SYNOPSIS: Krugman explains what happens when management ignores the bottom line in favor of business fads

"Lies. Arrogance. Betrayal." So reads Fortune's current cover, under the headline "The Enron Disaster." Sounds good to me. But Fortune may have overlooked one force for evil: trendy management theories. In part, this was a case of death by guru.

Enron sold lots of things, but above all it sold itself: it crafted a self-portrait that business gurus loved. Like a schematic diagram from The McKinsey Quarterly or The Harvard Business Review, Enron's business plan made a perfect PowerPoint presentation. Other companies hired business gurus as consultants; Enron, in effect, put the gurus in charge. (Jeff Skilling, who made Enron what it is today, is a former McKinsey consultant.) What they created was a company so trendy that investors were dazzled. And that let executives get away with financial murder.

Are trendy management theories really that important? A look at the business best-seller lists might suggest not; it might even suggest that the management-guru business is not what it was five or six years ago. In a bull market, readers wanted advice on investment, not on how to re-engineer the search for excellence in the total quality chaos. It has been a while since that giddy moment when both "Jesus CEO" and "Make It So: Management Lessons From Star Trek the Next Generation" were riding high in the charts.

But the real impact of the guru business — and the real money — has always come via consulting rather than book sales. While consultants may not have sold as many books in the late 1990's as they did in earlier years, the influence of trendy business doctrines probably increased as the millennium approached. Why? Because in a bubble economy, investors weren't interested in hard facts; they flocked to the companies that told the best stories. And this created tremendous pressure on managers to conform with the latest trend. Corporations became intellectual fashion victims.

Which brings us back to Enron. From 1997 to 2000, the years when Enron stock rose from $20 to $90, business gurus disdained old-fashioned companies whose valuation had something to do with hard assets. "The usefulness of asset-based strategies is waning," declared one article in The McKinsey Quarterly. The future belonged to companies with no visible means of support. I'm not just talking about dot-coms; gurus also celebrated such new-age business heroes as "petropreneurs," who owned neither oil wells nor refineries, and "fabless" chip companies that owned no factories. Flexibility and vision were what counted, not bricks, mortar and tubular steel.

And Enron was absolutely fabless — it prided itself on being an "asset light" company. O.K., it owned some pipelines, but what it really offered was the vision thing: it would create markets in everything, and make money by trading in those markets. And if you couldn't understand why Enron's trading operation was as profitable as it seemed to be, that was because you just didn't get it.

This sort of circular logic — if you don't believe, that's because there's something wrong with you — is typical of extreme religious and political sects. Well, what's a guru without a cult?

Admittedly, there is a chicken-or- Enron question: Was Enron so admired because it embodied faddish management ideas so perfectly, or did those ideas become so faddish because of Enron's apparent success? Probably both. The point is that the stock market rewarded Enron for following such a fashionable business strategy, and few analysts were willing to fly in the face of fashion by questioning Enron's numbers. Enron executives had every incentive to turn the company into a caricature of itself — a "giant hedge fund sitting on top of a pipeline," as one critic said. And the power that came with fashionability shielded the company from awkward questions about its accounts.

In the end, of course, reality bit. Enron is in bankruptcy; its stock closed yesterday at 57 cents. You can say this for the business world: Because there is a bottom line, ultimately the truth will out. No matter how plausible a business leader sounds, if his numbers don't add up, if he promises more than he can possibly deliver, the facts will eventually catch up with him.

It's just too bad that the false business prophets who ran Enron will probably get off lightly, while the people who trusted them — especially the ordinary employees — will pay a heavy price.

Originally published in The New York Times, 12.18.01