The collapse of Enron and ensuing scandal will affect both individual and institutional investors as well as corporate leaders profoundly. Already, financial reporting and auditing procedures are coming under far closer scrutiny. As the economist Paul Krugman has pointed out, the Enron story is not just about a corporate failure. It is about one of the most admired companies in the United States proved to be fraudulent. Its books were not at all what they appeared to be, nor were its values—or lack thereof. Additionally and as importantly, the credibility of one of the important pillars and guardians of the capitalist system—the accounting profession—has been deeply called into question. As a result, we are leaving an investment era of exuberance and laxity and entering one of vigilance and scrutiny. The days of accepting a company’s books at face value and investing money based on corporate pronouncements are gone. Integrity, thus, assumes an even greater importance and value—for leaders, their organizations, and their accounting partners. The best companies have integrity built into their brands and their books.

This new century may also be a time of soul-searching for the investment community about the efficacy of its short-term orientation. As though afflicted with attention deficit disorder, the financial markets have difficulty looking beyond an operating quarter. This orientation creates undue financial pressures that encourage unethical behavior such as pushing inventory into unreceptive channels in order to produce in the short term at the expense of the longer term Despite the Enron wakeup call, it is difficult to predict whether the investment community will actually refocus its attention span to a more appropriate longer term. The most likely scenario is that the shift will be spearheaded by the institutional and individual investment communities as they adjust their expectations to a more realistic approach, rewarding firms that operate for the long term. Either way, leaders in this century will be increasingly called upon to tell their “longer view” stories to accompany the quarterly financial results. The intensity of competition will also demand that these stories be supported by actual and substantial investments for the future.

Venture capital will continue to play an important role in facilitating the birth of new enterprises, but the glory days of the dotcom era are over for at least a decade. During the next few years, attention will be paid to protecting portfolios rather than growing them. There will be serious digestion problems from poor investments made in the late 1990s. This will result in shakedowns and consolidation in the venture capital industry. From the standpoint of investments, business models that have positive cash flow will regain their pre-dotcom stature as the places to invest. Entrepreneurs will also be strongly tested. We are entering a far tougher and less forgiving environment for this breed of leaders. While vision will reign as the entrepreneur’s trademark, execution and sound financials will be equally rewarded. As a result, entrepreneurial leaders can no longer rely simply upon their charisma and story-telling abilities. They must become tough decision-makers, hounds for the best talent they can find, deeply persistent, and strategically and financially savvy—a tall order for this next generation of start-up leaders.

Return to Leaders Talk Leaderhip main page