By HOLMAN W. JENKINS, JR.
How Could They Have Done It?
Did a bacillus descend from space and make Enron senior
employees in equal parts evil and stupid?
Whatever else it was, the activities of Enron's finance
department -- people like Andrew Fastow and Michael
Kopper, with the presumed if uncertain participation of
CEO Jeff Skilling -- amounted to a colossal misjudgment.
Their company is bankrupt instead of thriving. Its senior
employees are jobless, their wealth is under attack and
they face criminal prosecution and jail.
Presumably these are not the results Enron executives
intended. Laboring in the business schools
have been a breed of researcher
known as "behavior decision
theorists," who would be inclined
to see in Enron a saga of
incompetence as much as cupidity.
A widely-noted contribution to the
field was "Ethical leadership and
the psychology of decision
making," which appeared in the
January 1996 edition of Sloan
Management Review, by
Harvard's Max Bazerman and
Northwestern's David Messick.
Their clinical point of view, on first glance, will infuriate
those who believe moral condemnation is the end of
analysis: "Unethical business decisions may stem not from
the traditionally assumed trade-off between ethics and
profits . . . but from psychological tendencies that foster
poor decision making."
Let's say right off that not everybody buys this stuff. It's
based on psychological studies of decision making in
controlled games, often involving the handy fodder of the
grad student population. These experiments are said to
reveal systematic deviations from rationality when people
evaluate courses of action.
"There is a tendency to reduce the set of possible
consequences or outcomes to make the decision
manageable. In extreme cases, all but one aspect of a
decision will be suppressed, and the choice will be
made solely on the basis of the one privileged
feature."
As CEO, Jeff Skilling had set a goal of ridding Enron's
balance sheet of poorly-performing or volatile assets. Did
he decide at some point (well before his Congressional
testimony) that it would be better not to know exactly how
Mr. Fastow, his protege, was achieving his desired goal?
Did Mr. Fastow become preoccupied with designing
structures that he could personally benefit from to the
exclusion of other considerations? Chewco and RADR,
two of the partnerships formed in 1997, arguably
produced real benefits for Enron. By the time we get to
Southampton, initiated in 2000, raking off fees for Mr.
Fastow and selected others seems to have become the
sole purpose. How could he imagine that somebody
would not blow the whistle, if only out of resentment at not
being given a cut?
"One reason we think we are relatively immune to
common risks is that we exaggerate the extent to
which we can control random events."
Enron's stock price was the helium that kept the
partnerships airworthy. If the stock price remained high,
Enron's hidden debt exposure would not have to be
realized. But anybody in business knows that 99% of the factors influencing
a company's stock prices are out of
management's control.
People overestimate the likelihood that they will experience "good" future
events and underestimate the
likelihood of "bad" future events.
Mr. Fastow had done brilliantly in school, married an heiress, and attached
himself to Mr. Skilling, the rising star at
Enron, who put Mr. Fastow in the CFO's seat at age 36. He was obviously
somebody who could take risks without
really taking risks. Everything would always come up roses for him.
People believe their wants and demands are "fair" and "deserved."
A Journal article earlier this year quoted unnamed Enron "insiders" as
suggesting that any monies Mr. Fastow steered
into his own pockets were a "pittance" compared to the benefits he created
for Enron.
People are "erroneously confident"' in their knowledge and underestimate
the odds that their information or
beliefs will be proved wrong. They tend to seek additional information
in ways that confirm what they already
believe.
Mr. Skilling's surprise resignation a year ago came not long after he dismissed
an analyst's question on a conference call
by referring to a body part. Even allowing for the disgruntlement of ex-colleagues,
the overwhelming picture painted of
the Skilling-Fastow-Kopper circle's operating style is arrogant, secretive
and exclusive. Anyone who questioned their
methods was dismissed as not "getting it."
We're used to people making disastrous decisions in their personal lives,
where they have complete sovereignty. We're
used to people exhibiting obnoxious qualities to their own detriment. But
business executives make decisions as a group
and need the support of their colleagues: they create paper trails and
have to explain themselves.
Maybe it's too much to ask them to be invariably honest but we would expect
them not to be self-defeatingly stupid. In
most cases thieves either plan to get away with it or think they aren't
stealing. Enron executives seem to have believed
they weren't stealing.
The purpose here is not to make psychological excuses but to get at the
element of extraordinary miscalculation. On a
final note, Prof. Bazerman (who bears no responsibility for the use I've
made of his 1996 article) takes issue with those
who, in the wake of Enron, have been clamoring for business schools somehow
to teach remedial ethics to their
grown-up students. Surely that's a job for parents and churches when children
are still children.
What business schools can do, he says, is teach students to be aware of
the systematic errors in people's thinking that
can start a basically normal person "down the slippery slope to unethical
decisions."
Updated August 28, 2002 12:33 a.m. EDT