I have noted parallels with Enron over the last 10 years at QF. I thought I might share these from Forbes:
3/22/2002 @ 8:00AM
There are those who believe– Jeffrey Skilling Jeffrey Skilling is one–that Enron was a successful company brought down by a crisis of confidence in the market. Then there are those who think Enron appeared successful but actually hid its failures through dubious, even criminal, accounting tricks. In fact, Enron by most measures wasn’t particularly profitable–a fact obscured by its share price until late. But there was one area in which it succeeded like few others: executive compensation.
Between 1996 and 2000, the average chief executive salary and bonus increased by 24% to $1.72 million, according to a Forbes study of proxy reports. Total CEO compensation, including stock options and restricted stock grants, grew 166% to an average of $7.43 million. In the same period, corporate profits grew by 16%, and per capita income grew by 18%.
Enron was at the cutting edge of this trend. The stated goal of its board of directors was to pay executives in the 75th percentile of its peer group. In fact, it paid them vastly more and on a scale completely out of whack with the company’s financial results–even if its reported financial results are accepted as accurate.
And
Enron’s share price was climbing steadily prior to 2001. But Enron was systematically annihilating shareholder value, destroying more each year, says Solange Charas, who conducted the study. Enron’s profit picture was worsening, its debt growing and its margins were dwindling. Nevertheless, Enron executives were actually meeting many of the performance goals set by its board of directors. The problem was that the established goals ignored important measures of profitability, Charas says.
In its proxy statements, Enron’s board said, “The basic philosophy behind executive compensation is to reward executive performance that creates long-term shareholder value.” Most boards say much the same thing. In hindsight, the Enron executives didn’t create value in terms of the company share price. But what about along the way?
The Enron board said its “key performance criteria” included “funds flow, return on equity, debt reduction, earnings per share improvements and other relevant factors.” It claimed to have devised its pay package in consultation with Towers Perrin, a compensation consulting firm. A Towers-Perrin spokesman wouldn’t say what, if anything, it did for Enron, aside from providing it with an executive pay study.
By some of its self-styled benchmarks, Enron did well. Between 1996 and 2000, revenue increased to $100.8 billion from $13.3 billion. (For an analysis questioning Enron’s reported revenue, see “Enron The Incredible.”) Enron’s earnings per share grew to $1.22 from $1.12. The company never reduced debt. The bottom line did improve: Reported earnings climbed to $979 million from $584 million. (These numbers are prior to its restatement–information available to the board and shareholders at the time.)
As a percentage of invested capital, Enron’s earnings grew worse every year. In 1996, Enron earned a profit equaling 4.3% of its total assets–already sub-par. By 2000, it was earning 3%. In short, Enron was hoarding more and more assets, which it could do because its share price was rising and its credit was good. But it was doing less and less with the assets it had and furthermore using those assets to 'invest' in much lesser grade assets - in reality performing well below market averages.
“Enron executives were meeting their goals, but they were the wrong goals,” Charas says. If the idea was to create shareholder value, the board ignored important aspects of that value. The company excelled in revenue growth and share price growth, but there was no reality check provided by the balance sheet. It’s like paying a salesman a commission based on the volume of sales and letting him set the price of goods sold, using the company balance sheet to guarantee the price setting.
My bold..
Interesting articles are they not?