Business, like Houston, rarely uses a rearview mirror, so the anniversary of Enron’s bankruptcy filing, 10 years ago today, passes with a whiff of irony.
In our haste to look forward, to strike the crooked E from the city’s collective psyche as surely as it was plucked from the sidewalk on Smith Street, we inadvertently reinforce one of the more subtle yet important warnings wrapped in Enron’s failure.
Peeling back the fraud, the hubris and the wretched excess, stripping away the corruption of the lawyers, accountants and internal safeguards, Enron’s failure underscored the dangers of the short-term view that still pervades American business. Enron, fundamentally, was a company that lived for the moment.
“They never were seriously interested in a culture of integrity,” said Stephen Arbogast, a University of Houston finance professor who wrote a book on Enron’s culture of corruption and has used it as a case study in his classes for years. “They were interested in a culture of short-term gain.”
The pressure to meet quarterly earnings forecasts, of course, had been building long before Enron failed. The dot-com boom that preceded its collapse heightened the urgency for short-term gain.
Rules had changed?
Enron was no dot-com, but like the tech startups that littered the market at the time, it argued the rules had changed.
It struggled to find growth in new markets, to replicate its earlier success with natural gas trading. It hid its failures, and as it grew more desperate, it pushed employees to close big deals fast. Their long-term value didn’t matter as much as the momentary hype that would prop up Enron’s veneer of growth.
As those deals proved unprofitable, Enron’s financial engineers came up with ever more elaborate schemes to meet those all-important quarterly profit goals. Eventually, its income statement reflected little more than cartoon accounting.
“The issue was: ‘How do we keep the image up?’ And the answer was manufacturing earnings,” Arbogast said.
As a result, Enron came to embody the dangers of short-term corporate thinking taken to its extreme. Since its demise, some companies reined in rewards and created longer-term incentives. But they and their investors remain beholden to the quarterly benchmarks.
Today, the thirst for short-term gain is strongest among the investment banks, the heirs to Enron’s culture of corruption.
“That’s the piece of the Enron story that carries over to the financial community,” Arbogast said. “The money for the bankers is so big, they’re so acculturated to the idea that they can make so much money in the short term that the long run really doesn’t matter.”
Even now, after spawning a global economic crisis with its shortsightedness, Wall Street lobbies against regulations that would prevent restrictions on its riskiest practices because those rules would impede short-term profits.
“Until we change the incentives for people meeting their quarterly projections, we are going to continue to create cheats,” said Nancy Rapoport, a law professor at the University of Nevada, Las Vegas, who closely followed Enron’s failure and also wrote a book about it.
We don’t like to look back, but we don’t have to. Enron is with us still, a phantasm of expediency. It’s a reminder of how easily greed and hubris can overwhelm integrity, of how even good people can convince themselves that wrong is right when facing the prospect of a big, immediate payoff.
Loren Steffy is the Chronicle’s business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at firstname.lastname@example.org. His blog is at http://blogs.chron.com/lorensteffy. Follow him on his Facebook fan page and on Twitter at twitter.com/lsteffy.