Enron’s Ken Lay and BP’s Tony Hayward Were Paid to Be Reckless
What do disgraced CEOs Ken Lay and Tony Hayward have in common? As Robert Bryce explains, they were both shaped by a corporate culture that rewards bad behavior.
Tony Hayward’s lips were moving but all I could hear was Ken Lay.
Indeed, the specter of the late Enron CEO was apparent last week during Hayward’s testimony in front of Congress whenever he said something to the effect of “it wasn’t my job” or “I wasn’t directly involved” in the decisions that preceded the blowout of the Macondo well.
Since Enron imploded, we’ve seen a Gucci-heeled parade of multimillionaire executives get indicted in court—or in the court of public opinion—after their companies failed.
Hayward’s lawyerly excuses, like those made by Lay in the wake of Enron’s spectacular bankruptcy in 2001, are remarkable not because Hayward hopes to avoid blame and reduce BP’s liability. All executives facing a crisis would want to do the same. Instead, it’s clear that just as Lay didn’t understand just how perilous his company’s finances were, Hayward didn’t understand the risks that BP was taking by drilling in 5,000 feet of water. And the failure to fathom those risks may end up costing the company $40 billion, or perhaps much more.
But Lay and Hayward are hardly alone. And that brings us to the essential question: Why, over the past decade, have so many top executives been so blind to the company-killing risks that ended their careers, cost investors hundreds of billions of dollars, and put tens of thousands of people out of work?
Since Enron imploded, we’ve seen a Gucci-heeled parade of multimillionaire executives get indicted in court—or in the court of public opinion—after their companies failed. Notable paraders include Richard Fuld at Lehman, John Thain at Merrill Lynch, and Martin Sullivan at AIG.
To be sure, the risks faced by those financial firms are fundamentally different from those faced by BP. The British oil giant bungled what should have been the rather routine process of drilling an expensive wildcat well in the Gulf of Mexico, one of the most-drilled provinces on the planet. The Wall Street firms were overwhelmed by their exposure to toxic financial derivatives.
Although the risks that faced those companies were different, there is a common theme among the companies that do a good job of handling risk management. And the various money managers, energy analysts, and former Enron employees who I've interviewed over the past few weeks all pointed to one essential factor: a company culture that rewards honesty, diligence, and open communication.
Corporate culture has long been one of the most talked- and written-about concepts in management. In one of the best-selling business books of all time, Good to Great: Why Some Companies Make the Leap… And Others Don’t, author Jim Collins discusses the need for what he calls a “culture of discipline.” Collins says that while making decisions, great companies “infused the entire process with the brutal facts of reality.”
Enron’s corporate culture depended on unreality. Indeed, Enron’s management promoted a toxic mix of hubris and excessive compensation, which is the exact same cocktail that led many Wall Street firms to bankruptcy, or something close to it.
Enron rewarded its star dealmakers with big bonuses, regardless of whether the deals they did were profitable. That attitude still prevails today. In many companies, it’s the risk takers who get promoted and/or get the biggest paychecks. CEOs are often given lavish stock options, a move that gives them big incentives to take big risks in order to make those options more valuable. Or consider what happened at Morgan Stanley, the Wall Street firm that, in 2007, took some $9 billion in losses due to bad bets on subprime mortgages that were made by a trader named Howie Hubler. As Michael Lewis recounts in his book The Big Short, Hubler was given lots of latitude (and a huge compensation deal) by Morgan Stanley’s management because they feared that the trader might leave the firm to join a hedge fund. Hubler stayed, and nearly wrecked the company.
• Full Coverage of the oil spill Hubler’s trading book would have meant little or nothing to the roughnecks and tool-pushers working on the drilling floor of the Deepwater Horizon. But again it was hubris and inattention to detail. It was a chain of bad decisions by BP personnel that ultimately led to the blowout of the Macondo well, which will likely continue spewing tens of thousands of barrels of crude oil per day into the Gulf of Mexico until the company can drill a relief well. But the fundamental problem that led to the BP disaster is apparent: BP’s corporate culture was out of whack. Despite numerous accidents, including the multi-fatality explosion at its Texas City refinery in 2005, BP did not achieve any major reforms in its safety procedures.
That lack of attention to safety provides a stark contrast to the corporate overhaul that occurred at Exxon in the wake of the Valdez spill in Alaska in 1989. After the spill, the company made safety a top priority. Today, it’s one of the best, if not the best, operator in the oil and gas industry.
By contrast, in the wake of the Texas City disaster, Hayward's predecessor at BP, John Browne, continued pushing an expensive and flamboyant public-relations campaign that declared BP was going “beyond petroleum.” That focus on PR rather than operations resulted in a safety culture that was beyond pathetic.
Interviews with people who have dealt with BP for years point to two key factors in the company’s culture that created the opportunity for a catastrophic accident. First, BP relied heavily on outside contractors, a decision that helped cut costs but also created a widespread attitude within the company that “it’s not my job.” Second, and perhaps more important: BP’s management did not reward people who took bad news up the management chain.
Enron’s failure nearly a decade ago should have served as a wakeup call for all of corporate America. Instead, Enron’s business model—extravagant use of exotic financial derivatives and excessive leverage—became standard operating procedure on Wall Street. Lay and his second-in-command, Jeff Skilling, believed that by selling their oil and gas operations—by going “asset light” and focusing their company’s attention on trading—the company could pump up its stock price. The result was all too predictable: Enron became dominated by traders whose only allegiance was to their next paycheck. And when Enron failed, many of its top traders and risk-analysis people left to join the trading operations at, wait for it… BP.
Risk is part of life. Every person, every company, faces risks. As a society, we need entrepreneurs, artists, scientists, athletes, and others who are willing to take calculated risks. But if the U.S. is going to avoid another meltdown on Wall Street—and another Macondo-style blowout—then we will need more executives and managers whose first concern is honesty and rigorous analysis, not the next paycheck or quarterly earnings statement. If we fail to develop that type of corporate mindset, then the specter of Enron and Ken Lay will continue haunting America for many years to come.
Robert Bryce, a senior fellow at the Manhattan Institute, recently published his fourth book, Power Hungry: The Myths of "Green" Energy and the Real Fuels of the Future.