The Skilling Trap

Mark Gimein wrote a great analysis of the Enron scandal in Business Week. In The Skilling Trap, he hits the nail on the head. He responds to Jeffrey Skilling’s comments to reporters on the steps of the courthouse after being convicted of fraud and conspiracy: "Obviously I'm disappointed. But that's the way the system works." Gimein comments:

But there's more to it. "That's the way the system works." It's a strange thing for a man to say who has been convicted of 19 separate criminal charges. Reduced to words on a page, you can imagine the tone to be bitter or accusing. But it's not. Nor is it gallows humor, a tip of the hat to the prosecutors who won their case, but something more poignant.

It is a supremely characteristic statement, and it evokes the essence of what went wrong at Enron. Skilling had a startling confidence in what he thought of as "the system," a strange and even endearing belief in the mechanisms -- the letter and only the letter -- of the law.

It’s easy to blame the system, but the system isn’t something outside ourselves, some vast unseen force putting pressure on us to do things we don’t want to do. We are the system. It works that way because we work that way. It won’t change until we do. Adding more laws can’t protect us from ourselves. What is lacking here is character and the integrity to maintain right principles even at a personal loss. Gimein continues and address the spirit of the law:

But what made Enron possible was not a lack of rules. It was an unwillingness to think about regulation and responsibility in any but the most legalistic terms.

[T]here's little question that the source of all the crimes of which he was convicted was the basic dishonesty of trying to keep the company's stock afloat so he could make more money.

No question, the parade of executives in handcuffs will have some deterrent effect. But the evidence that any of this will make executives more accountable and more honest rather than just more careful is thin. Contemporary business culture accepts outsized compensation as a given and takes for granted the notion that chief executives have no special responsibilities more pressing than ensuring a fabulously wealthy retirement. In such a culture it's certain that when the market next crests and crashes, hundreds of corporate executives will at least toy with ways to make the numbers look good until they can get their own money out. After Enron, those who go that route will be more cautious in interpreting the law. Can that prevent the next wave of scandals? No, because no reading of securities law is so careful that it avoids the Skilling trap: When you try to keep to the letter of the law while undermining the spirit, you are likely to violate the letter in the end.

The Skilling Trap is that trap you fall into when you don’t see beyond the letter of the law. Sadly most laws are in place because we substitute what’s legal for what’s ethical. They are not the same. It’s a tug of war we have all experienced. Ethical addresses what should I do. Legal is about what do I have to do. If legal is the only consideration then caution is the watchword. Ethics is about principles and responsibilities.

As Mark Gimein observes, the issue is failure to deal with the spirit of the law. If your actions are right but your attitude is wrong, it will eventually catch up with you. When leaders are looking out for themselves—when leaders are in it for what they can get not for what they can give—we have Enrons. Leadership is about service and looking out for those you are responsible for. Some readers will yawn at this, but character is a real issue with real consequences.

Posted by Michael McKinney at 10:06 AM
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