What if Enron's Kenneth Lay had followed the classic rules of crisis management (Tell the truth: Tell it early, tell it all, tell it yourself)?
Probably in the long run it wouldn't have avoided the company's downfall - assuming that there was a fatal flaw in the company's business model, as appears to be the case.
But I don't think there is any doubt that Lay and his colleagues, by violating these three basic rules, made matters much worse. They accelerated the company's collapse and
bankruptcy filing in December 2001, and - worst of all - violated the trust of investors, employees, media and other stakeholders, plunging the company into the ultimate corporate
scandal.
There were three opportunities missed by Lay to tell the truth early:
Opportunity One
First, in July 2001, the company announced that its CFO, Andrew Fastow, had resigned his position leading various off-balance-sheet entities. Lay and Fastow declined to explain
the real reasons for the Fastow resignation. Suppose they had stated the following:
"We have these outside investments that serve to hedge risks for Enron. But they create actual or perceived conflicts of interest, and they tend to obscure commercial risks
undertaken by Enron. So we're going to unravel them, and Mr. Fastow's resignation is the first step to fix the problem."
The markets would certainly have reacted negatively, the press would have responded with thorough coverage and investigations, the SEC would probably have followed with its own
investigations, and all the details would have inevitably dribbled out.
But such a "truth trap" process might have forced Enron to face earlier the realities of what was, as we now know, a hemorrhage of losses in many segments of its business. And,
as a result, it might have preserved Enron's core trading business that appeared to be profitable.
And crucially, such steps might have avoided the credit rating agencies and the creditors precipitously pulling the plug in November-December.
Opportunity Two
The second missed opportunity occurred a month later, in August 2001, when the recently named CEO, Jeffrey Skilling, suddenly resigned for "personal reasons." That explanation
did not ring true - and was quickly modified in the second day's reporting to include Skilling's concerns about the company's business prospects and declining stock values. Lay
and Skilling declined to answer any further questions at that time, again keeping quiet when they knew the truth.
Instead, Lay could have used Skilling's departure as the opening announcement in an Enron "house cleaning" story - again, putting Lay and senior management in a preemptive role
of admitting to the problems first and trying to fix it themselves.
Opportunity Three
Finally, in September, Wall Street Journal reporters began calling Enron and asking specific questions about these off-balance-sheet entities. Fastow reportedly insisted that
the company refuse to respond, and Lay went along with the stonewall strategy. Such a reaction, of course, is unfortunately as typical in these situations as it is stupid. Did
they assume, for example, that The Wall Street Journal would lose interest and not write the story?
Of course anyone in the crisis management business knows that exactly the opposite is almost always the result of stonewalling - the story will be written anyway, but probably
incompletely and certainly lacking the perspective of balancing and mitigating facts. Rather than stonewall, Lay and Fastow could have taken advantage of the reporters' inquiries
by sitting down with them and getting all the facts out, all at once, combined with announcements that the problems would be fixed.
Monday morning quarterbacking is easy, of course, and to repeat, I doubt that in the final analysis, Enron could have avoided its bankruptcy filing.
But perhaps the best result of the way Lay and co. mishandled the pending crisis is that they provide an opportunity for other business executives and directors to study
everything they did and know with certainty that, when faced with a pending crisis, they should do exactly the opposite!
Davis is a partner at Patton Boggs LLP in Washington, D.C., and a member of the firm's legal crisis management group. He served as Special Counsel to President Clinton from
1996 to 1998 and is the author of a book about crisis management, Truth To Tell: Tell It Early, Tell It All, Tell It Yourself: Notes From My White House Education (The Free Press,
New York, 1999).
Avoiding Stonewalling with Few Details
Stonewalling the press - especially major league outlets like The Wall Street Journal - is never a wise idea. But suppose you don't know all the facts on the deadline-driven
reporters' timetable - as must have been the case regarding many of the complicated business and accounting issues at Enron?
Then you do the best you can:
- Lay and co. could have pushed into the story that there was still much that was unknown;
- They could have announced an investigation by the Audit Committee;
- They could have announced an investigation by independent professionals.