Documentary Enron: The Smartest Guys in the Room, Retelling the Story of the Rise and Fall of Enron Company

Part 1: Summary

The documentary is based on the best-selling book of the same title, co-written by Fortune magazine's Bethany McLean and Peter Elkind. It is assembled out of a wealth of documentary and video footage, narrated by Peter Coyote, from testimony at congressional hearings, and from interviews with such figures as disillusioned Enron executive Mike Muckleroy and whistle-blower Sherron Watkins. It is best when it sticks to fact, shakier when it goes for visual effects and heavy irony.

It was McLean who started the house of cards tumbling down with an innocent question about Enron's quarterly statements, which did not ever seem to add up. The movie uses in-house video made by Enron itself to show Lay and Skilling optimistically addressing employees and shareholders at a time when Skilling in particular was coming apart at the seams. Toward the end, he sells $200 million in his own Enron stock while encouraging Enron employees to invest their 401K retirement plans in the company. Then he suddenly resigns, but not quickly enough to escape Enron's collapse not long after. Televised taking the perp walk in handcuffs, both he and Lay face criminal trials in Texas.

This is not a documentary about politics. It is a story of crime. No matter what is your stand on politics, “Enron: The Smartest Guys in the Room” will make your anger to rise. It depicts the story of how Enron rose to be the 7th largest corporation in America with what was mainly Ponzi scheme. He robbed his workers’ pension funds to purchase a little more time in his last days.

There is a general feeling that Enron was a good organization at first and finally turned up to be worst. From the very beginning, the movie claims that it was a con game. According to its top executives, Kenneth Lay and Jeffrey Skilling, It was the best energy company in the world. At the very moment the claim has been done, they should have known that the organization was bankrupt, inflated its earnings, been worthless for months and overshadowed its losses through so corrupt bookkeeping procedures that venerable accounting firm of Arthur Anderson was demolished in the aftermath.

Occasionally, Skill and Lay were less than circumspect. When a New York market analyst questions Enron’s statements of profit and loss, during a conference call, Skilling was unable to respond and calls him using bad word which creates a bad buzz on the street.

What did Enron buy and sell, actually? Electricity? Natural gas? It was hard to say. The corporation basically created a market in energy, gambled in it and manipulated it. It moved on into other futures markets, even seriously considering 'trading weather.' At one point, we learn, its gambling traders lost the entire company in bad trades, and covered their losses by hiding the news and producing phony profit reports that drove the share price even higher. In hindsight, Enron was a corporation devoted to maintaining a high share price at any cost. That was its real product.

The most shocking material in the film involves the fact that Enron cynically and knowingly created the phony California energy crisis. There was never a shortage of power in California. Using tape recordings of Enron traders on the phone with California power plants, the film chillingly overhears them asking plant managers to 'get a little creative' in shutting down plants for 'repairs.' Between 30 percent and 50 percent of California's energy industry was shut down by Enron a great deal of the time, and up to 76 percent at one point, as the company drove the price of electricity higher by nine times.

We hear Enron traders laughing about 'Grandma Millie,' a hypothetical victim of the rolling blackouts, and boasting about the millions they made for Enron. As the company goes belly up, 20,000 employees are fired. Their pensions are gone, their stock worthless. The usual widows and orphans are victimized. A power company lineman in Portland, who worked for the same utility all his life, observes that his retirement fund was worth $248,000 before Enron bought the utility and looted it, investing its retirement funds in Enron stock. Now, he says, his retirement fund is worth about $1,200.

Strange, that there has not been more anger over the Enron scandals. The cost was incalculable, not only in lives lost during the power crisis, but in treasure. The state of California is suing for $6 billion in refunds for energy overcharges collected during the phony crisis. If the crisis had been created by Al Qaeda, if terrorists had shut down half of California's power plants, consider how we would regard these same events. Yet the crisis, made possible because of deregulation engineered by Enron's lobbyists, is still being blamed on 'too much regulation.' If there was ever a corporation that needed more regulation, that corporation was Enron.

Early in the film, there's a striking image. We see a vast empty room, with rows of what look like abandoned lunchroom tables. Then we see the room when it was Enron's main trading floor, with countless computer monitors on the tables and hundreds of traders on the phones. Two vast staircases sweep up from either side of the trading floor to the aeries of Lay and Skilling, whose palatial offices overlook the traders. They look like the Stairway to Heaven in that old David Niven movie, but at the end they only led down, down, down.

Part 2: Analysis

The Enron case has been extensively analyzed and reviewed in the business media; books and written case studies have been developed that provide substantial insights into this case of corporate malfeasance. Our observation has been that the use of the film Enron: The Smartest Guys In The Room can add to the educational process by providing us with a perspective that differs from written studies. The use of the video medium allows us to actually see and hear the principals in the company actively involved in the management process - with the eventual failures, missteps and questionable decisions and behaviors. As a result,we are provided with a richness of information that engages the mind in ways that a written case cannot. The emotions and perspectives displayed through the use of the video bring us into the case in a “real time” manner. We are also able to explore issues in the leadership of the company that are difficult to bring out without the video resource.

Furthermore, the financial maneuverings employed by the management of Enron provide an opportunity for us to present insights into the financial decision-making process that enriches traditional classroom methodologies. Concepts that are presented in textbook material can be illustrated in the context of an actual organization. In addition, the managerial behaviors that underlie the choices made by the company can be developed and create an opportunity to discuss the application of classroom concepts in an actual corporate settings.

Collapse of Enron has left thousands of people out of work. Thousands of people lost their personal investments and pensions and it has left many employees out of their work such as money employees had personal pension funds made up of Enron shares, a common situation in America, where occupational schemes based on final salary payments are increasingly rare and money purchase schemes, known as 401K plans, are the norm. Employees at Enron were encouraged to do so by the company, which also forbade them from selling their stocks, when the company share price came down. In contrast, many Enron executives were able to cash in their share options when the company’s fate became clear.

Enron’s CEO Jeffrey Skilling is addressing a large herd of Enron employees about the plans to introduce the Performance Review Committee in the upcoming quarter. The Performance Review Committee (PRC) had the foundations of the Vitality Curve, popularly known as the Bell Curve and originally pioneered by General Electric’s Jack Welch. Enron used the forced ranking system, or has infamously come to be known as the “Rank and Yank”. The employees were measured against their contribution to the company’s revenue and squeezed into a bell curve every 6 months by an evaluating committee. For the bottom-ranked, it was an out the door policy.

Amanda Martin, a former executive at Enron comments on the level of independence that the traders at Enron enjoyed and crossed every imaginable level of unethical practice without being questioned by the management (who were relishing the success).

It is hard to find a better oxymoron than calling Enron an asylum. The asylum had the smartest of people and managed to dupe the world economy into believing it generated billions in profits when in reality, these were imaginary profits. All very smartly arrived at using an orchestrated technique of mark-to-market accounting and hiding company’s debt in self-established special purpose entities. Clearly, an asylum could not conduct such a synchronized fraud for a decade and the ones running the show would not be able to make millions in selling shares, just before the company went bankrupt. Well, it did.

The inmates were awarded total freedom to take matters into their own hands as long as their actions were making money for the corporation. The unethical practices touched a new high in the year 2001 when Enron blacked out the state of California. The traders would call the operators in California power station to shut down the electricity supply so that the company could hike the prices and make more money. ‘The smartest guys in the room’ were now taking their own decisions and running the show. And they were rewarded for their efforts to commit fraud. No need to go beyond Andrew Fastow, the CFO of Enron, who created a web of companies that solely did business with Enron, and were used as decoys to hide Enron’s massive losses in its balance sheets. Backed fully by the management, he was able to make Enron appear debt free when in reality the company owed 30 billion dollars in debt. This drives home the point that absolute freedom sans a value system in place and no accountability for actions can breed such extreme steps. The system in place at Enron, not only allowed, but also encouraged the culture. The result? The inmates took over the asylum.

That’s how the culture at Enron was. The culture was the reason the PRC was born, and the PRC then fed back to the culture of unethical behavior, fraud, and hunger for money. It was a symbiotic relationship where the two would feed off each other, and it resulted in the birth of a huge parasite of corporate fraud. And that is what the Enron story reminds us that a performance management system must be a reflection of the core company values because that is what feeds back to the organization culture.

In summary, top officials at Enron abused their power and privileges. They manipulated information while engaging in inconsistent treatment of internal and external constituencies. These leaders put their own interests above those of their employees and the public, and failed to exercise proper oversight or shoulder responsibility for ethical failings. Therefore, there is need the directors to follow particular examples in following matters:

First, there should be a healthy corporate culture in a company. In Enron’s case, its corporate culture played an important role of its collapse. The senior executives believed Enron had to be the best at everything it did and the shareholders of the board, who were not involved in this scandal, were over optimistic about Enron’s operating conditions. When there existed failures and losses in their company performance, what they did was covering up their losses in order to protect their reputations instead of trying to do something to make it correct. Therefore, the“to-good-to-be-true” should be paid more attention by directors of board in company.

Secondly, a more complete system is needed for owners of a company to supervise the executives and operators and then get the idea of the company’s operating situation. There is no doubt that more governance from the board may keep Enron from falling to bankruptcy. The boards of directors should pay closer attention on the behavior of management and the way of making money. In addition, Enron’s fall also had strikingly bad influence on the whole U.S. economy. Maybe the government also should make better regulations or rules in the economy.

Thirdly, “Mark to market” is a plan that Jeffrey Skilling and Andrew Fastow proposed to pump the stock price, cover the loss and attract more investment. But it is impossible to gain in a long-term operation in this way, and so it is clearly immoral and illegal. However, it was reported that the then US Security and Exchange Commission allowed them to use “mark to market” accounting method. The ignorance of the drawbacks of this accounting method by Securities and Exchange Commission also caused the final scandal. Thus, an accounting system which can disclose more financial information should be created as soon as possible. Moreover, business ethics is the most thesis point people doing business should focus on. As a loyal agent of the employer, the manager has a duty to serve the employer in whatever ways will advance the employer's self-interest. In this case, they violated the principle to be loyal to the agency of their Enron. Especially for accountants, keeping a financial statement disclosed with true profits and losses information is the basic responsibility that they should follow.

It is worth mentioning that the Enron Corp case was the biggest in a series of scandals that damaged the reputations of corporations as a direct result, the Congress passed a law, called the Sarbanes auditors and made corporate executives criminally liable for lying about their accounts. The Enron scandal moved the balance of power away from the company boards towards the investors. After the scandal there is more caution among corporate executives about spinning off accounts that might be inaccurate, as now they face criminal liability. However, the temptation to boost stock prices has of booming markets mostly when the rewards for executives are high.

Finally it can be proved that the bankruptcy of the Enron was because of managerial scandal for the self benefit than shareholder’s benefit of this company. Therefore through law which has passed by Congress after this case, the rights of investors and employees will be guaranteed more.