Corporate Failure: The Enron Case
Rahul's Essays
Corporate Failure: The Enron Case
By Rahul Gladwin
December, 2003.
Introduction:
Enron was one of the largest energy companies in the US. By fraud and bribery, Enron executives avoided income taxes, and this lead to the downfall of this multi-billion dollar firm. Importantly, this wasn't the first time; a similar case appeared in 1973, when Equity Funding, an insurance firm located in Los Angeles went bankrupt (McLean and Elkind, 2003). In fact, every few years, a new business fraud is unraveled, often with similar components: corporate insatiability, uninformed accountants, high-level connections, and broke investors (Swartz and Watkins, 2003). While focusing on Enron as an example, this paper argues that in addition to having a Code of Ethics, the company should have better ethical oversight and people management. Furthermore, it considers questions like - could the fall of Enron be avoided? What can we do to prevent history from repeating itself?
Enron started in July 1985 when Omaha-based InterNorth merged with Houston Natural Gas. Kenneth Lay, who had originally held positions in academia and the government, became chief executive and chairman. By 2001, Enron had grown to one of the largest energy companies in the world (McLean and Elkind, 2003). However, the company suddenly unraveled and collapsed. But how could a billion dollar firm come crashing down? This paper outlines the various cases of Enron, then morally and conceptually analyses them.
Part 1: Better ethical oversight by the Chief Executive Officer
It starts at the top: Enron failed due to the lack of ethical management by the C.E.O. Kenneth Lay. Enron Vice President Sherron Watkins asserted, in the presence of congressional investigators, that Skilling and Fastow deceived Lay (Swartz and Watkins, 2003). Watkins was the "whistleblower" in the Enron scandal (McLean and Elkind, 2003). In August 2001, she wrote a letter to Mr. Lay, warning him of various accounting irregularities that could pose a threat to the company in the future (Senate, 2002). In her testimony before congressional committees, she blamed chief financial officer, Jeffrey Skilling, as the villain, but claimed that chairman Kenneth Lay was duped (Senate, 2002). A key report from the Enron's independent directors found that Kenneth Lay depended on Skilling to manage details of the company's partnerships, but Skilling used to inflate profits and improperly hide debts. In Watkin's own words, "Mr. Skilling was supposed to be an integral part of the controls and the review process with the LJM transactions" (Swartz and Watkins, 2003). Watkins expressed concerns with Enron's accounting practices in five memos that she sent to Kenneth Lay. Mr. Lay then promised he would personally investigate Enron's problems (Lay, 2002). In response, Lay also said he would sack Vinson and Elkins and Andersen and hire other accounting firms. Instead, Lay asked Vinson and Elkins to actually investigate the matter. In her testimony, Watkins said that Andersen was guilty, since the accounting firm had approved Enron's fraudulent partnerships.
Thus, here is another case of lying, the result of weak management by C.E.O. Kenneth Lay. Lying and hiding of critical information was done, not only by Enron's own workers, but also by external firms like Arthur Andersen. Senior executives like Fastow and Skilling lied because they had no one to report. They were bosses of themselves because Kenneth Lay was fully dependent on them and other senior executives (Lay, 2002). Mr. Lay never questioned their practices, and had complete trust in his executive staff. Thus, Mr. Lay didn't offer better oversight over all the company's major operations, and rarely challenged his subordinates in an ethical way. This was on of the main causes for the fall of Enron, because lack of ethical supervision bred a corporate culture that harbored deception and lies. In contrast, Texas Instruments is very strict about ethical management, and this case can rarely take place at Texas Instruments - why? Because Texas Instruments bosses carefully evaluate the actions of their subordinates (McLean and Elkind, 2003). Kenneth Lay created the breeding ground of fraud at Enron, due to weak ethical management. It is the leader's job to provide the vision for the group. A good executive must have a dream and the ability to get the company to support that dream. But it is not enough to merely have the dream. Kenneth Lay must have provided the framework by which the people in the organization can help achieve the dream. Mr. Lay was too naïve, and always believed that Enron was doing great in the business world (Lay, 2002). People took advantage of a weak boss and a culture of corruption and deceit was born at Enron. Management lacking the enforcement of ethics and oversight, can destroy a company. Thus, there should be better ethical oversight and stronger management from the C.E.O.
A counter argument could be that if the C.E.O. is authoritarian, it can negatively impact the corporate culture. It can give rise to an authoritarian-hierarchical culture. In this culture, the C.E.O. alone makes all the major decisions behind closed doors (McLean andElkind, 2003). Even when the decisions are harmful to the company, no one dares to challenge the boss. In this kind of culture, employees are to be controlled, manipulated and occasionally disagreed with. Workers are motivated by fear, rather than love for the company or passion for the work. The main criterion for promotion is loyalty to the boss, rather than competence and commitment. As a result, employees who dare to question the administration's decisions, even of the decisions are ethically wrong, are pacified, while those who obey the boss blindly, get a pat on the back and a promotion. Thus, there should be a balance between authoritativeness and leniency in ethical or overall management.
Part 2: Yes-men: agreeing to unethical decisions by superiors
Andrew Fastow was Enron's Chief Financial Officer from May 1998 to October 2001. He joined Enron in 1990, and was responsible for the company's inventive financing deals. However, Enron asserts that he was sacked for his alleged involvement in dubious business partnerships. He was also accountable for producing a network of off-balance sheet partnerships with external firms that allowed him to hide Enron's very large losses (Senate, 2002). By an internal investigation at Enron, he was found to have secretly made $30 million from managing one of the partnerships (Swartz and Watkins, 2003). Mr. Fastow was one of the first Enron executives to be beckoned by the Securities and Exchange Commission (McLean and Elkind, 2003). Upon his sudden disappearance, some people thought he had fled the country. Michael Kopper, who was Mr. Fastow's right hand, is presumed to have revealed information on the actions of his former boss. Mr. Kopper knew about Fastow's fraudulent practices, but never questioned them (Lay, 2002). Thus, Fastow was the authoritarian figure and Kopper was an obedient subordinate, who never questioned his boss's actions despite knowing the truth, which was deception and lies. In the words of Deputy attorney general Larry Thompson, "In the process, as alleged in the complaint, Fastow and his co-conspirators systematically and thoroughly corrupted the business of one of the largest corporations on the world" (Lay, 2002).
The case of Andrew Fastow and his partners is a typical case of lying. Importantly, yes-men working under Fastow didn't want to blow the whistle on him. If the Enron code of ethics was strictly followed, and everyone's actions were supervised, this type of lying in accounting practices wouldn't have occurred. Fastow cunningly stole large amounts of money from the company. Of course, to hide his evil deeds, he created a web of off-sheet partnerships with external firms - some of which didn't even exist. Furthermore, he could legally remove Enron's losses from accounting books, if these losses were passed to independent partnerships (McLean and Elkind, 2003). Lying and various other ways of misusing the truth are wrong. Of course, white lies can sometimes be moral, but in the case of Fastow, white lies are immoral because Fastow intentionally, or at least knowingly conveyed false or misleading information. A helpful way to visualize this is to consider Lying from the standpoints of ethics of respect for persons and utilitarianism; each can provide valuable suggestions for thinking about moral issues. Furthermore, Fastow went against the 'Business Ethics' section of the Enron Code of Ethics, which clearly states, "No bribes, bonuses, kickbacks, lavish entertainment, or gifts will be given or received in exchange for special position, price, or privilege." Fastow finally surrendered to the F.B.I. and was charged with fraud (Lay, 2002). Mr. Fastow cannot be fully blamed for all that happened at Enron because his subordinates intentionally ignored his evil deeds. The more important question to consider is - was it the corporate culture that nurtured this type of behavior? Could this have been avoided in Enron? How do we ensure that history doesn't repeat itself?
Most managers encourage their people to question them, and challenge their beliefs. However, most managers are not good subordinates themselves. These managers don't question the decisions of their bosses, and agree with all their decisions. This was a very important lesson learned from Enron: subordinates like Michael Kopper never questioned the decisions of their seniors like Fastow - even of the decisions were fraudulent. Ethics should be strictly enforced - not only by the managers on their people, but also vice-versa, and, if possible, everyone should oversight the work of their peers. In its foreword, the Enron Code of Ethics clearly states to new employees, "If you have any questions [about the Code of Ethics], talk them over with your supervisor, manager or Enron legal counsel." What if the supervisors and managers have questions about the Code of Ethics, or don't even follow the Code? Hence, managers should ethically question their subordinates, and vice versa; these terms should be agreed upon when people take up their jobs at corporations, thus, the 'yes-men' attitude should be discouraged.
Part 3: Corporate culture: Does it really matter?
C.E.O. Kenneth Lay was unaware of the Enron corporate culture of greed and deception. He trusted his juniors, and fully depended on them. Enron vice president, and whistle-blower Sherron Watkins said that the corporate culture made it difficult to come forward and speak up at the company. Watkins described Enron's corporate culture as aggressive and tinged with fear (Swartz and Watkins, 2003). She had discovered $700 million missing in Enron's finances, and urged Mr. Lay to find out who was responsible. Watkins added that Lay did not understand the seriousness of this situation. He thought that everything was working fine at Enron (Lay, 2002). Additionally, Watkins sent an anonymous letter to Lay, in which she expressed her uncertainties and doubts about the accounting practices taking place at Enron. Colleagues told her that Fastow was outraged when he heard she had secretly written to Lay. "He wanted to have me fired. He wanted to seize my computer," Watkins testified (Swartz and Watkins, 2003). She said she even consulted Enron security personnel, in case Fastow might do something malicious. A spokesman for Fastow declined to comment on this these claims. Furthermore, she also described Jeffrey Skilling as "an intense, hands-on manager" and a "highly intimidating and very smart individual" (Swartz and Watkins, 2003). Ms Watkins said that Skilling and Fastow intimidated a number of people. She asserted, "The saying around Enron was 'heads, Mr. Fastow wins; tails, Enron loses."'
The important question is, why the lack of ethics? What had gone wrong? Why did Enron executives create an atmosphere of intimidation at the company? How could executives at Enron encourage their employees to buy Enron stock, while cashing the stock for themselves? Why didn't they comply with Enron's Code of Ethics? What lessons can we learn from the fall of Enron? The most important argument of this essay is that corporate culture is very important - it can either bring disaster or power to the organization, depending on whether the corporate culture is good or bad. Enron executives created a culture of greed, corruption and deception; eventually, their plans were ruined because of the foreseeable correction by the external market.
The corporate culture at Enron can be described as a dishonest-corrupt culture. In this culture, greed is good and money is everything. People like Fastow intimidate people, who threaten to blow the whistle on them. There is little, or no regard, for ethics or the law. Such attitudes prevailed through the whole company, from the top down to individual workers, and began by weak ethical management by the top official - Kenneth Lay. Bribery, cheating, and fraudulent practices were widespread within the organization, and even spread to affiliated organizations like Arthur Anderson (Lay, 2002). Fraudulent accounting practices and misleading profit reports were common and engineered by senior accountants. Denial, rationalization and reputation management enabled the bad guys to carry on their unethical and often illegal activities, until they were caught red-handed or exposed to the outside market. When management is blinded by greed and ambition, their judgment becomes distorted and their decisions become seriously flawed; as a result, they often cross the line without being aware of it, and Enron serves as a good example. Thus, Kenneth Lay should have been a better molder of corporate culture because corporate culture does matter. Furthermore, Lay should have shaped the culture in such a way that it would stay healthy in spite of turbulent changes in the company. How can a healthy culture be created? Therefore, managers should not only be trained in technical aspects of running a business, but also in less obvious skills as empathy, communication, validation, conflict management, and community building.
Conclusion
It wasn't taken seriously, but Enron did have a sixty-four page Code of Ethics. New Employees were asked to read the code and sign a statement. However, Enron lacked ethical oversight and management. Thus, despite having a code of ethics, it was rendered useless. Therefore, a code of ethics is only useful when people take it seriously. Hence, in addition to having a code of ethics, and making new employees read it, the company should have offered better ethical oversight and people management, thus, saving Enron.
Bibliography
The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron
The Enron story (Newcomen publication)
Power Failure: The Inside Story of the Collapse of Enron
The Fall of Enron: How Could It Have Happened? : Hearing Before the Committee on Governmental Affairs United States Senate One Hundred Seventh Congress, Second Session
Conspiracy of Fools: A True Story
Wall Street: A History: From Its Beginnings to the Fall of Enron
Additional Readings:
Science Articles
1. The Big Bang: Proof that the Universe is Expanding
Business Articles
1. Corporate Failure: The Enron Case
Personal Experience Articles
1. My Experience during the Iraqi Invasion of Kuwait
2. Why did I decide to become a doctor? Medical School Admissions Essay
Philosophy Articles
1. The Existence of Matter
2. What is Time?
3. Life in a Drop of Water
4. Why I Support Mercy Killing
Short Stories
1. Short Story: Voices from Hell
Religious Articles
1. One Powerful Prayer written by an Anonymous Author
Internet/Technology Articles
1. How to Stop Feedback Form & Guestbook Spam
Miscellaneous Stuff
1. Body-Mass-Index, Waist-to-Height Ratio, Body Fat, Basal Metabolic Rate Calculator
2. Pictures of old Kuwaiti Dinars
What's New?
You can also keep track of updates on RahulGladwin.com by subscribing to my RSS newsfeed. 
Here is a comprehensive list of all documents on RahulGladwin.com.
Please Do Not Reproduce This Page
This page is written by Rahul Gladwin. Please do not duplicate the contents of this page in whole or part, in any form, without prior written permission.