The importance of trust

Why is the collapse of Enron so fascinating? Perhaps it’s the sheer magnitude of the fall. At its peak, Enron posted annual revenues of more than $100 billion. Today, the company is bankrupt.

In mid-October, Enron stock – even after the big plunge in tech stocks – still traded near $40 a share. Today, the New York Stock Exchange won’t even trade Enron shares, which are worth about as much over the counter as a cup of coffee. And that’s not Starbucks, either.

Or maybe it’s apparent corruption, deceit and conflicts of interest that are so compelling.
It’s incredible that this much trouble could have brewed for so long without anyone disclosing it. The board of directors didn’t catch problems. Neither did the so-called independent auditors. Worse, auditors may have hidden some accounting irregularities or even instigated them. Company officials continued to send upbeat signals even though they had to know the truth.

For me, the fascination lies in what I consider to be an old-fashioned truth. It wasn’t really the accounting tricks Enron pulled that brought it down. It was the absolute collapse of trust in the company’s management. That’s one lesson every business owner or executive should take from the Enron debacle.

Enron’s restated financial results, which produced a third-quarter loss of more than $600 million, weren’t the deathblow. Had that been the end of it, Enron would have been bloodied and bruised temporarily – but certainly not destroyed. Instead, damaging revelations kept spilling out. Shareholders, lenders and customers quickly lost faith, putting ever-increasing financial pressure on the company. The actual technology that ran Enron’s core business worked just as well as ever. But nobody trusted the company to keep its word.

Don’t be distracted by the differences between Enron and your own company. Yes, Enron was publicly traded. That meant the company was under enormously more complex and stringent legal requirements than you probably are. True, Enron was a “new economy” company; it certainly didn’t operate like a trucking company. And, of course, Enron was a global corporation generating billions of dollars a year in revenues. None of that really matters.

And don’t dismiss me as naive. I certainly don’t suggest that your operation would ever be headline news. A typical trucking company owner could commit fraud upon fraud and never receive any media scrutiny whatsoever. But beyond the fact that as a good citizen you should follow the law, you also would risk being exposed. Divorces and family squabbles, for example, can get pretty ugly, if you get my drift. Word gets around. People talk. Everyone you deal with – drivers, bankers, shippers and so on – eventually would hear about it. Perhaps they couldn’t prove it, but the rumors would be enough.

Illegal activity is an extreme and, I hope, implausible example. But what about the little things? Maybe you promise drivers weekends at home but frequently pressure them to take another load. Or you tell a vendor that the check is in the mail when you don’t intend to pay for another four or five days. Or perhaps you subcontract a load or two when your promised the shipper you wouldn’t do so. Or maybe you directly solicit a few accounts behind the back of the valued broker who sent you their loads originally.

Everyone occasionally must compromise his commitments, especially when they conflict with one another. But if your track record is one of distrust, you are setting yourself up for a fall. When things go well, you pay no attention. Then you hit a snag and need some concessions from key business partners. Do you think they will come running to help?

You have one thing going for you. Undoubtedly, the sheer volume of money streaming into Enron’s coffers bred some of the cozy relationships and conflicts of interest that led to the company’s downfall. Surely you don’t have to worry about that. Aren’t you lucky?