21st Century Business – 19th Century Structure – Fact or Fiction
It is almost incomprehensible to believe that the “word” “Enron” elicited responses such as “politician” or “science fiction weapon” when a name recognition survey was undertaken in 1996. Enron was the child of power deregulation. At its height Enron employed 20,000 people in 40 countries, was declared the most innovative US company from 1996 to 2001 by Fortune magazine, (including topping the ‘quality of management’ category in 2000), and yet in December 2001, filed for protection under Chapter 11 provisions.
An enormously influential cast of competitive, ambitious players had a role, but to keep this exercise manageable, only the 4 key players will be referred to by name:
Kenneth L. Lay, who was appointed chairman and chief executive in November 1985 of minor company that was to take the name “Enron”;
COO Richard Kinder named vice chairman in 1988 but whose influence on Enron dissipated rapidly upon his departure in November 1996, paving the way to the top for
Jeff Skillings, an energy consultant who joined Enron in June 1990; and
Andrew Fastow, a financial whiz promoted to CFO in March 1998.
The early days
As early as 1987 the newly named Enron (primarily a natural gas pipeline company), was regarded as highly leveraged and downgraded by Moody’s from ‘low investment’ to ‘high speculative’, effectively classifying it as ‘junk bond’ material. Debt would remain a constant for Enron.
Despite an original disastrous foray into speculative trading in oil by 2 external traders, Enron was soon to become very much part of the small town milieu of Texan oil interests.
Richard Kinder’s appointment as vice chairman in 1988 freed Kenneth Lay to look after the bigger picture issues and embedded the hands-off managerial style that was to be Lay’s hallmark. Kinder embraced the opportunities he saw in the deregulation of the gas business. It was clear that “the unregulated market was the new religion at Enron. The executive confab was like a management revival meeting, and executives later dubbed it the ‘Come to Jesus’ meeting. But the path was clear.”i
What happened next
Enron understood the need to have an information advantage if it was to maximise gas trading margins; what factors influenced demand and supply, how best to standardise and generate trust and certainty in gas contracts, (even if this meant having to buy gas in spot markets to fulfil a contract). Clearly trading gas contracts was the future.
Derivative trading was established originally through Bankers Trust, but by 1991 Enron had established its own trading desk placing it well on the way to its trading-centric view of the world. Critical to its trading success was the ability to guarantee gas supply. In the first of many innovations, its subsidiary Enron Finance accepted exploration loan repayments in gas.
With its early 1990s transformation into a pipeline and finance company, Enron hired the man for the job, Jeff Skillings, to head Enron Finance. Bearing a master’s degree from Harvard, experience as an energy consultant, Skillings was described as ‘whip-smart’ and an innovative, strategic thinker. His vision for moving Enron from its emphasis on hard assets to an ‘asset-light’ company would require considerable restructuring, manoeuvring, compliance and complicity.
Skillings understood the complexity of the industry’s differences within the context of financial trading and why the traditional Black-Scholes model used by others did not provide all the answers. In short, Enron managed the basic risk better and by 1992 had its own research team to develop the complex modelling required. A simple-looking contract may have had a series of complicated underlying contracts before it became economically viable. “By adapting options, swaps and other investment tools, Enron stood on the shoulders of the financial community to build its