Ken Lay: A Prisoner of His Own Success

Why did Kenneth L. Lay do it?

Pundits from every corner of academe are weighing in on this question. But the countless analysts who claim that the former Enron Corp. chairman lied out of greed are wrong.

After 25 years of studying and counseling self-destructive executives whose behavior was at least as abnormal as Lay’s, I can guarantee that what drove him--or, more accurately, caused him to freeze in his tracks as Enron’s financial house of cards was collapsing--was far more complex.

Consider what is arguably Lay’s greatest offense: In late October 2001, despite receiving several warnings about Enron’s accounting practices, Lay promised that Enron would again be wildly profitable.

Many Enron insiders who had heard the same warnings found Lay’s statements and inaction bizarre.

Yet one of the best-kept secrets of executive psychology is that, once you achieve success, you become a prisoner to the business model that brought you acclaim.

Before its collapse, Enron was the Microsoft of energy, primarily because of Lay’s brilliance. He took a garden-variety company--a union of two pipeline companies--and propelled it to Fortune 100 status. Rather than merely delivering gas to customers, Lay exploited the recent deregulation of pipelines, realigning Enron so that it could trade, at a huge profit, the product that others had to drill wells to extract.

The success of this paradigm shift set the stage for Lay’s undoing. Rather than sticking to gas, Enron branched into trading whatever seemed tradable--water, coal, fiber-optic capacity and so on.

Inevitably, Lay stretched this model too far. Before he could realize the damage he had done, success had warped his thinking. Rather than remaining true to the swashbuckling soul that enabled him to seize an opportunity, he grew hyperconservative and became blindly adherent to the business model responsible for his success.

Why else would Lay ignore Enron Vice President Sherron S.Watkins’ memo warning that “improper accounting practices” could destroy the corporation? A person who was not overcommitted to his self-styled, abstruse accounting practices would have immediately done an about-face to salvage whatever viable resources he could.

Yet Lay continued to tout the health of Enron and, implicitly, his own business model, just as gamblers who have a “system” that wins don’t see that they’re throwing good money after bad as losses mount up.

Psychologists call this type of management inflexibility “escalation of commitment”--a process as easy to understand as it is devastating.

Reluctant to face embarrassment by acknowledging that their success has evaporated, many achievers elect to stay the course far longer than they should. Those accustomed to success become overcommitted to bad decisions either by ignoring or suppressing contradictory information, or by psychologically distorting feedback that casts their judgment in a critical light.

By donning rose-colored glasses and insistently sticking to their defunct business model, many successful executives fail to see warnings that they are on a collision course with disaster.

History is littered with failed chief executives who suffered an escalation of commitment.

Consider Kenneth H. Olsen, founder of Digital Equipment Corp. After leading DEC to the top of its industry by building minicomputers, he refused to acknowledge the threat to his business model posed by personal computers. At a conference in 1974, Olsen boldly proclaimed, “There is no reason for any individual to have a computer in their home.” Shortly thereafter, DEC was nearly bankrupt and Olsen was gone.

This argument is neither an apology for Lay nor an effort to exonerate him. He is responsible for failing to exercise his fiduciary responsibilities. I do, however, urge caution before judging his motives. Contrary to Freud, smoking a cigar is typically far more complex than merely seeking a good smoke.