The only remaining question of great consequence about Enron is whether its prime movers, Kenneth L. Lay and Jeffrey K. Skilling, will go to prison for their part in its transformation from icon of New Age corporate cool to synonym for Bubble Era greed and deceit. As the pair go on trial on Jan. 30 in Houston, it will be important to keep in mind that the jury's decision will serve only to fix criminal culpability. Even if Lay and Skilling are acquitted, the trial holds zero hope of redemption for Enron's Big Two. History's verdict is already in, and it is harsh: As two of the most inept executives in business history, Lay and Skilling are heavily to blame for the demise of a company that once employed 31,000 people and had a stock market value of $35 billion but which survives today in shriveled form under the protection of the bankruptcy code.
Although the brash, combustible Skilling, now 52, makes a more flamboyant villain, the burden of responsibility falls mainly on the smoothly self-effacing Lay, 63. After all, Lay was Enron's highest-ranking executive from 1986 until the company filed for bankruptcy protection from its creditors in late 2001 -- both as CEO (except for a six-month stretch when Skilling held the job) and as chairman throughout. A prolific Republican Party contributor nicknamed "Kenny Boy" by President George W. Bush, Lay not only was The Man at Enron, once America's seventh-largest company, but also was Houston's most influential power broker for a decade.
Enron's fatal flaws emerged from two contradictory traits that defined Lay as a corporate leader. A PhD economist by training, he was a free-market devotee hell-bent on liberating the natural gas business from the dead hand of regulatory constraint. But for all the passion of his intellectual convictions, Lay was a weak, even spineless manager. He soon lost interest in the mundane realities of Enron's operations as he concentrated on manipulating the political system, and he made no real effort to control Skilling and his kamikaze minions as they gamed energy markets and U.S. accounting laws. Lay signed off on so many crazily convoluted transactions designed to mask high-risk investments gone bad that by the late 1990s most of the "cash flow" that Enron was reporting came from the company's dealings with itself.
Lay's failings now seem to be working to his advantage legally. Since resigning from Enron, he has repeatedly insisted that he was unaware of any wrongdoing committed on his watch. Prosecutors have tacitly conceded the effectiveness of Lay's use of what is known in legal circles as the "idiot" or "ostrich" defense. The indictment handed down against him was narrowly drawn, consisting of seven counts of fraud and conspiracy, compared with the 35 counts leveled against Skilling and the 98 against former Chief Financial Officer Andrew Fastow, who is set to testify against Lay and Skilling under a plea bargain that limits his prison term to 10 years. Confined almost entirely to Lay's actions during the last few months of 2001, the indictment accuses him of misrepresenting Enron's condition as it careered toward insolvency.
It is entirely possible that Lay will beat the rap. As last year's acquittal of HealthSouth Corp. (HLSH ) CEO Richard Scrushy showed, financially complex executive suite prosecutions are problematic by definition. Fraud and conspiracy are crimes of commission, not omission -- Lay's managerial forte. Lay "glided on the coattails of others and a Rolodex of influential relationships," says Jeffrey A. Sonnenfeld, senior associate dean at the Yale School of Management and founder of the Chief Executive Leadership Institute. "When he sensed dangerous truths, he saw his job as one of containment, rather than showing courage or character."
Lay is as audacious a defendant as he once was a corporate promoter. Even as the disgraced ex-CEO was readying himself for trial, he launched a PR campaign to overturn history's verdict against him with a defiant speech on Dec. 13. "Contrary to popular belief today, I firmly believe that Enron was a great company," Lay told some 250 invited VIPs at the Houston Forum. If not for the wrongdoing of "less than a handful" of rogue employees, he added, Enron would not have gone belly-up and would "still be a great and growing company today."
Lay's powers of self-delusion appear intact, but his fall from power has deprived him of the ability to count. To date, prosecutors have collected guilty pleas from 16 of his former colleagues, including Chief Accounting Officer Richard A. Causey as well as CFO Fastow. Another Enron manager was convicted at trial, along with four outside investment bankers. Five more Enron executives will go before a jury this fall. Factor in the 100 or so unindicted co-conspirators mentioned in the various cases, and it is plain that what differentiated Enron from Tyco (TYC ), WorldCom, and the era's other A-list corporate miscreants was not just the rococo sophistication of its dealings but also the sheer number of diligent, highly educated people that it corrupted.
Enron never was a great company, although it did have its transcendent moments. Lay's only significant accomplishment came at the outset, with the mid-1980s reverse takeover that birthed Enron from two old-line gas pipeline operators, InterNorth Inc. and Houston Natural Gas Co. Lay was CEO of the latter company, which was one-third InterNorth's size, but after much boardroom finagling, he emerged as top dog at Enron, the successor to InterNorth. With 37,500 miles of pipeline, Enron was the largest U.S. distributor of natural gas and seemed ideally positioned to profit as the deregulatory steps Lay had championed finally came to pass.
However, neither Lay nor anyone else at Enron was able to devise a business model to capitalize on a deregulatory process that proved frustratingly slow, erratic, and politically compromised. In fact, Lay's managerial shortcomings nearly doomed Enron in the cradle. One of its few profitable businesses at the outset was a small but hyperactive oil trading desk that InterNorth had set up in a suburb of New York. Lay and other Houston execs ignored mounting evidence of irregularities at the oil unit until disaster struck in 1987, according to a government filing in federal court in Houston. The subsidiary's top two traders pleaded guilty to felonies. Enron was stuck with oil contracts that could have bankrupted it had not a successful salvage operation reduced pretax losses to $140 million from a potential $1 billion.
It was only after Lay enticed Skilling away from McKinsey & Co. in 1990 that Enron revved up its growth rate and developed its trademark swagger. Skilling, an inventive and outlandishly ambitious executive, devised a brilliant scheme for trading gas supply contracts. But the company spun out of control as it tried to sustain its momentum by increasingly resorting to accounting legerdemain and trading-desk trickery. Like many of the dealmakers who worked under them, Lay and Skilling were so smart they were stupid -- blinded to the colossal risks that Enron routinely took by a fateful mix of hubris and desperation.
By Anthony Bianco