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Ken Lay, Enron & ETFsPosted by securities on: 2006-07-13 09:39:21
By Carl Delfeld The painful story of Ken Lay and Enron offers us many lessons on management and investing. My personal view is that Mr. Lay was a good man who got a bit carried away and made a few key mistakes. He should be judged on his total career as an innovative executive and generous contributor to his community and not just on the missteps that lead to the implosion of Enron. I first met Ken Lay and the Enron style of business while representing the United States on the Executive Board of the Asian Development Bank in Manila. Manila was experiencing severe power blackouts and Enron won one of several fast-track contracts offered by the Philippines’s Government to add generating capacity fast at nice fat margins. During 1994-1995, I joined Enron to help develop Asian energy projects. At that time, Ken Lay and Enron were both rising stars and darlings of the investment community. All too often, investors forget that the most important factor to consider in evaluating a company is the quality and character of management. You can have the best products, lucrative and profitable markets and the best balance sheet but if management is faulty the whole story and stock price will crumble. A related issue is the set up of a company’s board of directors and whether it is independent and offers strong oversight of management. Another important factor to consider is the culture of the company. Are economic incentives offered to management and staff closely aligned with shareholder interests? Finally, is the business easy to understand and are operations and financial statements transparent so investors can evaluate the value and profitability of the company. Unfortunately, Enron failed all four tests. Let’s briefly look at each failing. First, when I was with Enron, Mr. Lay had a strong and very capable COO Rich Kinder who made sure the trains ran on time. It was an effective partnership. Ken Lay was Mr. Outside and Rich Kinder was Mr. Inside. But the capable Kinder was not going to wait forever to become CEO and apparently for personal reasons Mr. Lay blocked his appointment as CEO leading to his eventual departure to form the highly successful pipeline company Kinder Morgan. Eventually, Mr. Jeffrey Skilling was appointed CEO and while he is intelligent and hard driving, he lacked the character, experience and administrative abilities required for the position. In retrospect, this should have been a red flag for investors. When Skilling abruptly left the company in 2001, Mr. Lay came back to the CEO position without apparently knowing enough of the details of Enron’s financial problems and mismanagement. Second, Enron’s Board of Directors was comprised mainly of allies and friends of Mr. Lay and did not adequately oversee Enron management and operations. Shareholders should have seen that this was the case and demanded more say in the appointment of experienced and independent board members as a check on management. Third, the culture of Enron was very short-term oriented. Substantial bonuses were linked to demanding but short term performance goals which led to employees leveraging shareholder capital for projects that sometimes did not make long-term sense. My perception was that for many employees, Enron was an opportunity to try to make a lot of money and then go do something else. The problem was that they weren’t using their own money to finance their entrepreneurial activities but rather shareholder’s money. CFO Andrew Fastow was just one example of the problem. Finally, Enron’s trading activity and so-called innovative financing techniques were so complex and opaque that even experienced Wall Street analysts could not figure out how or if Enron was making money. Therefore when questions arose about specific questionable financing transactions, investors lacked confidence to hang tough through the turbulence and headed to the exits at once. Investors had piled into Enron stock without even understanding its business and the risks inherent in its business. Well that is my opinion what went wrong with Enron and investors in Enron but what does all this have to do with ETFs? First, if Ken Lay had had a balanced global ETF portfolio instead of such a high concentration of Enron stock in a margin account, he may have faired better in court. A key charge against him was that as the stock price fell, he was selling Enron stock while he publicly was stating that he was buying it. For investors, it is logical to ask how they can be expected to assess the quality of management, board oversight, the culture and incentives for employees and understand all the fine print in financial statements. The answer is that the vast majority of investors have neither the experience nor time to do so. What if instead of buying a too much Enron stock, investors would have just spread their energy bets over a basket of energy companies by buying an energy ETF such as the S&P Global Energy (IXC) ETF? Even at its peak market capitalization, Enron would have been at best 6-7% of the basket. Even better if the investor has a trailing stop loss in place to lock in gains or limit losses. If you have the time and inclination, go ahead and do some stock picking but keep the lessons of Enron and Ken Lay in mind and put the core of your global portfolio in ETFs. Carl T. Delfeld President & Publisher Chartwell Partners http://www.chartwelladvisor.com/ Carl has over twenty years of experience in the global investment business with a strong background in Asia. Author of global investor primer "The New Global Investor" President of the global investment advisory firm Chartwell Partners Publisher of the Chartwell Advisor ETF Report and Asia-Pacific Growth Columnist on global investing with Forbes Asia: "Global Gambits" Former U.S. Representative to the Executive Board of Asian Development Bank Chairman of the global economic strategy think tank ChartwellAmerica Asian specialist with the U.S. Joint Economic Committee and the U.S. Treasury Former member of the U.S. Asia Pacific Economic Cooperation Committee Former investment executive with Robert Baird & Company and UBS Graduate of the Fletcher School of Law & Diplomacy with economics scholarship from U.S.-Japan Friendship Commission Exchange student at Sophia University, Japanese Ministry of Education Fellow at Keio University Article Source: http://EzineArticles.com/?expert=Carl_Delfeld |
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