I recently finished reading The Smartest Guys In The Room, Bethany McLean and Peter Elkind's masterful retelling of Enron's rise and fall. The narrative was extremely enaging, but what I found to more enlightening were the metacognitive triggers the book opened up for me. That is, my self-awareness and conscious societal commentary (aka "guilt") during this read was unusually high. I couldn't help but ask, "is there an Enron in me"?
Whenever I read a book, or say, listen to a podcast, I try to ask myself what lessons I can apply to my life. If I feel compelled to put in the extra effort, I'll try and connect those lessons to others I've learned previously, and synthesize the learning in some way. I'll ask how what I'm learning now might reshape something specific I've learned in the past.
And I think that is what my usual mode of metacognition is. For example, let's take a list I recently put together of books that shaped me. I may have read each of these titles at some specific time in my life and learned some specific lesson during that time. But when I jog my memory to recall other experiences I've lived since, and/or re-read parts of the book, I'll pick up knowledge that's almost entirely new. And the more I invest in trying to grasp the specifics of each specific lesson learned—each node of where my thinking changed—the more metacognitive I'll be, so to speak.
This was similar to what I experienced while reading The Smartest Guys In The Room, except that the process happened in reverse order. That is, I found myself not only trying to pull out lessons, but actually reflecting on how my own perception of the Enron story evolved throughout the years, from when it first entered my consciousness in the early 2000s through today. I'm coming away from this read with more than just hard facts about Enron—I'm coming away with a fascination and understanding of how my own perception of story has matured over the years, each time I relearn it, how I personally fit into the story, and some questions about the implications for society and our business culture in general. And oh yeah, I think I may have discovered there's an Enron in me.
Here's what I mean: I was 15 when the Enron scandal was first publicized, and at that time in my life it was just another story on the evening news. I vaguely recall a moral lesson that this world we live in has good guys and bad guys, and that "the bad guys" are people like the ones at Enron. Call this media bias, teenage immaturity, or whatever you want, but this was my perception in 2001 when the story first took the world stage.
Fast forward to 2006 when Enron scandal's entered my purview again. I was an undergrad at UMass-Amherst, and as I recall, part of my Accounting 101 class was learning a case study about the scandal. A documentary film had just come out, based on the book and also called "The Smartest Guys In The Room," which we watched as part of the class.
At that point in my life, I was most interested in my own business— a clothing company which I ran out of my dorm room. I relished counting envelopes full of cash from t-shirt sales, and having that "real world experience" against the backdrop of studying the academic side of accounting, I was in my element. But I also remember not fully internalizing the Enron film and ethics lectures. The message I took away was basically, "don't cheat because cheaters always get caught...", or something to that effect. Call that a failing of the instiution, or my own disinterest, but in 2006, five years after the bankruptcy and as all the court cases were wrapping up, that's where I was holding. I thought the Enron story was simply a story of cheaters. And the key takeaway I thought, was that if I want to get rich and stay rich, I shouldn't cheat.
Now, hopefully having learned a thing or two since my early-20s naivety, I read the book, and understand (a bit more) of what actually went on.
On December 2, 2001, Enron's lawyers filed what was then the largest bankruptcy case in U.S. history (there have since been five bigger cases. Enron Corp. had over $65 billion in assets in energy trading and natural gas assets prior to its bankruptcy. But what caused the downfall, and what exactly is a "trading asset"? These are some of the questions the federal prosecutors, shareholders, and other outsiders were asking.
But, based on my read of the story, insiders knew exactly what was going on, and chose to look the other way. One former Enron managing director was quoted saying: “A business that had stable and predictable earnings that’s primarily engaged in the trading of commodities is a contradiction in terms.” Arthur Andersen, one of the largest and most prestigious auditing firms in the world, infamously signed off on Enron's "off-balance-sheet debt" year after year after year. Top tier, well-respected investment banks were backing Enron's "structured-finance" deals and getting rich off associated fees.
These creative accounting tools and others accomplished one thing: they gave the appearance that Enron's earnings were growing even when they weren't. Enron's executives and the culture they established pushed and pushed to make profits appear in the company’s reported financial statements long before they actually appeared in its coffers.
But while all this was going on, the market was in a frenzy. As long as Enron's team could keep increasing its earnings promises and double-digit growth, investors would keep coming and the share price would keep rising. And it's the entire system—not just a single company—that enabled (encouraged?) this behavior. The book describes the market climate of the '90s:
"Companies that grow at double-digit rates are classified by investors as growth companies, and they tend to have higher stock valuations than slower-growing companies. This was never truer than during the bull market of the 1990s, an era when growth companies were the only kind of companies investors wanted to buy. Internet stocks were growth companies, of course, and so were big technology companies like Microsoft and Cisco and Sun Microsystems. Every company, it seemed, was striving to become known as a growth company. The problem is that whenever a growth company disappoints Wall Street—when it announces earnings that don’t meet the aggressive target it has set for itself—the punishment is usually severe. As rapidly as growth stocks can run up when the news is good, they can spiral downward just as quickly when the news is bad."
In a world where externally perceived value is rewarded far more than intrinsic value, where short termism rules, who is really to blame? Isn't this a "free market" after all? And besides, a lot of the Enron guys wound up in jail, so we learned our lesson as a society, didn't we? Sigh.