Enron Case Analysis #1. Joseph Martinez. Southwestern. Business Ethics

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1 Enron Case Analysis 1 Running head: CASE ANALYSIS #1 Enron Case Analysis #1 Joseph Martinez Southwestern Business Ethics 4 July 2007

2 Enron Case Analysis 2 Abstract Enron was the largest bankruptcies is US history and the most stunning failure in business history. Most of the Enron attention has been focused on its accounting practices. This paper will explore its internal culture and the leadership practices of its top people and the unethical practices of the auditors and attorneys. It will also highlight the charismatic leadership, particularly by Kenneth Lay, Enron CEO, and his promotion of a fraudulent vision hidden behind a sinister true vision of performance based profiteering. These top leaders designed a scheme to activate a process of adaptation and the promotion of a culture characterized by conformity and the punishing of dissent. Enron can be regarded as an example of a modern day corporate con-artist.

3 Enron Case Analysis 3 Enron Case Analysis #1 Enron Corporation was the largest bankruptcy is the United States history. It is a harsh reminder of how business is conducted in an unethical culture of escalating profit margins. Enron s stock fell from a high of $90.56 in August 2000, to $0.30 on January 2002 (Peterson, 2002). This down-turn had further reaching effects than just a too-bad for Enron story in the Wall Street Journal. There is no doubt that Enron defrauded its employees, stockholders, and creditors. It exaggerated its profits by transferring debts and losses to allied companies. The management encouraged employees to buy Enron stock which they knew would soon be worthless. The income helped bolster bonuses they paid to themselves just before the collapse. What justifications could be used to explain the ethical impact the Enron bankruptcy has had on society and future business? When looking at Enron from an outside ethical perspective, things seem to fall into three areas of concern: Individual Integrity, Group Culture or the Business System (Cohan, 2002, p.276). The Business System rational searches for causes outside the group such as legal issues that drive or direct groups or individuals down one path as opposed to another. These include laws and regulations that provide the construct in which an individual, auditors and attorneys will act on, using the economic and social expatiations that provide direction for a culture that shapes the values and perceptions of the individuals and groups. The Individual integrity area is simply searching for the proverbial Bad Guy from within the people involved in any issue. Finally, the Group Culture explanation is looking for causes in company cultural influences. An executive can influence a company operation which then translates down the chain. These influences include the shared belief that groups develop with concepts such as, the group and

4 Enron Case Analysis 4 individual boundaries, what the processes are in the group and who the power-brokers or authority figures in the chain are. I will concentrate my primary focus on the individual at the top of the chain as the catalyst in the unethical practices leading to the bankruptcy of Enron. The words selfish, arrogant, and unethical paint a realistic portrait of Enron s executives. The fantasy culture created by Enron came straight from the top. Kenneth Lay, former Enron chairmen designated Enron's ethical core values. The phrase The World s Leading Company (Ferrell 2007, p321) as well as the words Respect, Integrity, Communication and Excellence, were emblazoned on enormous banners that hung in the lobby of Enron s buildings. Ken Lay himself had a paper weight on his desk with the slogan Vision and Values imprinted on it (Ferrell 2007). Mr. Lay preached ethical conduct in public, but rewarded his true interest in private, performance and profiteering at any cost. The error in Enron s managerial philosophy was that performance defined by Enron executives, was limited to actions that increased the company's profit margin and ultimately its stock price regardless of ethics or the law. Ken Lay s charismatic leadership style allowed him to create a false perception of integrity combined with a company culture characterized by conformity and the punishing of views not in step with company leaders. Risk takers that generated revenue could reach there full potential at the expense and demise of other team members engaging in fare, less profitable business practices (AFF, 1986, p ). The company culture also had employees investing the majority of their pension plans in company stock. Enron froze the pension fund, so employees could not sell their stock while watching it drop in value. Many employees faced retirement without the funds they had counted on. Enron executives laid off thousands of employees and then filed for bankruptcy in one

5 Enron Case Analysis 5 month, and had company-hired auditors, CPA s, and attorneys shredding company documents the next month trying to cover up unethical corporate behavior. Instead of Enron's CPAs and attorneys acting as proper stewards of the company, they ended up shredding company documents and cooking the books thus being accomplices in the corporate deception. To ensure the scam could keep showing earned profits to investors and stakeholders, Enron hired and paid its own auditors because the process needed internal sympathizers. Using outside agencies to administer audits and annual reports are built as a filter into our legal system to prevent companies from providing incentives to auditors not to submit a negative financial report on the company that is paying them. This top-down distortion led to the final toppling of Enron s financial empire. The Enron bankruptcy is an example of how unstable a seemingly solid economy really is when ethics and laws are disregarded. Even Fortune 500 companies, which are supposed to be examples of ethical and upstanding institutions utilizing questionable business practice can disappear overnight leaving behind lies, cover-ups, and unemployment in its wake (Thomas, 2002). For Enron's employees, the surprise of the bankruptcy was a harsh lesson in the reality of big-business under a corporate culture designed and warped by individuals at the top. Thousands lost their jobs and their retirement funds overnight, as they were reliant on valueless stock. Enron s leaders blinded employees with corporate romance, while squashing quorums from asking probing questions. Ken Lay designed a corporate image through charismatic leadership stressing a vision that depicted Enron as an extended family and attempted to distort any perceived difference between the interests of internal and external stakeholders (Biggart, 1989)

6 Enron Case Analysis 6 References American Family Foundation (1986) Cultism: A conference for scholars and policy makers, Cultic Studies Journal, 3, Biggart, N. (1989) Charismatic Capitalism: Direct Selling Organizations in America, Chicago: University of Chicago Press. Cohan, J. (2002) I didn t know and I was only doing my job : Has corporate governance careened out of control? A case study of Enron s information myopia, Journal of Business Ethics, 40, Peterson, J (2002, 22 January) Enron - Imperialism in Action Thomas, W (2002) The American Institute of Certified Public Accountants The Rise and Fall of Enron