Enron Case Study
CASE STUDY:
CORPORATE GOVERNANCE AND THE FALL OF ENRON
Introduction to the Enron Case
Enron was one of the world’s leading energy traders born from deregulation of these markets in certain US states. It rapidly grew and the world followed suit. It was nominated ‘World’s Most Innovative Large Corporation’ six years in row and valued at 64 times its earnings and 6 times its book value. It had one of the highest paid CEOs in the world in 2000. It led an aggressive and apparently effective expansion model from its creation in 1985, as an interstate pipeline operator based in Houston, until secret cracks split wide open and the corporation was engulfed in a dramatic implosion. The climb to greatness took all of fourteen years, its fall was brief and brutal. On 02 December 2001, Enron filed for bankruptcy.
I - The Skilling Way:
A- ‘Light asset’ trading: a risky business model
Enron sells off heavy assets and sets its sights on ‘light asset’ trading. Assets were kept based on the reasoning that they generated key information for the business. It expanded focus from trading energy to all highly inefficient markets with the following characteristics: single commodity, fragmented/undergoing significant change (deregulation); complex distribution channels, capital intensive, lengthy sales cycles, loose contracts for supply/service quality and standards; opaque pricing, no public disclosure; buyers with limited flexibility to manage key business risks. In every new market, it acquired the assets necessary to guarantee delivery then offered customers contracts which allowed them to manage the business risks. Enron would offset market price volatility and hedge risk using a variety of future and forward contracts.
B- Innovation, ‘benefit of doubt’ talent management and immediate gain gratification
Enron pushed for innovation and creativity. Its staff were among the best and brightest business and science graduates. They were encouraged to move to business
CORPORATE GOVERNANCE AND THE FALL OF ENRON
Introduction to the Enron Case
Enron was one of the world’s leading energy traders born from deregulation of these markets in certain US states. It rapidly grew and the world followed suit. It was nominated ‘World’s Most Innovative Large Corporation’ six years in row and valued at 64 times its earnings and 6 times its book value. It had one of the highest paid CEOs in the world in 2000. It led an aggressive and apparently effective expansion model from its creation in 1985, as an interstate pipeline operator based in Houston, until secret cracks split wide open and the corporation was engulfed in a dramatic implosion. The climb to greatness took all of fourteen years, its fall was brief and brutal. On 02 December 2001, Enron filed for bankruptcy.
I - The Skilling Way:
A- ‘Light asset’ trading: a risky business model
Enron sells off heavy assets and sets its sights on ‘light asset’ trading. Assets were kept based on the reasoning that they generated key information for the business. It expanded focus from trading energy to all highly inefficient markets with the following characteristics: single commodity, fragmented/undergoing significant change (deregulation); complex distribution channels, capital intensive, lengthy sales cycles, loose contracts for supply/service quality and standards; opaque pricing, no public disclosure; buyers with limited flexibility to manage key business risks. In every new market, it acquired the assets necessary to guarantee delivery then offered customers contracts which allowed them to manage the business risks. Enron would offset market price volatility and hedge risk using a variety of future and forward contracts.
B- Innovation, ‘benefit of doubt’ talent management and immediate gain gratification
Enron pushed for innovation and creativity. Its staff were among the best and brightest business and science graduates. They were encouraged to move to business