Ken Lay, Al Dunlap, and the “Genius of Capitalism”

Paul O'Neill

“Companies come and go,” Treasury Secretary Paul O’Neill observed on Fox News Sunday this weekend. “Part of the genius of capitalism is people get to make good decisions or bad decisions, and they get to pay the consequence or to enjoy the fruits of their decisions. That’s the way the system works.”

O’Neill, of course, was on the show to talk about Enron, and this was the heart of his response to the question of whether he’d been surprised by the collapse of the company’s share price. The theme of the questioning, on that show and all the other Sunday talk shows, was an attempt to turn the Enron mess into more of a political story. But for various reasons, I’m not particularly interested in that angle. I don’t really care what nickname Dubya gave Ken Lay; what I care about is whether Lay was truly the evil mastermind that he’s being made out to have been, or whether he was simply delusional about what his firm could get away with. Either way, I think it’s safe to say that he made some “bad decisions,” and I’m wondering whether or not he will “pay the consequences.”

Which brings me to Al Dunlap. Remember Al Dunlap? “Chain Saw,” as he was called? Like Ken Lay, he was once a celebrated CEO. He rose to particular prominence after serving for a little more than a year as the chief executive of then-struggling Scott Paper. He fired thousands of people, chain-sawed away at the company’s assets, and sold the leftovers (at what subsequently looked like a wildly inflated price) to a competitor. Wall Street loved it, Scott’s stock exploded, and Dunlap made a reported $100 million. He also write a self-congratulatory memoir—dubbing himself the Michael Jordan of CEOs and so forth—that became a best seller. And his next act was to serve as chief of Sunbeam, another firm in need of a turnaround. The market was thrilled about this at the time: The day his hiring was announced, Sunbeam’s market cap jumped about 50 percent—an amazing $520 million. “People are banking on me,” Dunlap said back then. “I mean, just about everyone I know has bought stock in the company. I’ll have to move to Siberia if I don’t come through.”

Today Sunbeam, a $1 billion firm before Dunlap arrived, operates under bankruptcy protection. “Chain Saw” was cut out of the company in the summer of 1998, after about two years on the job. He was subsequently accused of complicity in massive accounting irregularities that inflated earnings during most of his brief tenure; six quarters of data was restated. He has been sued by shareholders and by the SEC. (Sunbeam’s auditor was Arthur Andersen, a name familiar to followers of the Enron saga, which paid $110 million to settle a related fraud suit.)

Dunlap did not move to Siberia. Yesterday it was reported that he (and some other ex-Sunbeamers) have reached a settlement in the shareholder suit that involves paying about $15 million. The SEC suit lives on, though of course Dunlap is yet to be convicted of anything and his lawyers steadfastly insist that he will be totally vindicated, etc. Even so, it’s hard to deny that he failed to “come through” for shareholders at Sunbeam, no matter how you look at it. And the consequences? Well, he lost money on the $3 million worth of Sunbeam shares he bought shortly before taking the top job there, but on the other hand, he was paid $1 million a year for his time. Let’s face it, a few million here, a few million there—to a guy like Dunlap, things will have to get a whole lot worse before he feels anything resembling financial pain for his less-than-Jordan-esque performance.

Back to Enron, then. People don’t seem very sympathetic when they hear that Ken Lay holds massive amounts of ENE that have been reduced to dust along with the stakes of all his fellow shareholders. This lack of sympathy isn’t surprising since it’s been widely repeated that Ken Lay sold more than $100 million worth of Enron shares in the last couple of years.

My disagreement with Paul O’Neill’s statement above is only with his last sentence—what he’s articulating isn’t exactly the way it works; it’s the way it’s supposed to work. In the real world—or maybe I should say in the rarified world of CEOs—it’s possible for some to lock in enough of the “fruits of their decisions” to make it more or less irrelevant if the worth of those decisions unravels and others start paying the consequences. Maybe Lay did nothing legally wrong, and maybe Dunlap didn’t either. Companies come and go, it’s true, but there’s a depressing repetitiveness about chief executive rise-and-fall tales: It always seems that the upside is limitless, but that the downside, somehow, invariably turns out to be rather elusive. Whether you figure that’s an outrage or genius is all in how you look at it, I suppose.