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Editors: Character is required post-Enron

Hubris tops the causes of energy giant's failure, says UH's law dean

by Portia-Elaine Gant
Senior Staff Writer

The editors of a new academic study of the collapse of Enron Corp. said Thursday that although no single factor brought about the energy giant's downfall, arrogance played a large part.

"No one was paying attention to cash flow after (former Enron President Rich) Kinder left. No one was monitoring the conflicts of interest. The outputs were wrong because the outputs misled the marketplace," UH Law Center Dean Nancy Rapoport, the co-editor of Enron: Corporate Fiascos and Their Implications, said. "So you've got hubris, a bad reliance on checks and balances that were fated to fail, and cognitive dissonance."

Rapoport compared Stanley Milgram's experiment on cognitive dissonance, in which random subjects were asked to deliver what they believed to be painful electric shocks to unwilling participants, to the escalating problems that led to the company's disintegration.

"If you go into something that you know is wrong, like shocking someone at 200 volts, then you have to admit to yourself before you stop that 175 volts was wrong or 150 volts was wrong, and cognitive dissonance makes it hard for you to do that," Rapoport said.

Rapoport and Rice University accounting professor Bala Dharan's book, released today, is the first published academic look at the self-destruction of the company that was once No. 7 on the Fortune 500.

Rapoport began her presentation by acknowledging the book's contributing authors, including her husband, Jeff Van Niel. She said the book is valuable because it draws on the knowledge of a variety of experts -- mainly locals.

"We let the folks from Harvard and Yale hang with us, but primarily it was a Houston effort," Rapoport said.

Dharan, who testified before the Congressional House Committee on Energy and Commerce and has been involved with the Enron issues since their inception, opened his section of the assembly with a pop quiz about Enron to help explain the problems leading to its demise.

Dharan compared Enron's fall to that of retailer Kmart, explaining that in the case of a business failure, customers tend to offer opportunities for the business to augment its situation, but in a financial failure, there's little chance of redemption.

"When you have an accounting problem with financial reporting, the company does not get a second chance. The investors don't say, ‘I don't believe any of those numbers, but what the heck, I'll buy more stock.' They decide to completely leave the room at the same time," Dharan said.

Though both speakers said no single factor destroyed Enron, they said the most important change necessary in the business world is a change of character.

"There's so many different ways you can game the system when you are bright, and one of the things that drives bright people is they want to come up with things faster and more distinctive than anyone has come up with before," Rapoport said. "Ultimately, it comes down to hubris."
 

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