Enron and Ethics Failure is the best teacher not only for those who fail, but also for those who observe the failure. Thus, for many businesses the Enron scandal proved to be the greatest teacher. Since the fall of Enron, there have been several theories and examinations about why it failed as it was a corporation that no one imagined would ever crash. Based on research to date there are multiple reasons for Enron’s failure; however, one that stands out immensely is corporate disregard for ethics.
To understand why Enron’s scandal was such a shock, it is first important to note its background. Prior to its collapse, Enron was one of the biggest global energy and services company. It sold natural gas and electricity. Once deregulation of electricity took place, Enron became more innovative and instead just selling energy, it became an “energy matchmaker” bringing buyers and sellers together and profiting from their exchanges (Borden, 2003).
It was named the greatest company to work for by Fortune Magazine several years in a row and at one time was the seventh largest company in the United States (Borden, 2003). Unfortunately, Enron’s unethical behavior led Enron to set yet another record—the highest corporate bankruptcy ever at that time (Borden, 2003). Enron’s unethical behavior rooted from the lack of a strong organizational culture. It is important to have a strong organizational culture as it helps tie ethics, attitudes, and organizational philosophy together. Enron’s culture lacked emphasis on business ethics.
Though it had a code of ethics in place for employees and executives alike, which outlined how business should be conducted, it was put on the back burner and was obviously overlooked by executive leaders, managers, and employees (Bartlett, 2002). Enron did not seem to value honesty, steady growth, and hard work. Rather, the corporation valued aggressiveness, risk-taking and creativity, all qualities that are respectable when balanced with social responsibility, integrity, and concern for a company’s employees, investors, and shareholders.
Enron was more concerned about its financial status and balance sheets than about acting accountably. Enron’s executives should have embraced business ethics and instilled them into their corporate values. It is a duty of the executives to trickle down ethics through its organizational culture to every employee and it is the job of managers to monitor and enforce ethics (Yukl, 2006). However, it can easily been realized that no one fulfilled such duties at Enron. Executive and managers alike “looked the other way” to meet the standards and pressures created by the company.
If management established an environment that restricted unethical behavior, employees would have been afraid to take questionable actions. Not developing a responsible organizational culture should have been an indicator that the corporation’s success would demise. The code of ethics was merely words on paper at Enron rather than the foundation of its culture. Like most things without a strong foundation, Enron too collapsed. Along with lack of concern for ethics, Enron’s executive leaders also became increasingly greedy, a volatile combination. They were unsatisfied even after their steady climb to success.
At one point the CEO, Skilling, announced that he wanted Enron to be the largest company in the world (Bartlett, 2002). Such ambitions are typically admirable however, they also can be despicable when the chosen methods of achieving such ambitions mislead others. Accelerated growth required funding that would ruin the quality of the Enron’s balance sheet. To counter that problem, Enron began to create questionable financial reports. One method the company utilized was market-to-market accounting (M2M), a technique that allows a company’s futures profits from current outstanding contracts to be accounted for in the present year.
This meant that Enron was able to record a profit in a single year that would typically be booked over a period of 10 to 20 years as the contracts reached conclusion (Stewart, 2006). M2M made Enron appear more profitable than it was and disillusioned its investors and stockholders. As result, when Enron failed, the individuals could not collect a return on their large investments. Employees who had their pensions tied to Enron’s stocks were stripped away of their life-savings in an instant. The executives were not the only ones responsible for the tragedy the Enron stockholder’s faced.
They executive leaders certainly encourage unethical and deceptive behavior, but the accountants performed the tasks and the managers approved them without any questions. No thoughts were put into whether or not their actions were sound and ethical. Lastly, Enron promoted overlooking ethics in employees as it compensated its employees largely through bonuses and stock-options. The idea was to keep employees centered on their earnings (Stewart, 2006). Skillings believed that money was the only motivator for employees and it turned out that many employees indeed responded to his incentives and did whatever was needed to sustain their income.
Although Enron’s compensation system in essence rewarded its highest performing employees, like many organizations, it was not suitable for Enron because it was combined with a culture that valued risk and high-volume spending. As result, employees took on high-risk deals and discarded the quality of profits and cash flow to earn higher performance bonuses (Stewart, 2006). High bonuses for employees meant even higher bonuses for managers, thus there was no intervention. Personal gains were more important than regard for integrity. As previously mentioned, Enron’s collapse was a great teacher for businesses.
Many businesses have learned that creating a strong organization cultural focused on ethical business conduct will lead to a successful organization. Enron’s creative accounting and poor structure even helped open the eyes of US legislation and contributed to the creation of Sarbanes-Oxley Act of 2002, which essentially forbids officers from falsifying financial data or internal control procedures. One can hope the Enron’s mistake will continue to educate others about the importance of honest, ethical business practices. References Bartlett, C. (2002). Enron 101. BizEd, 40(7). Retrieved from http://search. ebscohost. com /login. spx? direct=true&db=tfh&AN=8624332&site=ehost-live Borden, T. (2003). Enron: How did this Happen. In S. G. Benson, N. Matuszak, & M. A. O’Meara (Eds. )History Behind the Headlines: The Origins of Conflicts Worldwide, (Vol. 6). (pp. 98-111) Detroit: Gale Retrieved April 5, 2010, from Gale Virtual Reference Library via Gale: http://go. galegroup. com/ps/start. do? p=GVRL=apollo Stewart, B. (2006). The Real Reason Enron Failed . Journal of Applied Corporate Finance, 18(2), 116-119. doi:10. 1111/j. 1745-6622. 2006. 00092. x. Yukl, G. (2006). Leadership in organizations (6th ed. ). Upper Saddle River, NJ: Pearson Education.