The Entrepreneur’s Bookshelf: Corporate Scandals and Shams

“Study the past if you would define the future”
- Confucius

For the past few months, I have been thinking of setting up a short blog entry on recommending books which I feel will be useful to the entrepreneur. For anyone who has the entrepreneurial spirit, it is perhaps interesting to note whether you are doing business with the motivation of making more money or for your passion to make a difference, profit maximization to the investors is still an essential indicator of a successful enterprise. I have decided to start with the first list of books on corporate frauds, scandals and shams.

While on a plane back from China, an idea came to me while watching the documentary “The Smartest Guys in the Room” (Enron Scandal) on how I can recommend books based on themes. I will prefer to start with the dark side of enterprise. It has occurred to me as I have started to interact with the local community that a lot of young people get into entrepreneurship without realizing some of the issues which they have to face. Sometimes, they let their egos take over them and in the end, subject themselves to public shame.

A noteworthy event that has happened in the last two years are the China Aviation Oil scandal and the NKF debacle. While the NKF debacle has affected the credibility of social enterprise (for example, Big Issue, Body Shop, Aravind Eye Care), I believe that stronger and better regulatory measures from the government will help to do checks and balances on the charity bodies and other social enterprises.

The recommended list of books which I have placed here, showed various examples of financial bubble bursts, corporate frauds, scandals and shams that have happened across the ages. These books are put in my bookshelf to constantly remind me while it is important to maximize profits and create successful company as well as maintaining ethical and healthy corporate practices.

Extraordinary Popular Delusions and the Maddness of Crowds by Charles McKay

I came to know of this book while I was reading Lisa Endlich’s “Goldman Sachs: The Culture of Success”. John Weinberg, former head of Goldman Sachs, was asked to see Floyd Odlum, a shrewd and successful business man, who acquired and sold businesses that had failed in the 1930s. His sound advice to John Weinberg as I quote from Endlich’s book: “I am going to do something for you. I will give you this book but you have to promise me that you will keep a copy of this book and refer to it. Read it once and then from time to time refresh your memory with the table of contents … Watch for the excesses … No one is going to tell you what they are or when they will arise; each time they will look different.” Subsequently, John Weinberg kept a copy of this in each of his offices.

The book collects a series of tales from the past, from money mania to religious relics. It is a classic study of mass manias, crowd behaviour and human folly. The tulip mania, an incident where a lot of people lost fortunes on a single tulip bulbs, is a reflection of how people can fall into shams by following the actions of their peers. There are also stories on the philosopher’s stone, witch huntings and prophecies of Nostradamus.

I leave the reader with the author’s first words in the book, “Every age has its peculiar folly; some scheme, project or phantasy into which it plunges, spurred on by the love of gain, the necessity of excitement or the mere force of imitation.”. It was true in the past, and it is remains true today. If you want an example, just think about the recent dot.com bubble burst.

Inventing Money by Nicholas Dunbar

This book is based on the rise and fall of a hedge fund known as Long-Term Capital Management (LTCM) and the people who are behind it. The team behind this hedge fund consists of legends of Wall Street and two Nobel laureates, Robert Merton and Myron Scholes, known for their work behind option pricing models. What I liked about this book, is that it introduces interesting financial and mathematical concepts in the simplest manner to the layman. It also explains how LTCM used these theoretical concepts and ended up in the destruction of the fund without realizing that the markets are irrational.

The Smartest Guys in the Room by Bethany McLean and Peter Elkind

I read this book after watching the documentary movie on the plane. In essence, it traces the rise and fall of the Texan energy corporation, Enron. The story centres on a few key players: Ken Lay, Jeff Skilling and Andrew Fastow. The book is definitely better in giving the details on how the financial shams were set up by Andrew Fastow than in the movie and also how Enron traders exploited the Californian deregulation policies to make money at the expense of grid power failure that sent California into an energy crisis two years back.

Hope that you will like and enjoy reading these books.

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