Enron Scandal

On the eve of its spectacular collapse in the autumn of 2001, the Enron Corporation of Houston, Texas—a diversified energy trading company—was the seventh-largest corporation in the United States. More than that, Enron was touted as one of the greatest successes in U.S. business history. However, soon the success was over: The company's share price, which had traded at more than $80 early in the year, plummeted to less than $1 in late November, and Enron filed for Chapter 11 bankruptcy on 2 December. In a matter of months Enron became one of the greatest corporate failures—and one of the greatest corporate scandals—in U.S. business history.

Enron's leaders were chiefly responsible for the corporation's meteoric rise and breathtaking disintegration. They devised the corporation's unconventional business strategy; secured enormous infusions of investment capital; recruited legions of young, aggressive business school graduates; forged political ties with influential government officials across the political spectrum; and moved Enron's assets into increasingly speculative, legally dubious, and opaque investment instruments. Perhaps more significantly, Enron's top executives created an internal corporate culture and an external corporate image that transformed it into a juggernaut. Their leadership style was at once highly effective and deeply deceptive.

Enron was born in 1985 when InterNorth, a leading natural gas pipeline company, acquired one of its chief competitors, Houston Natural Gas, for $2.6 billion. The next year the company's name was changed to “Enron,” its headquarters were moved to Houston, and Kenneth Lay (the former chairman of Houston Natural Gas) was elected chief executive officer. Lay's initial strategy was to build Enron into the leading integrated natural gas corporation in the nation by pushing and exploiting opportunities created by the ongoing deregulation of the natural gas sector.

Lay ultimately stood at the center of the Enron scandal. He grew up on a farm in Tyrone, Missouri, [Page 438]earned B.A. and M.A. degrees in economics from the University of Missouri, then (while working at Exxon USA) earned a Ph.D. in economics from the University of Houston in 1968. From there, Lay worked for the federal government in a variety of posts, including deputy undersecretary of energy in the U.S. Department of Interior. While in government, Lay lobbied aggressively to deregulate natural gas markets. Returning to the private sector, he headed the Florida-based Continental Resources Company and (beginning in 1981) Transco Energy Company. Lay moved to Houston Natural Gas, as chairman and CEO, in June 1994. At Enron during its early years, he adeptly encouraged and exploited the emergence of spot markets (highly competitive temporary markets) for natural gas.

A second major figure in Enron's management—and later in the scandal investigation—joined the company in 1990. Jeffrey K. Skilling joined Enron as chairman and chief executive officer of Enron Finance Corporation (an Enron subsidiary that raised capital). A native of Pittsburgh, he had graduated from Southern Methodist University in Dallas with a B.A. in 1975 and from the Harvard Business School with a master's of business administration (M.B.A.) degree in 1979. Skilling subsequently held various positions in banking and finance. In 1982, while working as an energy and chemical specialist for the leading consulting firm McKinsey & Company, he began to consult for Enron as well. Skilling believed that people could make enormous profits from energy trading—that gas and electricity supply contracts, among other things, could be packaged as securities and traded in the financial markets.

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