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Corporate Governance And Ethics: Enron

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Question:

Discuss about the Corporate Governance and Ethics for Enron.

 

Answer:

Introduction:

‘Enron: The Smartest Guys in the Room’ is a 2005 American documentary film based on the rise and inglorious fall of the company, named Enron. This company was the seventh largest among the US companies and from that position, it entered bankruptcy within a year. Enron was founded in 1985 by Kenneth Lay. The case of Enron is one of the biggest business scandals of America. The top executives walked away with over $1 billion while the investors, shareholders and employees lost everything such as, salary, profit, pensions etc (Nicks 2014).

 

Corporate Culture of Enron:

The company believed in extravagance as well as greed and unethical practices. The top executives of Enron always encouraged in spending big, even when the company was suffering from rickety finances.  In its whole timeline, Enron did everything bigger and flashier. From announcing new ventures almost every year to celebrating every occasion in a most lavish way; these trends were very normal to every employee of the company. Not only extravagance, the relaxed attitudes of the management regarding the business controls and cultures also led to problems (McLean and Elkind 2013). The corporate culture of Enron was completely based on corruption and absence of ethics. The lack of an ethical corporate culture can lead to devastation and Enron proved that. Initially Enron managed to build a good reputation among the customers with the image of a prospective innovative company. It had a business of building power plants, operating gas lines, and unique trades. The company dealt with natural gas, electricity, communication, pulp and paper since its foundation. When it went bankrupt in 2001, the lack of ethics and lack of corporate culture of the company surfaced. All the top management kept on making money illegally while the investors and employees were cheated throughout. The company made money with smoke and mirrors. The executives kept on bluffing the market and introduced mark-to-marketing accounting to steal the public’s money. Enron also got involved in California power outage case (Markham 2015).

Enron had been doing good business except for the greed of money of the top management. The high level greed of the managers led to early death of the company. Instead of practicing ethics and trust themselves and incorporating those values among the employees, the management and leaders of Enron not only demonstrated their lack of ethics and greed, but also pushed the workers to follow the same practices. The managers focused only on making money and reaping all the financial benefits (Honneth 2014). It led to extreme competition for money among the employees and managers themselves. Hence, the corporate culture was rotten in Enron since the beginning. Everyone in the company was running after only money, leaving behind the ethics. Therefore, it can be said that Enron practiced a corporate culture of greed and money (Dempsey 2015). Everyone knew that the company is following unethical and illegal practices to make money, but nobody did anything to rectify. The fake accounting and auditing gave misleading profit reports to the investors and to the market, leading to a misconception about the company. Everyone from top to bottom in Enron followed illegal ways to make money, which eventually led to a massive downfall of the company. The managers got finally arrested and had to face imprisonment. The lack of morality, ethics, and values of the management of Enron led to bankruptcy and an inglorious fall of the seventh largest company of America (Bernstein 2014).

 

Normative Theory of Ethics

Normative ethics refers to the particular section of the philosophical study of ethical actions. These mainly consider the morality and the ethics one should practice while taking a decision. This ethics study also evaluates the right or wrongness of any action. However, the theories are mostly conceptual and abstract and the evaluation of any decision is a relative subject. These theories try to explain a moral or ethical event systematically. The business was not set up with unethical intensions, but the quest for personal wealth in a very short span of time led to the destruction of the company via unethical practices (Hursthouse 2013).

Normative Ethics Theory in the Corporate Culture of Enron:

Enron management introduced some extreme schemes for incentives for attracting and motivating people and focused on short term earnings. Then the company started manipulating the earnings to earn more money by increasing borrowing abilities. Since issuing ore equity would hurt the prices of the shares, they created the schemes for secret funding. This way, Enron developed an unethical and amoral culture and misled the customers, employees, suppliers to invest more in their schemes. The top management was reaping all the benefits and at the same time, creating a great image of the company by promoting its ethics. This all led to a failure of the corporate governance. There was no transparency maintained regarding the earnings and accounts. Enron achieved the growth in the market capitalization by deception and subterfuge (Nichols and Erakovich 2013).

According to the normative theories of ethics, there was a huge problem in morality of the leaders. The leaders and the managers introduced a narcissist culture and that explains the tradition of ethical egoism. Pojman defines ethical egoism as the concept that it is morally right to think about one’s self-interest. There are four types of ethical egoism: psychological, personal, individual and universal (Erhard, Jensen and Zaffron 2016). Enron falls under the universal ethical egoism. This states that, a person should always do things that would maximize his self-interest, even if that hampers others. The leaders in Enron applied this philosophy of ethical egoism in their actions. They wanted to maximize their own wealth by hampering the welfare of the society. Hence, the pursuit of rational self-interest had growth so much that other ethical considerations of business, like integrity and honesty, became insignificant and ignored. Enron’s leaders transformed the organizational culture into a money making one. Their behavior displayed the application of universal ethical egoism. In Enron, integrity was a missing link between the top and bottom level of hierarchy. Hence, the unethical culture developed by the top management, made the subordinate employees to follow the same practice of profit maximization without maintaining an honest system, at the cost of the benefit of the company and the shareholders. Enron did not apply the principle of justice and beneficence in its activities of profit maximization although they claimed to be a company with integrity, ethics, respect and values. Frankena described this organizational culture of Enron by the system of mixed deontological ethics, which says that personal behavior ultimately directs the ethical culture of the organization (Rescher 2014).

 

Kohlberg’s Theory of Cognitive Moral Reasoning and Development

Kohlberg’s theory of cognitive moral reasoning and development is an extension of Piaget’s theory of moral development (1932). Kohlberg says that people face dilemma between right and wrong, while taking any decision, and he illustrated these concepts by using moral dilemmas. There are three levels of morality and two stages under each of the level, making it total to six stages (Gibbs 2014).

Kohlberg's stages of moral development

Figure 1: Kohlberg's stages of moral development

(Source: Mischel 2013)

According to the cognitive moral development theory by Kohlberg, Jeffery Skilling is at stage 6 and Sherron Watkins is at stage 4.

Position of Jeffery Skilling in the Cognitive Moral Development Model

Jeffrey skilling was the former CEO of Enron. He was a consultant, hired by Kenneth Lay, founder of Enron. Skilling introduced the mark-to-market accounting in Enron, which is a method for accounting the expected future profits from a deal by estimating the present value than the historical cost. Skilling and his subordinates played a major role in the energy crisis in California. They kept the prices of energy so high, which led to the crisis. When Skilling was the CEO of Enron, he used to draw an enormous $132 million a year. Skilling followed many unethical practices and resigned suddenly from Enron and after a few months, the company declared bankruptcy. He denied of having any knowledge of any illegal activities when asked about the bankruptcy. However, he was accused of 35 cases of fraudulent activities, insider trading, giving false accounts to auditors, conspiracy and many more crimes leading to the corruption in Enron. Although, he pleaded not guilty to any of the charges, his crime was proved and he was sentenced to prison for 14 years. The fall of Enron caused 20000 employees to lose their jobs, many committed suicides, many lost their lifetime savings and pensions, investors lost more than $11 billion while Skilling and other top executives fled away with people’s money (McLean and Elkind 2013)

Stage 6 falls under the category of Post-conventional morality. It deals with the concept of universal ethical principal orientation. An individual at this stage usually develops his own set of ethical and moral guidelines, which may or may not fit the social and legal rules. The person would develop his own ideas about any particular issue and would be prepared to defend those at any cost, even if that becomes illegal or goes against the society. For that, he would be ready to face any consequences also (Mischel 2013). Here, Skilling had his own set of rules for maximizing his personal gain and to achieve that, he did everything illegal, because his gains were more important to him than principals or ethics. He ultimately got caught and sentenced for his actions, while he defended his stands on money making (Yazdani and Murad 2015). 

 

Position of Sherron Watkins in the Cognitive Moral Development Model

Sherron Watkins was the Vice President of Corporate Development at Enron. Just before the bankruptcy declaration, Watkins gave alerts to then-CEO, Lay about the irregularities in accounting in the financial reports immediately after Skilling left. She sensed that the company was going to collapse soon due to massive corruption. Although Lay ignored her warnings and gave false hopes to the employees and stakeholders that financial condition of the company is solid. However, she was charged for not letting the government authorities know about the corruption in the company (Nicks 2014).

Stage 4 falls under the level of Conventional morality. At this level, the process of internalization of the moral standards of the valued adult role model occurs. Stage 4 deals with maintaining the social order. Here, the person gets aware of the social rules and regulations and hence, their judgments depend on the obeying of rules to uphold the law and avoid guilt (Kurtines, Gewirtz and Lamb 2014). Watkins was aware of the social norms and she wanted to follow the ethics and rules to avoid guilt.

Conclusion:

In the end, it can be concluded that, the downfall of such a big company started with greed for money. The unethical and immoral organizational culture, created by the management and followed by all the employees ruined everyone associated with the company. According to the normative ethics theory, Enron applied universal ethical egoism in its activities; and as per the stages in Kohlberg’s cognitive moral development, Jeffery Skilling can be in stage 6 and Sherron Watkins can be in stage 4. Hence, Enron has proved how unethical practices and greed can ruin everything for a company.

 

References:

Bernstein, J.M., 2014. Recovering ethical life: Jurgen Habermas and the future of critical theory. Routledge.

Dempsey, J., 2015. Moral responsibility, shared values, and corporate culture. Business Ethics Quarterly, 25(03), pp.319-340.

Erhard, W., Jensen, M.C. and Zaffron, S., 2016. Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics, and Legality--Abridged (English Language Version).

Gibbs, J.C., 2013. Moral development and reality: Beyond the theories of Kohlberg, Hoffman, and Haidt. Oxford University Press.

Honneth, A., 2014. Disrespect: the normative foundations of critical theory. John Wiley & Sons.

Hursthouse, R., 2013. Normative virtue ethics. ETHICA, 645.

Kurtines, W.M., Gewirtz, J. and Lamb, J.L., 2014. Handbook of Moral Behavior and Development: Volume 1: Theory. Psychology Press.

Markham, J.W., 2015. A Financial History of the United States: From Enron-Era Scandals to the Subprime Crisis (2004-2006); From the Subprime Crisis to the Great Recession (2006-2009). Routledge.

McLean, B. and Elkind, P., 2013. The smartest guys in the room: The amazing rise and scandalous fall of Enron. Penguin.

Mischel, T. ed., 2013. Cognitive development and epistemology. Academic Press.

Nichols, T.W. and Erakovich, R., 2013. Authentic leadership and implicit theory: a normative form of leadership?. Leadership & Organization Development Journal, 34(2), pp.182-195.

Nicks, T., 2014. Enron: The Smartest Guys in The Room. [online] prezi.com. Available at: https://prezi.com/qr-l85grmc81/enron-the-smartest-guys-in-the-room/ [Accessed 22 May 2017].

Purnell, L.S. and Freeman, R.E., 2012. Stakeholder theory, fact/value dichotomy, and the normative core: How Wall Street stops the ethics conversation. Journal of Business Ethics, 109(1), pp.109-116.

Rescher, N., 2014. A System of Pragmatic Idealism, Volume II: The Validity of Values, A Normative Theory of Evaluative Rationality (Vol. 2). Princeton University Press.

Yazdani, N. and Murad, H.S., 2015. Toward an ethical theory of organizing. Journal of Business Ethics, 127(2), pp.399-417.

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