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Enron’s ride is quite a phenomenon: from a regional gas pipeline trader to the largest energy trader in the world, and then back down the hill into bankruptcy and disgrace. As a matter of fact, it took Enron 16 years to go from about $10 billion of assets to $65 billion of assets, and 24 days to go bankruptcy. Enron is also one of the most celebrated business ethics cases in the century. There are so many things that went wrong within the organization, from all personal (prescriptive and psychological approaches), managerial (group norms, reward system, etc. , and organizational (world-class culture) perspectives.
This paper will focus on the business ethics issues at Enron that were raised from the documentation Enron: The Smartest Guys in the Room, from cognitive moral development to group norms, etc. Enron scandal overview The Enron scandal was a financial scandal involving Enron Corporation and its accounting firm Arthur Andersen, that was revealed in late 2001. Many of Enron’s recorded assets and profits were inflated, or even fraudulent and nonexistent.
Debts and losses were put into entities formed “offshore” that were not included in the firm’s financial statements, and other sophisticated and hidden financial transactions between Enron and related companies were used to take unprofitable entities off the company’s books. This practice drove up their stock price to new levels, at which point the executives began to work on insider information and trade millions of dollars worth of Enron stocks. The executives and insiders at Enron knew about the offshore accounts that were hiding losses for the company; however, the investors knew nothing of this.
The Smartest Guys In The Room
As the scandal was revealed, Enron shares dropped from over $90 to less than $. 50. Enron filed for bankruptcy on December 2, 2001. Stakeholders and Conflicts of Interest Modern corporations like Enron usually have multiple stakeholders with often conflicting interests and expectations. The company’s stakeholders include primary groups of customers, employees, shareholders, owners, suppliers, etc. and secondary groups of community. All stakeholders have their own self-interests.
While employees want secure jobs with high earnings; ustomers want quality products with cheap prices, which may eventually result in the company and employees’ low income. Being said that, the corporation owes all stakeholders the obligations to meet their interests. That brings in the ethical issue of conflicts of interest, one of key problems at Enron. CFO Andrew Fastow created financial partnership to hide Enron debt, from which he allegedly collected $30 million in management fees. The action obviously made Enron financial data look good, but at the same time deceived the company’s investors about the real performance.
Many investors may make their investing decisions based on those false data. And that’s when the collapse begins. Prescriptive Reasoning Approach According to the documentation, those Enron people who faced ethical issues used different prescriptive reasoning approach to resolve their dilemma. Take Andrew Fastow as an example, he might not start all the fraudulent financial activities in the first place; however, he decided to do so in order to please the boss, when Ken Lay wanted to see neat financial disclosures.
It seemed that Fastow chose the obligations and principles approach to justify for his actions. He put his duties as an employee first when considering options to solve his ethical issues. On the other hands, Sherron Watkins, the whistleblower, chose the consequential and virtual ethics approaches to resolve her dilemma. She knew deeply that Enron accounting activities were wrong and couldn’t stand the facts that the company was deceiving its investors. Watkins could either be a team player and do nothing or a whistleblower and raise the questions.
Her morality won the situation; she decided to follow her ethical self. Psychological Approach – Cognitive Moral Development (Appendix 1) and Locus of Control Applying Kohlberg’s Cognitive Moral Development (CMD) to Enron key executives, I think they all were struggling in Conventional level, between stages Three and Four. The fact that those ken lay, Jeff Skilling, Andrew Fastow, and other leaders decided to cross the legal line to cover up the company failures and to deceive investors lowered their stand in CMD even though they were actually considered extremely smart and successful businessmen.
I personally think going against the laws is unacceptable in any circumstances, especially with those figurehead executives because they were the ones who set up such a bad culture for their organization. It’s hard to score those executives on Locus of Control. From my observation from the documentation, these smartest men were too confident about themselves. They always strived for the best. Actually, I believed they were the best in the arena. It suggested that they have high internal locus of control, which meant they absolutely have the ability to control their own life.
However, at the same time, decision to go against the laws meant those leaders were gambling with their business, which is a high external locus of control behavior. Also, while internal locus of control people are more likely to take consequential approach in their prescriptive decision making process to reach the best solution for all parties, Enron executives chose to benefit themselves first off. Situational Factors Arguments above suggest that at the individual level, there are so many “bad apples” at Enron that caused the organization’s collapse.
However, discarding those “bad apples” generally won’t solve Enron’s problem with unethical behaviors. The company must inspect itself to determine if there’s something rotten inside that’s spoiling the apples. In the Enron case, the reward/punishment system and multiple ethical selves are some of the key problems that help explain the Enron unethical activities. People do what’s rewarded and avoid what’s punished. Enron failed at this point to create a fair system that could encourage its people to act ethically.
When two Enron energy traders in New York made massive fraudulent energy trades and drew off company money to their own accounts in mid -1980s, the company didn’t take the chance to set up a standard. Instead, Ken Lay even said openly at a board meeting that the two traders “made too much money to let them go”. It meant that such behaviors were allowed at Enron. Later on, Lay also complained that he never knew about the same activities among his employees. I think Lay was responsible for creating such a bad culture within the company.
I believe Enron’s later difficulties would have been avoided if the executive team had disciplined the whole organization in time. Multiple ethical selves can explain best Ken Lay role in the Enron case. As a person, Lay was loved and admired by Enron employees. Even Watkins, the whistleblower, described Lay as a man of integrity. He created and led Enron to the seventh largest company in the US. He was also highly philanthropic in the Houston community as well as within his company. Despite this great personality, Lay had another self.
He was described as an aggressive gambler who valued risk taking and boosting the company’s stock price above all. That was the reason why Andrew Fastow, the hot shot risk taker, was one of Lay’s favorites. Lay created such a vicious corporate culture that encourage going beyond limits to create big money. Moral Manager/Moral Person Ethical Leadership Matrix I would describe Jeff Skilling as a hypocritical leader. A hypocritical leader talks persistently about integrity and ethical values but then engages in unethical conduct, encourages others to do so either explicitly or implicitly.
That was right in the case of Jeff Skilling, who was always seen as the brains behind the transformation of Enron. Graduated from Harvard Business School, Skilling was known for his arrogance and harsh attitude within the organization. He was the one who came up with the idea that the company didn’t really need any “assets. ” By pushing the company’s aggressive investment strategy, he helped make Enron the biggest wholesaler of gas and electricity, with $27 billion traded in a quarter. On February 12, 2001, Skilling was named CEO of Enron, receiving $132 million in a single year.
He surely knew how to lead an organization by setting the tone by the example of his own conduct. Unfortunately, he chose to set bad examples. Skilling unexpectedly resigned on August 14 of that year, citing personal reasons, and he soon sold large blocks of his shares in the corporation. All those behaviors suggest that Skilling is one of those “bad apples” who knows how to be a leader but has low moral person. Formal System and Informal System At Enron, the culture of unethical behaviors was so strong that it led up to the company collapse.
It was the organizational structure that encouraged employees to cross the ethical line. Enron executives really believed in a winner-take-all society, as a result, they pushed their employees very hard to create productivity, with little or no concern about ethical issues. Once people were hired, it was an “up-or-out” culture. People in such culture aim to be among the best and the brightest; therefore, they tend to play the game the way their boss has set it up. They usually don’t have the tendency to challenge top management.
With aggressive Jeff Skilling as the boss, such structure was manipulated at Enron. Along with formal system, informal system plays an important role in affecting people’s behaviors. Organizational norms were the most important informal system at Enron that led to the company failure. People did acknowledge wrong-doings within the organization; however, little or no action was taken to change the situation as well as to set the disciplines for future reference. Enron leaders failed at this point to produce positive symbolic management within the organization.
Ethics Code Enron did have an ethics code; however, it didn’t work. There are many causes of the Enron collapse. Among them are the conflict of interest between the two roles played by Arthur Andersen, as auditor but also as consultant to Enron; the lack of attention shown by members of the Enron board of directors to the off-books financial entities with which Enron did business; and the lack of truthfulness by management about the health of the company and its business operations. In some ways, the culture of Enron was the primary cause of the collapse.
The senior executives believed Enron had to be the best at everything it did and that they had to protect their reputations and their compensation as the most successful executives in the U. S. When some of their business and trading ventures began to perform poorly, they tried to cover up their own failures. The board is at fault for permitting the suspension of Enron’s own code of conduct to permit the conflicts of interest inherent in the off-books corporations controlled by Fastow. Board of Directors Role
The board of directors was not attentive to the nature of the off-books entities created by Enron, or to their own obligations to monitor those entities once they were approved. The board did not pay attention to the employees because most directors in the United States do not consider that their responsibility. They consider themselves representatives of the shareholders only, and not of the employees. However, in this case they did not even represent the shareholders well and particularly not the employees who were shareholders.
They were those who could made decision, but they put too much trust on the management team and didn’t catch their people doing things right or wrong in time. Conclusion The Enron scandal is the most significant corporate collapse in the United States in the century. This scandal demonstrates the need for significant reforms in accounting and corporate governance in the United States, as well as for a close look at the ethical quality of the culture of business generally and of business corporations in the United States.