Who’s afraid of Enron?

Even if you’re not a fan of big business, you should be worried about some of the prejudices that underpinned the Enron corruption trial.

Sean Collins
US correspondent

Topics Politics

Enron is the company everyone loves to hate. Accounting fraudsters, bilkers of investors’ billions, destroyers of employees’ jobs and pension funds, electricity manipulators joking about keeping Californian grannies in the dark, Texans in bed with the Bush administration…you name it, Enron has done it. ‘Enron’ has become a byword for the excess and criminality that is apparently running riot across Corporate America.

Given the animosity towards Enron, it comes as little surprise that last week’s convictions of its two former chief executive officers – Kenneth Lay and Jeffrey Skilling – on charges of fraud and conspiracy were widely welcomed. Many thought it fair and just that there was some retribution, even if it didn’t result in employees getting their jobs or money back. Few people will lose sleep over the harsh punishments awaiting the two executives, who are likely to spend the rest of their lives behind bars (possibly sharing cells with violent offenders).

In response to the verdict, the director of President George W Bush’s Corporate Fraud Task Force, Paul J McNulty, said: ‘The message of today’s verdict is simple: our criminal laws will be enforced just as vigorously against corporate executives as they will be against street criminals.’ (1) But that is not the only message being sent by the government and other crusaders against corporate corruption. Enron is being used as a bogeyman to ‘send messages’ that are even problematic for those of us who support civil liberties and economic development. Here are some messages that emerged from the trial and its aftermath, which we would do well to challenge:

The Enron executives were arrogant. Many claim that Enron’s fall was the result of executive hubris, from executives believing that they were, as the title of the book and film would have it, ‘the smartest guys in the room’ (2). Time and again during the trial, we were told that the chief crime of the Enron Two was ‘arrogance’. Journalists scrutinised the executives’ behavior at the trial, searching for signs of humility and remorse, and were galled to find defiance. Lay was roundly criticised for having, in the words of the Houston Chronicle, a ‘grouchy to hostile’ demeanour (3). Lay seemed to have ‘a chip on his shoulder’, one juror explained afterwards (4). This proved important, because the jury could not find a ‘smoking gun’ (that is, documented evidence) to link the executives to fraud, and therefore fell back on whether they found the defendants ‘credible’. In this day of ritualistic and flippant apologies, Lay and Skilling’s greatest sin was to remain unapologetic.

In the past, the collapse of companies would be explained by institutional factors, such as poor strategy or economic conditions; today, we assume that personal moral failings must be at the root. The criticism of executive ‘arrogance’ at Enron and other companies is one form that the attack on the independent individual takes today (5). We live in a society that assumes that the general human condition is vulnerability, where victimhood is even celebrated. As decision-makers and competitors in the marketplace, executives are non-victims, and their transformative behavior has consequently become stigmatised. Arrogance is not an attractive trait, but surely it beats passive deference?

Enron’s executives were excessively ambitious risk-takers. In a variation on the theme of arrogance, the Enron duo have been disparaged for being reckless cowboys in the pursuit of profit, blazing the trail with free-market ideology. As Andrew Leonard put it in the online magazine Salon: ‘Ken Lay and Jeff Skilling were men on a mission. Enron was an avatar of deregulation, the culmination of a quarter-century of political change that raised the icon of the Corporation up on to a pedestal above every other element in society. Let the market have its way, and all would be well.’ (6)

What is generally overlooked is that, rather than being gung-ho industry innovators, Enron’s executives sought to cash in on what was a conservative, risk-averse impulse in the economy generally (see Not the smartest film in the cinema, by Daniel Ben-Ami). Enron was at the leading edge of the development of new techniques of ‘risk trading’ that sought to provide sophisticated forms of insurance. Indeed, as the New York Times points out, these techniques have outlasted the company (7).

Furthermore, Enron’s ‘parking’ of assets in off-balance sheet partnerships was essentially the opposite of ambition – it was refuge in accounting trickery as a safe harbour from the harsh world of competition. In fact, Enron’s financial techniques enabled it to postpone the day of reckoning longer than companies could in the past – making for a spectacular crash once that day arrived. Finally, Enron might have made free-market noises, but as its forays into international expansion – backed by the Clinton administration – show, it sought state help whenever it could get it. And in California, Enron took advantage of the electricity market precisely because it was still significantly regulated and had anomalies it could exploit.

The stated or unstated message from the anti-Enron brigade is that risk-taking is bad and eventually ends up in scandal and corruption. Surely what we need now are a few companies that are willing to take risks and embark on true innovation?

Like Lay and Skilling, corporate executives are criminals and should be treated as such. In the past, the government took flak for appearing soft on white-collar crime. Now, the attack on executives is at the forefront of the state’s intrusion on civil liberties.

The traditional understanding of fraud and corruption in business is that there are always (as the over-used phrase goes) ‘a few bad apples’ that will emerge from time to time, especially at the end of a boom period. This is generally said to be a smaller price to pay compared with the benefits for allowing a less regulated market; just as individuals are free to walk down the street and commit a crime, so companies have the freedom to operate until they are caught doing something illegal. In the past, critics of capitalism focused on the problems that were entirely legal under the system – such as insufficient production, exploitative conditions, lack of fair distribution, and so on – and thus they also assumed that corruption was an aberration.

Today, however, there is no coherent or meaningful critique of the market economy – and instead of challenging economic ideas, would-be detractors have latched on to campaigns against corruption. Executives are presumed to be criminal, as crooked as the ‘E’ in Enron’s logo. For instance, it is argued that incentive pay tempts executives to cook the books; by this logic, since virtually every executive receives incentives in the form of cash bonuses and company shares, all are potential criminals.

Enron’s detractors claimed that only a guilty verdict in a criminal court would bring ‘justice’. But the most appalling feature of the Enron case – the loss of jobs and security for the employees – is actually a common result of bankruptcies, which occur almost every week, without lawbreaking (granted, few bankruptcies have been on Enron’s scale). In the past, a collapse like Enron’s might have led for calls for unionisation, greater controls on pension money, or some other assertive action; today, it’s thought best to sit on the sidelines and cheer as the government tries the executives for crimes.

Given this environment, the US Justice Department’s ‘hardball’ tactics have been praised, rather than being seen as a threat to democratic rights. Prosecutors have imported methods used in drug cases and mob trials into the boardroom. The techniques used include: ‘perp walks’, whereby the defendant is paraded in front of TV cameras wearing handcuffs; ‘squeezing’ of witnesses, by indicting those who fail to cooperate; placing potential witnesses in solitary confinement until they testify; insisting on the waiver of lawyer-client confidentiality; seeking extensive jail time in high-security prisons (8).

The Enron case will embolden government prosecutors to seek further actions, and is likely to send a chill in the corner offices of Corporate America. Enron’s executives may have committed crimes, but that fact is no justification for a broader campaign of criminalisation of executive behavior. Attacks on executives’ legal rights are attacks on all of our rights.

To convict executives of crimes, dumb it down for the jury. In some respects, the court case was a formality. As Kurt Eichenwald of the New York Times put it at the outset of the trial, ‘in the court of public opinion, they were convicted long ago.’ (9) But the authorities felt that their credibility was hanging on the outcome, and they fretted that a ‘not guilty’ verdict might reveal that their campaign was toothless.

For fear of coming up empty-handed, the government did not attempt to try Enron’s top executives on the central fraud behind the collapse of the company – the use of separate companies (‘related party transactions’) to take debt off the books – but instead argued that the defendants’ main crimes were around lying to the outside world, especially by contending that all was ship-shape when reports in the Wall Street Journal and other publications revealed that it clearly wasn’t. In other words, Lay and Skilling were tried for the cover-up, rather than the underlying crime. This has been a theme in many of the government’s recent trials, including the 2004 conviction of homemaker diva Martha Stewart; she was not convicted on the original charges of insider trading, but for misleading the authorities in her testimony. In both of these recent trials, the authorities came away with a guilty verdict – and self-praise that ‘a message has been sent’ – while avoiding the central issue.

Indeed, the prosecutors were lauded for dumbing down the Lay and Skilling trial into a case of greed and lying, on the grounds that accounting cases are far too complicated for hoi polloi to understand. As the press conference with the jurors after the verdicts were announced showed, these were articulate and thoughtful people. So after months of impugning the jurors’ intelligence, the pundits now congratulate the jury for reaching the ‘right’ decision; if they hadn’t, you can bet we would have had a parade of articles telling us how the case was too difficult for the simple-minded.

The Enron verdict is not the end of the era of corruption. Some observers remarked that the trial of Lay and Skilling finally brought ‘closure’ to the scandals that emerged about four years ago. As Jeffrey Sonnenfield, dean of executive programmes at Yale Management School, puts it: ‘Corporate America feels quite good about this. It’s a chance to get out from under the shadows.’ (10) Representative Michael Oxley, co-author of the bill that became known as the Sarbanes-Oxley Act of 2002, the most sweeping reform of company regulation since the 1930s, said ‘the end of the trial will mark the end of a dark era’ (11).

But it is unlikely that big business will get any relief. Having achieved success with Enron, and ingrained notions about the corrupt executive class generally, anti-corporate activists are now looking for their next targets. And indeed, most commentators believe it’s far from over. ‘Alas, the accounting games and executive-compensation excess that began in the 1990s are still very much with us. Some of the most obvious offenders have been caught, but huge amounts of corporate corruption remain’, writes Daniel Gross in online magazine Slate (12). Gross and others cite the recent scandals over mortgage financer Fannie Mae, commodities trading firm Refco, and companies accused of ‘backdating’ the grant prices of share options as evidence of ongoing corruption (13).

Scandal-mongering has become a way of life now. And not only in the business world: Washington is bogged down in corruption allegations, such as the cases involving the lobbyist Jack Abramoff, and Congressmen Tom DeLay and William Jefferson (whose ‘frozen asset’ was the $90,000 in bribe money allegedly discovered by the FBI in his freezer) (14). It’s interesting that no longer does a critic have to substantiate that a majority or a significant minority of companies is involved in wrongdoing; simply citing more than one company is apparently enough to prove that corruption is rampant. Moreover, critics do not distinguish between types of organisation or crimes – for instance, Fannie Mae’s problems are arguably related to its ambiguous status as quasi-state-regulated, quasi-private-sector company (15).

The breakdown of trust means that the process is now potentially out of control, expanding into new areas. In this regard, we only have to note how class-action law firm Milberg Weiss – the corporate-world version of ambulance-chasers – is now the target of a Justice Department action (16). It is ironic that the firm now has to confront the same strong-arm legal tactics that its corporate opponents have been enduring for the past four years.

Conclusion: Since its emergence in 2001, the Enron case has been portrayed as far more than an instance of large-scale bankruptcy or cooking of the books. Long ago many people stopped discussing the specifics, and instead the story became a morality tale. The convictions of Lay and Skilling seemed to fit neatly into this soap opera, with our villains getting their just comeuppance. Christopher Cox, head of the regulatory Securities and Exchange Commission, America’s main financial regulator, called the verdict ‘a victory for all Americans’ (16).

Yet this story is far from a simple case of good guys beating the bad guys, and it provides no reason to celebrate. While the Enron case per se may be virtually finished, unfortunately the erroneous lessons taken from it are likely to be with us for some time.

(1) Department of Justice press release, 25 May 2006

(2) Bethany McLean and Peter Elkind, The Smartest Guys in the Room, 2003. Also title of a documentary film directed by Alex Gibney

(3) Mark Babineck, “Enron Jurors Find Lay, Skilling Guilty,” Houston Chronicle, 25 May 2006

(4) Sheila McNulty, “Jurors Put the Puzzle Together,” Financial Times, 26 May 2006

(5) See Frank Furedi, Politics of Fear, 2005

(6) Andrew Leonard, Lay and Skilling: Guilty, Guilty, Guilty!, Salon, 25 May 2006

(7) Alex Berenson, ‘The Other Legacy of Enron’, New York Times, 28 May 2006

(8) Kurt Eichenwald and Alexei Barrionuevo, ‘Tough Justice for Executives in Enron Era’, New York Times, 27 May 2006

(9) Kurt Eichenwald, ‘Big Test Looms for Prosecutors at Enron Trial’, New York Times, 26 January 2006

(10) PBS Online Newshour with Jim Lehrer, program aired 25 May 2006

(11) Kristen Hays, ‘Lay, Skilling Convicted in Enron Collapse’, Associated Press (on, 25 May 2006

(12) Daniel Gross, ‘Lay and Skilling Aren’t the Only Guilty Ones’, Slate, 25 May 2006

(13) In addition to Gross, see John W. Schoen, ‘Corporate Fraud Alive and Well in U.S.’,, 25 May 2006; Laura Smitherman, ‘Unlike Enron CEOs, Fraud Not Going Away’, Baltimore Sun, 26 May 2006; Gretchen Morgenson, ‘Are Enrons Bustin’ Out All Over?’, New York Times, 28 May 2006

(14) See Matthew Continetti, The K Street Gang, 2006; Philip Shenon, ‘FBI Contends Lawmaker Hid Bribe in Freezer’, New York Times, 22 May 2006

(15) ‘…And the Beltway Version’, Wall Street Journal, 26 May 2006

(16) Greg Robb, ‘Enron Verdict Is “Victory for all Americans”, Cox Says,’ Marketwatch, 25 May 2006

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Topics Politics


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