The tragedy of enronicus rex.

WITH THE CONVICTION of Ken Lay and Jeffrey Skilling, the CEOs who guided Enron through its meteoric rise and even more spectacular implosion of fraud and conspiracy, an era has come to an end. For Lay, who founded Enron's antecedent, Houston Natural Gas, and who had become the public face of what was once the nation's seventh largest publicly traded company, the end must seem personally tragic.

Chief Executive knew Ken Lay. In the mid-1980s, he participated in one of our earliest CEO roundtables--the first held in Dallas. When CE featured him in a cover story years later, Lay exhibited all the characteristics of an upstanding entrepreneur who took justifiable pride in his organization and the people with whom he worked in building it into a global energy trading giant. On a snow-covered street in Davos, Switzerland, one could find him walking by himself--no entourage for him--between World Economic Forum sessions. After a hearty hello, he chatted at length and with his west Texas humor in evidence.

So is this how it ends? The Henry V of Houston becomes the Richard 111 of corporate corruption, the archetype of greed, deception and self-dealing? Not privy to the evidence heard by the eight women and four men of the jury, one is not in a position to dispute their verdict.

Rather, it is the verdict of history that interests us. It is commonly believed that Enron--all right, Lay and Skilling--failed because of fraud, imaginative accounting, poor oversight and a criminal CFO who overreached himself with a few too many off-balance-sheet special purpose entities. When the history of this era is written, however, there may be a different view. As Stern Stewart, senior partner at Bennett Stewart, has argued elsewhere, "Enron did not fail because of creative bookkeeping, but was creative in its bookkeeping because it was failing."

Eager to impress Wall Street, Skilling and his lieutenants paid their managers to aim at questionable financial targets; consequently, their internal system of financial controls was a shambles. The firm's use of mark-to-market accounting, a technique whereby expected future profit derived from the spread between long and short gas contracts would be taken as upfront earnings, is but one example. Kurt Eichenwald's excellent Conspiracy of Fools offers numerous other details.

Fraud clearly contributed, but when future historians assess the lessons of Enron they will uncover a myopia that continues to mesmerize managements today--a misplaced emphasis on chasing metrics that don't correlate to real economic value. Investors value return on invested capital more highly than growth in book income.