>First, when I was with Enron, Mr. Lay had a strong and very capable COO Rich Kinder who made sure the trains ran on time. It was an effective partnership. Ken Lay was Mr. Outside and Rich Kinder was Mr. Inside. But the capable Kinder was not going to wait forever to become CEO and apparently for personal reasons Mr. Lay blocked his appointment as CEO leading to his eventual departure to form the highly successful pipeline company Kinder MorgaThe painful story of Ken Lay and Enron offers us many lessons on management and investing. My personal view is that Mr. Lay was a good man who got a bit carried away and made a few key mistakes. He should be judged on his total career as an innovative executive and generous contributor to his community and not just on the missteps that lead to the implosion of Enron.

I first met Ken Lay and the Enron style of business while representing the United States on the Executive Board of the Asian Development Bank in Manila. Manila was experiencing severe power blackouts and Enron won one of several fast-track contracts offered by the Philippines’s Government to add generating capacity fast at nice fat margins. During 1994-1995, I joined Enron to help develop Asian energy projects.

At that time, Ken Lay and Enron were both rising stars and darlings of the investment community.

All too often, investors forget that the most important factor to consider in evaluating a company is the quality and character of management. You can have the best products, lucrative and profitable markets and the best balance sheet but if management is faulty the whole story and stock price will crumble.

A related issue is the set up of a company’s board of directors and whether it is independent and offers strong oversight of management. Another important factor to consider is the culture of the company. Are economic incentives offered to management and staff closely aligned with shareholder interests?

Finally, is the business easy to understand and are operations and financial statements transparent so investors can evaluate the value and profitability of the company.

Unfortunately, Enron failed all four tests. Let’s briefly look at each failing.

First, when I was with Enron, Mr. Lay had a strong and very capable COO Rich Kinder who made sure the trains ran on time. It was an effective partnership. Ken Lay was Mr. Outside and Rich Kinder was Mr. Inside. But the capable Kinder was not going to wait forever to become CEO and apparently for personal reasons Mr. Lay blocked his appointment as CEO leading to his eventual departure to form the highly successful pipeline company Kinder Morga

the United States on the Executive Board of the Asian Development Bank in Manila. Manila was experiencing severe power blackouts and Enron won one of several fast-track contracts offered by the Philippines’s Government to add generating capacity fast at nice fat margins. During 1994-1995, I joined Enron to help develop Asian energy projects.

At that time, Ken Lay and Enron were both rising stars and darlings of the investment community.

All too often, investors forget that the most important factor to consider in evaluating a company is the quality and character of management. You can have the best products, lucrative and profitable markets and the best balance sheet but if management is faulty the whole story and stock price will crumble.

A related issue is the set up of a company’s board of directors and whether it is independent and offers strong oversight of management. Another important factor to consider is the culture of the company. Are economic incentives offered to management and staff closely aligned with shareholder interests?

Finally, is the business easy to understand and are operations and financial statements transparent so investors can evaluate the value and profitability of the company.

Unfortunately, Enron failed all four tests. Let’s briefly look at each failing.

First, when I was with Enron, Mr. Lay had a strong and very capable COO Rich Kinder who made sure the trains ran on time. It was an effective partnership. Ken Lay was Mr. Outside and Rich Kinder was Mr. Inside. But the capable Kinder was not going to wait forever to become CEO and apparently for personal reasons Mr. Lay blocked his appointment as CEO leading to his eventual departure to form the highly successful pipeline company Kinder Morga

All too often, investors forget that the most important factor to consider in evaluating a company is the quality and character of management. You can have the best products, lucrative and profitable markets and the best balance sheet but if management is faulty the whole story and stock price will crumble.

A related issue is the set up of a company’s board of directors and whether it is independent and offers strong oversight of management. Another important factor to consider is the culture of the company. Are economic incentives offered to management and staff closely aligned with shareholder interests?

Finally, is the business easy to understand and are operations and financial statements transparent so investors can evaluate the value and profitability of the company.

Unfortunately, Enron failed all four tests. Let’s briefly look at each failing.

First, when I was with Enron, Mr. Lay had a strong and very capable COO Rich Kinder who made sure the trains ran on time. It was an effective partnership. Ken Lay was Mr. Outside and Rich Kinder was Mr. Inside. But the capable Kinder was not going to wait forever to become CEO and apparently for personal reasons Mr. Lay blocked his appointment as CEO leading to his eventual departure to form the highly successful pipeline company Kinder Morga

management. Another important factor to consider is the culture of the company. Are economic incentives offered to management and staff closely aligned with shareholder interests?

Finally, is the business easy to understand and are operations and financial statements transparent so investors can evaluate the value and profitability of the company.

Unfortunately, Enron failed all four tests. Let’s briefly look at each failing.

First, when I was with Enron, Mr. Lay had a strong and very capable COO Rich Kinder who made sure the trains ran on time. It was an effective partnership. Ken Lay was Mr. Outside and Rich Kinder was Mr. Inside. But the capable Kinder was not going to wait forever to become CEO and apparently for personal reasons Mr. Lay blocked his appointment as CEO leading to his eventual departure to form the highly successful pipeline company Kinder Morga

>First, when I was with Enron, Mr. Lay had a strong and very capable COO Rich Kinder who made sure the trains ran on time. It was an effective partnership. Ken Lay was Mr. Outside and Rich Kinder was Mr. Inside. But the capable Kinder was not going to wait forever to become CEO and apparently for personal reasons Mr. Lay blocked his appointment as CEO leading to his eventual departure to form the highly successful pipeline company Kinder Morgan. Eventually, Mr. Jeffrey Skilling was appointed CEO and while he is intelligent and hard driving, he lacked the character, experience and administrative abilities required for the position. In retrospect, this should have been a red flag for investors. When Skilling abruptly left the company in 2001, Mr. Lay came back to the CEO position without apparently knowing enough of the details of Enron’s financial problems and mismanagement.

Second, Enron’s Board of Directors was comprised mainly of allies and friends of Mr. Lay and did not adequately oversee Enron management and operations. Shareholders should have seen that this was the case and demanded more say in the appointment of experienced and independent board members as a check on management.

Third, the culture of Enron was very short-term oriented. Substantial bonuses were linked to demanding but short term performance goals which led to employees leveraging shareholder capital for projects that sometimes did not make long-term sense. My perception was that for many employees, Enron was an opportunity to try to make a lot of money and then go do something else. The problem was that they weren’t using their own money to finance their entrepreneurial activities but rather shareholder’s money. CFO Andrew Fastow was just one example of the problem.

Finally, Enron’s trading activity and so-called innovative financing techniques were so complex and opaque that even experienced Wall Street analysts could not figure out how or if Enron was making money. Therefore when questions arose about specific questionable financing transactions, investors lacked confidence to hang tough through the turbulence and headed to the exits at once. Investors had piled into Enron stock without even understandi