Introduction
Enron Company got involved in several financial scandals between the years 2001 and 2002. The most interesting part of the scandal, however, was the persistent denial by the top managers of the company of their knowledge on the same. The managers vehemently denied knowledge of the mischievous financial activities of their employees. The events of this incident shifted the attention on the role of communication in assigning the responsibilities to the employees by the management. It is believed that there existed a serious and fundamental disconnect between the employees and the management.
The Case Preview
Enron was formed in the year 1985 through the intervention of Kenneth Lay. It was a merger between a gas pipeline company named Internorth Omaha and a utility company called Houston Natural Gas. Enron grew so fast and within fifteen years, it was ranked the seventh most lucrative firm based on revenue. Its major trading line was the purchase of electricity from the generators and selling it to clients. The company began by first broking electricity. This was achieved by identifying areas with high demand of energy and building power plants there before selling them later before their values decrease and move on to new areas. With time, the company expanded further in terms of acquisition of new markets and employment of new members of staff.
It is reported that the company hired Arthur Anderson, LLP as an internal auditor and accountant in the year 1985. He was allegedly paid huge sums of money amounting into millions of dollars. In the year 1999, the executives at Enron sought to isolate losses from equity and derivative trades into special purpose entities. In December, 2000, the chief operating officer, Jeffrey Skilling, who also doubled up as the president of the company assumed the position of the chief executive officer, which had long been held by Kenneth Lay. Skilling’s stint at the helm was, however, short lived as he opted to resign in August, 2001 citing personal reasons. Consequently, Lay was re-appointed to the same position
During the same month of August in 2000, things became uglier when the company’s vice president of cooperate development, Sherron Watkins, blew up the whistle. Through a letter, she wrote to Lay, the chief executive officer. She accused Enron of under dealings, improprieties and fraud due to issues such as the special purpose entities (SPE) case. Incidentally, Anderson Arthur was privy to this information. Apparently, Enron had made a loss of over $618 million, which was transferred to SPE in October, 2001. This loss was then publicly reported by the company as the net loss in the third quarter. Things escalated further by the end of the year when a reduction of $1.2 billion was made by the company to the value of the stakes of its shareholders. It later emerged that the company had engaged in activities such as inflation of profits and debts hiding, actions that were allegedly supported by the chief financial officer, Andrew Fastow.
The events that transpired from then on led to the formation of a commission of enquiry to investigate the activities of the company. Consequently, Fastow was sacked by the company and a revelation of $586 million losses within the past five years was made. This further led to the drop of the company’s market shares to the levels below $1 in November, 2001. In order to satisfy the losses, the company was forced to transfer the stocks. This necessitated the company to become insolvent, after which it filed for bankruptcy in December 2001. Lay then resigned as the chairman and CEO in January, 2002.
It is also reported that Anderson had prior knowledge of what was happening and he also knew the financial condition of Enron but chose not to communicate conflicting information to the public. As the company’s main book keeper and auditor, he misadvised the company on several occasions. For instance, through his guidance, shareholders equities that were recorded to have decreased were intentionally categorized as increases. The company even destroyed all the documentation materials related to it in October, 2002 under the instructions of Anderson. These actions by Anderson led to his induction in March, 2002 and later he was banned from auditing public companies. Other people who were to face separate charges regarding the insolvency of Enron included Fastow, Skilling, Lay and Ben Glisan Jr., who was the company’s treasurer. A year later, the company indicated that it wanted to come out of the bankruptcy but in the form of two separate companies.
Enron’s Case
The failure and collapse of Enron can be attributed to a number of reasons ranging from the organizational culture to poor management. The management and the board of the company opted to withhold the critical information that was otherwise necessary for the provision of checks and balances, which are important for ethical business practices. The company had a culture that facilitated the employees to push the limits. According to the Management Institute of Paris (MIP), Anderson and Enron’s senior managers were the ones responsible for the failure of the company. They did this because of their lack of morals and ethics in leadership, besides creating a secretive and greedy organizational culture. They had ‘a winner takes it all’ mentality. At the time when the company was going through massive losses, Anderson termed its financial position as fair, reliable and adequate.
The managers of this company tended to misconstrue the reality. Incidentally, the managers had apparently built a model of success in their minds and were determined to brush aside any news, which tended to contradict their mentalities. They also chose to pay no heed to their perceived problems instead of addressing them. Worse still, the managers were very harsh to their employees, thereby instilling fear in them. This discouraged the employees from reporting the actual problems that the company was facing and this was enforced by the management. The company believed in a risk taking culture that encouraged and affected the SPE’s program. When the program started running into losses, the management personnel deemed it fit to keep it a secret and greedily decided to keep the profits to themselves. When they discovered that they had run into problems and difficulties, the company opted to implement the ad hoc strategies with the aim of quickly fixing its problems.
The fact that Enron’s scandalous deals were exposed by an insider perhaps after being short-changed in some of the dealings portrayed the manner in which greed run through the company. This case was not only a blow to the investors who lost their billions of dollars through the under dealings, but also to the SEC regulations, which had to be amended. Another casualty in the case was the notorious accounting firm of Arthur Anderson.
After the collapse of the company, many players came to the conclusion that the initial success stories that pervaded under the CEO, Kenneth Lay, were because of the existence of the federal legislations that deregulated the energy sector. Lay is also said to be in good terms with senior republican figures that helped him raise funds besides influencing the passage of favorable legislations. Apparently, Lay started off well for he had a broad revolutionary goal for the company. In addition, he diligently carried out the corporate social responsibility of the company for he was sufficiently philanthropic. This earned Enron the recognition of the Council of Economic Priorities that awarded the company the Corporate Conscience Award in 1996. It was credited for uplifting respect, integrity, communication and excellence.
Despite receiving the award, open communication was not given much consideration within the company. All the messages, which seemed dissident, were ignored by the management. There were visible claims of boldness, free, wheeling ethical climate, confident values and ambitions. In this regard, employees who were highly skilled and ambitious worked in decentralized structures where supervision or oversight was hardly available. The company had an aggressive obsession to increase its profits hence the tireless exploits for new opportunities in India, Great Britain and South America. However, it is interesting that all these activities were being driven and pushed by Skilling and Fastow with the exclusion of the CEO, Ken Lay, whose disconnect from the company seemed apparent. This fierce pursuit for wealth encouraged the company to overlook its core principles of respect, integrity, communication and excellence. At the end the existing corporate models were broken significantly making the company to start running at a loss. But in order to retain its presence at the New York stock exchange, the company opted to hide its losses and shuffled its debts through very dubious accounting procedures. Apparently, all these procedures were within the bounds of the law.
It is also important to note that the collapse of the company was a big blow to the provision of power within its areas of operations. This then gave rise to the question of competition in the industry especially in India, where its branch was the sole provider of electricity energy. Competition is needed by ensuring that the process of bidding is transparent. Some analysts have argued that the company’s management was encouraged to behave as it did due to the lack of a serious challenger either from within the region or from other parts in the world. The company also adopted a policy of fear toward problems. It adopted a culture of repelling bad news. This in essence created self persuasion and self censorship among the management personnel making it difficult for them to come to terms with the fact that the company was experiencing losses.
Conclusion
Enron was started on good business ethics of corporate social responsibility. At a time when much emphasis was put on the observance of these ethics, the company thrived well and was actually experiencing a tremendous growth. However, due to some mischief, the managers and some of the company employees decided to run its affairs based on deception. The result is that the company’s communication channels were closed encouraging more deception to thrive, which later led to its collapse. Therefore, it is important that transparency prevails in all the decisions of a company, no matter how displeasing they might be.