Leadership in the Black Box

In chapter four of "The Rise of the Rogue Executive" by Leonard R. Sayles and Cynthia J. Smith, the authors discuss the evolution of so-called “Black Box” accounting systems. Taking their name from the “black box technologies” (technologies so complex that their inner workings are essentially unknowable to the average person), the accounting systems are described as contributing to a perceived spread of corporate fiscal irresponsibility. The ease and discretion with which accountants and CEO’s can manipulate, hide, and even destroy computerized financial records has undoubtedly been a factor in some of the most high-profile cases of corporate fraud in the last 20 years.

The leaders of these unsuccessful and/or fraudulent companies operate in black boxes of their own. While many unsuccessful CEO’s have been very public figures, the same cannot be said for the management structures of their companies. In many famous instances, the management operated without external accountability

In the case of Enron, the Audit and Compliance Committee, chaired by Robert Jaedicke, was created to ensure that the actions of Enron’s management met with federal and internal regulations. The Audit and Compliance Committee reported to the board of directors, who were responsible (along with the company’s external auditing firm, Arthur Andersen), for overseeing the legal and ethical integrity of the company’s financial reporting. However, in 1999 the board temporarily suspended the code of ethics to permit Andrew Fastow, the chief financial officer of Enron, to hold positions with Enron and its partner companies.

Even when the board made recommendations and regulations meant to restrict the management of Enron, it was often ignored. When the board required reviews of all financial transactions and CEO signatures on related documents, they were granted brief and incomplete reviews and ignored completely by Skilling (the CEO). This lack of accountability on the part of the management allowed the company to commit massive fraud behind the backs of their shareholders, and eventually lead to the downfall of Enron.

Though convenient, leaders cannot operate in “black box” environments. The lack of accountability and oversight in the case of Enron no doubt contributed to their fraud and destruction. A leader cannot operate in a vacuum, outside the view of those that they lead. The role of leadership requires that the leader be held accountable for their actions, outside the Black Box and in the light of day.