The Smartest Guys in the Room


The definitive volume on Enron's amazing rise and scandalous fall, from an award-winning team of Fortune investigative reporters.


. . . Enron was thought to epitomize a great New Economy company, with its skyrocketing profits and share price. But that was before Fortune published an article by McLean that asked a seemingly innocent question: How exactly does Enron make money?


From that point on, Enron's house of cards began to crumble. Now, McLean and Elkind have investigated much deeper, to offer the definitive book about the Enron scandal and the fascinating people behind it. Meticulously researched and character driven, Smartest Guys in the Room takes the reader deep into Enron's past-and behind the closed doors of private meetings. Drawing on a wide range of unique sources, the book follows Enron's rise from obscurity to the top of the business world to its disastrous demise. It reveals as never before major characters such as Ken Lay, Jeff Skilling, and Andy Fastow, as well as lesser known players like Cliff Baxter and Rebecca Mark. Smartest Guys in the Room is a story of greed, arrogance, and deceit: a microcosm of all that is wrong with American business today.

by Lawrence M. Hinman San Diego Union-Tribune, March 31, 2002


There has been no shortage of upsetting things about the Enron scandal: rank and file employees often losing their life savings while high level executives cashed in for millions and received additional millions in bonuses for the stock inflation that eventually brought Enron down; blatant conflicts of interest being quietly overlooked by almost everyone involved; executives who should have known better (and probably did know better) misleading the public through the eleventh hour; the accountants and auditors seeming to be more concerned with shredding documents than shedding light; members of the board of directors receiving lavish gifts from the executives they were charged with overseeing; millions being spent to discourage genuine oversight and meaningful government regulation; and the few warnings that came from within the organization being steadfastly ignored by those in charge.


The harm caused by the Enron/Andersen debacle remains to be calculated. Some of it will be tangible -- the retirement funds lost by Enron employees, the lost jobs, the devalued stock.


Other harms are harder to count, but no less important. Consider the impact on public trust.


Trust is like the glue that holds society together -- without it, we crumble into tiny isolated pieces that collide randomly with one another. In a world without trust, individuals cannot depend on one another; as a result, individuals can only be out for themselves.


Economists have shown that societies where trust is low have stunted economic growth because a robust economy demands that individuals be able to enter into cooperative economic relationships of trust with people who are strangers.


The Enron affair has damaged public trust both directly and indirectly. We have seen the way Enron and Andersen conducted themselves, and our trust in them has obviously been deeply shaken. Even more damaging, however, is the realization that these practices were not aberrations. We have come to realize the way in which executives are rewarded with seven-figure bonuses for inflating the stock value of their company. We have come to realize the Wall Street analysts are often singing the praises of stocks in which they have a strong financial interest, even -- or perhaps especially -- when those stocks are of questionable value. We have come to realize that auditors are often beholden to the companies they are auditing, depending on them for lucrative consulting fees.


The stock market survives on trust, and if the public's trust in the functioning of the market -- stock prices, analysts' reports, and independent audits -- is too deeply eroded, then the market itself will fall.


This damage to public trust occurs, unfortunately, in a climate that has seen significant damage to trust in other areas as well. Trust in Catholic priests has certainly been shaken by the seemingly endless revelations of sexual abuse and the ways in which allegations in this area were handled for years. Trust in physicians, once the most revered nonreligious figure in our society, has declined significantly with the rise of managed care.


When trust disappears from our lives, those lives are diminished and, at best, we try to do everything ourselves, refusing to rely on those who should be more knowledgeable than us.


In the face of these dangers, there are two things we can do. One has to do with better rules, the other with better people.


First, we need better rules, not just for corporations, but for analysts and auditors as well. . . . But better rules are not the concern of Congress alone. Numerous professional organizations, including accountants and auditors and analysts as well as investment businesses, have codes of professional ethics that purportedly govern the behavior of their members. These codes need to be strengthened, publicly proclaimed, and enforced by the professional organizations themselves. Finally, corporations themselves need to strengthen and enforce their own codes of ethics. That means more than simply having a nice- sounding code of ethics posted on the corporate Web site. It means a commitment to enforcement, and that in turn means budgetary commitments for ethics training, corporate ethics officers, ombudsmen, and other things that can guarantee the effective implementation of a code of ethics. The Enron board waived its own code of ethics at one point to allow its own chief financial officer to manage the limited partnerships that would eventually be the undoing of Enron.


Second, we need better people, and we need to support those people when they step forward. The tragedy is that Sept. 11 was marked by countless heroes, individuals who risked (and often lost) their lives in efforts to save others. The Enron collapse had almost no heroes. . . . One cannot help but wonder why there were not more people willing to stand up for what is right. Part of the answer to that question is to be found in the formative years before individuals enter the corporate world.


Good business practices stem from a combination of good rules and good people, and the process of formation of good people begins far earlier than the point at which they join the fast track of major corporations.


. . . This process of character formation needs to begin early in life, in schools, in families, in the media, and in civic organizations. Parents who give clear moral messages to their children need to have their messages reinforced by schools, by sports teams, by youth organizations, by movies and the popular press.


It is a task to which all of us can contribute.


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Taken on December 12, 2008