Enron's Ken Lay: "There's No Other Shoe to Fall"

As the energy giant's stock tumbles after Jeffrey Skilling's sudden resignation, the new CEO tries to reassure investors

Enron Corp.'s Jeffrey K. Skilling dropped a bombshell on Aug. 14, when he abruptly resigned as the company's president and CEO, citing "entirely personal reasons (see BW Online, 8/15/01, "Jeffrey Skilling's Surprising Split from Enron"). Skilling has since allowed that the precipitous 50% drop in the Houston-based energy giant's stock this year had something to do with his decision. Meanwhile, Enron's stock has fallen an additional 14%, to around $36, following Skilling's resignation (for a Q&A with the former CEO, see "We Built a Heck of a Business").

Enron immediately named its chairman, Kenneth L. Lay, as Skilling's replacement. Lay is no stranger to the job, having served as CEO from 1985 until Skilling became CEO in January. During Lay's 15 years at the helm, he transformed Enron from a regional natural-gas pipeline company into the world's largest energy-trading company -- guided in part by Skilling, who he was grooming as a successor.

Enron's market capitalization under Lay increased from $2 billion to $70 billion, and Enron's shareholders received a total return three times that of the S&P 500. The company, which had revenues of $101 billion in 2000, markets electricity and natural gas, delivers physical commodities, and provides financial and risk-management services to customers around the world. It has also developed an intelligent network platform to facilitate online business.

In an exclusive interview on Aug. 20 with BusinessWeek Dallas Correspondent Stephanie Anderson Forest, Lay discussed Skilling's resignation and the future of Enron. Here are edited excerpts from their conversation:

Q: Since his official resignation announcement Aug. 14, Mr. Skilling has since added that one of those personal reasons included Enron's falling stock price on his watch. A declining stock price doesn't seem like a very personal reason.


I believe the stock price played a role in his decision. He was probably feeling quite a bit of pressure from the stock price decline, from California [where state regulators are asking Enron and other power companies to refund billions in alleged energy overcharges], from India [Enron is involved in a high-profile, costly fight with the Indian government over its $3 billion Dabhol power plant], and other issues. I think all of those kinds of things impacted his decision.

Q: There has been some concern among investors that perhaps there is more to his resignation than meets the eye, perhaps accounting or other issues that have yet to come to light. Is there anything more?


There are absolutely no problems that had anything to do with Jeff's departure. There are no accounting issues, no trading issues, no reserve issues, no previously unknown problem issues. The company is probably in the strongest and best shape that it has ever been in.

There are no surprises. We did file our 10-Q [with the Securities & Exchange Commission] a few days ago [Aug. 14]. And, if there were any serious problems, they would be in there. If there's anything material and we're not reporting it, we'd be breaking the law. We don't break the law.

Q: Did he disclose these personal reasons to you?


Yes...and they are very legitimate, personal reasons that Jeff will have to disclose when and if he sees fit. He says he wants to keep those reasons private and I respect that. I can say, these are situations that needed to be addressed now. These are things that he can't put off dealing with for two to three years.

Q: Are these personal issues related to his health?



Q: When did he tell you he wanted to resign and what was your reaction?


I don't recall the exact date. It was a few days before the board meeting. I called several of the board members before the meeting to let them know what was going on. I do remember I was in my office when he told me. I had been out of town on a business trip and had just gotten back the night before. The next morning he came over to my office and said he had a few things on his mind. We went over several business items for about 20 to 30 minutes. Then he said, "I've decided I need to step down as president and CEO and leave the company."

I said, "You're going to do what?" I was very surprised. I asked him if there was anything I or the board had or had not done that led him to this decision. He said no. I then asked him if there was anything I or the board could do to persuade him to stay. He said his mind was made up. That was on a Friday.

The following Monday, we talked again. I asked him if he had changed his mind. He said no. Over the next few days, I tried three or four times to talk him out of it, but he had his mind made up. He needed to deal with these [personal] issues right away, not two or three years from now.

Q: These issues couldn't have waited a few months? I ask because according to the [2000] proxy, had Mr. Skilling stayed on through the end of the year, his $2 million debt to the company would have been forgiven. [According to the proxy, in 1997 Enron loaned $4 million to Skilling, who repaid $2 million of that in 1999. His employment contract, which ran through the end of 2003, called for the balance of the loan to be forgiven if he stayed on until December 31, 2001.]


Jeff knew full well what he was walking away from. Again, he needed to deal with this right away. [Note: Skilling also relinquished severance pay by walking away voluntarily. Had he been forced out, Skilling would have been eligible to receive a single severance payment of at least $19.9 million, not including the value of the options received in 2000, according to Enron's 2000 proxy statement. Also, the nonvested portion of the 2.4 million stock options he owns immediately would have become vested, the proxy statement says.]

Q: Judging by the stock's performance since the announcement, investors appear to still be skeptical.


Yes, and I understand that. Investors don't like uncertainty. When there's uncertainty they always think there's another shoe to fall. There is no other shoe to fall.

Q: Is the door open for Mr. Skilling to return to the CEO post after he has resolved these personal issues?


It's always a possibility. But he understands that we've got to move ahead, and I assume for now we will be moving on without him. He will be dealing with these other issues for at least a year or two.

Q: What will the new management team look like?


Clearly, there will be changes in the office of the chairman. Jeff and I had shared responsibility in that office since 1997 and, from time to time, we have had one other person in that office. I'll be looking for some help now. We will appoint one or two people to that office within the next few days.

Q: Who are the likely candidates?


Any slots at the senior level, including CEO or other slots, will be filled internally. That tells you how confident we are in the talent we have. We have a a number of senior executives qualified to serve in this capacity. We have many large businesses in Enron, any one of which would be ranked rather high as a standalone. Anyone of the top two people in any of these businesses or our CFO, chief accounting officer or chief of staff would be qualified. [That pool of executives include: CFO Andrew S. Fastow, Chief Accounting Officer Richard A. Causey, Chief of Staff Steven J. Kean, Chairman and CEO of Enron Energy Services Dave Delainey, Chairman and CEO of Enron Wholesale Services Mark A. Frevert, CEO Enron Global Assets & Services Kevin P. Hannon, and Chairman and CEO Stanley C. Horton of Enron Transportation Services Co.].

Q: Despite having a deep bench of talented executives, some analysts say few Enron executives are as seasoned as Skilling was. Is that a concern?


No, because the ones I'm looking at are very seasoned, though some are more seasoned than others. They are all very strong candidates who understand our business and our culture. In every case, [the candidates] have been here several years, and, in some cases, 11 or 12 years. These are not unseasoned people.

Q: So, whoever makes it to the office of the chairman has a shot at being Enron's next CEO?


Yes, but I have made it very clear that although they certainly will be on the list of people to be the CEO, they're not guaranteed to be the CEO.

Q: What qualities will you and the board be looking for in Enron's next CEO?


We'll be looking for a good, strong leader, a very effective leader [who] really knows our business -- all our businesses, not just what they're running today. We're also looking for a good people person who is able to motivate others and get strong performances out of people. We need someone who is a strong representative of our value system.

That someone would also be very intelligent, very creative, and able to develop successful strategies. Being a good communicator is also very important. Clearly, to be a good leader you need to be a good communicator.

Q: How involved will you be with the company until a new CEO is found?


I've extended my contract with the company through 2005 and have reassumed the CEO and president positions [both previously held by Skilling]. I have told the board I will stay as long as necessary to get our next level of succession ready and to get the board and investors comfortable with that person. I didn't expect to be CEO again, but I'm happy to be doing it.

Q: Will Mr. Skilling's departure bring a new shift or focus in Enron's business strategy?


There won't be any refocus. [Since turning over the CEO reins in January], I have stayed actively involved and working full-time as Jeff asked me to. More importantly, the current direction of the company was jointly decided by both of us in the last several years.

Q: And, the fundamentals of the business strategy remain solid?


Yes. We think the company is on solid footing, and we're looking forward to continued strong growth. We had a very, very strong first half, including second-quarter net income up 40%, earnings per share up 32%, and operational physical volume delivery up 60%. In the last five years, we have had 25% per year compounded annual growth in earnings per share.

I think you'll continue to see strong growth in all of our business areas. Our revenues and income quarter-to-quarter continues to be strong and we have strong momentum. We think that will be sustained, and eventually, if we continue to do that, investors will recognize and reward us for that.

Edited by Douglas Harbrecht

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