The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron

by Bethany McLean

  Nor did Skilling’s Enron seem to care how much it cost to land a deal. A former Enron vice president, Bob Schorr, a company veteran who worked as a gas-marketing executive in ECT, says: “If you met your earnings target, you’d get your bonus, even if you spent twice your budget for expenses.” An executive who worked in London adds: “If you’re told to make $25 million and you do it, you’re in great shape. It doesn’t matter how much it costs you to make that $25 million.”

  One Enron executive estimated the company’s worldwide overhead at a staggering $1.8 billion. It wasn’t until 2000 that the company finally started to get a grip on expenses. A veteran Enron executive, George Wasaff, was named procurement czar. Wasaff was appalled to discover that Enron was spending upward of $750 million annually just on consultants and professional services with virtually no controls. He centralized purchasing, required approval for consultants, and imposed reasonable limits on travel and other expenses. Travel costs alone dropped by 25 percent.

  Here was another Skilling theory: if you hired smart people, it didn’t matter whether they had any experience. In fact, it didn’t even matter if they stayed in one job long enough to learn it. Job assignments at Skilling’s Enron could change from month to month. The company started and folded new businesses—and reorganized old ones—constantly. Some didn’t last a year. (“Intellectual businesses: the life cycle is short,” explained Skilling.) Speed was of the essence: everything moved so fast there was no point in long-range planning. “Other companies set goals for a person for a year, but the market moves so fast that we don’t know what someone should do in July,” said Skilling.

  In the early ECT days, support staff would complete all the necessary employee moves around the building—known at Enron as churns—once a week, on Friday nights. By 1998, special “move teams” were carrying out churns every night. Enron spent more than $6 million a year just on relocating offices and cubicles, according to Wyatt: “I had a million square feet I was moving around every day.” It was not unusual for someone in the merchant business to move three or four times a year. The shifting and blending and renaming of business units took place so often that human resources managers joked about the “reorg du jour” and date-stamped incoming organizational charts.

  This was terribly disruptive, of course. New recruits barely had time to learn the fundamentals of one new job before rushing off to another department. There were always plenty of fresh troops. Taking yet another cue from Wall Street, Skilling had begun an analyst-associate program in the early 1990s, bringing in a handful of top students from the best undergraduate and MBA programs. These were supposed to be the company’s prize recruits, but by 1999, the company was awash in them, hiring upward of 400 a year. In the early years, a former executive says, the associates and analysts were like the Delta force. By the end, they were like the reserves.

  As Skilling saw it, experience in any one part of the business really wasn’t important: smart people who “got it” could work anywhere. “I don’t want anyone sitting in the same position for five years and getting bored,” he said. “Fluid movement is absolutely necessary in our company.”

  Most of this movement was self-directed, with workers, in effect, transferring themselves. This flowed from yet another Skilling theory: that employees helped Enron figure out which businesses it should be in by voting with their feet. Those new businesses that attracted lots of staff were obviously the most promising; those that went begging for people were ones that Enron needed to shut down. Of course, this ignored the simple reality that employees went wherever they thought the action was—which was defined by Skilling’s public pronouncements. This made Skilling’s indicator self-fulfilling. “I called it the ‘klieg-light syndrome,’ ” says Bob Schorr. “Wherever Jeff was, talent would flock. The activity was following the light.” Says a former company vice president: “The best way to describe Enron was as a constant job search.”

  This freedom of movement intensified the political wrangling during the rank-and-yank process. Bosses needed to win top ranking for their best talent to keep them from going somewhere else in the company. “Managers have to deliver good bonuses to their best guys to keep them,” says Hamd Alkhayat, an Enron associate who worked closely with Skilling. “Everyone’s horse-trading—‘I need this guy; I’ll vote for your guy if you vote for mine.’ ”

  In retrospect, one wonders why Wall Street and the press were so willing—so eager, even—to swallow the idea that Enron was reinventing corporate culture. Part of it was that Skilling—and Lay, too—could make it all sound so perfect. Skilling liked to use the phrase “loose-tight” to describe Enron’s culture, a phrase borrowed from In Search of Excellence. The company, he said, could be managed loosely because of its tight internal-control mechanism.

  It was also, in part, that the world had entered the era of Internet mania, an era in which there was a complete suspension of healthy skepticism and disbelief. Brand new dot-coms—companies that barely had revenues, much less profits—were going to pose serious threats to big, established companies. The dot-coms, too, had newfangled cultures, which featured spending without controls and strategies that changed on the fly. Everybody talked about moving at Internet speed. Much of what Skilling was selling had the effect of positioning Enron as a company that had more in common with the dot-coms than with an old energy giant like Exxon. Of course it also helped that no one suspended disbelief more than Skilling himself: he seems to have truly thought the culture he was establishing would give Enron a huge competitive advantage in the new age.

  But to many of those on the inside, the new Enron culture made it, quite simply, an unpleasant place to work. Many who had joined ECT in the early 1990s looked back on those days with great fondness. That Enron had been an exciting, even magical, place to work, where the powerful sense that they were changing the world was intoxicating. The Enron of the early 1990s really had felt new and different. But that place was gone. At the Enron Skilling wrought in the late 1990s, money seemed to be the only thing that mattered. Gradually, people who prized teamwork were weeded out by the PRC process, and those who stayed and thrived were the ones who were the most ruthless in cutting deals and looking out for themselves.

  By the late 1990s, says one executive, “corporate killers” had come to dominate Enron. “You always had to look out for someone stabbing you in the back because the prize was so big,” says another. Enron operatives sometimes dropped big sums competing against one another to launch the same business idea and took special delight in outmaneuvering other Enron subsidiaries. “If you made money at the expense of other business units, it was good,” says Amanda Martin. “To put one over on one of your own was a sign of creativity and greatness.”

  There was no incentive for making reasonable assumptions about how a deal would play out. A former Enron managing director says: “The mentality on most of this stuff was they did deals and moved on. They closed one deal and moved on to another one to try to find some more income for themselves.” And if you couldn’t get it done quickly, you abandoned the idea, even if it looked promising. “If you hold onto a deal too long, it looks like you’ve got nothing better to do,” says John Allario, an MBA who went through the analyst-associate program. “That’s the one thing you didn’t want to be associated with at Enron: something that lingers.” People became “deal machines,” says Amanda Martin. “All you had to do was bring them in the door.”

  Little attention was paid to customer relationships, since nobody was going to get a big bonus for keeping the customer happy. “We managed to screw and piss off every major utility customer we had,” says Martin. The word was out, she says: “ ‘Don’t do business with Enron: they’ll steal your wallet when you aren’t looking.’ ”

  The old ECT veterans could only shake their heads at the brutality of the new culture. By comparison, the first generation of executives—Pai, Baxter, Hannon, Rice—were “gentlemen-rogues,” says one former managing director. The next generati
on “were screamers. They would cut you off at the knees and make you bleed.”

  • • •

  It had become a culture of excess, where nothing was too over-the-top.

  During his years running ECT, Skilling had led small groups of Enron executives and customers (all male, of course) on daredevil expeditions to the Australian outback; to Baja, Mexico; and to the glaciers of Patagonia. His goal, Ken Rice said later, was to find an adventure “where someone could actually get killed.”

  The Baja trip—a 1,200-mile road race in jeeps and on dirt bikes—was particularly hairy. Only three members of the group (including Rice and Skilling) finished the entire course. Rice put a tooth through his lip when he slid off his bike. Another man barely escaped death when his 4x4 jeep flipped end over end. A third broke several ribs after wiping out on his motorcycle; the first one on the scene was Andy Fastow, who promptly tumbled off an embankment and landed on a cactus. Others arrived to find the injured rider plucking cactus spines from Fastow’s behind. The journey ended at a huge rented mansion in Cabo San Lucas called the Villa Golden Dome, where a chef had prepared a gourmet meal and a team of masseuses awaited the weary executives. Everyone was flown back to Houston on a chartered jet, and photo albums showcasing the expedition’s highlights were later handed out. These trips entered Enron lore, serving as symbols of the company’s macho, risk-taking culture.

  For those at the top of Enron, excess was a part of daily life. Enron had a fleet of corporate jets, limousines on constant call, and even its own concierge, who would pick up busy employees’ dry cleaning, water houseplants, and shop for anniversary presents. At bonus time, there was a rush on Houston’s luxury car dealerships; flashy wheels (Porsches were a particular favorite) were de rigueur for top earners. Many built new homes and bought vacation properties or ranches. After living modestly for several years following his divorce, Skilling began construction on an 8,000-square-foot Mediterranean villa in River Oaks, full of modernist touches and with black-and-white decor. In Enron’s work-hard, play-hard culture, the scent of sex was unmistakable; affairs flourished inside the company.

  “Money went to those guys’ heads,” says a longtime Enron executive. “I used to walk off the company plane after being picked up and being dropped off by limousine, and I’d have to remind myself I was a real human being. You start living that life long enough, if you don’t have very strong morals, you lose it fast. Enron was the kind of company that could spoil you pretty well.”

  That phenomenon clearly affected Ken Rice, the Nebraska farm boy who had once yanked nails for spending money. In the years after the Sithe deal, Rice found himself a multimillionaire while still in his mid-30s. He became caught up in the Enron whirl. Rice was one of the ringleaders of the daredevil trips Skilling organized; he developed a fondness for fast cars and motorcycles. Rice also had a reputation as a womanizer, and in 1996, while still married to his college sweetheart, he fell into Enron’s most celebrated affair. The relationship became widely known because of the high-profile participants and because it lasted for three years.

  Rice’s mistress was Amanda Martin, who had worked at Enron since late 1991. A slim, stylish woman who had been raised on her family’s sugar plantation in Zimbabwe, Martin had trained as a lawyer and come to ECT from Vinson & Elkins, the giant Houston law firm with close ties to the company. After starting out as an in-house lawyer, she ran a new group managing Enron’s power plants worldwide for more than a year, then returned to ECT as a deal maker. In early 1995, she became ECT’s first female managing director. In 1996, Martin was named president of North American origination and finance.

  Martin’s rapid rise was striking in ECT, with its lingering fondness for strip bars and its well-deserved reputation as a boys’ club. One day in 1996, Martin received an interoffice envelope with an anonymous message: “Just thought you’d be interested to see this.” Inside were computer printouts of the salary and bonus history of the male executives who had been promoted to managing director along with her. Everyone in the group had been promoted at the same time; all of them, including Martin, had consistently received a 1 performance ranking. Yet the printouts showed all the men were being paid $300,000 a year—Martin’s base was $225,000—and had gotten bonuses that were at least $100,000 higher than hers for two consecutive years.

  Martin immediately brought the documents to Skilling, who had often given her what he intended as a considerable compliment: “Amanda, you’re one of the smartest women we have here.” Now, insisting he knew nothing about the pay discrepancy, Skilling promised to look into it. Two weeks later, she received a check for $300,000. “Enron,” says Martin, “was a hard place for a woman to work. It was like a boys’ locker room.”

  At about the same time, though, Martin also made matters considerably more awkward for herself by beginning her relationship with Rice. The situation was messy. Both were married, with children (though Martin was separated from her husband). Rice was also Martin’s boss. Not surprisingly, as the relationship became known, coworkers muttered that sleeping with the boss had accelerated her advance. One disgruntled ECT originator named Brian Barrington did more than mutter: he filed suit against the company and Rice, blaming the relationship for Rice’s refusal to overturn Martin’s decision to demote him. (The litigation aired some embarrassing discovery about Rice’s sophomoric behavior before it was finally settled out of court.)

  Skilling had first picked up complaints about the relationship a few months after it began. He confronted Rice, who denied that he was involved with Martin. But Skilling eventually realized that Rice had lied to him. Rice and Martin came clean and began appearing together in public, generating even more bitter complaints of favoritism. To deal with the complaints Skilling dispatched Martin to Rebecca Mark’s new water company, Azurix. And Ken Rice? Nothing happened to him.

  For his part, Skilling also began seeing someone from Enron, a woman named Rebecca Carter, a former Andersen accountant who worked on the trading floor as a risk manager. Skilling actually asked the board for permission to date her (after, according to several sources, their relationship had already begun). Skilling also gave her a big promotion, naming her to the powerful post of corporate secretary, which put her in charge of organizing board meetings and taking the official minutes, among other duties. By the time she left Enron, her salary and bonus approached $600,000.

  Which was yet another problem with Skilling’s Enron. He still had his favorites, and they could still do no wrong. Skilling’s handful of direct reports, noted Alkhayat, the COO’s Egyptian-born aide, operated with his “blessed hand”; it was as if they’d been anointed by the leader as infallible and holy.

  But they didn’t consider Skilling infallible. It was a given, of course, that he was brilliant and that he could get to the essence of an issue faster than anybody. But once he felt he understood the strategy, he lost interest. Execution bored him. “Just do it!” he’d tell his subordinates with a dismissive wave of his hand. “Just get it done!” The details were irrelevant.

  Many times, it wasn’t even clear what Skilling wanted. He sometimes praised deals that had been carried out against his orders. He became enraptured with businesses he had initially dismissed. And he sometimes insisted he’d always opposed deals that he had actually embraced. When he gave specific directions, those unaccustomed to dealing with him sometimes made the mistake of following them too precisely. One longtime Skilling deputy says the boss’s instructions at times required translation. “We’d understand where Jeff wanted to go and what he wanted to do. A lot of people who came over later would take him literally. They’d say: ‘Jeff wants me to do this.’ I’d say, ‘Well, Jeff doesn’t want you to do something stupid! He wants the end results. He doesn’t know how to get there.’ ”

  • • •

  And always, hovering over everything and everyone at Enron, was Wall Street. During the Kinder era, of course, Enron executives had cared a great deal about pleasing the Street and watchi
ng the stock move upward. In the Skilling era, the stock became something else entirely: it became Enron’s obsession. A stock ticker in the headquarters lobby offered a constant update on the price of Enron shares. TV monitors broadcast CNBC in the building elevators. Employees were repeatedly encouraged to buy Enron shares; on average, they kept more than half their 401(k) retirement holdings in Enron shares. In 1998, when the stock price hit $50, Skilling and Lay treated it as a major corporate milestone, handing out $50 bills to every Enron employee. Later Lay announced a new personnel initiative: if the company hit performance targets over several years, every employee would get twice his annual salary in Enron shares.

  For Skilling himself, says a former aide, “the stock price was his report card.” When it rose, he was exultant; when it dropped, he was glum. Whenever he was on the road, Skilling would call several times a day just to check on how the stock was performing. Lots of corporate executives were fixated on their companies’ stock price during the bull market of the 1990s, but Skilling’s obsession went beyond most of them. As a businessman, his thought process revolved almost entirely around the stock, to the point where he began to believe that Enron’s market capitalization—that is, the total value of the company’s stock—was the only measure the company should be concerned with. Eventually, he would justify business decisions entirely on the basis of what it would mean to Enron’s valuation.