The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (23 page)

Another Skilling precept: a company that worried too much about costs would discourage original thinking. “I don’t think we should be doing stupid things,” he later explained, “but I don’t think a penny-pinching environment is one that fosters creative ideas. We are not the Wal-Mart of the natural-gas business. We are the Mercedes-Benz of the natural-gas business.” An Enron managing director summed up the philosophy this way: “If you are focusing on costs, you’re fucking up.”

How did this play out in the daily lives of Enron employees? Not surprisingly, people began spending as if every day were Christmas. Expenses soared, for items large and small. Want a new PalmPilot? No problem; it was on your desk in hours. Fancy a new flat-panel monitor for your computer? It would be waiting for you the next day. On many floors in the Enron building, catered lunches arrived daily.

The sense of entitlement, bankrolled with corporate cash, was shared by many at Enron, from Ken Lay to the secretarial staff, most of whom carried Enron-purchased cell phones. There was no requirement to use a particular vendor; if you didn’t want to wait for something, you could just pick up the phone and order it yourself. Anyone with a half-baked idea to launch a business in Europe could hop a plane and fly to London. Hundreds of deal makers made a habit of flying first class and staying in deluxe hotels; no one seemed to care. Even junior executives didn’t hesitate to hire expensive consultants; sometimes different business units hired different consultants to study the same idea. The corporate administrative types gave up trying to keep a lid on things. “These people literally did not understand what they were doing and what they were spending,” says Mary Wyatt, who worked as vice president for administration until 1998. “People just did what they wanted.”

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 generation “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.