Prevent an Enron sort of demise

Updated: Jan 22 2002, 05:30am hrs
Management with a crooked E. That might well be Enrons epitaph for posterity. But it wasnt always so. In fact, as recently as the year 2000, Fortune listed Enron as Americas second most admired company on the attribute quality of management. Ahead of General Electric, Citigroup, Cisco and Charles Schwab. But of course, that counts for little now. In fact, making management mavens eat a slice of humble pie is now on the post fireworks menu. A recent issue of Businessweek gleefully exhumed quotes of management gurus like Christopher Bartlett and Gary Hamel, all naturally extolling the Big E in the past and asked them if they now felt like idiots.

But if you can bear to put away the long knives for a moment, there just might be a management lesson to salvage from the debris of Enron. And another not-so-well-known company, Dollar General Corp, a fast-growing discount retailer based in Scottsville, Kentucky, which also ran into rough weather recently. Unlike Enron, Dollar General did not close its eyes and ears to its impending financial problems. Instead, last week, the company publicly apologized for improper accounting practices and sliced its net income by $199 million over three years to compensate for account restatements. Primarily, the accounting problems arose due to leases at 400 stores.

What is common between Enron and Dollar Generals woes is a niggling suspicion that one of the factors contributing to the humiliating debacles of these fast growing companies is their reward system. At Enron, powering the dynamo was a forced ranking GE-type mechanism, which was designed to pick out the hi-fliers and kick out the poor performers within the rank and file of management. Nothing wrong with that: most American companies and increasingly, Indian companies implement such systems to build aggressive, smart leaders within the company.

The problem is when the system is pursued too aggressively or too smartly. You are then left with a cut-throat environment which is far more competitive within the company than even outside the company. Being perceived as a high-flyer becomes such a pressure point for mere survival that corporate executives are almost pushed into cutting corners, making snap decisions, and gambling against the dice in the hope of getting ahead in the rat race. And it certainly does not encourage stodgy, conservative managers who are quick to raise alarms.

Okay, so you are a sceptic and are sarcastically saying yeah, who twisted the Enron managements rubber arm But a highly competitive internal culture is capable of doing just that. Worse, it happens subtly: short-term good performance begins to hide a lack of long-term good judgement. It happens across divisions, global operations, in small deals and big board battles and slowly but surely, the cancer of internal competition erodes the muscle and bone of corporate governance.

In the case of Dollar General, I was struck by one of the measures the company is taking to avoid repeating the mistakes of the past: it has announced that stock options for managers will no longer be tied to the company reaching its annual earnings goals. Once again, the implication here is that a reward structure that focused mainly on reaching an aggregate revenue number, blinded the company from the importance of focusing on how to reach that number. Once again, the lure of the final destination led employees to cut corners until finally it was blind-sided by its own failings.

There is nothing wrong in linking compensation policies to the companys performance as long as it is within limits and has built-in safety mechanisms. The idea works well for motivating employees and calibrating the wage bill in good times the company earns more, you earn more; in bad times, everyone suffers together and many New Economy companies swear by this rewards structure. But if too high a percentage of the salary gets linked to overall company performance, beware! The cracks will sooner or later show up, as employees begin to push the envelope in the quest for a fatter envelope on pay-day.

Gloating over Enrons demise is one way to lull yourself into a false sense of security, but a wiser option would be to use Enron as an alarm. Revisit your own rewards and recognition mechanism. Take it apart for a thorough overhaul. Check its pressure points, gauge its weaknesses, reset its levers. Ensure that it is not just pointed in the right direction, but will also take your company through a safe and secure journey there. Finally, check if your R&R game-plan is grooming the right qualities of leadership in your people. As Enrons leadership failed to show, leadership is not just how you behave in a crisis, but how you prevent one.