When BIG Went Wrong: Enron

Founder Series

Share:

By Mark Moses

The second article in a 25-part series on history’s greatest business collapses—and the decisions that sealed their fate.

Part 2: Enron — The Company That Decided Truth Was Optional

What follows is based on court records, SEC filings, congressional testimony, and contemporaneous reporting.

On December 2, 2001, Enron filed for bankruptcy. At the time, it was the largest bankruptcy in American history—a record it would hold until Lehman Brothers shattered it seven years later.

But Enron’s collapse wasn’t really about money. It was about something more fundamental.

Enron operated as if reality were negotiable. That the story you told mattered more than the truth underneath. That if everyone believed you were winning, you were winning.

They were wrong. And 20,000 employees paid for that mistake with their jobs, their retirement savings, and their futures.

The Company at Its Peak

Enron wasn’t just successful. Enron was worshipped.

Fortune magazine named it “America’s Most Innovative Company” for six consecutive years. Harvard Business School wrote glowing case studies. The stock price climbed from $20 to $90 in just four years. By 2000, Enron reported revenues of $101 billion, making it the seventh-largest company in America.

The company had transformed from a boring natural gas pipeline operator into something that felt revolutionary. They traded energy like a commodity. They created markets that didn’t exist before. They hired the smartest MBAs from the best schools and told them they were changing the world.

Ken Lay, the founder and Chairman, was a fixture in political circles—close to presidents, governors, and regulators. Jeff Skilling, the CEO, was the visionary architect. He was brilliant, intense, and utterly convinced that Enron represented the future of American business.

The culture matched the ambition. Enron’s performance review system, nicknamed “rank and yank,” forced managers to rate employees on a curve. Every year, the bottom 15% were fired. The message was clear: produce results or get out.

The problem was how they defined “results.”

The Decision Point

There wasn’t one decision that killed Enron. There was a series of decisions that built a culture where deception became the only way to survive.

Decision 1: Mark-to-market accounting. In 1991, Skilling convinced the SEC to let Enron use mark-to-market accounting for its trading business. This meant they could book the entire projected profit of a long-term contract the moment it was signed—before a single dollar actually came in.

On paper, this looked like explosive growth. In reality, it was borrowing from the future. And it created an insatiable need for new deals to keep the illusion alive.

Decision 2: Hide the debt. As the gap between reported profits and actual cash flow widened, CFO Andy Fastow created a web of special purpose entities—off-balance-sheet partnerships with names like LJM and Raptor. These vehicles had one purpose: hide Enron’s mounting debt and failing investments from shareholders and analysts.

Fastow personally profited tens of millions from these arrangements, which were approved by the board at the time.

Decision 3: Silence the truth-tellers. When Sherron Watkins, a vice president, wrote a memo to Ken Lay warning that the company might “implode in a wave of accounting scandals,” the response was to consider firing her. When journalists and analysts raised questions, Enron attacked their credibility.

Decision 4: Skilling’s exit. On August 14, 2001, Jeff Skilling abruptly resigned as CEO after just six months in the role, citing “personal reasons.” The stock was already declining. Insiders were selling. “Skilling had sold over $60 million in Enron stock in the year prior to his resignation.

Six weeks later, Enron announced a $544 million loss and disclosed that it had overstated earnings by nearly $600 million over four years.

Ten weeks after that, the company was bankrupt.

Why They Got It Wrong

This wasn’t a failure of intelligence. Enron was full of brilliant people—Ivy League MBAs, creative dealmakers, sophisticated financial engineers. That was part of the problem.

They confused cleverness with wisdom. Enron’s leaders believed that if something was technically legal, it was acceptable. If the accountants signed off, it was fine. If the board approved, it was ethical. They optimized for what they could get away with, not what they should do.

The culture punished honesty. Rank and yank created a Darwinian environment where admitting problems was career suicide. If your division was struggling, you didn’t raise your hand—you found creative ways to make the numbers look better. The pressure to perform overwhelmed the obligation to tell the truth.

Short-term metrics drove long-term destruction. Enron’s compensation system rewarded deal volume and stock price, not sustainable value creation. Executives were incentivized to inflate the present at the expense of the future. When your bonus depends on this quarter’s numbers, you’ll find a way to make this quarter’s numbers work.

Leadership modeled the behavior. Ken Lay and Jeff Skilling set the tone. When the CEO celebrates “innovative” accounting and attacks critics as uninformed, the organization learns what’s valued. Culture flows downhill. Enron’s leaders created a system where ethical people either conformed or left.

They believed their own story. This is the most dangerous part. By the end, Enron’s executives appeared to genuinely believe they were visionaries being persecuted by people who didn’t understand their genius. The lie had been told so many times it became their truth.

What a Great CEO Would Have Done

The rot started early, which means the intervention needed to start early too.

A great CEO would have recognized that mark-to-market accounting, while legal, created perverse incentives. Booking future profits today means you need even bigger profits tomorrow to show growth. It’s a treadmill that only speeds up.

A great CEO asks: “What behavior does this system encourage? And is that behavior sustainable?”

A great CEO would have built a culture where bad news was rewarded, not punished. The rank-and-yank system virtually guaranteed that problems would be hidden. When your job depends on looking successful, you’ll find ways to look successful—even if the underlying reality is failing.

A great CEO would have listened to Sherron Watkins. When a senior employee puts their career on the line to warn you that the company might implode, you don’t consult lawyers about firing her. You investigate. You get independent eyes on the problem. You assume she might be right.

Most importantly, a great CEO understands that your job is to grow the company and protect it—and you cannot protect what you’re unwilling to see clearly. Enron’s leaders protected their stock price, their bonuses, and their reputations. They failed to protect the actual business underneath.

The Lesson for Today’s Growth CEO

Enron is usually taught as a story about fraud. It was. But it’s more useful as a story about culture—about what happens when an organization systematically optimizes for the wrong things.

Here’s what I want you to take from this:

1. Your culture is your controls. Compliance departments and audit committees matter, but they’re not enough. The real question is: what does your culture reward? If people get promoted for hitting numbers regardless of how they hit them, you’re building an Enron. If people get promoted for solving real problems and telling hard truths, you’re building something durable.

2. Beware the metrics that eat your company. Whatever you measure, people will optimize for—sometimes in ways you didn’t intend. Enron measured deal volume and stock price. They got lots of deals and a soaring stock price. They also got fraud.

Choose your metrics carefully, and watch for gaming.

3. Listen to your Sherron Watkins. Every organization has people who see problems clearly and have the courage to say something. These people are precious. If your response to internal criticism is to circle the wagons and question the critic’s motives, you’re on Enron’s path.

4. Legal is not the same as right. “The accountants approved it” is not a leadership standard. “The lawyers said it’s defensible” is not a leadership standard. You are the CEO. You set the ethical tone. If something feels wrong, it probably is—regardless of what the experts tell you.

5. Sustainable growth requires sustainable truth. You can fake results for a while. You can massage numbers, time revenue recognition creatively, and push problems into future quarters. But reality compounds. The gap between your story and your truth will eventually become too large to bridge. Great CEOs close that gap early, even when it’s painful.

The Final Count

Twenty thousand employees lost their jobs. Many lost their retirement savings—Enron had encouraged workers to hold company stock in their 401(k) plans, and employees were locked out of selling during the final collapse.

Arthur Andersen, Enron’s auditor and one of the world’s largest accounting firms, was destroyed. An 89-year-old institution with 85,000 employees ceased to exist.

Jeff Skilling served 12 years in federal prison. Andy Fastow served six. Ken Lay was convicted but died before sentencing.

The Sarbanes-Oxley Act, passed in response to Enron, fundamentally changed corporate governance in America. Every public company CEO now personally certifies their financial statements.

But here’s what I remember most: Enron was celebrated. They won awards. They were studied at business schools. The smartest people in the room told us they were geniuses.

And none of it was real.

The lesson isn’t complicated. Build something true. Reward honesty. Measure what matters. And never let your story get so far ahead of your reality that you can’t find your way back.

Next, in Part 3: WorldCom—When the CFO Becomes the Cover-Up

Founder Series

Share: