Enron Redux: Mr. Skilling Meet Mr. Buffett

Paul Vollmer, Global Director, Capital Markets

In 1995 Warren Buffett spoke to a group of MBA students at the University of North Carolina about the most important hiring decision he ever had to make. It was the naming of Deryck Maughan to head Salomon Bros. in the aftermath of a highly publicized Treasury security trading scandal that forced the resignations of the prior management team and nearly destroyed the firm. What was most instructive in Buffett's discussion was his consistent focus on "character" as the driver in his selection process. And in typical, plain-spoken avuncular fashion, he advised these future CEO's that while competence was important, a core set of internalized values that included honesty, integrity, diligence, and a willingness to subordinate ego in the achievement of a higher purpose were more so.

Reflecting on the Enron story over the last few months, so much of this is about character not competence and how a group of very bright individuals appear to have checked conscience at the door in pursuit of illusion. If the classic definition of a fanatic is one who re-doubles his efforts after losing sight of his objective, then Jeff Skilling, the firm's former CEO, may indeed be seen to be the prototypical Enron fanatic. One wonders whether he would have made the cut with Warren Buffett in whose world it is more important to be good than to look good.

I would like to share a few brief observations on the Congress as a fitting stage for this unfolding drama, on the historical context within which Enron should be placed, and finally on the macro view of capitalism that should prevail in Enron's wake.

The Congress

Better than any episode of Dallas, the multiple Congressional hearings on Enron that C-span is televising evoke a fond reminiscence for J.R. and the Ewings of Southfork. The cast included executives, directors, accountants, attorneys, whistle blowers, analysts, regulators, and shareholders each beginning by raising their right hands and swearing an oath to the veracity of their often contradictory testimony.

What makes C-span great viewing is that you really see government in action without the benefit of some talking head offering "expert" commentary. But the sum total of it all was best summarized by Robert Glauber the Chairman of the National Association of Securities Dealers (NASD) who described the entire sad affair as the end product of directors who didn't direct, accountants who held no one accountable, and analysts who didn't analyze.

Congress continues to supply a forum for the airing of views by all parties. Again Mr. Skilling occupied center stage on more than one occasion before both the House Subcommittee on Energy and Commerce and the Senate. In the House members already irritated by the non-cooperation of Andrew Fastow, Enron's CFO and his associate Michael Kopper, the Global Finance Director (both of whom took the Fifth), rained down upon Mr. Skilling a torrent of bi-partisan invective that was truly eloquent as they struggled to understand the vagaries of "gain on sale accounting", options without counterparties, and a labyrinth of 4,000 limited partnerships that produced obscene wealth for a few executives while systematically gutting the pension assets of 20,000 employees.

From Scripture to Grimm's Fairy Tales to the Godfather, the members did their constituencies proud as Mr. Skilling, posturing as a puzzled observer, offered a "run on the bank" theory in defense of the indefensible. From Congressman Greenwood Republican of Pennsylvania to Mr. Skilling: "He that troubleth his own house will inherit the wind" (Proverbs). From Congressman Stupak Democrat of Michigan a recitation from The Emperor's New Clothes. From Congressman Deutsch Democrat of Florida, who tried valiantly to diagram one of Enron's fictional protected put strategies to the gallery, words of wisdom from Don Corleone: "You can always steal more with a briefcase than with a gun." And finally, my personal favorite from Congressman Gene Green of Texas in response to Mr. Skilling who despite a Harvard MBA and a reputation as a "control freak" repeatedly asserted that he had not the slightest hint of Enron's imminent collapse: "Sir, I was born at night, but not last night!"

The Context

What then are we to make of all this ? Enron is not the first nor will it be the last example of corporate and financial malfunction. From the failure of Penn Central in the 70's to the collapse of Drexel Burnham in the 80's to the implosion of Long Term Capital Management in the 90's, there is a certain Darwinian character to Capitalism. For while these negative events were occurring, GE, Fidelity, Disney, and Harley Davidson were growing robust franchises serving consumer needs. Pfizer and Merck were discovering ways to alleviate chronic pain; and Microsoft , Sun, and Intel were democratizing technology making it available not just to the privileged few but to the masses.

While the press tends to focus on the anomalous often negative event, this has a tendency to skew reality. A subway mugging is news; the fact that 5 million people a day ride without incident in New York is not. A plane crash is big news often obscuring the statistical reality that air travel is by far the safest mode of transport.

In its finest embodiment Capitalism is about moving wealth from places of abundance to places of need according to a quantifiable risk - reward calculus. Failures on the scale of Enron divert attention from how well the capitalist model actually works. They do in fact give Capitalism a bad name especially to those who view Enron as the contemporary embodiment of robber baron exploitation rather than seeing free markets as the best system yet devised to advance the commonweal.

The size of the World Equity Market is approximately $38 trillion; the U.S.share about $20 trillion. There are more than 3500 firms listed on the New York Stock Exchange; over 6000 on Nasdaq. The fixed income markets are equally robust. But these markets, though wonders of liquidity depend for their smooth functioning on trust. This entire carefully constructed scrupulously regulated edifice rests on "creditum" - the Latin word for trust. And what occurred at Enron was a breach of this trust, a suspension of corporate conscience camouflaged by numbers.

Conclusion and a Modest Proposal

In educating the current generation of corporate executives, perhaps we have overemphasized technical competence while de-emphasizing the seminal importance of conscience. Warren Buffett tells us that "… you can't write good contracts with bad people." In stressing the trappings, privileges, and material benefits of office we may have lost sight of the core values of service, community, and esprit de corps.

These are the values you can't legislate but they are precisely what serious organizations strive to internalize. Ask a Marine about the "Code" and see what he or she tells you. Ask a Sister of St. Dominic running a major hospital or school system why she's a nun and you won't have to wait long for a reply. Honor, honesty, integrity, and the subordination of self interest should lie at the heart of an executive ethic that calibrates an internal moral compass to stay a true course. Perhaps an executive oath of office similar to that taken by elected officials, the uniformed services, judges, and the clergy might be a fitting reminder to corporate executives of the public trust and weighty responsibility they are assuming.

And how important is all this? In Robert Bolt's masterful play A Man for All Seasons, Sir Thomas More - a man who was to die for a belief - is being chided by Cardinal Wolsey, the Chancellor of England, for voting his conscience against an overwhelming majority in legislative session. More's response in defense of his action is succinct, salient and should serve as a point of reflection for us all: " When statesmen forsake their private conscience for the sake of their public duty, they lead their country by a short but direct route to chaos."

Warren Buffett understands this clearly. And so should we all.