• Categories: Role of the board
  • Author: Graeme Nahkies
  • Published: Oct 25, 2021
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October 2021 is the 20th anniversary of the sudden collapse of US energy trader Enron. At the time the largest and possibly most dramatic corporate collapse in US history, Enron’s multi-billion dollar meltdown also took international accounting and audit giant Arthur Andersen with it. Collateral damage included not only shareholder and creditor losses, but the retirement savings of thousands of Enron employees. The whole energy trading sector that had seemed so prosperous largely disintegrated as knowledge of inflated volumes and price manipulation emerged. As the widespread abuse of mark-to-market accounting also became better understood, it became obvious that the industry had never been firmly grounded in economic reality.

Twenty years on, Enron is gone but not forgotten. Analysed and documented more thoroughly than perhaps any other single corporate scandal,[1] Enron lives on in infamy. In retrospect it is worth noting that Enron’s collapse spawned a raft of legislation and regulation that was intended, simply put, to legislate for ‘good governance’. While a few accounting and auditing loopholes were closed, that broader intent has certainly not been achieved. At regular intervals over the past two decades, we have seen over-lauded CEOs, over-hyped share market plays and sudden corporate failures that, under closer scrutiny, reveal fatal flaws—many of which could be tracked directly to the boardroom.

Because we do well to remind ourselves that ‘those who cannot learn from history are doomed to repeat it’, we offer the following brief review.


Did the board commit fraud or was it simply incompetent?

Enron-type situations, occurring as they do all round the world, beg important questions. For example, were the boards of Enron and other corporate cot cases just innocent victims of unpredictable market forces and unforeseeable events? Did they act in good faith but were caught short by others providing deliberately misleading information and self-interested advice? Did the spirit and intent of board decisions get undermined by fraudulent collusion between their top executives and company auditors?

As various enquiries and legal actions unfolded, Enron directors consistently answered these questions in self-serving terms. In time, Senate and congressional hearings and court findings concluded that they were asleep at the wheel and/or simply not up to the job.

The underperformance of the Enron board was such that the chairman of the Senate Committee enquiring into the company’s collapse suggested that: “The board of Enron didn’t just fiddle while Rome burned – they toasted marshmallows over the flames.”[2] 

The five Enron directors (the chairs of Enron’s various board committees) appearing before the Committee vigorously defended their record and the character and competence of their fellows. They tried to shift the blame to management and auditors and offered other excuses. Several said, for example, that it was unrealistic to expect part-time board members to uncover hidden problems in a large, complex corporation like Enron

Initially, Enron’s board insisted that it was kept in the dark about the company’s financial problems but ultimately was forced to accept that this was not true. In front of the Senate Committee, the former Enron Audit Committee Chairman agreed that the board was told on several occasions that some of the company’s accounting practices were risky. Seemingly, however, the board took no notice of those warnings, or of other ‘red flags’ noted by the committee.

Reflecting on the fact that Enron’s directors had been paid an average annual compensation of US$329,000 each for looking after shareholders’ and other stakeholders’ interests, it was not surprising when the Senate Committee concluded that some of the board’s actions had been ‘extraordinary irresponsible’.


Had the tail been wagging the dog?

While there was some evidence that the (executive) tail had been wagging the (board) dog, the Senate Committee rightly attributed this shortcoming to the Enron board. The committee described the board’s attitude to top management as ‘deferential and obsequious’. Committee members observed that directors appeared to have been reluctant to question and challenge company executives even after learning that Enron CFO Andrew Fastow had personally pocketed millions by running ‘off-the-books’ partnerships.

Like Enron, many of the companies that have fallen from grace since 2001 have been headed by prominent CEOs lauded by the media and shareholders alike. Interestingly, Enron’s collapse coincided with the publication of research findings by Jim Collins to the effect that consistently great companies are unlikely to be headed by charismatic CEOs.[3] At the time, The Economist chimed in with its conclusion that “The world is falling out of love with celebrity chief executives”.[4]

Collins’s research also concluded that high remuneration does not guarantee comparable corporate performance. Since then, the ‘pay for performance’ concept enthusiastically embraced by Enron has been seriously discredited by other leading management academics.[5]

Despite that research and the confident assertions about its implications, unwise practices have continued, and many more examples of the extent of the personal greed and fallibility of previously lionised CEOs have been revealed.


Is it better to follow the jockeys or the form?

The cult of the all-powerful CEO was fostered, according to The Economist at the time, by the fact that investors found themselves lost in the maths of newly emerging e-business. Traditional company accounts were, it said, ill-equipped to inform the market about company performance. So “in the search for winners, it was easier to follow the jockeys than the form”. For example, few understood Enron’s accounts, but they were prepared to trust Kenneth Lay and Jeffrey Skilling (chairman and chief executive respectively) when they said that the company was in a totally new ball game that would lead to great wealth.

It’s interesting to note the similarities in recent examples. Adam Neumann (WeWork) spun a simple and well-established real-estate practice into a cult-like post-millennial transformation of the relationship between work and play. Neumann was able to have his board play along as he extracted and then destroyed billions of dollars gained from investors willing to believe that WeWork was some kind of new technology play.

Elizabeth Holmes (Theranos) followed a similar pattern. Touting a breakthrough health diagnostic technology that no reputable agency was able to validate, she raised millions and along the way gathered around her a board of the ‘good and great’ of US business and politics.

It may have been coincidence that Holmes was the daughter of an Enron executive but the collapse of Theranos unfolded in a remarkably similar way to the abrupt end of Enron. Journalist Bethany Mclean published a Fortune magazine article that articulated the concerns of some analysts as to how Enron made money.[6] The pressure immediately heaped on the company forced the disclosure that it didn’t, except ‘on paper’.

For Holmes and Theranos, there was a similar trip point, when medical research professors John Ioannidis and Eleftherios Diamandis, along with investigative journalist John Carreyrou, publicly questioned the validity of Theranos’s technology. In late 2015, Carreyrou began a series of articles on this theme in The Wall Street Journal. It triggered a string of legal and commercial challenges to Theranos and by June 2016, it was estimated that Holmes’s personal net worth had dropped from $4.5 billion to virtually nothing. What remained of the company was dissolved in September 2018.

These recent illustrations show we have learned little from Enron’s demise. Far from shattering investors’ illusions that backing the jockeys was a good idea, many otherwise intelligent directors and investors have continued to put their faith and trust in larger-than-life but flawed personalities.


The fish (still) rots from the head

Conservative lenders, funders and investors know that, ultimately, they must put their faith in the governing boards of the organisations in which they have an interest. As in many start-ups, the early boards of companies with histories like Enron, WeWork and Theranos were often friends of the dominant founder, subordinate executives, and major shareholders with interests parallel to those of the founder. Many, if not most of them, had the same incentive to (over)hype the business and its perceived value. Unfortunately, the quality and nature of corporate governance didn’t improve as these companies scaled up. Their boards remained largely compliant with the founder’s wishes, regardless of ethical shortcomings, accounting irregularities, and the rest. These boards continued to be little more than window dressing—‘rubber-stamping’ boards at best—when a great deal more was required of them.

Sustained corporate success does not occur unless a board exercises effective stewardship of the company it governs, ensuring its resources are put to good use, and enhancing its true value over time. This does not happen by itself. A board must ‘give direction’ and exercise control, especially through the speed wobbles that often accompany rapid growth. It is an inherently proactive undertaking. Any board that just sits by, waiting to react to and applaud management initiatives, confining its role to a passive, after-the-fact, scrutiny of corporate performance, is almost certain to preside over eventual value destruction. As British governance writer Bob Garratt, mindful of the global corporate excesses of the 1980s, warned directors five years before the demise of Enron, ‘the fish rots from the head’. Weak board performance is very visible and likely to infect the rest of the company.[7]

These examples suggest it is not always what boards do, but how they do it, that is most important.


Exemplary boards are robust, effective social systems

If Enron (and its recent comparators) have epitomised weak governance performance, what favourable characteristics we should be looking for? Certainly not those susceptible to more rules or prescriptions. Good governance is ultimately behavioural. Writing in 2002, in the wake of the Enron collapse (and several others: Adelphia, WorldCom and Tyco), Yale professor Jeffrey Sonnenfeld made the following observation:

It’s time for some fundamentally new thinking about how corporate boards should operate and be evaluated. We need to consider not only how we structure the work of a board but also how we manage the social system a board actually is. We’ll be fighting the wrong war if we simply tighten procedural rules for boards and ignore their more pressing needto be strong, high functioning work groups whose members trust and challenge one another and engage directly with senior managers on critical issues facing corporations.[8]

So, what are some of the key characteristics of a board that has a ‘robust, effective social system’?


Board members and senior executives develop mutual respect. This triggers a virtuous circle: respect leads to trust; trust leads to a willingness to share information; information can be acknowledged and tested; and better decisions made.  At Enron, the board was not told that whistleblower Sherron Watkins had raised serious questions about financial irregularities. In this case, the CEO apparently did not trust the board. However, this virtuous circle is just as likely to be broken by excessively political board members pursuing agendas they don’t want the CEO or other board members to know about. To develop and maintain this virtuous circle, boards must set explicit expectations of members’ behaviour and undertake specific teambuilding initiatives.


Dissent is valued and encouraged. About the time that Enron was collapsing, I spoke with the CEO of a New Zealand major corporate who told me that if the board should ever disagree with him, he would feel obliged to resign! Thankfully times have changed but—given the risks of groupthink to which many boards are vulnerable (e.g. the pressure to ‘fit in’)—it is vital that “boards regard dissent as an obligation and…treat no subject as undiscussable”.[9] That means explicitly valuing and adopting processes that encourage directors and executives to challenge each other’s thinking. This is particularly important where there is inherently little diversity of thought within the board’s membership.


Directors walk the talk. Their behaviour is always consistent with the published values of the organisation. Enron had a huge gap between its espoused values (respect, integrity, communication, and excellence) and its values-in-practice. After Enron’s fall, for example, it became apparent that the board granted specific exemption from its own Code of Conduct that enabled Andrew Fastow to create the ‘special purpose entities’ that ultimately brought down the Enron ‘house of cards’. Fastow eventually admitted that “I and other members of Enron’s senior management fraudulently manipulated Enron’s publicly reported financial results. Our purpose was to mislead investors and others about the true financial position of Enron, and consequently, to inflate artificially the price of Enron stock and maintain fraudulently Enron’s credit rating.”[10]


Individual responsibilities are clear. When directors accept appointment to a board, it is made absolutely clear what is expected of them—including personal responsibility for their actions. Individual and collective accountability is reinforced in various ways including by periodic performance evaluation. Feedback is essential for learning, and effective directors have a thirst for it. A characteristic Enron shares with other, more recent corporate meltdowns like WeWork[11] is that the key contributors to those corporate collapses subsequently pointed the finger of blame at others or proclaimed their ignorance about what was going on.


The board sees itself as an expert team rather than a team of experts. Governance accountability is ultimately collective but, on many boards, individuals get locked into playing solo parts. These usually reflect their particular experience or subject matter expertise, but may also be based on their personalities, or some other attribute. The effect is to encourage undue deference from their colleagues and thus reduce challenge. It also allows some directors to ‘snooze’ through certain kinds of discussion, confident that others are doing the heavy lifting. To avoid directors getting trapped in rigid typecast positions, ensure, for example, that they spend some time on board committees that deal with matters outside their expertise and experience. Their ‘intelligent naivety’ applied there may add as much value as does their expertise on their primary committee. Another example would be to ask an optimistic, big picture thinker to act as a devil’s advocate on a proposal that requires a detailed critique.



Enron has proved an enduring example of egregious corporate behaviour. Despite its well-publicised lessons, it has had numerous successors in corporate infamy. Hardly a year has gone by without fresh examples to puzzle over, and we have benefited from the efforts of both academics and investigative journalists to help us understand what went wrong. In the process, we have learned that—despite the best efforts of legislators and regulators—ethical corporate behaviour and sound decision-making remain vulnerable to the delusions of those who peddle corporate snake oil. Such delusions cannot be sustained without an endless line of investors keen to believe the hype and willing to jump aboard superficially attractive gravy trains.

So, what have we learned in the end? It is this: corporate stakeholders must still rely on the courage, capabilities, and values of those in the boardroom, and their ability to steer corporations in sustainable and worthwhile directions.





[1] See, for example, Bethany McLean and Peter Elkind (2003) The Smartest Guys in the Room. New York, Portfolio, and the film of the same name.

[2] Los Angeles Times, 8 May 2002

[3] Jim Collins (2001) Good To Great.  New York, HarperBusiness.  ISBN 0-06-6620099-6.

[4] ‘Fallen Idols’. The Economist, 4 May 2002, p.11.

[5] For example, Roger Martin. See ‘It’s Time To Accept That Pay For Performance Doesn’t Work.’ Blog 15 June 2021

[6] Bethany McLean ‘Is Enron Overpriced?’ Fortune, 5 March 2001

[7] Bob Garratt (1996) The Fish Rots From The Head. London, HarperCollins Business.

[8] Jeffrey A Sonnenfeld. ‘What Makes Great Boards Great’ Harvard Business Review. September 2002. Reprint R0209H

[9] Sonnenfeld (2002, 7)

[10] McLean and Elkind, op cit, p. 415

[11] See Eliot Brown and Maureen Farrell (2021) The Cult of We: Adam Neumann and the Great Startup Delusion.