Infectious Greed by Frank Partnoy

supposed to oversee and control. Jaedicke also made nearly $1 million from Enron stock—a lot of money for an accounting professor, even one who had been the dean at Stanford Business School during the 1980s.
    Enron’s anything-goes atmosphere was ideal for Jeff Skilling and Andy Fastow. Skilling was promoted to president and chief operating officer, and became Ken Lay’s clear No. 2 man in 1997. After Fastow raised more than $5 billion for Enron in 1996, in dozens of financings, Lay promoted him to senior vice president of finance, where he became the youngest member of Lay’s inner circle, at the age of 35. Incredibly, Enron—now a large multinational firm—still did not have a chief financial officer, so Lay quickly created the position and put Fastow in it.
    With Skilling and Fastow at the helm, Lay disengaged even more, turning to his social and political circles, and lobbying his friend, Texas governor George W. Bush. When Lay and Skilling were together, it often was merely for public appearances: for example, they posed for photographs
while playing basketball with members of the Houston Rockets, who periodically stopped by Enron’s headquarters during the lunch hour to play on a special court set up in the street in front of Enron’s building.
    Meanwhile, Enron was changing its face. In 1997, Jeff Skilling unveiled a major new advertising campaign, complete with television advertising during the Super Bowl and a newly redesigned corporate logo (the one that later became known as the “crooked E”). Skilling described the ad campaign as the beginning of a process “to take Enron from being one of the least well-known large companies, to joining McDonald’s, Coca-Cola and American Express as one of the most recognized names in the world.” 23 Enron even purchased the rights to name the Houston Astros’ baseball stadium, which became Enron Field.
    As the Internet IPO market began its boom, Enron strived to look like a dot.com , and began betting its future on technology and the Internet. Television monitors scattered throughout Enron’s headquarters in downtown Houston flashed the company’s stock price. Inspirational messages played inside the elevators. There was an on-site gym, and even a subsidized Starbucks coffee shop. Enron was named one of the best companies to work for in the United States. The retirement plan was generous, especially given that the stock price was rising. Every year, young executives received big bonuses and more stock options. And every year, the number of new Porsches and BMWs in the Enron garage multiplied.
    Enron’s board increased the incentives for executives to bet shareholders’ money on speculative ventures by granting huge numbers of stock options. In 1998, Enron granted almost 16 million options to its employees and executives. 24 In 1999 and 2000, those grants more than doubled, to roughly five percent of Enron’s outstanding shares. By Enron’s own estimate, these options would have reduced Enron’s earnings by almost ten percent if their cost had been reflected in Enron’s financial statements. 25 (Fortunately for Enron, Congress had defeated the proposal to include stock options as an expense.) Moreover, because options were a one-way bet, unlike stock, they created incentives for the options holders to take risks that shareholders might not support, and to reduce dividend payments, which benefited only holders of stock, not options.
    In addition to granting these options, Enron entered into derivatives deals to ensure that it would have adequate shares to cover the options by agreeing to purchase its own shares in the future. These forward purchases of its own shares were like a cash repurchase of shares in the open market, except that they didn’t require any cash. Moreover, because
these forward purchases involved over-the-counter derivatives, not actual securities, they did not need to