Former chief executive officer and chairman, Enron Corporation
Born: April 15, 1942, in Tyrone, Missouri.
Education: University of Missouri, BA, 1964; MA, 1965; University of Houston, PhD, 1970.
Family: Son of Omer Lay (a store owner, salesman, and lay minister) and Ruth Reese (a farmer); married Judith Diane Ayers, 1966 (divorced 1982); married Linda Ann Herrold (a legal secretary), 1982; children (first marriage): two.
Career: Humble Oil, 1965–1968, economist and speech writer; U.S. Navy, 1968–1969, supply officer; George Washington University, 1969–1973, lecturer and assistant professor; Federal Power Commission, 1971–1972, commissioner's assistant; U.S. Department of the Interior, 1972–1974, deputy undersecretary for energy; Florida Gas Company, 1974–1976, vice president; 1976–1979, president; The Continental Group, 1979–1981, executive vice president; Transco Energy Company, 1981–1984, president and COO; Houston Natural Gas Corporation, 1984–1985, CEO and chairman; HNG/InterNorth, 1985–1986, chairman and CEO; Enron, 1986–2002, chairman and CEO; 1997, president.
Awards: Leadership Award, Private Sector Council, 1997; Business Hall of Fame, Texas, 1997; Horatio Alger Award, Horatio Alger Association of Distinguished Americans, 1998.
■ Kenneth L. Lay's life began in poverty, but his stature rose so high that he once turned down an offer to join the elder George Bush's cabinet because he deemed the position of Secretary of Commerce to be beneath his dignity. In business he became a role model for chief executives, and his opinions on the future world economy and world politics were widely sought. Although his achievements were envied by many, he was such a nice man that few resented him. In the early 2000s he fell from admired leader to despised failure: he looted billions of dollars for the sake of self-aggrandizement and self-indulgence,
bringing about catastrophe for tens of thousands of victims and misery for millions more.
Ken Lay's parents owned a feed store that went out of business; the Lays eventually moved in with relatives on a farm. Not until he was 11 years old did Kenneth Lay live in a house with indoor plumbing. His childhood was one of adult responsibilities, as he had to work driving tractors and plowing fields, during which time he would daydream about becoming rich in commerce.
A good student, Lay earned a scholarship to the University of Missouri, but since all his expenses would not be paid for he took out loans and worked painting houses. A basic economics class taught by Pinkney Walker caught his imagination, and he decided to major in the subject. Walker persuaded Lay to stay in school to earn a master's degree, which would increase his chances for advancement in business.
After graduation, for a couple of years Lay worked for Humble Oil, which would soon become Exxon, meanwhile taking part-time courses to work on his doctorate. In 1968 he enlisted in the Navy; Walker used his connections to get Lay a position in Washington, D.C., where he worked on navy procurement. He found work teaching night school at George Washington University after his enlistment expired, and he finished earning his PhD. During this period he married his college sweetheart Judith Diane Ayers and had two children, Mark in 1968 and Elizabeth in 1971.
In 1971 Walker was appointed to the Federal Power Commission, and he made Lay his chief assistant. Lay's work impressed many people, resulting in his being appointed deputy undersecretary for energy in October 1972, answering to the Secretary of the Interior Rogers Morton. In a time of power outages and oil embargoes there was much for Lay to work on, but he saw the energy crises of the 1970s as opportunities for business and thus applied for a job at Florida Gas in September 1973. The chief executive officer W. J. Bowen hired Lay as vice president in charge of corporate planning in 1974.
Lay quickly rose to corporate president in 1976. In 1979 he moved on to a bigger company and a higher salary at The Continental Group. In 1980 he asked his wife for a separation; he was having an affair with his secretary Linda Ann Herrold. The divorce was a bitter one, with custody of the children hotly contested and Judith suffering a nervous breakdown that required hospitalization. But Lay's winning personality made people love being around him, and within a few years after 1982—when the divorce became final and Lay married his lover—Judith and the children mingled with Lay and his new wife for Christmases in Aspen.
By 1980 Lay seemed to have all he wanted. He was paid almost $400,000 per year; he owned expensive homes and could afford most of life's luxuries; but he was obsessed with earning ever more money and buying ever more luxuries. When he went to Houston Natural Gas (HNG) in 1984, he helped engineer the acquisition of his former company, Florida Gas, expanding HNG's pipelines through much of the southeastern United States. It was in 1985, after he became CEO, that Lay seized his biggest opportunity.
In Omaha, Nebraska, Samuel F. Segnar, the CEO of the pipeline company InterNorth, and other company officers were distressed by the venture capitalist Irwin Jacobs, who had bought about one-third of their company's shares. They feared that Jacobs would take over the company. Thus, they looked for a way to turn InterNorth into a poisoned pill. They found at HNG a friendly, folksy CEO who was willing to cut a deal: InterNorth would purchase Houston Natural Gas for so much money that the newly merged company would have $5 billion in outstanding debt.
Segnar and his co-workers made an astonishing blunder, however: as part of their agreement with Houston Natural Gas they gave former HNG officers more seats on the new board of directors than were given to former InterNorth officers. The new company, dubbed HNG/InterNorth, bought out Jacobs's shares for $357 million, of which $230 million was taken from employees' retirement funds. In November 1985 the new company's board of directors fired Segnar and appointed Lay CEO. The entire turn of events became ironic when Jacobs said that he had never intended to take over InterNorth; he had just invested in what he regarded as a growth stock.
HNG/InterNorth was then paying over $50 million per month on its outstanding debt, which stood at three-quarters of the company's equity. In 1986 Lay began selling some of the company's holdings, including its chemical business, the sale of which garnered $634 million. In 1986 Lay was given $731,000 in cash compensation, making him one of America's highest paid executives.
In 1986, after senior executives debated new name possibilities, HNG/InterNorth became Enron, and Lay found another avenue to greater wealth: deregulation of the natural-gas industry. He used his Washington connections and had Enron make political donations in order to influence Congress to make natural gas an unregulated, tradeable commodity.
In January 1987 a bank contacted Enron, warning that the division in charge of managing the company's crude-oil business had opened an account with a suspicious amount of activity. Oddly, Lay seemed unconcerned. The employees who owned the account, Louis Borget and Thomas Mastroeni, were given a clean bill of ethical health by Enron's board of directors. In fact, Borget and Mastroeni were running a scam to make profits look bigger than they actually were by creating trades with dummy corporations, enriching themselves in the process through their mysterious account. In October 1987 Enron lost $150 million as a result of the scam. Although Lay had brought Enron's indebtedness down to $3.5 billion, that loss in addition to a precipitous decline in the value of Enron's shares put the company in danger of not being able to meet its payroll. Yet, New York banks bailed Enron out with new loans. In 1990 Borget and Mastroeni pleaded guilty to charges of fraud.
In 1989, as natural gas was deregulated, Lay created the Gas Bank. The idea was to form a bridge between producer and consumer. Natural gas had been subject to large increases and drops in prices, and producers were reluctant to sign long-term contracts for fear that they would miss out on the next big upward spike in prices. The Gas Bank was intended to guarantee consumers long-term supplies at set rates while stockpiling reserves of natural gas bought from producers. While the Gas Bank never made much of a profit, as producers were suspicious of its potential for dampening prices, it set the stage for Enron's worst years.
In 1990 Lay was given $1.5 million in cash compensation along with millions of shares of Enron stock. He was becoming an important Houston civic leader by investing in charities. It was in that year that he hired Jeffrey K. Skilling; as a condition of employment, Skilling insisted that any project he worked on use mark-to-marking accounting, meaning that whatever profit a deal was expected to make would be counted when the deal was first closed, not when the money actually came in. As such, while deals might take several years to actually earn money, their projected profits would be immediately counted against Enron's bottom line—showing profits where they had yet to be made.
In 1991 President Bush offered Lay the cabinet position of Secretary of Commerce, but Walker told Lay that the position was not important enough for someone of his stature; Lay declined. Meanwhile, Enron's chief financial officer Andrew Fastow found a new use for the Gas Bank: he created Cactus, the first of what would eventually amount to 3,500 dummy companies created by Enron. Enron would make phony deals with the Gas Bank and assume, as a supposedly separate and independent company, any debts the Gas Bank incurred. By keeping Cactus off the books, Enron's actual indebtedness would be hidden.
Thanks to Cactus and other dummy companies created by Fastow, none of Enron's earning's reports would be accurate, but to unsuspecting observers Enron seemed to do very well. In 1993 Enron reported $387 million in profits; in 1994 profits totaled $453 million; in 1995, they totaled $520 million. These gains drew investors, and Enron's stock value climbed. In May 1995 James Alexander, an executive in Enron's Global Power & Pipelines division, warned Lay of suspicious accounting of the division's finances. Lay seemed not to have acted on the warning.
Enron's corporate culture changed radically during the mid 1990s. Lay was an affable, relaxed man who had run Enron like a club of old friends; with the arrival of Skilling the corporate climate became cutthroat. Bonuses and salaries became dependent on the closing of deals—any kind of deals—and employees stopped working together, instead battling each other for the rights to each deal made. Furthermore, the chief operating officer Skilling adopted the practice of semiannually firing the employees rated in the bottom 20 percent at the company; ratings were based primarily on the number of deals closed.
In 1996 Skilling turned his attention to electricity, and Lay pushed for electricity deregulation. This proved to be a hard sell, but Enron invested millions of dollars promoting the idea, winning its biggest victory in California, which opened both electricity and natural gas to the whims of the marketplace. Lay argued that electricity prices were kept artificially high by greedy public utilities and regulators who represented the utilities more than they did the public.
In 1997 Lay served briefly as president of Enron after the previous president left for better opportunities. He campaigned for the use of natural gas for generating power, noting that it was cleaner and cheaper than other fuels. Within Enron he broke down corporate divisions into small units dedicated to finding and making deals quickly, hoping this would inspire an entrepreneurial spirit in the company. He seemed unaware of how profoundly cutthroat competition among his employees had become.
Lay and Skilling decided that Enron's core business should be energy trading and that assets such as power plants and pipelines were of secondary importance. That year, Fortune magazine named Enron the most innovative company in America. On November 5, 1997, Enron's board approved the creation of Chewco, an off-the-books dummy company created by Fastow. Chewco hid $2.6 billion in debt while inflating profits by $405 million.
In 1998 Lay helped set up a subsidiary of Enron named Azurix, which was created for his protégée Rebecca Mark. Azurix traded in water the way Enron traded in energy and fuels, and Mark lived as Lay did. Enron had a fleet of jets that flew Lay and his family wherever they wanted to go; he owned over 20 houses and estates in Texas and Colorado, all of which were lavishly decorated with antiques by his wife. Mark, too, tried to live large, but Azurix was a start-up and could not support her the way Enron had; thus, she drove Azurix into debt that was hidden by a dummy corporate partner. That year Enron would try to create a trading market for broadband, which seemed like the next big commodity, but lost $1.2 billion in the effort because there was insufficient demand for broadband services.
One of Enron's weirdest moments occurred in 1998 when Lay and other corporate bigwigs led Wall Street analysts through the trading floor of the Enron Energy Services divisions, which was abuzz with employees cutting deals and making trades. It was impressive; it was also fake. The floor had previously been vacant and had been filled with employees told to look as though they were doing something simply to impress the visitors. This episode suggested that Lay was at ease with Enron's duplicitous practices.
In 1999 Lay received a salary of $1.3 million and a bonus of $3.9 million, plus a $1.2 million cash reward for Enron's rising stock price, which would peak at $90 per share. These numbers did not tell the whole story; investigation after Enron's collapse showed that Lay was compensated over $200 million for the years 1999 through 2001. In addition, he had numerous services paid for by Enron, from vacations to meals. In June 1999 Enron's board of directors allowed Fastow to serve as manager for Enron's dummy companies even while he continued to serve as Enron's chief financial officer. This meant that he could pay himself with fake deals between Enron and his fake companies. The most notorious of these companies were the Raptors, which bought and sold Enron stock, inflating the stock price. The Raptors alone cost Enron about $700 million.
In 2000 California learned what Enron had wanted from a deregulated marketplace. For years afterward Enron employees would insist that the catastrophe was California's fault and that Enron had done nothing wrong; Lay himself said California had deregulated stupidly instead of intelligently. Government investigators discovered that Enron's dummy companies had traded natural gas and electricity among themselves, with each trade increasing the price, until the commodities were sold to California for several times their actual market value. This practice bankrupted businesses and households, made people homeless, and devastated lives; Enron claimed earnings of $101 billion for the year.
In January 2001 Enron stock was valued at $80 per share. In February Skilling replaced Lay as CEO, with Lay remaining chairman of the board. In May the vice chairman of the board J. Clifford Baxter warned Lay and the board that he had found accounting irregularities; his warnings were not acted upon. In August Skilling resigned from Enron, claiming personal reasons; accounts of his behavior suggest that he had a nervous breakdown and passionately wanted to spend more time with his family, having missed his children's growing up while giving his life to Enron. After Skilling's departure Lay was reap-pointed CEO by the board of directors.
On August 15, 2001, the Enron accountant Sherron Watkins gave Lay a memo detailing the crimes of corporate officers, hoping he would fix the problems. He promised to protect her and actually did when Fastow tried to seize her computer and fire her. Even so, Watkins feared for her life and consulted Enron's security department for help. Lay had security concerns of his own; he skipped a scheduled speech in Los Angeles because California's senate had charged him with contempt, such that he might have been arrested. Lay's son Mark had a three-year, million-dollar contract with Enron, but he quit in 2001 to attend a Baptist seminary. Lay was selling his stock rapidly, perhaps to feed his appetite for luxuries, perhaps to escape Enron's impending doom; but in September 2001 he urged employees to buy more Enron stock and to urge their families and friends to do so. In October he admitted publicly that Enron was "missing" $1.2 billion.
On October 30, 2001, Watkins again warned Lay about malfeasance in Enron's finances, and so Lay promised to fire those responsible. Instead, on October 31 he created an investigative committee from the board of directors. In 2002 the committee would deliver a scathing report on Enron's disastrous financial schemes, but by then Enron's criminal activities had become public. On December 2, 2001, Enron declared bankruptcy. Ranked seventh on the Fortune 500 list, the $70 billion company could not pay its bills and was over $30 billion in debt, $17 billion of which was accounted for by phony partnerships. Enron's investors lost $67 billion. All of the company's 21,000 employees worldwide lost their pensions, which were invested in Enron stock; in addition, most lost their life savings, which had also been tied up in shares in Enron.
After trying to hang on during the crisis, Lay found he had no support among his employees; on January 23, 2002, he resigned as CEO and chairman of the board, briefly remaining as a board member until he was forced to leave. He turned down his $60 million in severance pay after much hue and cry about the possibility of his taking it after leading Enron into historic disaster. On January 28 Lay's wife Linda appeared on the Today talk show, declaring that she and her husband were broke and that her husband had not known about the crimes of his subordinates. That month Lay put his numerous homes and estates up for sale, though he kept his $8 million high-rise condominium in Houston. Late in January the vice chairman Baxter was found dead from a gunshot wound to the head in his locked automobile; it was declared a suicide, although the circumstances were suspicious and traces of Baxter's blood found outside the locked car went unexplained.
In February 2002 Watkins told a Congressional committee that Lay had been duped by Fastow and others and had not participated in the duplicitous bookkeeping. Linda Lay opened a shop in a building she owned near upscale River Oaks in Houston; she called it Jus' Stuff and sold the furnishings and knickknacks with which she had filled her numerous homes. An Enron employee remarked that the store was filled with just stuff bought with stolen money. Enron stock dropped to $0.26 per share.
Although some businessmen despised him, Lay remained a member of Houston's social elite, and people still listened to what he had to say. After all, he had saved the Houston Astros from leaving by leading the drive to build the team a new stadium, and he had helped charities such as the YMCA and various museums—though the Enron Boys & Girls Club removed Enron from its name because it had never received promised money. In November 2003 Lay helped his son Mark start up EnviroFuels LP, a business selling a lubricant that made internal combustion engines produce less pollution.
In July 2004 Lay was indicted by a federal grand jury on 11 counts including wire fraud, securities fraud, and making false statements to banks.
See also entry on Enron Corporation in International Directory of Company Histories .
Barnes, Julian E., et al., "How a Titan Came Undone," U.S. News & World Report , March 18, 2002, pp. 26–36.
Cruver, Brian, Anatomy of Greed: The Unshredded Truth from an Enron Insider , New York, N.Y.: Carroll & Graf Publishers, 2002.
McLean, Bethany, and Peter Elkind, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron , New York, N.Y.: Portfolio, 2003.
Thomas, Evan, and Andrew Murr, "The Gambler Who Blew It All: The Bland Smile Concealed an Epic Arrogance," Newsweek , February 4, 2002, pp. 18–24.
—Kirk H. Beetz