicles Zappos rise from dot com startup to the net’s dominant player in shoe retailing, with a particular emphasis on how the company manages people and culture. The case ends as Zappos faces the possibility of being acquired by Amazon.

8. Team Meetings • Syllabus: questions, suggestions • Class leadership: decide on your preferences

9. Roles for Columbia Case & Day 8 MMT Meeting Ron Dittemore – Space Shuttle Program Manager Linda Ham – Mission Manager Don McCormack – Mission Evaluation Room Manager Rodney Rocha – Debris Assessment Team Co-Chair, NASA Engineer Pamela Madera – Debris Assessment Team Co-Chair, United Space Alliance Engineer Calvin Schomburg – Thermal Protection System expert, NASA Engineer

10. What are the characteristics of an effective manager?

11. What are the characteristics of an ethical manager?

12. Enron and Worldcom • What went wrong at Enron and Worldcom? • Could it happen to you?

13. Realist/Contingency: Leader’s job is to do what’s necessary to achieve leader’s ends and move organization forward What’s necessary “all depends” In a crisis, tough, even tyrannical leadership may be necessary Rushmorean Values-based Respect followers: expressed through “listening to them, faithfully representing them, pursuing their noblest aspirations, keep promises made to them, and never doing harm to them or their cause” O’Toole: Realist or Rushmorean?

14. Realist or Rushmorean? • Which are you? • Realist? • Rushmorean? • Some of each • A pretending to be B? • Which do you want to be? • Which do you think you need to be?

15. Just do the right thing? “If everyone will follow their own best instincts – do their own jobs ethically and legally – businesses and business people will be known for what the vast majority truly are: honest, productive, constructive, competent, and deserving of the country’s trust. ----Dick Thornburgh, Former U. S. Attorney General

16. A Manager Who Agrees: Andrew Fastow, former Chief Financial Officer, Enron

17. A Manager Who Agrees

18. “We’re going to make money without having to do anything but the right thing.” --Andy Fastow, Chief Financial Officer, Enron [Fastow was indicted in October, 2002, on 98 counts of conspiracy, fraud, money laundering, insider trading and other charges. In a plea bargain this month, he pleaded guilty to two counts of wire and securities fraud, in return for two five-year prison terms.]

19. What was the right thing? • CEO Jeff Skilling describes Enron’s values

20. Enron’s Values

21. Enron’s Values • Communication • Respect • Integrity • Excellence

22. Espoused vs. Real Values • Skilling was described by subordinates as a “Darth Vader” who created an environment of fear and cut-throat competition while turning a deaf ear to anyone who offered input he didn’t want to hear. “After Enron’s collapse in late 2001, one of the interviewers, Professor Robert F. Bruner of the University of Virginia, said that Skilling was ‘very smooth, very, very smooth.’ But, he added, it later became clear that Skilling was not doing what he said he was doing” (Dewan, 2002, p. C7).

23. How Did Enron Get Off Track?

24. Enron 1985 • Born in merger of Houston Natural Gas and Internorth (Omaha) – changed name to Enron • Ken Lay – born in Tyrone, Missouri, son of a Baptist preacher, with a Ph.D. in economics, became Enron’s first CEO • Largest gas pipeline business in U.S. • Low-cost producer with economies of scale • Slow growth and cyclical profitability dependent on price of gas

25. As Ken Lay in 1985… • What do you see ahead of you? • What options would you consider for where to take the company? • Would you • Play it safe? • Reach for the stars?

26. Enron 1985 - 2000

27. Changing Vision • Gene Humphrey • Ken Lay • Jeff Skilling

28. Changing Vision(Gene Humphreys, Ken Lay, Jeff Skilling)

29. Two Directions In the late 80s and early 90s, Enron was evolving in two distinct directions at once: • Merchant (Skilling): buying, selling, making markets • Exploit deregulation and overbuilt existing domestic infrastructure • “Asset light” • International (Rebecca Mark): big capital investments in energy assets (primarily abroad) • Power plant in India • Water in Latin America

30. Merchant Model • Jeff Skilling

31. Merchant Model(Jeffrey Skilling)

32. Weather

34. Fruits of Enron’s Labors • In September, 2001, a month before the collapse, Enron came in at the 30th position on Fortune’s list of the 50 fastest growing companies – it was by far the largest company on the list • For six consecutive years through 2000, Enron was voted the most innovative of Fortune’s “most admired companies” – and it was duly hailed by analysts, reporters, and business school professors

35. Aggressive? PBS Interviewer: A general comment that I've heard about Enron, and to a certain extent about you, [is] that you're very, very smart, very aggressive. You'll lay out your argument, "The rules in California are terrible," but then once you see what the rules are, you guys push those rules to the edge in an effort to make a buck. Skilling: That's probably fair, yes. Once you set the rules to a marketplace, we adhere to the rules. If that's what you're saying, that's what we do.

36. Improving Earnings: Enron and California Electricity • “Death Star” and “Load Shift” – create appearance of overload on the power grid, and then get paid to relieve the congestion • Buy capped power ($250 megawatt) in California, sell it outside California (at up to $1200 megawatt • “Ricochet” – buy capped power in CA, sell it to 3rd party, then buy it back and resell it in CA at a much higher market price

37. Energy Trading

38. Improving Earnings: Enron’s Creativity at Work • “Mark to market”Accounting

39. Improving Earnings: Enron’s Creativity at Work • Selling the dogs • Sell underperforming assets to an “independent” partnership controlled by Fastow • Partnership borrows the money from banks (or other financial institution) • Enron books a profit on the sale and guarantees the loans • Or: sell to a financial institution (e.g., power barges off Nigeria sold to Merrill Lynch) with a promise to buy back at a premium in 6 months

40. Improving Earnings: Enron’s Creativity at Work (II) • “Pre-pay” • Enron is paid up-front for promise of future delivery of gas or oil to an “independent entity” controlled by a lender, such as Chase’s “Mahonia” • Mahonia promises to deliver gas to Chase • Chase promises to deliver gas to Enron • No one has to deliver any gas, but Enron gets money now which it books as operating income, and the lender gets its money back later – along with a profit on its energy “sale”

41. Improving Earnings: Worldcom’s Creativity at Work Accrual releases Capitalize line costs

42. Kotter: What Leaders Really Do • Managers cope with complexity through: • Planning and budgeting • Organizing and staffing • Controlling and problem-solving • Leaders cope with change through: • Setting a direction • Aligning people • Motivating

43. Enablers: A, B, C, D, E • Enron & Worlcom got a lot of help – from all the best people

44. A is for Accountants • Arthur Andersen, until the 1990s, a highly successful and respected gold standard in the accounting business “stamped its approval on the dirty books of Sunbeam, Waste Management, Enron, Global Crossing, Qwest, and WorldCom. The scandals that enveloped those corporations alone have cost investors more than $300 billion and have put tens of thousands of people out of work.” (Business Week, August 12, 2002)

45. Accountants (II) • 1980: Andersen and other “Big 5” firms derived most of their income from auditing, where professional standards and ethics were central • “Slowly, auditing went from being the soul of the firm to a loss leader used to attract and retain the consulting contracts. Just as the vast riches represented by stock options helped corrupt ethics at some corporations, consulting helped push Andersen and its rivals off course.” (Business Week, August 12, 2002)

46. B is for Banks and Brokers • “One of the most sordid aspects of the Enron scandal is the complicity of so many highly regarded Wall Street firms—a complicity that is stunningly documented in internal presentations and e-mails….They show banks helping Enron mask debt as cash flow from operations and create phony profits at the end of a quarter. They also show how almost all of them put money into Fastow's partnerships because of—not in spite of—their potential for abuse. Most of all, the documents show that the banks weren't merely enablers; they were truly Enron's partners in crime.” (McLean & Elkind, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron)

47. Banks and Brokers (II) • J.P. Morgan, Citigroup, and Merrill Lynch originally cast themselves as Enron’s victims, but later admitted abetting fraud, paid a total of $366 million in fines, and promised internal reforms

48. Banks and Brokers (III) • The 1933 Glass-Steagall act mandated separation of banks, brokers, and insurers • The walls of separation gradually crumbled, particularly in the 1980s as the Federal Reserve carved out growing loopholes • After repeated attempts, Glass-Steagall was finally repealed in 1999

49. C is for Consultants • McKinsey & Co., “the high priest of high-level consulting” worked so closely with Enron that managing partner Rajat Gupta sent his chief lawyer down to Houston after Enron’s collapse to see if the consulting company might be in legal trouble. The lawyer reported that McKinsey was safe, and Gupta insisted bravely,” We stand by all the work we did. Beyond that, we can only empathize with the trouble they are going through. It’s a sad thing to see.” (Business Week, July 8, 2002)

50. Consultants (II) • When Rajat Gupta became McKinsey’s managing partner in 1994, “some colleagues argued for keeping McKinsey small, to safeguard its culture and quality. Gupta was of another mind: He aggressively expanded abroad, opening up far-flung branches throughout Asia and Eastern Europe. In all, he expanded McKinsey's network to 84 worldwide locations from 58, boosted the consulting staff to 7,700 from 2,900, and lifted revenues to $3.4 billion from $1.2 billion in 1993.” (Business Week, July, 2002)