FEBRUARY 11, 2002

NEWS: ANALYSIS & COMMENTARY

Jeff Skilling: Enron's Missing Man

The CEO who created its in-your-face culture has been largely absent from the inquiry

Former Enron (ENE ) CEO Jeffrey K. Skilling was never known for his subtlety. Just ask Joe Barton. A Republican congressman from Texas, Barton has long been friendly to energy companies. And as head of the House energy and air quality subcommittee, he was in perfect position last year to help Enron Corp. in its quest to open state electricity markets to competition. But when Barton struck a deal that he thought was fair, allowing states to set their own timetable without threatening federal preemption, he soon found that Enron--which donated $28,909 to Barton since 1989--had something else in mind.

Accompanied by Enron lobbyists, Skilling demanded to know why Barton had not insisted on a fixed date for states to deregulate. "He didn't like that and proceeded to tell me how I should run my subcommittee," Barton recalls. "I told him he could run his company the way he wanted and I would run my subcommittee the way I wanted."

Now, Washington wants another crack at Jeff Skilling, the mystery man at the center of the Enron scandal. He was the architect of Enron's strategy and of much of the financial underpinnings. And his abrupt Aug. 14 resignation prompted many outsiders and even an inside whistleblower to conclude for the first time that something must be terribly wrong with Enron.

Investigators in Congress are curious as to just how the brilliant and intimidating Skilling ran his company--and whether he orchestrated the accounting scandal that brought down the nation's biggest energy trader. The Senate Commerce Committee tried twice to get him to testify at its Feb. 4 hearing. His ex-boss, Chairman Kenneth L. Lay, is set to testify then about his role. Lay's wife and children have appeared on TV, portraying him as a victim. So far, Skilling has indicated to the committee that he will possibly talk at some point, but not on Feb. 4. He declined to comment for this story.

But even if Skilling doesn't answer the Senate's questions, he'll have a hard time escaping the spotlight. By nearly all accounts, Skilling, 48, was Enron's chief visionary, head cheerleader, and internal compass. He created and embodied the in-your-face Enron culture, where risk-taking, deal-making, and "thinking outside the box" were richly rewarded, while controls appeared loose at best. The question is, did he implicitly or explicitly push subordinates to break laws as a heavily indebted Enron scrambled to hide years of bad investments to keep its crucial credit rating? "Enron was presented externally as a flat organization, but there was never any question who was in charge," says a former Enron trader. "It was Jeff."

Former colleagues are divided over how much Skilling knew about Enron's looming financial troubles before his surprise exit. Some insist there was no concerted effort to mislead investors, just a company trying bold new ideas that are now being misconstrued. One former exec recalls that last June, Skilling was talking about leaving in a few years and showed no sign of concerns.

Now, an embattled Skilling is fending off lawsuits from a new, $4 million Houston mansion where he can track commodity prices on ceiling screens. He has insisted that Enron was in great shape when he left for undisclosed personal reasons and that he wasn't warned of any accounting improprieties. But even those who are reluctant to attribute sinister motives to the former McKinsey & Co. consultant paint an unflattering portrait. Skilling "was a brilliant strategist and a terrible manager" who surrounded himself with "yes men," says a high-level Enron exec. A veteran analyst says the impulsive, immature Skilling--who once called a hedge fund manager an "a--hole" on a conference call--was simply a poor choice for CEO: "He didn't provide the kind of balance wheel so necessary for a CEO. Someone has to say no."

That's the generous view. Sources close to a Securities & Exchange Commission probe say they're skeptical that underlings could have concealed wrongdoing from such a hands-on manager as Skilling, who regularly walked the halls and talked to employees. A more damning picture is gaining currency among critics as a growing number of ex-employees describe a rogue company that seemingly created earnings from thin air in unit after unit. The off-balance-sheet partnerships that triggered Enron's collapse, in this view, were just a symptom of a company determined to pump up its stock and make earnings at any price. "Everyone knew that the company was a house of cards and that it was overvalued," says an ex-manager at Enron's Azurix Corp. water-services unit. "I just figured--and I think most people did--that if they were getting away with it now, they will get away with it forever."

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.

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. Skilling "would trash other companies," recalls one banker. Indeed, he once compared Exxon Mobil Corp. (XOM ) to a floundering seven-mast clipper ship.

It's hard to remember that only a year ago, when he took the reins, Skilling was widely hailed as a management genius and the toast of Wall Street. As he spread Enron's trading prowess into everything from metals to high-speed communications capacity, Skilling bragged that the stock--which hit a high of 90 in August, 2000--could easily hit 126. (In January, Enron was dropped from the New York Stock Exchange.) Many observers were inclined to give him the benefit of the doubt. After all, as a fast-rising McKinsey consultant, he had correctly predicted that then-regulated gas pipelines would face crushing liabilities from pricey contracts that required them to take gas at agreed-upon prices even if they no longer had customers willing to pay for it. And he saw early on how deregulation of gas and power markets would open vast new trading opportunities. In 1987, while still at McKinsey, he helped Lay create the first forward contracts for gas.

Skilling surprised his McKinsey colleagues when he joined Enron full time in 1990. He quickly turned it into a laboratory for McKinsey's management ideas, adopting the concepts of such intellectual heavyweights as financial-markets expert Lowell Bryan and innovation guru Dick Foster. Over the years, as many as 20 McKinsey consultants worked for Enron, billing it in the tens of millions of dollars annually, says an ex-McKinsey consultant.

Skilling, whose father was a sales manager for a valve company, was used to success long before he joined Enron. An engineering student who went to Southern Methodist University in Dallas on a full scholarship, he fell in love with business classes, particularly the study of derivatives. After graduation, he landed a job in operations at First City National Bank in Houston and later moved into asset-liability management. One of his first projects was to come up with a computer model to catch check-kiters. The bank went under while Skilling was getting his Harvard MBA. In a comment that now seems ironic, he told BusinessWeek last year that he focused on risk controls at Enron because of what had happened at First City.

But if controls in Enron's trading units were not as strong as Skilling purported, some former and current employees say controls were in fact extremely weak in other parts of the company. Certainly, they say, he did little to control his closest confidantes. Many were executives who had helped him build Enron's wholesale-trading business and had risen with him through the ranks. "Once you gained Jeff's trust, the leash became really long," says a Houston headhunter.

One operation that ex-employees say was out of control was Enron Energy Services, the retail unit that managed the energy needs of such big companies as J.C. Penney Co. (JCP ) and Owens-Illinois Inc. (OI ) According to former managers, Enron salespeople used wildly optimistic assumptions about the forward price of commodities and other factors to value their contracts. Huge profits were then booked upfront, though many of the contracts in fact produced losses in the early years. An Enron spokeswoman denies the allegation.

Yet Skilling himself seemed to see problems even as he was talking up the unit's success to analysts. Last spring, he led a reorganization of the operation, moving then-retail chief Lou L. Pai into a new venture-capital business. Pai was replaced by new managers from the trading operation who revamped the compensation system, cut costs, and pulled out of some markets. Pai's lawyer calls charges of accounting impropriety "nonsense" and insists it was Pai's own decision to leave.

Similar complaints about questionable accounting are echoed by an employee in the company's Risk Assessment & Control Division. Asset valuations done by the RAC unit were frequently increased by higher-level managers under the quarterly or twice-a-year review process, says the former employee. "We saw all these deals that had gone sour quickly and how we had booked a profit for them," the source says.

Did fears that such troubles would come to light cause Skilling to head for the door? Certainly, inside Enron, his departure was taken by some as a sign that deep problems were brewing. Still, a former high school classmate recalls that Skilling seemed happy when he showed up with a date at his 30th reunion on Aug. 4. Skilling, whom the classmate remembers as "a kid who concentrated on the book work rather than the social aspects of going to high school," seemed less concerned about business problems than with his difficult divorce--he told former classmates that he had spent too little time with his family. "I think he said he was thinking about moving to the Bahamas or someplace like that," the classmate recalls. Whatever Skilling knew about Enron's woes, the scandal is sure to keep him from relaxing on the beach anytime soon.

By Wendy Zellner in Dallas, with Christopher Palmeri in Houston, Mike France in New York, Joseph Weber in Chicago, and Dan Carney in Washington

Table: Jeff Skilling's Rise at Enron...

-- A hotshot McKinsey consultant, Skilling caught the eye of Enron CEO Ken Lay by creating new energy-trading products.

-- He became the architect of Enron's "asset-light" strategy, insisting that its trading model could be applied to many different markets.

-- He was the foremost advocate of energy deregulation, pushing states to open their electricity markets

Enron's Exodus of Executives

Jeff Skilling's resignation as Enron CEO last August stunned employees and
investors. But several top execs had already abandoned ship:

KENNETH             DEPARTED            LAST TITLE
RICE                August, 2001        CEO, Enron Broadband Services

Helped create Enron's massive trading operation with Skilling. Took over
the telecom unit, which is now suspected of accounting gimmickry.

LOU                 DEPARTED            LAST TITLE
PAI                 May, 2001           Chairman, Enron Accelerator

Spearheaded retail energy sales as head of Enron Energy Services. Left in
February, 2001, to head a new investment arm. Left Enron three months later.

THOMAS              DEPARTED            LAST TITLE
WHITE JR.           May, 2001           Vice-Chairman, Enron Energy Services

Served under Pai at EES, which critics now accuse of overvaluing its contracts.
Left to become Secretary of the Army.

J. CLIFFORD         DEPARTED            LAST TITLE
BAXTER              May, 2001           Vice-Chairman, Enron
Once ran Enron's trading operation and later tried to sell its troubled
international assets. Had raised questions about Enron's investment
partnerships. Baxter died on Jan. 25, an apparent suicide.

JOSEPH              DEPARTED            LAST TITLE
SUTTON              November, 2000      Vice-Chairman, Enron

Joined Enron in 1992 and took over its international operations. Critics
say he overbid for an electric utility in Brazil in 1998.

REBECCA             DEPARTED            LAST TITLE
MARK-JUSBASCHE      August, 2000        Chairman and CEO, Azurix

Once headed Enron's international pipeline and power-plant operations.
She then started Enron's troubled water-services company, Azurix.