Politics & Prose April 2002

Good Times for the Bad Guys

Good Times for the Bad Guys

Enron is but one (grotesque) example of corporations that show no loyalty to their employees yet demand loyalty in return

Last month I wrote about Enron's use of conflict of interest as a management tool both inside and outside the company, creating a web of self-dealing so intricately distinctive that it deserves its own verb—to enron: to secure compliance by enmeshing in conflicts of interest. This column is about a more typical feature of the Enron scandal—one that mirrors what's going on in the rest of corporate America. The New York Times columnist Paul Krugman calls it "class warfare"—the bosses turning on the workers. Krugman sees this manifested in the way Enron executives sold off their shares in the company while urging employees to buy and then, as the end neared, requiring them to hold on to their stock until it was worthless. At a December, 1999, company meeting with Jeffrey Skilling one employee asked, "Should we put all of our retirement money into Enron?" The woman moderating the meeting said, "Absolutely," and looked at Skilling, who, unbeknownst to the employees, had sold off 500,000 shares of Enron during that year. He smiled and nodded his head yes. When Skilling's abrupt departure in August, 2001, raised concerns about the company's health, Kenneth Lay, on reassuming the role of CEO, told employees, "Now is the time to buy Enron stock." This after selling $70 million worth of his own stock that year, and after being told by Sherron Watkins that Enron was one accounting scandal away from collapse. Marie Thibaut, an Enron administrator, was so reassured by Lay's statement that she transferred all of her 401K assets into Enron stock. By November, when she cashed out, her $480,000 stake had shriveled to $23,000.

"Companies come and go," Paul O'Neill, the treasury secretary, said the weekend following Enron's collapse. The genius of capitalism, he added, is that "people get to make good decisions or bad decisions. And they get to pay the consequences or enjoy the fruits of those decisions. That's the way the system works." Tell that, Mr. O'Neill, to the 20,000 Enron employees who lost their life savings because they took the advice of their CEO. Tell it to Marie Thibaut. She was swindled. Is that the way the system works?

The self-dealing involved was a breach of fiduciary duty: Lay, Skilling, & Co. apparently took advantage of their knowledge that the company was in trouble to cash out, leaving the owner-stockholders whose interests they were sworn to protect in the dark. But the more socially resonant failure of loyalty was to the employees, many of whom, unlike the institutional investors who owned most of Enron's stock, were known personally or by sight to the executives who betrayed them. And here, I argue, is where the ethics of Enron are the ethics of corporate capitalism writ egregious. The Enron story casts light on a kind of moral numbing rife in executive suites in the 1990s.

When, on the first business day of 1996, AT&T announced it was cutting 40,000 jobs, its stock price rose with perverse celerity. In the calculus of Wall Street, bad human news was good financial news, and news like this was suddenly all over the financial pages—as General Motors, IBM, Sears, Boeing, NYNEX, and other giants shed thousands of jobs. What The New York Times, in a seven-part series beginning that March, called "The Downsizing of America" was in full swing. Three-quarters of all households, The Times found, had had "a close encounter with layoffs since 1980," a third had seen family members laid off, and 19 million people had gone through "a major crisis in their lives" as a result of layoffs. Critics of this way of doing business, like Jack Stack, the CEO of Springfield Remanufacturing Corporation, charged that layoffs were a sign of management failure. "You lay off people when you've screwed up," he told Inc Magazine, "when you have guessed wrong about the market ... or haven't created adequate contingency plans." Global competition and vertiginous technological change also played a role in making the job a locus of insecurity. But Stack was right in saying, "Those who get hurt are invariably those who had nothing to do with creating the problems in the first place."

From Atlantic Unbound:

"What Work Costs Us" (February 10, 1999)
A recent book examines the demoralizing effects of the newly ascendant business regime. By Jack Beatty

Layoffs were a constant in bad economic times; new in the nineties was their coming in good times. Indeed, some people argued, they were the cause of the good times. Companies had learned they could cut their way to profitability and a rising stock price. CEOs who mastered this punishing economics earned nicknames like "Neutron Jack" and "Chainsaw Al." Since much of their compensation came in the form of stock options, CEOs personally profited from downsizing. The more people the CEOs fired, the higher the stock price rose, and the more money the CEOs made. The Wall Street Journal found that the size of the pensions of many CEOs were directly tied to cuts they made in employee pensions. Peter Drucker called this vested interest in despoiling employees an "unforgivable social crime" on the part of America's management class. "The days of corporate loyalty are gone," an AT&T executive said in a statement; employees had to think of themselves as self-employed. In his book Corporate Executions, the management consultant Alan Downs got to the brutal core of the new class war: "Employees are interchangeable parts that can be plugged in wherever and whenever they are needed. They are disposable as well. When the immediate demand for their services has subsided, they can be discarded."

The same companies that led downsizing in the nineties once offered secure employment, extending loyalty down the ladder and receiving loyalty up it. In the 1950s Frank Abrams, the chairman of Standard Oil of New Jersey, voiced the philosophy of corporate stakeholding. "The job of management," he said, "is to maintain an equitable and working balance among stockholders, employees, customers and the public at large." Why did corporations abandon this balance? The proliferation of institutional investors over the past two decades and the competition among them to deliver the best returns on their pension and 401K investments—that's a big part of the story, and the most ironic part, with the restlessness of pension funds rendering the jobs of the pensioners hostage to the next quarterly dividend. The philosophy of today's corporation was put most bluntly by Al Dunlap, "Chainsaw Al," notorious for firing employees and fixing company books à la Enron. Sayeth Chainsaw: "The responsibility of the CEO is to deliver shareholder value. Period."

Companies have essentially told workers that loyalty down the ladder is over, a feature of the post-war corporation run for all its stakeholders not just for Wall Street. Yet the companies still expect loyalty up. That is not an ethical relationship but an exploitative one, and Enron's debauch of its employees, I'm afraid, is a grotesque instance of a trend.

Presented by

Jack Beatty is a senior editor at The Atlantic Monthly and the editor of Colossus: How the Corporation Changed America, which was named one of the top ten books of 2001 by Business Week. His previous books are The World According to Peter Drucker (1998) and The Rascal King: The Life and Times of James Michael Curley (1992). More

Jack Beatty"The Atlantic Monthly is an American tradition; since 1857 it has helped to shape the American mind and conscience," senior editor Jack Beatty explains. "We are proud of that tradition. It is the tradition of excellence for which we were awarded the National Magazine Award for General Excellence. It is the tie that binds us to our past. It is a standard we won't betray."

Beatty joined The Atlantic Monthly as a senior editor in September of 1983, having previously worked as a book reviewer at Newsweek and as the literary editor of The New Republic.

Born, raised, and educated in Boston, Beatty wrote a best-selling biography of James Michael Curley, the Massachusetts congressman and governor and Boston mayor, which Addison-Wesley published in 1992 to enthusiastic reviews. The Washington Post said, "The Rascal King is an exemplary political biography. It is thorough, balanced, reflective, and gracefully written." The Chicago Sun-Times called it a ". . . beautifully written, richly detailed, vibrant biography." The book was nominated for a National Book Critics' Circle award.

His 1993 contribution to The Atlantic Monthly's Travel pages, "The Bounteous Berkshires," earned these words of praise from The Washington Post: "The best travel writers make you want to travel with them. I, for instance, would like to travel somewhere with Jack Beatty, having read his superb account of a cultural journey to the Berkshire Hills of western Massachusetts." Beatty is also the author of The World According to Peter Drucker, published in 1998 by The Free Press and called "a fine intellectual portrait" by Michael Lewis in the New York Times Book Review.

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