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Enron's Financial Scandal and Lack of Ethical Leadership

Discuss about the Diabolical Dictators or Capable Commanders.

Corporate social responsibility or CSR is an internal organizational policy of an organization. However, the CSR should be integrated into the business model to improve the performance of an organization. CSR goes beyond compliance with the legal requirements of an organization (Schwartz, 2017). A business includes CSR for ethical and strategic purpose. The strategic purpose of the CSR is to enhance the long-term profit in the business on the other hand, from the ethical perspective a business needs to adopt CSR to reduce the legal risk. This current study deals with the Enron scandal that leads this organization to face bankruptcy. Enron case is the largest report of bankruptcy in U.S. However, Enron is accused for the financial scandal in U.S. The CSR activities are not maintained in this organization properly, which leads them to face legal obstacle in their business.

Enron is a U.S based organization. This organization has started their business as a regional natural gas pipeline company in 1985. However, this organization is blamed for the financial scandal and faced bankruptcy. Deregulation of the energy market allows this organization to make bets on the future price. Enron has taken advantages of this situation. Enron has created a financial website EOL for their electronic trading. In this business they invested more and finally faced huge loss without any significant return. Jeffrey Skilling the CEO of Enron tried to hide their finical loss and expressed their organization as a profitable organization. As a result, after the audit Enron has found as the biggest audit failure in U.S (Consultancy.uk, 2018).  It can be said that the leadership style and activity in this organization was not good, which hampered the reputation of this organization.

In the context of Enron there was lack of ethical leadership, which leads this organization to face financial scandal. The CEO of this organization failed to follow the ethics and their responsibilities. As commented by Bhattacharya et al., (2017), ethical leadership is a kind of leadership that allows an individual to manage the each and every activity of an organization in an ethical way. The ethical leader shows professional behavior and maintains the business ethics. Based on the leadership concept it can be said that leadership is a process of evaluation and adaption. Leadership and ethics has a close relation in an organization. However, the keeping the trust of the stakeholders is the major responsibility of an ethical leader. As argued by Shapiro & Stefkovich, (2016), if the leader fails to build the trust of the stakeholders then it is difficult for this organization to keep their brand image and to continue their business in the global market. In the context of Enron it has been seen that the CEO of this organization affected the trust of the stakeholders as a result, this organization has faced bankruptcy. It is important for an organization to follow the ethics, rules and responsibility while using the leadership in an organization (Burnes & By, 2012). In the context of Enron there was lack of ethical leadership in this organization. However, the financial scandal is an incident of this organization due to the lack of ethical leadership.

The Importance of Ethics and CSR in Leadership

In an organization it is crucial to incorporate the ethics into the leadership. However, it is important to adopt a good leadership style to improve the performance of the organization (Demirtas & Akdogan, 2015). In the context of Enron it is seen that Jeffrey Skilling was hired as the CEO of this organization. However, there was loophole in accounting and they had executed a poor financial reporting through which they were able to hide billions of dollar. This scandal occurred as the CEO did not follow the leadership ethics, which led this organization to face financial scandal. Such financial scandal is the ethical failure in Enron. The leader of this organization had a poor ethical choice, which led this organization to create a scandal. For Enron it is required to incorporate justice and honesty in their leadership style that were lack in their leadership character. By incorporating such feature in the leadership this organization could be able to make honesty in their financial decision-making process. For every organization, honesty and justice should be incorporated in the leadership style, which will enhance the CSR activities and improve the transparency in the leadership in near future (Smith, 1776).

Corporate social responsibility or CSR is another vital area of the business organization. However, it is important for an organization to maintain the corporate social responsibility by following the business ethics in this organization (Walumbwa, Hartnell & Misati, 2015). In the context of executive compensation, accounting scandal, and pollution the business ethics is always the important topic. From the financial scandal of Enron, it has been received that they have not followed the CSR activities in their business. However, CSR enables an organization to follow the rule and regulation of the government policy as legal compliance is the part of CSR. Conduction is a fair business is the major part of business ethics. The CSR highlights that a firm needs to show a good behave in order to become a good corporate citizen. They should obey the law while conducting the business (Wu et al., 2015). In the context of Enron, they did not comply with the law as they hide financial loss and caused financial scandal. This incident ensures that Enron was not able to keep transparency in their operation and failed to maintain the principle of CSR.

Organizational culture focuses on the value, belief, and way of interacting with the people within this organization (van Gils et al., 2015). Enron was a popular world’s leading energy company that creates innovative and effective energy solution for growing economic. This organization always focuses on the establishment of a better economy and environment. For the individuals, Enron always called as the Enron Crop and it was considered as the classic example of ethical business. In the year 1900 and early 2000s, they started the business of the wholesale of electricity and natural gas. They did not own the business and act as an intermediary between the customers and suppliers. During this business, they had faced huge loss and their accounting procedure is not transparent. Due to lack of accounting transparency Enron's managers are able to show high financial performance, which was not the actual performance of this organization. However, the power culture, hierarchy culture and role culture of this organization were not well. Power culture refers to the decision-making process of the leaders (Ruggie, 2017). However, the hierarchy of this organization failed to develop a positive culture in this organization. The organizational showed that they are ethical in their work, however; they had taken a bad ethical decision. This organization did not have any ethical culture, which influenced them to create a financial scandal ad to take a wrong ethical decision. Ethical culture highlights that the employees should have a sense of responsibility and accountability. In the context of Enron the employees especially the managers had no accountability as a result; they failed to keep transparency in their financial accounting process. Therefore, in an ethical culture, the managers need to communicate the significance of integrity while taking the difficult decision. In Enron, the managers were not able to take a good ethical decision.

Organizational Culture and Ethical Leadership

Enron followed a very irresponsible and unethical culture throughout this organization. However, the financial and decision-making factors made them the worst sufferer and to face the legal obstacle. Ethical leadership has a great impact on the organizational culture. If the leader of an organization adopts ethical leadership then they are able to establish the transparency in the organizational process (Shapiro, Stefkovich & Gutierrez, 2014). In the context of Enron if the CEO could follow ethical leadership then they might maintain the accountability of the employees. It could be helpful for Enron to keep every financial statement updated and maintain them in a proper way. Ethical leadership helps an organization to build a positive culture in an organization. It could be helpful for the Enron leader to establish an ethical organizational culture by following the ethical leadership. Therefore, the employee organizational commitment was low in Enron. Adoption of ethical leadership increases the employee commitment in an organization, which ensures a positive working culture in an organization (Lehnert, Park & Singh, 2015). Adoption of ethical leadership could be helpful for Enron to influence their employees to follow the business ethics, rules, and CSR activities. Hence, it can be said that the ethical leadership is effective to establish a transparent organizational culture and to improve the decision-making process of the hierarchy culture.

Ethical decision-making is a crucial part of any business to reduce the legal obstacle from the business. As argued by Dane & Sonenshein, (2015), often the leaders face an ethical dilemma while taking a business related decision. However, a wrong decision may lead an organization to face challenges in their business. One of the major ethical decision-making tools is the application of Potter Box. This tool enables the leader to identify the policy or action that causes the dilemma during the decision-making process. In the context of Enron, the manipulation in the financial statement is a wrong action that causes dilemma during the decision-making process. The next step of Potter Box is the analysis of the situation. Often the situation leads the managers to take a wrong decision and to face an ethical dilemma. The leaders of Enron wanted to hide their financial loss and they manipulated the financial data. This situation led this organization to take a bad ethical decision. The third element of this tool is the value that caused ethical dilemma. From the scenario of Enron it has been received that there was lack of honesty and reliability, which led this organization to take a wrong decision. However, the leaders wanted to keep the financial profit of this organization despite their loss. This ensures the lack of reliability of this organization. The fourth step of this decision-making tool is the personal belief of the individuals. However, the managers and CEO of this organization had lack of personality and they did not believe that theft is always a wrong process. As a result, they became influenced to create a financial scandal. The fifth element of this tool is loyalty. In Enron, there was lack of loyalty among the managers and the employees, which led this organization to misuse their power and to make a scandal for the organizational profit. The final step of this tool is the action plan to deal with this dilemma. Application of Potter Box is an effective method to take an ethical decision by resolving the issues of an organization. This tool could be helpful for the managers of Enron to take an ethical decision during the organizational crisis.

Ethical Decision-Making in Organizations

Kidder process is another ethical decision-making tool. This tool enables the leaders to sort out the ethical issues during the decision-making process. The managers of Enron had faced the ethical dilemma while taking a financial decision. According to this tool reorganization of the moral dilemma is crucial to reduce ethical issues from the decision-making process (Lehnert, Park & Singh, 2015). However, the managers of Enron did not think about the future while making loopholes in the decision-making. However, it is important for the managers to forecast the future events that may affect their decision-making process. In the context of Enron, the managers did not focus on the future impact of their decision-making process on the business. To keep the profit of the organization they made the financial scandal. The managers faced the ethical dilemma when they had been suffering from huge loss as they need to save their business from loss. Therefore, to determine right versus wrong is vital to take an ethical decision. The managers of Enron tried to hide the huge loss and to keep the business profitable. However, they wanted to make a false situation, which ensured that their business was running through a high profit but the actual scenario was totally different.  As a result, they created loopholes in financial report, which broke the law. Their decision-making process was against the law and they were not able to make a legal compliance. As a result, the ethical decision-making process was hampered. Application of the kidder process might be helpful for the Enron to take ethical decision during their ethical dilemma. 

With globalization and advancement of technology, companies all over the world have the opportunity to expand their business beyond the geographical boundaries of the country of operation. This has given rise to the importance of the acceptance of diversity and culture in the company.  When a multinational organization appoints employees in another country, the company is expected to be at par with the culture and traditions of the country in order to align the interest of the stakeholders with the objective of the company (White & Stirling, 2013). Acceptance of diversity in an organization ensures the company new ways of achieving the goals as the approach towards problems in different culture can be different. The companies must ensure that the organization provides equal opportunity for all the employees in an unbiased way. The organisation must. Diversity does not only restrict to culture it also has other demographic categories as well, such as gender, age, religion etc. With the change in the society and the development of several rules and regulations by the government of countries, organisation have adapted to new and improved employment strategies and Organsiational culture in order to encourage diversity in the business process. Diversity is something that should not be treated as an advantageous or beneficial attribute of the company. Rather it should be regarded as something that is natural and the perks of the process is a part of the business endeavor. It is essential to include diversity in the core plan for the business because (Özbilgin et al, 2014).

With the changes in the dynamics of the society there are changes that has to be incorporated in the business product as well as in the process as the companies it ensures development of the business. In order for a business to thrive there has to be various kind of people whose thought process do not match with one another (Özbilgin et al, 2014). This will help in getting a number of perspectives and ideas for the business process. Accepting diversity is opening doors to new ideas and concepts which can help the company to gain competitive advantage in the market as well (Hunt et al., 2015)..

Diversity among the organisation can ensure a wider reach towards the customers; the diversity among the employees will help in understanding the changing needs of the customers and therefore help the company adapt to the needs and requirements that are evolving (Özbilgin et al, 2014). This can ensure effective communication in the process of business if the company wanted to cater to a specific target market. Communication is an important advantage in accepting diversity (White & Stirling, 2013).

Talent acquisition is one of the major aspects of acceptance of diversity in the organization. When a company recruits the employees based on their qualification and their skills or talent there are a better chance for the organization to heir people who are focused on their performance and are also committed towards the organization (Hunt et al., 2015).. High rate of productivity among the people of the organization is beneficial. If the management of the organisation focuses on the development of the people and irrespective of their cultural background or any other biasness provide the employees with equal benefits then the employees also remain loyal and hardworking which helps to increase the company’s productivity and profit (Hunt et al., 2015).

Eron is an organization that with the help of diversity could have understood the ethical nuance and the severity of the case that they had performed, The company could have achieved their objective without falsifying the reports, the advantages that has been discussed above state that the company can connect better to the customers with the help of diversity, similarly the company can also build a valuable relationship with the other stakeholders of the company as well (Hunt et al., 2015).. The communication with the stakeholder is what the major issue that the company had faced (White & Stirling, 2013).

There are various business level policies that are formulated by the management of the company. Strategic management is the process by which rational decisions on these various levels can be made. Corporate policies of the company are based on the macro environment aligning the advantage of the micro environment in order to achieve the objective of the business (Hickman & Silva, 2018). The corporate policies of the company help the organisation establish its culture and to maintain and build goodwill in the market.  The organisations devise corporate policies to streamline the business process so that the operations are hassle free. The stakeholders of the company can be divided in two categories: internal and external. The management, owners, employees are the internal stakeholders, where as the government,  investors, shareholders, suppliers, distributors, third party service providers etc are some of the external stakeholders. The corporate strategies of an organisation impacts the internal stakeholders in a major way for example: if the company has taken a decision to merge with another organisation, there are several factors that has to be considered and in the process all the stakeholders will be impacted, the employees will be unsure of their position in the company, the management will be unsure of their hold until the contract or the completion is over etc (Hickman & Silva, 2018). This can also give rise to internal conflict situations in the company if the people associated with the organisation are apprehensive of the situation. The business process is impacted by corporate policies and decisions taken by the company therefore the internal stakeholders are significantly impacted. On the other hand, external stakeholder like the customers is majorly impacted by corporate decisions as well, for example if the company has decided to incorporate the process of diversification in order to achieve competitive advantage, they will come up with a new line of products or services. This will impact the buying behaviour of the customers as well (Hickman & Silva, 2018).

Organisation culture is established by the mission, vision and objectives of the company. The culture of an organization is essential part as it is a part of the identity of the company. Based on the value and principles that are driven by the company the culture is determined. It helps the company take rational and ethical decisions and also impact the stakeholders of the company in a large way. The stakeholders are impacted as they have to keep up with the work environment and culture in the internal environment and the image of the company is impacted with the external stakeholders (Habib et al., 2014).

Enron has failed to establish an ethical Organsiational culture as the company as the organization was caught in a case of falsifying the documents, the image of the company among the stakeholders have reduced and there is no goodwill. As an ethical leader the company could have announced the insolvency in order to stay true to the stakeholders. The company could have taken other decisions in the process of business rather than taking an unethical path (Jani?ijevi?, 2013).

Conclusion

It can be concluded from the above discussion that the organisation that has been discussed as case study, Enron, could have acted responsibly towards the stakeholders. An ethical leader should have taken a decision which would have helped the organisation to improve the situation rather than filing false documents. Ethical leadership is more than doing what is right and avoiding what is wrong, it is about doing the right thing at the right time.

References

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