Date: Jun 13, 2019
Category: Business Essay
Enron's Ethical Collapse

In the past decade, a series of illegal activities and ethical scandals have been documented in the business environment. For example, Enron Corporation filed for bankruptcy in December 2001. HealthSouth was accused of using an extreme fraud scheme that resulted in the imprisonment of the involved entities. WorldCom filed for bankruptcy in 2002. The current paper explores business ethics by considering Enron Corporation as a sensitive example of ethical collapse in corporate essays. Research indicates that employees’ behavior is driven primarily by organization culture and that leadership shapes ethical behavior. In spite of Enron’s statement of its core ethical values, top leadership actions resulted in a culture of greed that facilitated unethical behaviors across all levels of its organizational structure. Journals, books and online articles were used to investigate and analyze the case study from a qualitative perspective.

The Enron Culture

At its peak, Enron was a commodity, energy and service company. Its core values were listed as communication, respect, integrity, and excellence. However, several practices suggested that Enron’s culture as opposed to the stated values. Enron’s bankruptcy in 2001 is subject to study because it is one of the most complex and largest bankruptcies in United States history. Enron emerged from bankruptcy in 2004 pursuant to a Bankruptcy Court, which approved the plan of reorganization. Enron Corp. changed its name to Enron Creditors Recovery Corp after the United States Bankruptcy Court approved its reorganization plan. The change of the name was a right move in the sense that it reflected its immediate purpose of reorganizing and liquidating some of its operations and assets before bankruptcy for the benefits of creditors. This decision was not only strategic but also ethical in the sense that the Board of Directors gave the creditors priority. As part of its efforts to avoid problems, ECRC (Enron Creditors Recovery Corp.) took legal action to handle the key financial institutions that it contends and helped the original Enron to deceive the public. As of this writing, those legal efforts had resulted in settlements of approximately $2 billion in cash.

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The Enron Backdrop

Ethically, explanation tends to fall in personal, systematic and organizational categories. Personal explanations concentrate on the evils in the character of the involved leaders. Organizational explanations consider the causes of Enron’s collapse in group influences. Such influences include shared beliefs developed about what is permissible, who is important and how things are done at the group level. It also entails shared values or group culture; policies and rules that groups develop to govern their interactions with the internal and external environment. Jeffrey Skilling developed a leadership that used accounting loophole, poor financial reporting and SPE (Special Purpose Entity) to hide debts from failed projects and deals. CFO (Chief Financial Officer) Andrew Fastow and other senior executives misled Enron’s audit committees and Board of Directors on high–risk. In addition, they pressurized AC (Andersen Consulting) to ignore the issues. In response to the lawsuit filed by shareholders, the United States SEC (Securities and Exchange Commission) investigated the scandal. Systematic explanations consist of environmental forces the direct or drive individuals or groups to take an action rather than another. Examples include laws and regulations designed to provide a framework in which people or businesses act. In Enron’s case, one of the systematic causes of the scandal was a shortcoming in the legal and regulatory structure. The existing laws and SEC regulations allowed auditing firms like Arthur Andersen to offer consulting services to Enron and then provide an audited report about its consulting activities. It was a conflict of interest that emanated in the existing legal structure. Additionally, Enron hired and paid its own auditors. This was unethical because the auditors had an incentive to disclose a favorable report of Enron. Enron was also allowed to manage its employees’ pension funds. Additionally, it was unaccepted due to the fact that Enron had an incentive of using these funds in ways that benefitted the company even in scenarios where employees were disadvantaged. Lastly, Enron had a code of ethics that prohibited executives and managers from being involved in other business organizations that transacted with it. However, these codes of ethics were voluntary and could be set aside by its Board of Directors. This constituted a conflict of interest. In spite of the fact that managers have a fiduciary duty and social responsibility to act in the best interest of the shareholders and the company as a whole, the existing laws gave the managers some considerable discretion to exercise their own business judgement in regards to what was in the best interest of the shareholders and the company.

Theoretical Assumptions Related to Corporate Social Responsibility, Corporate Governance, and Sustainability

Ethical issues originate at different levels and move to other levels from an individual, organizational, association, societal to the international level. Categorical imperative, utilitarianism and moral relativism are philosophical terms pertaining to ethics. In the current study, moral relativism is a normative assertion that principles of morality are relative to the culture of a particular organization. That is to say, what is perceived as right or appropriate for a particular leader and his/her company may be wrong for others. Typically, legal requirements represent an ethical minimum. However, personal ethical standards often exceed legal standards. In other words, laws are ethical issues with socioeconomic implications as interpreted by the legislature or judiciary. On the other hand, personal ethics have a broader scope and application. Business entities that promote CSR (Corporate Social Responsibility) and ethical environment provide an opportunity to develop an ethical organizational culture and sustain their competitive advantage. It can be achieved with organization-wide commitment to do the right thing. Commitment can be obtained from ethical leaders such as CEOs (Chief Executive Officer), CFOs and Board of Directors. Through commitment, companies can define the right standards or actions and outline how to achieve them. Categorical imperative means that leaders should evaluate their actions or decisions based on the outcomes if all other organizational members in similar scenario acted in the same way. It means that in determining right or wrong or desirable or undesirable targets, leaders should employ categorical imperative to corporate behavior to limit the incidence of corporate scandal and collapses.

Discussion and Recommendations

Some of the common unethical business practices include fraud or theft, which entails the use of the company’s property for personal use or misrepresentations. Other unethical practices include sexual harassment, termination without fair cause or notice, discrimination against a protected class, accurate but incomplete disclosures, abusive or intimidating behavior, offering/receiving kickback bribes or incentives. Besides organizational culture, other forces that shape business ethics include personal ethics, organizational system, and external stakeholders. Personal ethics entails values, beliefs, ethical framework and moral development. Organizations systems include structure, code of ethics, policies, and rules, selection and training, reward systems. External stakeholders that shape business ethics include customers, market forces, government regulation, and special interest groups. These forces determine whether a decision or behavior is socially or ethically responsible.

From the author’s perspective, business ethics requires employees or the organization as a whole to choose actions that may be accepted as right or wrong. In this end, business ethical issues can be categorized as a conflict of interest, communications, fairness and honesty, and organizational relationships. In the case of Enron, conflict of interest formed a bias or financial interest. When confronting ethical conflicts, the Enron sought to preserve the organization, employee concerns, and customer relationships. It is in line with the notion that corporations are legal entities created and managed by directors, shareholders, and employees. From the case study, and in agreement with the court ruling, the Code of Ethics should serve as standards, whereas the code of conduct serves as action areas in formal ethics systems and structure of Enron and other corporations. Communication network within the organizations should have been structured to improve transparency in both formal and informal processes for cementing and refreshing. From the author’s standpoint, actions should satisfy standards of equity and fairness. Leaders should also behave in a manner that is generally accepted if their actions affected them. Most importantly, actions or code of conduct must respect the rights of individuals or groups affected. It implies that actions should be consistent with organizational goals and not motivated by self-interest. CEOs (Chief Executive Officer), CFOs and other senior management leaders should consider each decision or action separately alongside with the standard accounting practices and procedures, such as GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards). In this respect, formulated legislations, such as SOX (Sarbanes-Oxley Act), result positively only if the provisions are adhered to without compromise as documented in the pre-bankruptcy Enron.

The bottom-line of ethical leadership or management is that decision-making at corporate level entails personal, organizational and societal values. Typically, ethical values are open to discussion and criticism and are subject to the resistance between binding standards and exceptional cases. Moreover, leadership should accept the responsibility for moral judgments as it is indicated in every leader’s job description. In terms of Enron’s system from a character standpoint, there is a need for reforms that discourage materialism and loopholes in legal frameworks.

 

In the past decade, the business environment has witnessed a series of ethical scandal and illegal activities. Central to the analytical review of American corporations namely Enron, WorldCom, and HealthSouth is the corporate scandals due to fraud and collapse in business ethics and corporate governance. In the wake of these, stakeholders often wonder how organizations that recognize a commitment to ethical core values can fall short of ethical and legal expectations in blatant ethical violations. Social proof asserts that members of an organization will consider their prompt about behavioral decisions from the organizational culture before personal stated core values. Research on organizational culture continues to support strong organizational culture as the key factor of employees’ behavior. Organizational culture is highly influenced by the actions of senior leaders. In Enron’s case, irrespective of the company code of ethics and statement of ethical values, unethical behavior was encouraged by senior leadership at all organizational levels. This case study suggests that organizational leaders need to consider organizational culture as a pillar of building an ethical company. Misalignment between organizational culture, core values, and leadership behavior can limit any desired, positive effecting from defining core values.