The Greediest Guys in the Room

The movie ‘The Smartest Guys in the Room’ is a comprehensive history and analysis of the rise of Enron and its dramatic and catastrophic collapse. It starts when Ken Lay becomes CEO of Houston Natural Gas and concludes with the collapse of Enron. Along the way it paints a fascinating and compelling picture not only of what Enron did as a company, but also the personalities that ran it and the details of where and how it went wrong.

The core of the Enron story is the people, an array of brilliant, egotistical, and arrogant executives who create a corporate culture that selects for raw intelligence and vicious competition and discards most of the social virtues typical of a corporation. Both the intelligence and the arrogance come through clearly. Whatever else those involved in the Enron story were, they were smart. The company was filled with people capable of solving advanced equations in their head, and brilliant economists who came up with both revolutionary trading techniques and ways of exploiting legal loopholes before anyone else. That it captures not only the weaknesses but also the strengths of Enron and shows how much talent was let loose in an environment with no effective controls.

I think that one of the obvious systemic causes of the Enron scandal is the legal and regulatory structure. First, laws regulations allow firms to provide consulting services to a company and then turn around and provide the audited report about the financial results of these consulting activities. This is an obvious conflict of interest that is built into the legal structure.

Second, a private company like Enron currently hires and pays its own auditors. This again is a conflict of interest built into the legal system because the auditor has an incentive not to issue an unfavorable report on the company that is paying him or her.

Third, most large companies like Enron are allowed to manage their own employee pension funds. Again, this is a conflict of interest built into our legal system because the company has an incentive to use these funds in ways that advantage the company even when they may disadvantage employees.

And fourth, most companies like Enron have codes of ethics that prohibit managers and executives from being involved in another business entity that does business with their own company. But these codes of ethics are voluntary and can be set aside by the board of directors. The managers and executives, of course, have a fiduciary duty to act in the best interest of the company and its shareholders, But the law leaves considerable discretion to managers and executives to exercise their own business judgment about what is in the best interests of the company.

                Add to this, in an individualistic point of view, managers at Enron grew arrogant, thinking themselves as invincible. Due to its leaders, there was a tendency for the company to seal itself off from forces on the outside. Or perhaps it was the corporate culture in which they operated that led to the problem. They had rank-and-yank performance appraisal system, which eliminated anyone who fell behind, survival of the fittest as they say.

                It was painful to watch the outcome of this scandal. However, I am more pleased that I had the opportunity to watch this movie as this shows an accurate picture of what us, the future leaders would have to deal with in the near future.