Corporate Failure: The Enron Case Page 1

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By Rahul Gladwin | December, 2003.

The Fall of Enron:

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 nave, 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.

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