It's clever but not smart...

In two of the chapters Malcolm delves into the ENRON scandal of 2001, when one of the most lauded American energy corporation suddenly went bankrupt.  It has since paled in significance and size with the banking and credit crisis of 2008, but it was big, and, Malcolm argues, if the true lessons of the ENRON debacle had been learnt, the 2008 crisis need not have happened.

ENRON stood out, not because it stood out as sleazy, corrupt or old-fashioned, but because it was inspired by modern management theories to hire the most talented staff from the best universities, and pay them top dollar.  They also gave these talented department managers much more freedom to follow their hunches, believing that this would lead to the most advanced business practices, and hence highest profitability. These practices were strongly advocated by management consultants McKinsey at the time, which is one of the reasons why ENRON had such a good name. 

ENRON's exposure and sudden downfall were caused by two practices that were quite common, but poorly understood by the general public: mark-to-market accounting and Special Purpose Entities (SPEs).  Mark-to-market accounting means that the profits of projects that haven't come to fruition yet (and may never happen) are shown in the company's financial statements, and are used by shareholders and others to estimate the company's value and therefore share price. SPE's are soft loans by 3rd parties to the company to enable it to expand and fund new investments, that enable the company to avoid having to go to traditional lenders, who, seeing a company that is rather exposed, would charge a higher interest.  The problem is, that these 3rd parties are kept happy with a stake in the business, they become part owners of the business, just like a mortgage company owns your house.

You can see that once all these mechanisms are in place (with the documentation running into thousands of pages), it becomes extremely hard to assess in what state of financial health a company really is.  This is where the similarity with the trigger for the current economic crisis comes in: The assets of lenders of sub-prime mortgages were close to worthless, the banks had next to no liquidity (cash in hand), and countries like Greece were taking financial risks on the strength of being cushioned by a strong currency kept strong by other nations.  Over-exposure across the board in other words.

So how come that this could happen to a company that had hired the best talent and paid so well to keep them? Gladwell delves deeper into this question than I can do here, but he believes that a theory by psychologists Hogan, Raskin and Fazzini helps to understand what happened. They describe a type of manager that they call the Narcissist,  who will take credit for things that go well, but don't take responsibility when thing don't go so well.

Gladwell also refers to research by psychologist Carol Dweck, who found that people whose self-esteem relied on their intelligence and talent, were likely to exaggerate their skill, and play down their mistakes.  He then concludes that inadvertently ENRON had staffed the higher echelons of its business with these psychological types, and that his, combined with the opaque financial dealings of the company, led to its downfall.

The point I'm coming to is that there are all kinds of intelligence, and organisations ignore this at their peril.  Someone who is judged to have an IQ of 60 may not be able to hurt an animal, but a "highly talented graduate" may smoothly move into research that involves vivisection.  Someone with a deep appreciation of classical music can run a death camp....

Now these are deliberately extreme examples, but one can make the case for there being, for instance, emotional intelligence, musical intelligence, pragmatic intelligence, specialist intelligence, spiritual intelligence and visual intelligence.  Society needs all of them.

What baffles me about the recruitment of the "highly talented" by companies such as ENRON though, is that I do not think that any child when asked "what would you like to become later?" would answer "I would like to sell oil and gas, mummy".  I can just imagine a child answering "I would like to be rich", but that would be more likely when either growing up in grinding poverty, or growing up with parents who give love conditional on achievement.

It seems to me that many people who choose to work for big corporations, do so for remuneration and status, in other words for external validation, not for a particular passion for the company's services.  That to me does not seem very smart.  Whilst I'm not applauding the image of the struggling, eccentric artist (although there are many great specimens), I do believe that by and large artists are smart enough to do what they love and to love what they do.