Conspiracy of Fools Page 5

  His big chance came when he was about thirteen. The station was hosting an event to celebrate its early success, and a number of local politicians were on hand. When one part of the broadcast didn’t come off properly, the station’s anxious general manager screamed at the young man running the control booth, who quit on the spot.

  The evening looked doomed. Then the chief electrician came up with a suggestion: since Jeff Skilling had learned to work the equipment, why not let him try his hand? Within minutes the teenager was running the broadcast, and he was so successful he kept the job. Skilling was thrilled; here he was, a kid dropped at the station in his mom’s car, bossing around grown-ups. He found that he loved being in charge, dictating how the work should be accomplished.

  The television station went bankrupt just before Skilling left for Southern Methodist University in Dallas, where he had been granted a full scholarship. While there, Skilling had his first real exposure to the vagaries of the business world—and showed his own disposition toward gambling in the markets. He had invested his savings in the company that employed his dad, and watched with delight as the price climbed year after year. It seemed like a painless way to wealth; Skilling even borrowed against the stock to buy his first car. But the early 1970s ushered in a bear market, the price collapsed, and Skilling was broke. He was forced to get a bank loan just to purchase new tires for his car.

  But his investment failure only spurred him to deepen his knowledge of business by studying esoteric investments, like options and warrants. Ultimately, he dreamed up a theory of how to turn commodities like gold into securities like stock and wrote a school paper about the idea. Exhilarated by the intellectual challenge, Skilling abandoned his plans to become an engineer and instead focused on preparing for a career in business.

  Skilling skipped his college graduation, instead driving up to Chicago to marry his girlfriend, Susan Long, whom he met at SMU. From there, he found his first full-time job at First City National Bank in Houston, where he figured out a way to identify sophisticated crooks who were defrauding the bank with bad checks; he was bursting with pride when an equation he devised helped catch a couple of bad guys.

  Despite his success, he decided that the place that could help him really shine was Harvard Business School. He applied and was notified that a dean from the school would be in Houston for another event and would interview him. Freshly scrubbed and in a suit, Skilling headed for the meeting at the downtown Hyatt Hotel, but things got awkward quickly. The dean drilled Skilling with questions for about forty-five minutes; Skilling gave prepared, formulaic answers and sensed things were going badly. “Skilling,” the dean finally said. “Are you smart?”

  Skilling smiled. I’ve probably blown this anyway. What the hell? “I’m fucking smart,” he shot back.

  “That’s what I would guess. So why are you giving me all these bullshit answers?”

  “I thought that was what you were supposed to do.”

  “Okay, so drop that. Tell me what you really think. Why do you want to go to Harvard?”

  Skilling breathed in deeply. “I want to be a businessman,” he said. “I really want it bad.”

  The conversation began anew, continuing for another hour, and this time Skilling sensed everything was clicking. And he was right; before the day was out, he learned that he had been admitted.

  Harvard transformed him. At first intimidated by his classmates, he soon found he outscored most of them on classroom tests. His conceit began to show, alienating some potential friends. But his professors considered Skilling brilliant, and in 1979 he graduated as a Baker Scholar, a designation bestowed on the top five percent of the class.

  He was offered a position at McKinsey & Company, the consulting firm with a reputation for arrogance that matched his own, and leaped at it. After wheedling his way back to Texas—first in McKinsey’s Dallas office, then in Houston—he focused on energy, an industry whose approach to business struck him as hopelessly outdated and, more important, just plain screwy. He attacked its problems with a vehemence that won him the reputation of a brilliant but self-important strategist.

  By 1985, Skilling had been working with John Sawhill on InterNorth for more than three years, long enough to understand the company’s internal politics and steer clear of the headquarters debate. After fobbing the assignment off on Washington, Skilling thought little about it again until a draft copy landed on his desk. He picked it up and flipped through the pages.

  What the hell?

  He couldn’t believe what he was reading. The thing was junk—more like a travelogue than a real report. Which city had more professional sports teams? Which had more nonstop flights? What businessman would relocate his business solely on the basis of such trivia?

  Skilling snapped up a pen and started writing. He wasn’t about to turn over such a shoddy piece of work to a client—suicide mission or not. If the Washington office couldn’t handle the assignment, then he’d do it himself.

  Skilling and Sawhill walked past the front desk at the Omaha Marriott on their way to the first-floor meeting rooms. On this day, November 12, 1985, a film crew—in town to make a movie about Boys Town—had taken over, lending the usually businesslike place an air of frivolity. Still, Skilling and Sawhill barely noticed. Not this morning, on the day of their formal report to the HNG/InterNorth board.

  The two men arrived at ten o’clock at the door of the Columbus Room, where the board was meeting. An aide told them to wait. They wandered over to chairs outside the door and sat. Minutes passed, followed by hours.

  Then, fireworks. Directors started yelling at one another. Skilling and Sawhill glanced at each other. Neither could quite make out the words. Finally, sometime after one o’clock, the door opened. Sam Segnar emerged, his eyes red-rimmed. Sawhill and Skilling stood.

  “Listen,” Segnar said, “I just want you to know I’ve been replaced as the chief executive of the company.”

  Sawhill and Skilling were too stunned to speak.

  “It’s been nice knowing you,” Segnar said. He headed down the hallway, tears in his eyes. The two consultants just stood there; all this over the headquarters? This assignment might be more lethal than even Skilling had thought.

  The door opened again; the board was ready for them. Most of the directors were looking sheepish. On one side, Ken Lay, a man Skilling had met in passing only a few weeks before, was wide-eyed and a little pale.

  Sawhill and Skilling found their seats, and the situation was laid out for them. Segnar was gone; Ken Lay was now president and chief executive. Bill Strauss, InterNorth’s sixty-three-year-old former chairman, had returned to his old job and would be running the meeting.

  “All right,” Strauss said. “Now we want to hear your advice on the corporate headquarters location.”

  Sawhill stood, straightening his coat. “Thank you,” he said. He spoke for a few minutes, then gestured toward his colleague. “Let me introduce Jeff Skilling, who’s handling this presentation.”

  Oh, thanks, John. Skilling launched into the report. The conclusions were simple: HNG/InterNorth’s business was in Houston. Its key pipeline there had numerous problems, and its contracts required renegotiation; management needed to be there to oversee the work.

  “Now,” Skilling said, “the worst possible outcome would be to maintain dual headquarters. So you need to decide, Houston or Omaha, and we would recommend Houston.”

  A pause. Charles Harper, the chairman and chief executive of ConAgra, an Omaha-based food company, gestured that he wished to speak. Strauss recognized him.

  “This,” Harper said, fury in his voice, “is the biggest pile of bullshit I have ever heard in my life!”

  For several minutes Harper and other directors raged. The company was a major Omaha employer; it couldn’t just pick up and leave. Harper turned red as he stormed, and Skilling feared the man was building up to a heart attack.

  “Okay,” Skilling said, holding up his hands. “Listen, I’m just a cons
ultant. I’m just giving my advice.”

  One director moved that the company maintain dual headquarters. Another seconded the motion.

  “Fine,” said Strauss, the chairman. “All in favor?”

  A chorus of ayes filled the room.

  “Opposed?” Silence.

  Jesus Christ, Skilling thought.

  “The ayes have it,” Strauss said.

  Defeated, Skilling and Sawhill made their way out of the room as the directors called a break. Lay hustled to the hallway to find the consultants. “Jeff! John!” he called.

  The two consultants waited as Lay hurried up to them.

  “I want to apologize for what happened here,” he said. “The work you did was very good, we appreciate the thought that went into it. I think you’re probably right, but we just can’t do it now.”

  Skilling nodded, mumbling his thanks. For all the trouble the board had given him, he thought, at least this fellow Lay was a class act.

  HNG/InterNorth descended into chaos. The ousting of Segnar was supposed to calm the waters at the company; instead, it set in motion an endless drama of backstabbing and one-upmanship as longtime InterNorth employees prepared for a final battle with the interlopers from HNG. Many viewed Lay as one misstep away from Segnar’s fate.

  Topping it off, the newly merged company was still struggling through the basics, including the selection of its independent accounting firm. HNG had long relied on Deloitte Haskins & Sells; Lay and his top management were recommending that firm. But InterNorth had used the prestigious Arthur Andersen & Company, and the directors were frightened that changing firms would leave Andersen no choice but to shut down its Omaha office.

  The issues came to a head in late January 1986 at a series of directors’ meetings in the sixteenth-floor boardroom of the Omaha headquarters. Lay easily won the battles with subordinates; the directors accepted his appeal to terminate two longtime InterNorth executives he believed were sowing discontent. But the selection of auditors proved to be far stickier. The audit committee—which would make the final recommendation of accountants to the full board—listened in silence as Keith Kern, the chief financial officer, presented management’s recommendation of Deloitte as auditors and Andersen as consultants.

  When Kern was finished, Lay spoke up. “Now, the management committee is not unanimous here,” he said. “But I personally agree with the recommendation.”

  The first shot from the directors was a surprise: it was aimed at Andersen. James Renier, who worked at Honeywell, said he was worried about that firm. He knew Andersen had been clobbered in recent years by malpractice lawsuits; it had paid about $140 million in such cases over five years, seven times more than any other firm.

  That would not be an issue, Kern replied. “They’ve discussed those cases with us in detail. The amount of money is large, but, really, the number of cases is relatively small. We don’t think it’s a concern.”

  The signal of support for Andersen was all the other directors needed. Of course the lawsuits weren’t a problem, several said. In fact, one suggested, why take the auditing away from Andersen? With all the difficulties that HNG/InterNorth was facing, why go to the trouble of a switch? Why not rely on Andersen for everything?

  Georgiana Sheldon, formerly head of the Federal Energy Regulatory Commission, felt uncomfortable with the suggestion. “Wait,” she said. “I don’t like the idea of giving all the work to Arthur Andersen. I’d be concerned about a possible conflict of interest if the same firm performed both the consulting and the auditing.”

  The directors understood. Auditors might need to examine the outcomes of consultants’ strategies. Who would want an adviser grading its own papers?

  “I agree,” said Robert Jaedicke, the Stanford Business School dean who served as the committee chair. “I’d be concerned if Andersen was appointed auditor and a transition wasn’t made quickly to another consultant.”

  The bantering left Lay uneasy. Once again the board members seemed to be undercutting their managers in favor of their own parochial interests. “I need to point something out,” he said. “Our CFO made this recommendation to me, and I agreed with it. So it’s the recommendation of the CFO and the CEO that this proposal, as outlined, be accepted.”

  The room went silent. Finally, someone took the bait. “I’m concerned about the message we’d send if this committee doesn’t support management,” Renier said.

  The dynamic of the discussion was shifting. But Jaedicke asked for a forty-eight-hour recess. Lay walked out frustrated. It was a stupid squabble, one that, if he lost, would once again undercut his authority.

  Some battles are just not worth fighting.

  The only way to win, Lay decided, was to adopt the board’s position as his own. He would be victorious in defeat. Two days later, Lay went back to the boardroom to speak with the directors by conference call.

  “It is very important at this stage in the company’s history to have unanimity from this committee,” Lay said. “In view of the fact of the virtual equality of the two firms, management has revised its recommendation”

  He paused for a moment. “We are now recommending that Arthur Andersen be retained as our independent auditor.”

  The directors unanimously agreed. Arthur Andersen was retained as auditor and consultant; Deloitte was abandoned. No one raised the concerns again about the possible problems of Andersen serving in two conflicting roles.

  Lay’s defeat on the accounting issue set Bill Strauss to thinking. His reappointment as chairman was supposed to help the company come together. Instead, it was pulling itself apart. Already he thought Lay was spending too much time on internal politics; the man had been given the CEO title but received little of the respect that the job deserved. Something needed to be done, Strauss decided. Everything was put in motion in early February 1986, when Strauss ambled down to Lay’s office.

  “Look, Ken, I know these are tough times, and they’re probably not going to get any easier,” Strauss said.

  “That’s probably an understatement,” Lay said, chuckling.

  “Well, we need to resolve a few things. I need to know your hands are tied to the steering wheel, that you’re here for good.”

  One problem, Strauss said, was that Lay’s contract from HNG allowed him to pull the rip cord on a golden parachute up to a year after the company merged. So there was still plenty of time left for Lay to walk away from his job with about three years’ worth of salary and bonus.

  “If everybody is going to get behind you, Ken, we need to know there’s no escape hatch,” Strauss said. “I’d like you to give up your golden parachute, and I’d like to be able to tell the board at the next meeting that you did.”

  Lay asked for the weekend to think about it, and talked it over with his wife, Linda. On Monday he returned with the verdict: Strauss could let the directors know he was giving up the pay package.

  The board met on February 11, 1986, at an office building in Orlando, Florida. The directors gathered around the table, and Strauss started things off. Lay figured he would open with the announcement about the pay package.

  “I have something to tell you,” Strauss began. “I’m going to tell you something that only my wife and I know.”

  What? Strauss’s wife sure wasn’t the only one to know about Lay’s decision. What was going on?

  “In the last few weeks I’ve met with each of you individually. I’ve talked to you about what ought to happen at this company. I’ve asked you about the management team, and the problems and all of that”

  Strauss looked over at Lay. “I’ve reached the conclusion that I should step down as chairman and Ken should become chairman.”

  No one spoke; no one moved.

  “This company needs one leader and one leader only,” Strauss continued. “There has to be no doubt about that. So, effective right now, I resign as chairman, I resign from the board, and I am going back to Omaha.”

  Strauss walked out—no good-byes, no ha
ndshakes. In that moment Lay understood Strauss’s request from the week before; he had tied Lay’s hands to the steering wheel before jumping out of the car. It was the ultimate rebuke to the board; the company had only one driver now, and the board could either support him or crash.

  The directors sat in silence, until finally one of them spoke up. “I nominate Ken Lay as chairman.”

  The vote was immediate and unanimous. Lay assumed total control. Before the year was out, his own supporters had a majority on the board—enough to succeed in moving the headquarters to Houston. But the tumult that surrounded the creation of his company was far from over.

  “Enteron.” The decision seemed final. HNG/InterNorth would abandon its awkward name and be rechristened “Enteron.” It would be the strongest signal of the company’s emergence into the new Lay era. On February 19, 1986, eight days into Lay’s chairmanship, the company announced that the new name would be put to a shareholder vote in April.

  The name had been proposed by Lippincott & Margulies, a pricey New York consulting firm that had spent three months and millions of dollars on the project. It derived from an analysis of the company’s business—“En” for “energy,” “ter” for “international” and “InterNorth,” and “on” because it sounded cool. After thinking it up, the consultants had checked around the world to be sure no other company was using the name and that it did not have some vulgar meaning in another language.

  Problem was, no one bothered to check Webster’s. “Enteron” is also a word for the digestive tube running from the mouth to the anus—particularly unfortunate, given that Lay’s company produced natural gas. Within days of the announcement, the soon-to-be Enteron was a laughingstock.

  It all came to a head one Saturday as Lay and his two top advisers—Mick Seidl, his president, and Rich Kinder, his general counsel—jogged three miles in Houston’s Memorial Park, debating what to do. Seidl and Kinder believed that the issue would blow over in little time; Lay was equally adamant that the new name had to go.