As reported in the BusinessWeek Online article, “[1] The Skilling Trap” (June 12, 2006), Jeffrey Skilling, former CEO of Enron, said on the courthouse steps, after being convicted of white-collar crimes that will send him to jail, probably for the rest of his life,

“Obviously I’m disappointed. But that’s the way the system works.”

The BusinessWeek article, went on to say:

… walking out of his trial into the prospect of decades of imprisonment, he stayed in character. He did not say that he was robbed of justice or express regret or defiance. He proved himself, considering the circumstances, a maestro of emotional detachment.

Jeff Skilling’s comments suggest a professional gambler who, having lost a fortune, shrugs and says,

“That’s the way the game is played. You win some, you lose some.”

It may be unfortunate and lamentable for society, but Jeff Skilling was simply telling the truth as he saw it, according to tenets of moral relativism learned at the Harvard Business School and his interpretation of corporate behavior observed while working as a consultant with McKinsey and Company.

After the fall of Enron, corporate America joined together and proclaimed that Jeff Skilling was a ‘bad apple’, not representative of the average CEO, or of any of those formerly associated with him in any way.

But is this true? After all, Skilling is a smart guy and was certainly in a position to know what was going on.

See the essay, “[2] MBAs and Ethics“.

A Product of Harvard Business School and McKinsey & Company

Skilling went to Southern Methodist University on a full scholarship. After graduation, he worked at First City National Bank in Houston, which closed down while he was studying at the Harvard Business School.

Graduating from Harvard with an MBA in 1979, he was recruited by McKinsey and Company as a high-priced consultant to big business.

By 1987, he was working on the Enron account.

On one occasion, I had the opportunity to be on the receiving end of a McKinsey and Company sales presentation, which I remember as extremely impressive — a razzle-dazzle Powerpoint parade of hard-to-get facts and well-researched graphs, presented by a gaggle of PhDs, leading up to a consulting proposal at nose-bleed rates.

According to the [3] Wall Street Journal (January 17, 2002):

“McKinsey was instrumental in advising Enron during its decade-long transformation from a natural-gas-pipeline company into a massively complex trading operation with far-flung interests in water, timber, and high-speed Internet. McKinsey typically stationed its own personnel at Enron’s offices, and dispatched about five to 15 consultants to the Houston headquarters to advise on strategy and operations, according to former Enron executives.”

“… In an article published in the March 22, 1997, edition of its academic publication, McKinsey Quarterly, the authors celebrated Enron’s “new breed of tightly focused and vertically specialized ‘petropreneurs.’ “

“Later in that same article, McKinsey writers extolled how Enron had created a trading, finance and risk management business worth more than $250 million in five years, and how “its deployment of off-balance-sheet funds using institutional investment money fostered its securitization skills and granted it access to capital at below the hurdle rates of major oil companies.”

“For decades, McKinsey has been revered — even feared — for its influence in boardrooms and its extensive and powerful old-boy network among major corporations. Its alumni list reads like a who’s who of the Fortune 500, including the likes of IBM Corp. Chief Executive Lou Gerstner.”

“In recent years, that network has helped privately held McKinsey win lucrative consulting contracts from companies run by its former partners.”

“Mr. Skilling, a vital bridge between McKinsey and Enron, described McKinsey’s approach in an interview with this newspaper in 1993, three years after joining Enron: “In the old days, we’d do one project and go away,” he said of his days at McKinsey. But over time, “the relationships got closer and bigger.”

See: “[4] The Asset-Lite Movement“

For background reading on the influence of McKinsey and Company on American corporate ethics and morality, here are some useful books:

Moving On to Enron

In 1990, after Jeff Skilling had worked with McKinsey and Company for a decade, he was recruited by Ken Lay as Chairman and CEO of Enron Finance Corporation.

In 2001, at the age of 48, he became CEO of Enron Corporation, having risen from the amphitheaters of the Harvard Business School, through training in consultancy at McKinsey, to the peak of corporate America.

Skilling was devoted to the business school philosophy that he had learned at Harvard and polished at McKinsey and Company. According to [10] BusinessWeek Online (February 11, 2002):

“Skilling hired some 250 bright young MBAs each year, all desperate to prove themselves so they, too, could hit the jackpot. Around Houston, a Porsche was seen as the Enron company car. “Skilling would say all that matters is money: You buy loyalty with money,” says an ex-exec. Enron employees felt entitled to rich rewards. After all, Skilling and other top managers fostered the belief that they were the best and that they were on a mission to open markets across the globe in the face of entrenched, lumbering monopolies. …”

“Under Skilling, Enron’s performance-review and compensation systems were lauded by management gurus for fostering creativity. Now, they’re being excoriated for promoting greed and financial impropriety at the expense of long-term shareholder value. Ex-employees say bonuses and good reviews were based on doing deals–the more and bigger, the better. Often, the estimated profits numbers attached to a deal bore little resemblance to the reality of the profits Enron would reap, former employees say. Under Skilling’s philosophy of shedding assets and valuing “intellectual capital,” those who pitched the next deal were the heroes; those who worried about creating solid assets for the next decade “wore a scarlet A” and were marginalized, says a former manager.”

In one year, Skilling’s remuneration as a hired-manager surpassed $100 million.

Skilling Did Not Act Alone

Virtually all the deals in which Skilling was involved during his time at Enron had, in one form or the other, the participation, oversight, and knowledge of representatives of America’s blue-chip auditing, legal, banking, consulting, and securities rating firms, and these smart people had, in one way or the other, the right and obligation to ask questions and see the internal records of Enron.

The fact that Enron was over-extended, extremely leveraged, and speculating in derivatives was public knowledge.

The fact that Skilling was arrogant, brash, over-confident, and a follower of the ‘make-money-at-all-costs’ school of business ethics should have been apparent to all that met him.

However, before the Enron bankruptcy, he was not shunned as a ‘bad apple’.

Skilling had even been invited to speak at the Harvard Business School to youngsters aspiring to follow his example — but that was before the collapse of Enron.

Lessons Learned at the Harvard Business School

Jeff Skilling might be considered the perfect practitioner of the Harvard Business School’s relativistic code of ethics.

His classmate, John Leboutillier, recalls in the article ‘[11] Biz School Blindness‘, how the Harvard Business School case method contributed to the world view of Jeff Skilling.

“On this particular day, the case study involved a company that manufactured a product that might be harmful, even fatal, to the consumer.”

“The question was, what should you do, if you were the company’s CEO, in such an ambiguous but potentially dangerous situation?”

“Several students offered suggestions, none of which galvanized the class. Then a hand shot up …”

“Jeff [Skilling], with his thinning blond hair, wire-rim spectacles and slight Southern drawl, was one of the brightest members of the class and a natural leader. When he talked, as the commercial used to say, everyone listened.”

“I’d keep making and selling the product,” Jeff said. “My job as a businessman is to be a profit center and to maximize return to the shareholders. It’s the government’s job to step in if a product is dangerous.”

“Several heads nodded.”

“Neither Jeff nor those who agreed with him seemed to care about the potential effects of their cavalier attitude. What if the product really did harm consumers? How about the company’s employees? Were they in danger during the manufacture of the product? What would happen to the company if the CEO’s decision was wrong?”

“Few in the classroom that day dared to raise these questions. At Harvard Business School — and business schools nationwide — you’re considered soft, a wuss [a weak and stupid person], if you dwell on morality or scruples.”

A Relativistic Moral Compass

Since Harvard Business School, through the case method, preaches that there is no right or wrong answer in business, it is hard to blame Skilling for what he was taught as a young man at America’s most prestigious university — an institution whose motto is “Veritas”.

Furthermore, Skilling graduated in the top 10% of his class at Harvard Business School, indicating that those in charge were quite satisfied with their student.

As he was taught to do, over the years Skilling’s critical decisions were vetted and approved by independent lawyers, accountants, financiers, and other specialists.

Although some things might seem to be on the edge of the law, there was always someone with the authority to certify that an action, although questionable, was, in their expert opinion, exempt from legal sanction, and therefore, if profitable, morally justifiable according to MBA tenets.

Skilling did not work alone, secretly pulling off nefarious deeds in dark of night.

In each action he had the backing and support of other MBAs, CPAs, CFAs, doctors of law, senior bankers, and assorted credentialed ‘big names’.

Of course, once Enron collapsed, his supporters ran for cover, seeking to shield themselves from the ensuing scandal.

But, as Jeff Skilling said at the end of his trial, “… that’s the way the system works.”

Jeff Skilling Is No Wuss

Now that Ken Lay has passed on to the next world, escaping through the legal loophole of death-before-sentencing the stigma of being branded a criminal, Jeff Skilling is the only Enron CEO who will bear that label and serve, most likely, a life term in prison.

What we must admire about Jeff Skilling is that he played the game to the end as he was led to believe it should be played at the Harvard Business School.

He is no wuss and would not snivel and make excuses about his misfortune.

He followed rules that he learned from famous professors and from his mentors and superiors at McKinsey and Company.

If the gods of chance turned against him, so be it. He would bear the consequences like a man.

Jeff Skilling’s bad luck was that Enron went bankrupt too soon after he had left the company. Perhaps, if the bankruptcy had come two or three years later, he might have might have spent the rest of his life in respected luxury, spending his millions and sponsoring charities.

However, that was not the be. It was the luck of the draw — the way the system works.

See: “[12] Sarbanes-Oxley and the Shortage of Equities” (Lessons from Enron)

Business As A Game

We should not be surprised that Jeff Skilling might view the ’system’ as essentially a game of chance, to be played according to rules of moral relativism, with an outcome to be accepted with stoic complacency.

After all,

• John Maynard Keynes described the stock market as a [13] game of musical chairs;

• Nobel laureate Harry Markowitz used a [14] carnival wheel of chance to describe Modern Portfolio Theory;

• Nobel laureates Miller and Modigliani were honored for saying that [15] debt and equity were equivalent, thereby laying the ethical foundations for Enron’s absurd leverage;

• Nobel laureates [16] Myron Scholes and Robert Merton cooked up the extremely leveraged, highly speculative concept of Long Term Capital Management — a scheme that eventually blew up, requiring intervention of the Federal Reserve, without hint of misconduct.

Jeff Skilling’s attitudes were formed in the heady atmosphere of Nobel laureate financial economics and flowered under the protective bell jars of the Harvard Business School and the McKinsey consultancy.

Skilling had made his way up without exposure to the world faced by modest entrepreneurs who must rise from nothing, scraping to build capital and a reputation for honesty and service, gaining clients and success slowly by giving more than they receive.

What Are Jeff’s Classmates Up To Now?

Although Wall Street hucksters portray the Enron scandal and Jeff Skilling as an isolated, non-representative case, it seems likely, given the prevalence of MBAs in board rooms, that moral relativism and the Harvard Business School’s doctrine of ‘no-right-no-wrong’ are endemic in American public companies.

The astounding growth of stock buybacks that dominate today’s equity markets, surely reflects a generalized willingness of executives, investment bankers, and fund managers, to enhance their own ‘bottom line’ at the expense of less-sophisticated, long-term shareholders to whom they bear fiduciary responsibility.

When we consider that America’s largest banks have much of their capitalization tied up in speculative positions of over-the-counter derivatives and the risky financing of stock buybacks and hedge funds, it seems reasonable that many are following in Jeff Skilling’s footsteps, ‘playing the game’ as taught in business school.

What Would Adam Smith Say?

Before concluding that this is the way capitalism is supposed to work, I would direct your attention to the book, “[17] How the Scots Invented the Modern World” and its excellent discussion of morality and ethics as seen by Adam Smith and fellow philosophers at the time of “Wealth of Nations”.

As for the authority of the Harvard Business School, here is how Adam Smith described the average university:

“… a sanctuary in which exploded systems and obsolete prejudices find shelter and protection, after they have been hunted out of every other corner of the world.”

I have a subscription to the Harvard Business School Review which I read, seeking some sign that the ethical compass of that institution might have begun to stop spinning — rather than pointing every which way at once.

So far, there is no such sign.

Before you put your life savings in a diversified portfolio of corporate equities, you might want to contemplate the moral compass that guides US corporate executives, for if Jeff Skilling is right about ‘how the system works’, you won’t be on the right side of capital flows.