On
energy, one of my favorite quotations comes from one of his
old economics professors at the University of Houston back
in the 60’s, Henry Steele who remembered: “In addition to
working days at Exxon, writing speeches for the Chairman,
Mike Wright - among other things, Ken was taking a five
course load in evening classes which he said was easy and
jogging a number of miles after work too”.
I was
quite taken by his energy to say the least. Incredible
energy. To make one extra phone call to get on a plane -
Ken Lay always did that. So Ken Lay was very ambitious but
at some point, Ken wanted Enron to be much more than good
and successful, Ken wanted Enron and himself to be great and
legendary. He wanted to be a great man of the energy
industry But more, a great man of American society and
business. And this explains the hugely ambitious visions
at Enron. The ink was barely dry in 1985 on the merger of
Houston Natural Gas and Inter-North where H&G’s debt load
went from 25% to almost 70% when Ken proclaimed the new
combined company to be America’s premier energy company.
And this was at a very scary time in the industry’s
history. There was the success of Enron Visions to become
the premier integrated natural gas company of North
America. To become the world’s first natural gas major; To
become the world’s leading energy company and to become the
world’s leading company. Wow. Some of these visions in
retrospect were tragically beyond the business plan and the
capabilities of the Enron management team and the rank and
file employees.
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But
not only did Lay’s ambitions for Enron change, he himself
changed in a profound way in the mid 1990’s by the mid- 90’s
- a change that led to a fateful decision to not retain
Richard Kinder by making him CEO and to choose Jeff Skilling
instead.
This
is Ken Lay in 1986 - his game face is on. There are real
problems confronting Enron and the industry. This is Ken
Lay about 15 or 16 years later when he believed that Enron
had unassailable competitive advantage. And I think these
are two very different people - very different people. My
working hypothesis is that Skilling was picked over Kinder
because Richard Kinder was an incrementalist in terms of a
business model and Jeff Skilling was a revolutionist. And
Lay’s vision was all about the later.
Let’s
talk a little bit about Ken Lay’s business model. There
hasn’t been nearly as much emphasis on this as there should
be. You cannot understand Enron from the mid 90’s forward
without understanding what Lay was trying to achieve. Ken
Lay had a business model. That model was perpetual first
mover advantage - a model of revolutionary change or
revolution always over incremental improvement. It’s
baseball season now so the analogy would be to swing for the
fences and don’t use the strategy of the small ball: the
walk, the steal, the sacrifice, scoring runs that way - go
for the fences. And Ken’s years at Florida Gas Company,
Transco and at the very beginning of Enron in the early
90’s, it was more small ball. And this is Ken’s first
annual report at Houston Natural Gas, “Getting Back To
Basics”, we’re going to stay with our knitting and do what
we do best. And this quotation is Principle 6 of A from Tom
Peters book, “In Search of Excellence” and this book is in
the tradition of incremental improvement for business. And
parenthetically, this business philosophy - Peter’s business
philosophy of staying close to the customer, hands on
management is most certainly Rich Kinder’s business model at
Kinder & Morgan today or Exxon-Mobil’s business model. And
now it is so common sensical and so engrained that you
really don’t want to footnote it to anybody. But Ken Lay
was not a status quo person. He had something else in mind
rather than just incremental improvement.
And
the roots of Ken Lay’s business model can be traced back to
the great and colorful economist Joseph Schumpter who
famously said in the 1940’s, “Every piece of business
strategy must be seen in its role in the perennial gale of
creative destruction. It cannot be understood irrespective
of it or in fact on the hypothesis that there is a perennial
lull”.
The
two parts of the sentence “business strategy” - it was the
first time that business strategy had ever been used in a
significant way - that was in 1942 by Joseph Schumpter. He
also used the term “creative destruction” which next to the
“invisible hand” is the most important concept in economics
and business. But Lay was not a direct student of Schumpter.
Lay was a student of Peter Drucker whose 1968 book - the
‘Age of Discontinuity’ influenced Lay greatly and Lay used
it as a textbook in a graduate course he taught at George
Washington University in the early 70’s in Washington DC
while he was working for the Federal Power Commission -
teaching at night. He had way too much energy to go home
after working during the day.
Drucker’s book spoke about a new economic reality where
knowledge trumps experience and the managerial role was
ceding ground to the entrepreneurial function. The Age of
Continuity Drucker explained, was being overthrown by
rapidly improving knowledge, disruptive technology and the
diffusion of new products. Business value in the future,
Drucker concluded - and this was back in 1968, would come
from the disrupting value creating entrepreneur.
Fast
forward a quarter century and let me introduce you to the
guru of Ken Lay and Enron’s business model - Gary Hamel. Hamel was a Drucker disciple who brought the discontinuity
revolution to new heights in his book, “Competing for the
Future and Leading the Revolution”. To Hamel, the Age of
Incrementalism was over. The idea of cutting costs a
little bit, increasing revenue a little bit - if you are
doing that, there is another competitor that’s reinventing
the industry that is going to leave you behind. Don’t
transform your organization. Transform your industry.
Don’t be a rule taker, be a rule maker - no more, be a rule
breaker. How many of us at Enron remember all the
presentations: ‘rule taker, rule maker, rule breaker. “We’re
the rule breaker”. “We’re revolutionaries”.
Speaking of revolutionaries, there is an Enron mouse pad:
“What are you going to do to change the world today”. And
there are interviews with Andy Fastow during this period:
“I’m a revolutionary”. Lots of things at Enron were going on
because people saw themselves as revolutionary. And the
idea went to the very end. There was a conference in New
York City by Gary Hamel on revolution, “Revolt, Revolt” and
Ken Lay was scheduled to appear and this was less than a
month before Enron’s bankruptcy. And here is the draft of
the speech that never got given [displays papers]. And I
look back on it and maybe in the Q & A we can talk about
some of the strengths and weaknesses of it. But try to get
into Ken Lay and Enron’s mind on what’s going on here - the
Age of Incrementalism is over.
So Ken
Lay’s business model put in practice is something like this
- there are great pools of potential profits just awaiting
entrepreneurial discovery and action - opportunities that
the stodgy competition has not or cannot see. By employing
and empowering the best and brightest, potential profits can
be turned into actual profits. But to get the best and the
brightest, you have to implement very aggressive
compensation systems, very aggressive employee review
systems to weed out the slow folks - to create a world
class, fun corporate culture. In the corporate culture at
Enron the basketball games in the front of the building with
Ken Lay guarding Clyde Drexler and uh we have a couple of
old Enron PR people here and I’m trying to remember if we
got out a press release where it said that Ken Lay dunked
one on Clyde the Glide - but maybe we didn’t.
Houston’s professional sports teams - Ken Lay’s determined
efforts to keep professional sports in Houston was
absolutely essential if Enron was going to hire the best and
the brightest; if Enron was going to get the top MBA’s
instead of New York, San Francisco or Chicago with their
sports teams. Think of Ken Lay in terms of Enron from the
beginning to just about the end.
Now to
create a lot of new competitive space for Enron’s
revolutionaries to make money - something very important had
to be done. At this point, you have to understand that
Enron was the foremost - not free market capitalist company
- but the foremost political capitalism company - because a
lot of the new competitive space came from rule changes in
Washington DC. So many of Enron’s profit centers had lots
to do with new legislation and rule changes to create the
competitive space where the first mover profits. It was
political capitalism over free market capitalism.
Revolution over Incrementalism and asset lite.
If you
can use everyone else’s interstate pipelines and interstate
transmission grid through government regulation, mandatory
open access, indeed you can be asset lite and indeed you can
hire the best and brightest to buy and sell gas and
electricity at Enron. But the irony here that the
interpretation when Enron fell was that capitalism got the
blame for no company in the history of the United States
lobbied for and received more government favors in more ways
than Enron. It’s very ironic that many have concluded that
more regulation was the correction for the failure of prior
regulation. In fact, existing regulation allowed the gaming
opportunities for Enron with the tax system, the accounting
system and regulatory trading particularly out in
California. Many have failed to understand that in some if
not many cases, the more you regulate, the more you need to
regulate. And Enron was a master at gaming the regulations.
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