Review of “Smartest Guys in the Room” by Bethany McLean

The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of EnronThe Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron by Bethany McLean
My rating: 5 of 5 stars

The Enron business story remains one of the most significant instances of business corruption leading to failure and bankruptcy in American history. This book gives an excellent overview of the business practices of Enron, and of the roles played by the major players on the inside. In my opinion the author does a really terrific job of shedding light on the business in a non-technical way, allowing for all to understand the insanity that constituted the Enron business model and practices.
McLean brings us the major players, including Enron top man Ken Lay, who was a major player on the social and political scene in Houston, and had national political connections. We meet Jeff Skilling, the McKinsey alumnus who brings great drive and “brains” to the table, operating as the day to day manager of the operation, and who likely bears much of the responsibility for the calamity that Enron became. We get introduced to Andy Fastow, who devised the complex financial tools that enabled Enron to hide massive losses “off book” while enriching himself through the “third party entities” where the losses were stashed.

The Enron story obviously has many more major players, but these three are the real “stars” of this story. The devotion to financial practices that caused the collapse takes center stage, and those practices should be a main focus. However the collapse entailed far more than shady financial practices. For a group with the these business pedigrees the poor business decisions were shocking, and were the real reason for the collapse. The financial chicanery was necessary to paper over the losses created by the business geniuses at Enron, while enabling the company to put out a false narrative that fooled the investing public, and drove the stock price higher, and enabled all involved to draw huge compensation packages. While the stock price continued to rise the fraud was manageable, but it is not hard to see now that it was never truly sustainable, especially with the disastrous business decisions made by Skilling.

There are many lessons to be learned from the debacle, and the book covers some of them. Board oversight, or the lack of that oversight, was especially damning here. The complicity of the rating agencies in this fraud is self evident, and they bear a heavy burden for the ultimate calamity.

The disturbing trend of dismissing “management details” did not start with Enron, but that style of management usually leads to disaster, and seems to have more fans than ever before. Certainly the management team at Enron, especially Lay, practiced that methodology. Those details may be pesky, but they are usually the difference between success and failure. If there was a shoddy business practice you will likely find it practiced by the “smartest guys in the room,” the Enron management team. Great book, highly recommended.

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