MARKET COMMENT
What Went Wrong At Enron

By David Kuo (TMFDragon)
July 15, 2002

Many people are, quite rightly, asking whether an Enron-type scandal could happen here in the UK. However those people forget that it wasn't so long ago we had the Maxwell Scandal, BCCI, Polly Peck and the Guinness Affair to contend with. Nevertheless those incidences almost pale into insignificance, in monetary terms that is, when we consider the level of deceit and corruption that took place at Enron. There is however a common factor that links all these corporate shenanigans. That is a belief by some of those in charge of those businesses that they could perhaps re-write the rules that govern the way free markets operate.

The free market, despite its name, is not a free for all where the participants can ride roughshod over the interests of others as and when they like. In " What Went Wrong At Enron", an easy-to-read new book that uncovers many of the goings on at the energy trader, Peter Fusaro and Ross Miller provide their insight into Enron's destructive culture. At the heart of that rotten corporate culture, they claim, was a man called Jeffrey Skilling, the former president and chief operating officer of Enron.

Skilling was once asked, whilst he was a business student at Harvard, what he would do if a company he was in charge of produced a drug that might cause harm or even death. Skilling replied, "I'd keep making and selling the product. My job as a businessman is to be a profit centre and to maximise return to the shareholders. It is the government's job to step in if a product is dangerous." Skilling's misguided perception of free market economics led him down the path of Special Purpose Entities (SPE), companies that were initially set up to raise finance to fuel growth at Enron. Eventually those SPEs would be used to conceal, from the market, astronomical losses at the company.

Sadly Enron will not be the last company to try its hand at pulling the wool over the market's eye. Indeed we already have the events at WorldCom (Nasdaq: WCOME), Global Crossing, Qwest (NYSE: Q) and Xerox (NYSE: XRX) to grapple with. But at this time of greater stock market uncertainty it is good to remind ourselves just exactly what the equity market is all about. It is a place where companies can go to raise finance for their businesses. In return for that funding, investors will want to be assured that those companies operate at the very highest level of honesty and integrity.

Investing in the stock market is about putting your money into businesses that you believe will grow over time. It is also about putting your faith in managers that will look after your money and put it to good use. Before you invest in a company you need to be certain that you understand the nature of the business and how it goes about making its money. You should also try and find out something about the people who are running the show at these companies. If you aren't happy about either the company or the people that are behind the company then don't invest in the business.