Lessons in Great Leadership — From Enron and Theranos?

By Scott Young, managing director, client delivery, for CultureIQ

It's a tale of two company implosions, past and present. Enron, a Texasbased energy goliath went bankrupt in 2001 and wiped out $1.2 billion in shareholder equity, thousands of jobs, and much of its workers' retirement savings. Theranos, once a Silicon Valley darling, fizzled out in 2018 after its leaders were indicted in a "massive fraud" scheme that raised $700 million from investors for blood-testing technology that flopped.

What these firms had in common was plenty of warning flags waving in front of their leaders, employees, investors, and the media. In each case, only a few whistleblowers and a few reporters stepped up to uncover the truth. By the time the rest of the business world had decided to listen, the damage had been done.

How can leaders learn to spot these warning signs early and stop workplace shadiness before it is too late? Is there anything prospective and current employees can do to avoid problem workplaces or expose major issues when they arise?

For leaders, the key is to create a workplace culture in which people feel gratitude and recognition for speaking up about a problem.

For would-be or current employees, it's vital to ask the kind of questions that can reveal a compromised culture.

The cultures of Enron and Theranos were too far down the road of deception and denial for red flags to be properly remedied, but the rest of us can benefit from their mistakes. Here are a few red flags that could pop up in your organization — and some advice on how to act on them before disaster strikes.

4 Red Flags to Watch For

1. Zero Tolerance for Challenging Assumptions

Both Enron and Theranos discouraged workers, investors, and the press from questioning their wisdom. While Theranos's punishments were harsher (the company axed detractors quickly), Enron's leaders simply turned a blind eye, ignored the criticism, or condescended, saying critics just didn't understand Enron's sophisticated trading methods.

Remedy: Company-wide measures to gauge employee sentiment might have been able to get around the C-suite's intolerance for challenge and paint a clear picture of just how much (or how little) faith Theranos's workers had in the company's products. As Cerius Executives CEO Pamela Wasley points out in a Forbes article entitled "The Theranos Crisis: Where Was The Board?," an active, ethical board of directors that could have demanded answers from secretive company leaders may have also accomplished the same thing. Theranos had neither of these, but your firm should have both.

2. A Lack of Transparency and Sharing From Leadership With Employees and Investors

Remedy: When leadership isn't transparent, employees often have little recourse other than to be aware of the opacity and be on the lookout — because lack of transparency generally signals that something isn't right behind those closed doors. If a company is lucky enough, someone with an inside track blows the whistle early on, before the company crumbles.

3. Leaders Relied on External Actors to Justify and Hide Their Actions

Enron had accounting firm Arthur Andersen vouching for it, and Theranos founder Elizabeth Holmes crafted a Steve Jobs-inspired image that successfully wooed much of the business press. Both had the media trumpeting a message that was too good to be true.

Remedy: Don't depend on people outside the company to mask your mistakes. If something is rotten, no amount of good PR will cover the stench forever. When a scandal is finally exposed, it will only become an even bigger story for the press. It's better to fix your mistakes early and transparently, if possible.

4. Putting a Premium on Raking in Revenue at the Expense of Quality and Integrity

Enron's culture was obsessed with fostering competition to get ever-bigger results, but there was no value placed on the ways in which those results were achieved. As a result, employees fudged their way to better numbers, which eventually brought Enron down.

Theranos had a similar obsession — and, arguably, its fudging happened on a much grander scale, as the entire company was built and funded on a nonexistent technology.

Remedy: Making it rain is a core value of many successful companies, but the difference is sustainably successful firms don't make it the sole value. Your survival depends on having a culture of trust and transparency among all employees.

Firms that want to make it rain for the long haul will not only tolerate employees who point out errors and issues, but they will also encourage and reward such reporting.

Where Is Your Company on the Calamity-Prevention Ladder?

The Enron and Theranos disasters show that failure to actively manage culture and respond to warning signs can lead to behavior and decisions that have devastating consequences for a firm's very survival. Companies can manage this risk by supporting employees who speak up when they see decisions, behaviors, or practices that are questionable. How good is your organization at doing this?

Dirt Level: Speaking up is clearly punished (and in the worst cases, for all to see). This was the Theranos strategy, and it failed spectacularly.

Lowest Rung: You tolerate internal whistleblowing but stop short of supporting it or encouraging it. This is how Enron treated company Vice President of Corporate Development Sherron Watkins, who warned leadership repeatedly about accounting irregularities.

Second Rung: Leaders verbally encourage coming forward, but they don't actually value it (a.k.a., lip service).

Third Rung: You encourage and actually value your employees' feedback on questionable activities. That means you use the information when it's brought to you.

Highest Rung: Your leadership team models, recognizes, and rewards this reporting behavior.

To create a culture where people speak up when they should, you really should be striving for the top rung on this ladder. More than simply not fearing negative consequences for speaking up, employees should know that doing so makes them trusted and valued members of the company.