Go to Jail? – RICO, BP, Enron, Worldcom

by | Jul 12, 2010 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in


What do Tony Hayward, Jeff Skilling and Bernard Ebbers possibly have in common?  They all might end up convicted felons. 

While this may sound ridiculous, and very, very scary to corporate CEOs, nobody expected Skilling, the CEO of Enron, or Ebbers, the CEO of Worldcom, to go to jail.  They were hailed as heros, and admired for their leadership of large, high growth companies.  Yet, Ebbers is waiting out a 25 year sentence, convicted of acting illegally in the value destruction at Worldcom (CNNMoney.com “Ebbers Gets 25 Years.”)  And Skilling is working on a 24 year sentence for the downfall of Enron (CNNMoney.com “Skilling Gets 24 Years.”)

Now, BusinessWeek.com is asking if the same fate awaits Tony Hayward in “The Oil Spill:  Will BP Face Criminal Charges?“  As the spill goes on and on, and the damages increase, the public sentiment against BP is increasing.  If the spill goes around Florida to the east coast there will be millions more citizens, and businesses, affected.  It is clear that many laws were broken, as the article lays out.  So it’s not a mute question that an aggressive prosecutor would go after imprisoning Hayward.

As reprehensible as many may find each of these 3 men, how did they end up facing criminal prosecution?  Even The Washington Post has asked “Did Jeff Skilling Do Anything Illegal?“  A Harvard MBA and former McKinsey partner, Mr. Skilling calmly described the practices at Enron completely unapologitically. He was certain he’d done nothing wrong.  Mr. Ebbers was a devout Christian and Sunday School teacher who claimed all through the trial and to reporters on the way to jail he’d done nothing wrong.  I’m sure Mr. Hayward believes similarly.

What all 3 did was simply push the Success Formula too far.  Worldcom, Enron and BP were wildly successful companies.  They created Success Formulas that earned billions of dollars.  For years they grew.  But unfortunately, they kept trying to push the Success Formula to better results when market shifts left that formula earning lower returns.  Rather than recognize that lower returns were an indication of a Success Formula needing change, they dug in their heals and “got creative” in Defending & Extending it.  They used “best practices” to lower costs, and to seek out financial machinations which would allow the business to look more profitable – even as they undertook more, and more risk. 

To them, taking risk rather than change the Success Formula wasn’t thought of as risk.  They were out to protect something they felt had to be protected, at all cost.  The Success Formula that had made money for years, enriching not only themselves but investors, employees and suppliers.  They were blind to the added risk, because it was assumed that doing incrementally more was the “right thing to do” for the company.  They were doing what they believed were “best practices” for the “health” of their companies.

Defending a Success Formula can become very risky, as I wrote in Forbes “BP’s Only Hope For Its Future.”  Years of doing the same thing, only more, better, faster, cheaper, makes it harder and harder to do something different.  The culture and decision-making systems are designed, and modified — Locked-in — to push employees to make the same decision over and over, regardless of risk.  In BPs case we now know that cheaper parts and practices were employed to improve profitability – something each employee felt was in the company’s best interest.  Only, in the end, it served to layer risk upon risk – and lead to an eventual disaster.

Are you “doubling down” on risk in your business?  Are you investing more and more into trying to improve returns in a business that is earning less and less – and growing less and less?  If so, you could be setting yourself up for disaster as well.  Let’s hope in doing so you don’t run afoul of the law.  25 years in prison is a hefty price to pay for spending too much energy “focused on your core” business at a time when you should be looking for new ways to expand and grow where the risks are less.

Big Bankruptcies from Big Market Shifts – GM, Lehman, WaMu, WorldCom, Enron, etc.

by | Jun 29, 2009 | Defend & Extend, In the Whirlpool, Leadership, Lock-in

In May "The Largest U.S. Bankruptcies" was published in BusinessWeek – and since then we've added General Motors to the list.  From biggest down:

  1. General Motors
  2. Lehman Brothers
  3. Washington Mutual
  4. Worldcom
  5. Enron
  6. Conseco
  7. Chrysler
  8. Thornburg Mortgage
  9. Pacific Gas & Electric
  10. Texaco

Did you notice that only 1 of these happened prior to 2001 (Texaco)?  As I pointed out in Create Marketplace Disruption, the number of bankruptcies has been skyrocketing from historical norms.  And the number of bankruptcies of truly huge companies has been growing at an unprecedented rate. 

Ever since the modern corporation was born, the theory has been that being large gave a company lower risk.  Since the 1940s people have believed that their jobs, and careers, are safer in big corporations.  But today big corporations are failing at a truly alarming rate.  What's changed?

Very large companies usually have a Success Formula, locked into place with hierarchy, decision-making processes, narrow strategy programs, consistent hiring processes, tight employee review processes, rigid IT infrastructure and very large investments designed to provide economies of scale.  Their approach to success was driven by the notion that with size they would create entry barriers which would protect them from competitors, allowing for years of ongoing profitability.  These practices were designed to focus the business on its core technology, products, customers and markets.  Management theorists believed that with focus came ongoing success.  They did expected businesses to be stable.  With limited change. 

But today we're seeing dramatic market shifts.  And locked-in Success Formulas are literally failing because the company, and leadership, is unable to adapt to these shifts.  During the 1950s, '60s, '70s and '80s competition was relatively stable.  But that is no longer true.  Success no longer comes from Defending & Extending what you used to do.

Dramatic improvements in telecommunications connectivity, computer assisted data accumulation and analysis, and global access to resources has changed the basis of competition.  Now businesses must adjust to an extremely dynamic marketplace.  Scale is meaningless when a new competitor can access your customers with a web page, achieve global distribution with a logistics partner, access a low-cost outsourced manufacturing plant via telephone, and provide 24×7 service with an Indian-based service contractor.  When a new technology can go from invention to market in weeks, adaptability becomes far more important than size.

The marketplace has been shifting dramatically since 2001.  In everything from manufacturing to financial services to commodities.  Yet, far too few companies are adjusting to the new competitive requirements.  Too many analysts and business leaders still seek market segments, market share and developing entry barriers.  To succeed today businesses have to overcome Lock-in to Success Formulas in order to Disrupt their old approaches and remain vital to customers through the use of White Space to develop, test and implement new solutions.  During periods of dramatic shift, those who follow these practices are far more successful.  Regardless of size. 

Don't forget to download the new ebook "The Fall of GM" for more on how the world's largest auto company failed to adjust to market shifts – and how you can avoid the GM fate by taking actions to make your business more adaptable.