Enron: whatever happened to risk management

The
Enron collapse strikes right at the heart of management ideas now considered de
rigueur
in progressive HR circles. Jane Lewis reports

Pick
up any management magazine and you soon get the point: professionals are still
being exhorted to gear the organisation around the drive to boost shareholder
value, create an environment in which entrepreneurs can flourish, and dream up
original incentives to boost performance.

Yet
Enron was the leading exponent of this model and its downfall surely highlights
the dangers of buying wholesale into new wave management techniques.

Or
does it? Some experts have already expressed concern that in the rush to
condemn Enron particularly – and the new economy bubble generally – we run the
risk of throwing out the baby with the bath water.

Many
of the HR practices pioneered at Enron were not so much wrong, as badly
managed. And it was this that led to the warped culture that eventually
hastened the company’s demise.

The
most important issue here is controlling the risk inherent in any
entrepreneurial culture. True to form, Enron’s management believed it had the
question sussed – on paper at least.

Fast
and loose

CEO
Jeff Skilling claimed that an early career experience working for a bank that
collapsed had inspired the ‘sophisticated’ risk control system he pioneered at
Enron. Essentially, he embraced the same ‘loose tight’ model outlined by fellow
Mckinsey consultants Tom Peters and Robert Waterman in their highly influential
study of best practice, In Search of Excellence.

While
executives in the field were given the freedom to initiate ideas and lay the
groundwork for deals, every proposal had to be screened by a central group of
risk management experts before it was given the go-ahead.  

But
the practical application of this system was flawed, to say the least. Many of
those attached to the risk assessment group had every reason to sign off deals
regardless, because their own performance reviews often hinged on the approval
of the very managers whose deals they were considering.

Moreover,
Enron’s Risk Assessment Group was not answerable to the board of directors, but
to Skilling, who was encouraging all the risk taking in the first place.

With
hindsight, it is clear that even if the Enron board had got involved as it
should, the outcome may have been the same. Far from acting as a sturdy check
and balance to the management team, the non-executive board – which included
the former Tory cabinet minister and PCC chairman Lord Wakeham – acted all too
often as a management rubber stamp and rarely asked tough questions.  

Runaway
train

But
by far the biggest threat to effective risk management at Enron was the
tendency of senior management to turn a blind eye to malpractice so long as it
came up with the goods in terms of profits. “Nobody at corporate was asking the
right questions,” says one former manager. “It was completely hands-off
management… like a runaway train.”

The
best example of this was the genesis of EnronOnline, the company’s internet
trading arm launched in 1999, which swiftly became one of its most effective
profit centres, eventually handling volume with a notional value of  £3bn a day.

The
prime mover behind the operation was a twentysomething British trader, Louise
Kitchen, who effectively dreamed up the operation – and established it as a
working model – completely on the quiet. She led a team of some 350 front-line
managers, designers and developers who worked on the London-based project covertly
at evenings and weekends, using funds diverted from other projects and some
$30m in hardware bootlegged from other Enron divisions.

When
the head of the London office finally broached the subject of online trading
with Skilling, whose reputation as an internet nay-sayer had sparked the
secrecy in the first place, he reportedly rolled his eyes before conceding the
idea might work. “That’s good,” said the London executive, “because we’re
rolling it out next week.”

Household
name

The
subsequent success of EnronOnline, and elevation of Kitchen as an Enron
corporate heroine, meant that Skilling frequently told this anecdote as an
example of what could be achieved in a risk-centric culture. Others interpreted
it differently. The moral of the story, says one employee, “is that you can
break the rules, you can cheat, you can lie, but as long as you make money it’s
OK.”

As
for Kitchen, she went on to feature prominently on America’s list of most
powerful women, before falling on her feet when Enron collapsed. As head of the
still-profitable online trading division, she was paid millions in incentive
bonuses to stay on at the firm, before master-minding the division’s buy-out by
UBS Warburg Energy, where she remains head of trading operations.

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