Enrone Leadership failure free essay sample

Enron stands out as one of the biggest failures in business history. In 2001, Americans were appalled to learn of the unethical practices carried out by leaders and other employees of Enron. Enron used various methods of deception to appear more profitable than it really was, including through creating off-the-book entities to which Enron transferred its substantial debt. (Jennings, 2005). Enron implosion took the world capital markets and Shake the investor confidence in accounting and financial reporting. It even caused the world’s renowned international accounting firm Arthur Andersen to collapse. The most important gatekeeper could not predict Enron’s collapse before it occurred. It was then discovered that Enron senior management had employed complex creative accounting techniques to manipulate the company’s financial figures and hence boost up the financial performance. (Cruver, July 2002) This essay explores the internal culture and leadership practices of its top management. It includes a particular emphasis on charismatic leadership, in people like Kenneth Lay and Jeffrey Skilling. The compelling vision of these leaders, expressed in a recruitment system designed to activate a process of conversion and the promotion of culture by conformity and penalizing of dissent. Introduction Enron went bankrupt and disappeared thirteen years ago, the impacts it has made on the ethical standards never faded. It took Enron 16 years to go from about ten billion dollar assets to more than sixty-five billion dollar assets, and took twenty-four days to go bankrupt. Enron, which once ranked as the seventh-largest company on the Fortune 500 and ranked as the sixth-largest energy company in the world, on December 2, 2001, filed for bankruptcy protection in the biggest case of bankruptcy in the United States up to that point. By November 2001, the company’s stock, which once peaked at $90, was down to less than $1. It was a disaster for the thousands of employees and investors. Employees lost their jobs and pensions, and investors lost billions of dollars. Enron’s ethics code was based on respect, integrity, communication, and excellence. Respect. We treat others, as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness and arrogance do not belong here. (chairman, 2000) Integrity. We work with customers and prospects openly, honestly and sincerely. When we say we will do something, we will do it; when we say we cannot or will not do something, then we won’t do it. We have an obligation to communicate. Here we take the time to talk with one another and to listen. We believe that information is meant to move and that information moves people. (chairman, 2000) Excellence. We are satisfied with nothing less than the very best in everything we do. We will continue to raise the bar for everyone. The great fun here will be for all of us to discover just how good we can really be (chairman, 2000) As per this code of conduct and Ken Lay’s professed commitment to business ethics, how could Enron have collapsed so dramatically, going from reported revenues of $101 billion in 2000 and approximately $140 billion during the first three quarters of 2001 to declaring bankruptcy in December 2001? The answer to this question seems to be rooted in a combination of the failure of top leadership, a corporate culture that supported unethical behavior, and the complicity of the investment banking community. (chairman, 2000) The Enron History Enron found in 1985 as a pipeline company, there power supplier to utilities. Enron business start through the merger of Houston Natural Gas. In the following years, Enron improve quickly and became one of the successful energy trader in the world. Enron identified as a one of the world’s leading electricity, natural gas, and communications organization. (The Crooked E: The Unshredded Truth About Enron, January 5, 2003) In the following years, with the increase of competition, Enron decided to use diversification and international investment to keep its market position. Actually, these activities brought Enron an unexpected large amount of losses rather than profits. In 1999, after a foray into fiber optics and the broadband market, which was a wrong decision again, Enron suffered too many substantial losses and began bleeding quickly. However, Enron had never declared any information about its losses until October 2001. Besides manipulated the financial statements, Enron never mentioned the risks, which it should disclose to its investors. On the contrary, the executives of Enron disclosed a great earnings forecast through the media and encouraged investors to purchase Enron’s stocks. They also suggested their employees invest their pensions in Enron’s stock or stock options. Arthur Andersen, the audit company for Enron, helped Enron hide these frauds for five years. Every time when analysts or Enron’s employees expressed their doubts about Enron’s financial condition, Enron would try to keep them quiet and fired them later. Meanwhile, top executive embezzled. The executives also drove up the stock price and put a large amount of money into their own pockets through trading stocks. (Mclean, 2004) Because of those frauds, from 1998 to 2001, the stock price peaked at $90 US. â€Å"By December 2000, Enron’s shares were selling for $85 each, its employees had their 401(k)s heavily invested in Enron Stock, and the company [had] a matching program in which it contribute additionally shares of stock to savings and retirement plans when employees chose to fund them with Enron stock† Therefore, both investors and employees suffered heavily from this disaster when Enron collapsed. Problems began erupting in 2001. Jeffrey Skilling, the CEO, left in August of 2001. Then in October 2001, Enron reported a loss of million $. Following that, Chief financial officer Andrew Fastow was replaced, and the Securities and Exchange Commission began investigating the Enron. After about one month, in late November, the SEC found off-the-books entities and overstated revenues, and then the company’s stock was down to less than $1 US. Finally, on December 2, 2001, Enron filed for bankruptcy protection. Investors lost billions of dollars. (The Crooked E: The Unshredded Truth About Enron, January 5, 2003) The Enron 1985 | To be the first natural gas company in North America 1990 | To be the first natural gas company in the world 1995 | To be best performing energy company in the world 2001 | To be the best performing company in the world 2002 | To recover from bankruptcy The Enron Culture Enron’s corporate culture developed inside its office during the heady days of its success and has revealed many signs of how things could go wrong. In general, the top management developed arrogance due to its success, the tone was set at the top and it percolated to the lower level and finally became a culture of the corporation. Enron’s top management, Kenneth Lay and it associates gave its executives freedom to pursue the corporate goal and left them to be and was only questioned when goals were not met. (William, 2002) â€Å"These controls were not rigorous enough, implementation and oversight was inadequate at Management and Board levels, as no one took responsibility for oversight; controls were not execute properly and structural defects became apparent over time. No one in Management addressed issues as it arose or brought it to the Board’s attention† Skilling instituted the performance review committee which known as the harshest employee ranking system as associates had to â€Å"do deals† and post earnings to be ranked high. Secrecy became order of the day for many of the company’s trading as well as disclosures†. (Thomas, 2002) Who to blame for Unethical Leadership Enron top executives lay and Skilling are mainly to blame for the Enron collapse. As intemperate leaders, Lay and Skilling were surely able to lead an effective and efficient Enron, but they lacked self- control and in turn followed a path down a slippery and slimy slope to disaster. They fostered a competitive environment that crushed any little creativity employees had and had them constantly worried about the permanence of their job. Not only were Enron’s top executives intemperate, they were also just plain toxic. Lay blatantly lied to employees, sending emails of false hope. He also conned his employees into keeping all stocks they held in the company all the while he sold millions of dollars’ worth of his stock. As employees of Enron, many were making a decent living. Many shut themselves off from the utter corruption they saw. Speaking out would surely cost them their jobs and possibly their childs college fund. (Cruver, July 2002) Looking back, many would want to say they would have been the whistle blowers, they would have spoken out, but personally, I do not think I would have. Maybe if I did not have a family or anything to live for I would, but I do. It may be selfish, but I believe that too much was at stake. I also find that the auditing firm Arthur Anderson played a key and pivotal role in this collapse. Ordering all Enron related documents to wipe after the scandal illustrates. Fault of Arthur Andersen’s There is no single answer for who is responsible for Enron downfall. There are many different people and groups at vault all varying degrees. Chairman and Jeffery Skilling are most certainly at fault, but I do not think you can blame a man for acting in his own best interests and for doing what he â€Å"thought† would protect a the organization. However, you can blame an organization whose sole job is to audit the books, for screwing up the auditing of the books. For this reason, I put Arthur Andersen most at fault. As a separate entity from Enron, the firm was the only check put in place on Enron’s’ accounting. However, it failed to properly report those findings as evidenced by not only the tragedy that was Enron’s finances, but also by the shredding of documents. Arthur Andersen not only had the information to stop the Enron train wreck, it also had the means of doing so. They expected to remain objective in the auditing of the finances but by instead became too invested in the company and the fees it generated. Whereas Ken Ley faltered in his attempts to keep the company afloat, he still â€Å"tried. † The job of Enron was to produce earning for its investors and they attempted to do so. Arthur Andersen’s job was to keep the books clean and they failed at just that. (The Crooked E: The Unshredded Truth About Enron, January 5, 2003) †¢Way of Leadership Failure and Leaders The Top leaders were Kenneth Lay, CEO and Jeffery Skilling, COO/then CEO. However, Andy Fastow, who eventually became CFO, also played a leadership role in the development of special purpose entities their leadership failed on a number of Stages. (Cruver, July 2002) Ambition and greed created a culture of revenue growth at all costs, Poor financial controls allowed bad business decisions to be masked over, Unethical â€Å"quid pro quo† partnerships with auditors and other external reviewers were developed, and Compensation and bonuses went to the top without correlation to earnings. Enron failed in many different aspects but primarily due to the failure of the leadership team and people in different positions within Enron and other organization to act reputably and responsibly. Key issues were Transparency, protection of shareholder rights, and responsibility of the boards of directors. (The Crooked E: The Unshredded Truth About Enron, January 5, 2003) †¢Leadership influence the organizational culture The best examples in which the leadership beliefs shaped the culture can found in the work of Andrew Fastow. He had tremendous authority to create the Special Purpose Entities. These organizations became a dumping ground for bad assets and a source of cash flow to please Wall-Street: â€Å"First, by selling troubled assets to the partnerships, Enron removed them from the balance sheet, taking pressure off the firm’s total indebtedness and simultaneously hiding underperforming investments†¦Second, the sale of the troubled investments to the partnerships generated income which Enron could then use to make its quarterly earnings commitments to Wall Street† In Enron’s case, SPEs were used widely to conceal the real performance some troubled assets and investments. SPEs were a way of securing capital funds and are very deceptive as we learned later on because it can deviate from the main purpose of creating SPEs. Jeffery Skilling was the first who employed this concept through the creation of Cactus Fun in 1991. Later, Fastow (CFO) took this concept to a new level and created these SPEs mainly for the purpose to sell troubled investments to partnership and remove these troubled investments from its balance sheet. Enron’s leadership was positively rewarding many people who participated in flourishing its corporate balance sheet starting from Andrew Fastow himself through promotion and compensation to other influential outsiders by rewarding them with multimillion consulting projects. By doing so, the leadership encouraged deceptive and shady practices within its corporate governance systems. Whether Lay and Skilling overlooked the SPE practices or encouraged them outright, the culture was such that Fastow could go forth recklessly as long as he returned revenues. The SPE solution would only provide short-term relief from swelling debt pressures. In the end, the SPE’s helped to undo Enron. (Mclean, 2004) †¢Corporate culture and organizational leadership support or undermine Enron vision According to the New York Times, Enron’s vision was to operate â€Å"as a global corporate citizen† conducting business with â€Å"respect, integrity, communication and excellence. † Enron wanted to become â€Å"the world’s leading energy company-creating innovative and efficient energy solutions for growing economies and a better environment worldwide (CSUS). The corporate culture and organizational leadership undermined this vision in that the business did not operate with integrity; instead Enron focused more on off-balance sheet accounting to unjustly enrich the pockets of its top management and meet/exceed Wall Street’s expectations. Such focus diverted Enron’s resources from creating innovative and efficient energy solutions. The culture can easily be summarized as aggressive which lead to unethical behavior in the form of issuing worthless stock options to employees. In addition, during Enron’s takeover in India over 200 million people in India experienced a massive blackout which further lead to Enron demanding more than â€Å"three times the normal rate for supplying power† to re-power the electricity stations. (The Crooked E: The Unshredded Truth About Enron, January 5, 2003) †¢The Most parts of the corporate governance system that failed in Enron Enron failed because appropriate internal governance failure, especially since the SPE’s were specifically designed to write-off bad assets and hide poor profits. The focus on revenue above real earnings was the fault of upper management. Of course, external governance failed to acknowledge warning signs. Clearly at fault, the auditors and legal counsel did not serve the Enron community of stakeholders well. Rather, both accounting and legal entities overlooked discrepancies and errors and favored the relationship with Enron to continue the revenue streams for their own professional services companies. Without appropriate financial information from the auditors and legal counsel the SEC and SYSE (external corporate governance systems) cannot be held accountable for their failure to notice Enron’s illegal practices. If I am in Enron If I am Enron employee. I will have many questions about the condition of the company, and depending on our business intuition, I feel there must be some problems at Enron. But if I ask questions or mention my opinions, I will be hurt right now, such as lose my job, or receive unfair reviews. In the Utilitarian Theory, Philosophers Jeremy Bentham and John Stuart Mill argued that â€Å"resolution of ethical dilemmas requires a balancing effort in which we minimize the harms that result from a decision even as we maximize the benefits† (M.J, 2009) In this theory, when we make decisions, we should consider the interest of all the parties who are affected by our decision and choose the actions which can maximize the benefits. We can just do the most good that we can. It is an ethical dilemma—protecting our own interest with a predicted harm to all the investors, or just protecting most of stakeholder’s interest and give up our own short-term interest. According to the Utilitarian Theory, the answer is obvious. The Categorical Imperative and Immanuel Kant theories stated a standard â€Å"you cannot use others in a way that gives you a one-side benefit† (M.J, 2009) I ask myself the following three questions: Is it legal? Is it balanced? How does it make me feel? If I were an employee of Enron, I would think about the answers for the three questions above. 1. According to our business intuition or some threads, I feel the Management may commit fraud. It’s illegal to help the Management to hide fraud. 2. If I disclose this information to public, I may lose my job. Otherwise, if I hide the information, more people will suffer, such as the investors and stockholders of Enron. 3. I need to disclose these to public and try best to stop the fraud of Enron although I may lose my job. Hiding the facts I know and letting others suffered from that facts, make me feel guilty. Conclusion Enron the weakness is bad leadership. The executives of Enron are really smart guys, but they destroyed the fortune they built in 16 years and also hurt many investors. The fundamental cause of this disaster is that they lack the idea of the business ethic. Therefore, when the executives encounter dilemmas, they chose the wrong way. To avoid another Enron, I have three suggestions for organizations in today’s business world. 1. Organization has to think about their corporate culture carefully because organization’ culture will impact the decision of both the employees and employers when they face ethical dilemmas. As discussed in the third part, Enron’s culture brought many bad results and contributed to its fraud and bankruptcy. Enron had competitive environments and rigorous performance evaluation standards. Besides that, Enron only focused on its financial goals. If Enron gave more job securities to their employees, there might be less cheating on work. Additionally, employers could not make so many decisions if they cared about the interests of their employees and other stakeholders. Therefore, organizations should build a healthy corporate culture. 2. Organizations need to build a robust ethics infrastructure and follow it in the daily business. Only having ethical codes is far from enough. Enron had a well written code of ethics, but many unethical behaviors still happened. So organizations should write a code of ethic and communicate it to all the employees. If you have an ethical code, you should try your best to follow it. Don’t make your code of ethics be window dressing. Instead, organizations should make ethical standards common sense in every person’s mind. 3. Organizations need to learn business ethics theories and models because they are the ethical basis in all the situations. For example, in these theories and models, the impacts of your decisions and the interests of related parties are emphasized. These ethics and models give out good ways of balancing the interests of all the related parties, so they can help you make the right decisions when you face ethical dilemmas. Executives of business should have a good knowledge of business ethics. Then when they encounter dilemmas, they can know what to do. Therefore, to avoid another Enron, organizations should consider whether they have a healthy business culture, whether they have a well-written code of ethics and also follow the code, and whether the employers and employees have enough knowledge about business ethics.