Enron’s PRC: A walk down memory lane of a symbol of poor governance
PRCs adoption in the 90s was the initial step towards feeding a money-hungry unethical culture.
Enron was the model organization – soaring business, stable and rising stock, great place to work; a stock broker’s darling, an employee’s love. It was run efficiently, so much so that its operational efficiency was cited as an industry best practice. The Vitality Curve that the company used as its performance management system was one of those tools for its operational efficiency.
The energy company was the “Star of the New Economy” at the turn of the millennium. Until it wasn’t. From $100 billion in revenue in 2000 to bankruptcy in 2001. From “America’s Most Innovative Company” in 1999 to “The Enron Disaster” in 2001. That’s how the fortunes turned.
In this article, we take a walk down memory lane to study how Enron’s performance management system fed into the unethical culture of one of the largest corporate frauds.
We have a very tough culture; an aggressive culture
Enron’s CEO Jeffrey Skilling is addressing a large herd of Enron employees about the plans to introduce the Performance Review Committee in the upcoming quarter.
The Performance Review Committee had the foundations of the Vitality Curve, popularly known as the Bell Curve and originally pioneered by General Electric’s Jack Welch. Enron used the forced ranking system, or has infamously come to be known as the “Rank and Yank”.
Here is how the employees were classified:
- Superior: Top 5%
- Excellent: 66% - 95%
- Strong: 36% - 65%
- Satisfactory: 16%-35%
- Needs improvement: Bottom 15%
The employees were measured against their contribution to the company’s revenue and squeezed into a bell curve every 6 months by an evaluating committee. For the bottom-ranked, it was an out the door policy.
PRC’s adoption in the 1990s was the initial step towards feeding a money-hungry unethical culture - If I’m going to my boss’s office to talk about compensation and if I step on some guy’s throat and that doubles it, then I’ll stomp on that guy’s throat.
An ex-trader at Enron shares how an Enron employee felt about money-making and perceived team members as their competition
The PRC incentivized two things –
- Making money for the company
- Making more money for the company than your compatriots
So not only were the traders at Enron motivated to make as much money possible for the business, they benefitted from the failures of others. This performance review system was an invitation for the Enron employees to indulge in unethical practices to get the highest rating; and the more people they brought down on their way, the more it benefitted them. And indulge they did. The traders would.
Jeff Skilling was a staunch believer in Darwin’s theory of ‘Survival of the fittest’; and this was a mere reflection of his ideology – employees fighting amongst each other to survive, and it was the weakest who would lose out in the race to the top. The PRC and the ‘stomp-on-someone’s-throat’ ideology symbolized that.
What is incentivized is what drives an employee’s actions.
What this tells about a performance management system is that what is incentivized is what will be the driver of an employee’s actions. If it is just making money without any ethical check, the employee will turn to unethical ways of making money. If it is making more money than your compatriots, chances are an employee will try to sabotage his peers’ performance. So be careful with what you incentivize, and what you reward.
The inmates had taken over the asylum
Amanda Martin, a former executive at Enron comments on the level of independence that the traders at Enron enjoyed and crossed every imaginable level of unethical practice without being questioned by the management (who were relishing the success)
It is hard to find a better oxymoron than calling Enron an asylum. The asylum had the smartest of people and managed to dupe the world economy into believing it generated billions in profits when in reality, these were imaginary profits – all very smartly arrived at using an orchestrated technique of mark-to-market accounting and hiding company’s debt in self-established special purpose entities.
Clearly, an asylum could not conduct such a synchronized fraud for a decade and the ones running the show would not be able to make millions in selling shares, just before the company went bankrupt. Well, it did.
The inmates were awarded total freedom to take matters into their own hands – as long as their actions were making money for the corporation. The unethical practices touched a new high in the year 2001 when Enron blacked out the state of California. The traders would call the operators in California power station to shut down the electricity supply so that the company could hike the prices and make more money.
‘The smartest guys in the room’ were now taking their own decisions and running the show. And they were rewarded for their efforts to commit fraud. No need to go beyond Andrew Fastow, the CFO of Enron, who created a web of companies that solely did business with Enron, and were used as decoys to hide Enron’s massive losses in its balance sheets. Backed fully by the management, he was able to make Enron appear debt free when in reality the company owed 30 billion dollars in debt.
This drives home the point that absolute freedom sans a value system in place and no accountability for actions can breed such extreme steps. The system in place at Enron, not only allowed, but also encouraged the culture. The result? The inmates took over the asylum.
That’s how the culture at Enron was. The culture was the reason the PRC was born, and the PRC then fed back to the culture of unethical behavior, fraud, and hunger for money. It was a symbiotic relationship where the two would feed off each other, and it resulted in the birth of a huge parasite of corporate fraud.
And that is what the Enron story reminds us that a performance management system must be a reflection of the core company values because that is what feeds back to the organization culture.