Twenty-eight years as chief financial officer of an injection molder enabled me to understand the need for the risk-management product that Enron Corp. offered to the plastics processing community. A year and a half as consultant to Enron's trading division, made it possible to understand the traders' mentality that pervaded the Enron corporate culture. Three years with Price Waterhouse left me totally unable to comprehend off-balance-sheet liabilities of literally billions of dollars. The never-ending process of writing my doctoral dissertation on business ethics has left me wondering how legality and ethics relate to each other, and Enron.
Plastics processors are quite a conservative bunch when it comes to the introduction of new financial concepts. During my years as CFO of Tennessee molder Plastic Industries Inc., I was a member of the Society of Plastics Industry Inc.'s financial management committee for almost three decades. There I witnessed, and participated in, the creation of industry standards that were almost universally conventional.
Generally this stance worked well for us, but in a few instances it left us slightly behind the curve. One of these times was when Enron, Koch Industries, Shell Chemical Risk Management Co. and Louis Dreyfus Energy Corp. began marketing forward contracts for resin pricing.
The weakest link of a processor's business model is the inability to manage and budget for the cost of raw material, which might be 50 percent of the cost of goods sold. Plastics processing today is a very large industry dominated by smaller companies. The sector is highly fragmented, divided by both process and markets.
Suppliers, on the other hand, tend to be large, multinational organizations with significant market power. I admit to animosity toward suppliers because of their purposeful obfuscation of raw material prices. I could never be sure of the real price of polystyrene, a commodity material, no matter how I tried. Nor could I understand price volatility of 20-30 percent with no change in the underlying fundamentals.
I believed that forward contracting for the price of raw material would make a fundamental change in the processing industry. It would make the price of commodity resins transparent and enable the processor to plan the material cost component of the income statement for up to a year in the future. I still believe this.
Upon retirement I contacted Enron, which I thought had the most passionate dedication to the industry and the product. I eventually became a consultant for them. The employees at the firm's Houston headquarters were some of the best and brightest I've ever been around. All were between the ages of 25 and 35, sporting MBAs from prestigious schools, dedicated to the company, and highly motivated.
Being gray-haired and slightly slower than this group of paragons, I repeatedly had to ask them to explain how they made money. I was instructed to read Liar's Poker and Against the Gods, books on trading and risk. After doing so, I finally began to comprehend a trader's mentality. I also understood a very basic concept that some there did not — that trust was the key concept, and a prerequisite, to success in a market-making environment.
As late as Nov. 10, I represented Enron at the Plastics Encounter trade show in Atlanta. I told SPI, whose relationship I value highly, as well as peers in the industry, that Enron would survive and prosper. Boy, was I wrong.
I was shocked, as were those bright MBAs, at the implosion of Enron. I wondered at the company's personal ethical breakdowns and at the lack of systems control on the part of a major accounting firm, and even the accounting regulatory structure itself.
A little over three years ago I entered a doctoral program with the objective of understanding ethical behavior in business. To a degree I understood legality, but as a fiduciary in many enterprises, I wanted to be able to verbalize what was morally right. A concise definition of ethical behavior in a business enterprise has proven extremely elusive.
The motto of the University of Pennsylvania is “Laws without morals [ethics] are vain.” Through the centuries, this moral principle had been declared, etching in stone the idea that laws and the legal system were often distinct from “what is right.”
Despite this almost universal ability to state a distinction between “right” and “legal,” it is the genius of the United States to treat all perceived lapses in ethical situations with the remedy, “There ought to be a law against that.” Generally speaking, when enough U.S. citizens concur, laws are passed. Few societies in history have been so diligent in translating “ought” into “law.”
The Enron/Arthur Andersen debacle will, of course, be a boon to attorneys. We will have some new laws, campaign reform almost surely, something on probity in accounting, protection for 401(k) holders, stock options may be expensed and possibly an increase in the number of workers at the Securities and Exchange Commission. But what will be said about integrity, truth, trust, loyalty, character, and honesty? These are little used words today, and when words are not used it means they are not valued.
However ethically flawed at the top, Enron provided a glimpse of the future. Their innovative trading of plastic resins was an idea that could revolutionize the pricing function and knowledge base for our entire industry. The failure of the country's seventh-largest company resulted from the moral breakdown of individuals and the systemic failure of the accounting profession.
There is a cycle to many commercial ideas — origin, boom, bust, and then return as a useful tool. The concept of resin pricing insurance is both viable and valuable, and it will return.
Dan Fisher, an MBA, is a past chief financial officer of molder Plastic Industries Inc. in Athens, Tenn., a former consultant to Enron, and currently is in the doctoral program at Oxford Graduate School in Dayton, Tenn., and the University of Oxford's Kellogg College in the United Kingdom.
He can be contacted via e-mail at [email protected]