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The Last Interview with Ken Lay Linda Ferrell

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The Last Interview with Ken Lay Linda Ferrell Journal of Business Ethics Ó Springer 2010 DOI 10.1007/s10551-010-0675-y The Responsibility and Accountability O. C. Ferrell of CEOs: The Last Interview with Ken Lay Linda Ferrell ABSTRACT. Responsibility and accountability of CEOs regulatory environments, which improve compli- has been a major ethical concern over the past 10 years. ance and business ethics. Major ethical dilemmas at Enron, Worldcom, AIG, as The most visible case of alleged CEO failure to well as other well-known organizations have been at least act accountable and responsible is the conduct of partially blamed on CEO malfeasance. Interviews with Ken Lay and Jeff Skilling at Enron. The prosecution Ken Lay, CEO of Enron, after his 2006 fraud convictions of these corporate leaders for honest services fraud, provides an opportunity to document his perceived role in the demise of Enron. Possibly no other CEO has had as among other charges, and the recent U.S. Supreme much impact on the scrutiny and legalization of busi- Court ruling on Jeff Skilling’s appeal of his convic- ness ethics as Ken Lay. This analysis is timely because of tion, provides the background for our analysis. Our many information sources now available and the recent purpose is to explore the role of the corporate CEO Supreme Court decisions on Enron conviction appeals. in the ethical, legal, and financial performance of the Using Ken Lay as the focal point, a review of literature organization. The Enron case was selected because provides the background for research questions to explore of its numerous information points that were gath- the role of the CEO in developing an ethical corporate ered from a diversity of organizational stakeholders, culture. including interviews on ungagged.net (‘‘The Other Side of the Enron Story’’, 2010) and many academic KEY WORDS: ethical leadership, honest services fraud, articles. In addition, the authors obtained key Ken Lay, Jeff Skilling, Enron, legalization of business informant interviews from the founder and last CEO ethics of Enron, Ken Lay. In the following analysis, we summarize what Introduction happened at Enron and how this business failure was viewed by various stakeholders, including govern- Over the past 10 years, a number of legal and ethical ment prosecution. We also look at the role of Ken issues have diminished trust in business. One may ask Lay in the failure of Enron. We have key informant many questions about our ability globally to develop accounts related by Ken Lay, whom we interviewed CEOs as ethical role models and the effectiveness of after his May 26, 2006 conviction in the Enron case. regulatory approaches to legalize the foundations of These extended encounters with Lay have provided effective compliance and business ethics. A major us with a deep understanding of his views on what amount of theory and research focuses on the happened at Enron. While we cannot validate the morals of individual decision makers such as CEOs truthfulness of his statements, these interviews will (Reidenbach and Robin, 1990). Our approach to offer an accurate account of what Lay said he examining this issue is to look back to the beginning believed about the Enron disaster. In addition, we of this century and the business failures associated will analyze ethical and legal outcomes from the with Enron, WorldCom, Royal Ahold, and other prosecution of Ken Lay and Jeff Skilling and assess more recent scandals including AIG and Lehman these developments in the context of public policy. Brothers. From these earlier examples we may be Our goal is to improve the understanding of the role able to determine what we have learned and whe- of top management and criminal prosecutions in ther there have been changes to the business and developing an ethical organizational culture. We O. C. Ferrell and Linda Ferrell provide significant updates from the 2010 Supreme honesty, accounting fraud, and corporate gover- Court appeal of Jeff Skilling for his conviction in nance failure. Enron is also associated with personal 2006. To integrate and synthesize the issues covered tragedy. An estimated 5600, and perhaps up to in our analysis, we provide research questions to 10,000, jobs were lost, life savings and retirement advance the application of theory and research in accounts were wiped out, and billions were lost by business ethics. investors and banks – but those losses are small compared to the 2008–2009 financial industry implosion. There were many indictments, convic- Enron and Ken Lay tions, and plea bargains in the government’s attempts to find and blame whoever was responsible for the We had the opportunity to be among a select few, downfall. Only 22 former Enron employees were perhaps the only individuals outside of family indicted or convicted, with just one acquittal; members, legal advisors, and close friends, to speak however, there were 130 unindicted co-conspirators openly with Ken Lay in the days following his which included most top managers that worked with conviction in late May but before his death on July Ken Lay and Jeff Skilling. 5, 2006. Through an accidental meeting aboard an Ken Lay has been vilified by federal prosecutors airplane, we were able to have personal interaction and the media as being the key executive in a and later to conduct more than 4 h of telephone massive fraud that destroyed jobs, savings, and interviews. The conversations ranged from his role shareholder wealth. But in reality, Ken Lay was as CEO of Enron to his views about what caused the convicted for not being proactive in preventing the disaster and demise of the company. As society fraud or knowing about what was going on inside struggles to understand the role of the CEO in Enron. He and Jeff Skilling were convicted for ethical decision making, the thoughts of Ken Lay are ‘‘honest services fraud’’ that did not involve bribes or an important component, both in documenting kickbacks involving the exchange of money. The history and assessing the present. law is used for alleged transgressions such as making Ken Lay returned as Enron’s CEO after its busi- false statements or depriving another of the intan- ness model had failed. Nevertheless, fewer than 4 gible right of honest service. There were certainly months before Enron filed for bankruptcy, Lay pockets of corruption within Enron, and ethical rule remained highly positive about the company’s bending was a part of the midlevel management financial health. He was undoubtedly convicted with corporate culture. Even the ‘‘so-called’’ whistle- the honest services fraud statute for what he said. blower Sherron Watkins claims that Ken Lay was Statements such as ‘‘the balance sheet is strong,’’ some distance from the fraud and was not in any way ‘‘third quarter is looking great,’’ and ‘‘Enron stock is involved in creating it (Watkins and Pierce, 2003). an incredible bargain at current prices’’ is where the Ken Lay was convicted for allegedly not telling the jury found that Lay had crossed the line and lied truth about what was happening at Enron. Enron about Enron’s financial conditions. juror Wendy Vaughan said, ‘‘I felt it was their duty At the time, most experts assumed Enron was an to know what was going on.’’ This same theme was isolated case of CEO and corporate greed, fraud, and echoed by Enron juror Douglas Baggett. ‘‘For a man malfeasance. After the collapse of WorldCom and that knew every aspect of that business and seemed the financial misconduct at other large corporations to know every deal, why didn’t he know what was such as Tyco International, Global Crossing, and going on?’’ he asked. Ken Lay’s fate was sealed when Royal Ahold and Parmalat in Europe, many people the judge told the Enron jury that they could find questioned whether these were systematic failures in the defendants (Lay and Skilling) guilty of con- ethics and regulations. sciously avoiding knowledge about wrongdoing at No other executive has had as much impact on the company. the scrutiny of business ethics in corporate America The complexity of the Enron case illustrates the than Ken Lay. Enron has become the ultimate difficulty of a prosecution and the thin line between symbol of corporate wrongdoing. Enron means ethical and criminal conduct. Enron used complex greed, ethical disaster, corporate malfeasance, dis- computer trading models, exotic derivative products, The Responsibility and Accountability of CEOs and extreme risk-taking without considering the had been and the circus environment after the ethical dimensions of decision making or the rami- conviction, Ken Lay wanted to talk about the future. fications of high-risk financial instruments on stake- He believed that Houston was the wrong place for holders. All of these factors have made running the trial and that there were excellent grounds for an business more difficult and elevated the importance appeal. The appeal, filed later by Jeff Skilling, was of ethics. The focus has become excessively fixed on rejected by the Supreme Court; however, three the bottom line. The role of human beings utilizing justices felt the Houston trial venue to be ques- experience and creative skills to predict consequences tionable. Lay came off as confident and appeared to beyond the reach of quantitative models has dimin- feel in control of his future. If Lay had lived, he ished in recent decades. would have seen his conviction for honest services fraud overturned by the U.S. Supreme Court. Lay indicated that with 30,000 employees in 30 The interview with Ken Lay countries and 200 executives at the vice president level he was surprised that the corruption existed We will document our interactions and interviews without him knowing about it. According to Lay, he with Ken Lay to provide a more in-depth under- had relied on lawyers, accountants, and senior standing of the former CEO who was the alleged executives to keep him informed of issues such as mastermind behind the events leading up to the misconduct.
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