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Lessons from Enron

Don’t lie. The whole company image portrayed by Enron proved to be a complete fraud. And as soon as one lie emerged, it didn’t take too long before the rest were unravelled.

Be legal. A rather obvious lesson, but one which is still being broken at every level of the corporate community.

Be open. Enron managed to make a terrible situation even worse by refusing to acknowledge any wrongdoing after the facts emerged.

65 Arthur Andersen

Shredding a reputation

If the Enron scandal proved anything, it was the interconnected nature of the modern business world. After all, Enron had a lot of corporate connections, particularly in its home state of Texas. ‘Within two or three degrees of separation, virtually everybody would have a connection to Enron,’ said Richard Murray, director for the University of Houston’s Center for Public Policy.

However, while the Enron association has had a negative impact on the Texan corporate community, for those firms directly involved with Enron’s day-to-day business practices, the result has been catastrophic. For Enron’s accountancy firm, Arthur Andersen, the association has proved fatal. Andersen was one of the world’s big five accounting practices, with annual revenues approaching $10bn and offices in 40 countries. Founded in 1913, 90 years of prudent progress was swept aside in days.

After all, if it was about anything the Enron scandal was about accountancy. Specifically it was about shredding documents relating to Enron’s accounts and concealing massive debts, a fact that immediately implied a considerable element of complicity on the part of the accountancy firm. This complicity was implied further when David Duncan, Enron’s chief auditor at Andersen, appeared involuntarily at the first investigation into the scandal and then refused to speak in order to avoid incriminating himself. Even when Joseph Berardino, Andersen’s chief executive, vigorously defended his firm’s role in the affair, he was unable to undo the damage. Once it was found guilty of deliberately destroying evidence, the firm suffered severe brand damage and the tremors were felt throughout the entire accountancy industry. Andersen surrendered its licence to practice in the US and though eventually cleared of the worst charges against it, its brand was destroyed.

Lessons from Arthur Andersen

Understand that businesses are interconnected. No firm is completely immune from other businesses. Andersen and Enron’s actions have been impossible to separate, at least in the mind of the public.

Don’t send mixed messages. As the plot thickened, different versions of events started to emerge from inside Andersen.

66 Ratner’s

When honesty is not the best policy

One of the most popular and influential books ever written about marketing is The 22 Immutable Laws of Marketing by Al Ries and Jack Trout and first published in 1993. Their fifteenth ‘law’ is ‘the law of candour’. This states that if a company admits a negative aspect about a brand, the consumer will think more highly about that brand because of the company’s sheer honesty.

Ries and Trout say that it goes against corporate and human nature to acknowledge a problem or weakness. ‘First and foremost,’ they write, ‘candour is very disarming. Every negative statement you make about yourself is instantly accepted as truth. Positive statements, on the other hand, are looked at as dubious at best. Especially in an advertisement.’

The authors go on to give a list of companies which have used this honest approach to great effect. They admire, for instance, the strap line ‘Avis is only number two in rent-a-cars.’ They also declare that ‘positive thinking has been highly overrated’:

The explosive growth of communications in our society has made people defensive and cautious about companies trying to sell them anything. Admitting a problem is something that very few companies do.

When a company starts a message by admitting a problem, people tend to almost instinctively open their minds.