As the global economy strengthens and economic borders are being broken, governments are increasingly pushing for accountability and ethical practices in business dealings. Accountability and ethics within an organization are functions of the culture within the organization. Organizational culture describes the particular set of values and norms that individuals in an organization share, and that guides how these individuals interact with their stakeholders as well as with each other (Cameron & Quinn, 2011). Organizational culture is thus a system of mutual meanings and symbols that is responsible for the shared laws controlling the emotional and cognitive features of relationships in an organization and the processes, in which they come about (Needle, 2004).
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The culture of an organization is very important in determining how employees and the business as a whole interact with customers, stakeholders, the society, as well as the environment. The leaders of an organization play a very important role in defining its culture. Through their management and leadership styles, leaders pave the way for the development and evolution of the company’s organizational culture (Anthony, 1994).
Due to developments in communication technology, business, and environmental awareness, business practices have increasingly come under scrutiny. The media has been very instrumental at highlighting various cases of unethical business practices, and the organizations that carry them out. The Enron Scandal of 2001 exemplifies the adverse impacts of establishing a weak and ineffective organizational culture.
Enron Corporation came about when the CEO of Houston Gas Company, Kenneth Lay, arranged a merger with InterNorth Corporation. Samuel Segnar, the previous president of InterNorth Corporation, became the first CEO of the newly formed company (Dembinski, Lager, Cornford, & Bonvin, 2006). He created an elitist environment in the new company, such that employees and the executive could not interact as they did before the merger.
He merged the board of directors of both InterNorth and HNC giving Kenneth Lay the opportunity to plan a takeover of the Board a few months later. Kenneth Lay was not much better to Segnar and maintained the elitist, extravagant culture instituted by Segnar (Madsen & Vance, 2009). Despite having the second largest pipeline network in the country and having assets worth over $12 billion, Enron recorded a loss of $14 million after the first year (Free, Macintosh, & Stein, 2007).
Business Ethics Failure at Enron
When Enron was born, it was highly vulnerable to outside influences, and as such, the top management had a perfect window to imprint an organizational culture. From its infancy, leaders at the company instilled negative values to the business, leading to a weak organizational culture.
Enron was created on an elitist foundation. Employees could not interact with their leaders and had very little power. This led to an organizational culture that lacked the checks and balances that prevent unethical behaviors. This also led to a culture without open lines of communication, hence errors and problems went unchecked for a long time.
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The initial presidents of the company were also goal-oriented. They had giant plans for the company and thus the focus of the company became making money and getting ahead of their competitors (Dembinski et al., 2006). In order to achieve this, they micromanaged their employees, created a reward system based on internal competition, and shuffled employees thus creating weak interpersonal relationships within the company. The need for success also created the foundation for financial fraud and report manipulation in the company
Kenneth Lay also introduced a system, in which bullying was used to attain specific goals. He utilized force to pull people into his way of thinking (Madsen & Vance, 2009). He surrounded himself with only those people who agreed with his visions. The culture that evolved was thus unable to question executives and was submissive to the whims of those in charge.
When later executives began falsifying financial data, employees who had knowledge of what was going on could not raise any issue. The company could not respond to changes in the external environment, as the communication channels that existed were poor, and innovation was stifled in the company. These factors combined with the personal failures of the executives resulted in the collapse of Enron.
Leadership is vital to the establishment and preservation of culture in any organization. The vision of a leader provides the design framework for the development of a new organization culture. All of the factors that led to the collapse of Enron can be attributed to poor leadership and a weak organizational culture.
The first responsibility of leaders at Enron was to institute good values and traits during the infancy years of the company. Being a new company, Enron was very vulnerable at this period and had yet to establish an organizational culture. The leaders should have set a precedence that employees could emulate and establish a strong and ethical organizational culture in the process. Segnar had the opportunity to emulate his predecessor at InterNorth and develop a company that valued personal relationship and employee empowerment. He had the responsibility to create open communication channels and a system, in which employees are valued and respected despite their level in the organization.
The leaders also had a responsibility of transparency to their stakeholders (Cameron & Quinn, 2011). The company leadership was empowered to make decisions for the sake of their stakeholders, and they should have been more transparent and honest in their interactions with the stakeholders. Falsifying financial information and hiding pertinent information from their shareholder portrays an irresponsible and untrustworthy leadership team that should not have been trusted with power.
The key executives at Enron did not develop a good culture but worked at reshaping the culture of the fledgling company negatively. The first CEO, Sam Segnar, was empowered at designing the organizational culture of the company. He designed a culture that was elitist, extravagant and had poor personal interrelationships. After his dismissal, Kenneth Lay took on the reigns and advanced this elitist and extravagant system. Kenneth Lay also used coercion and bullying to get what he wanted. Thus he created a dictatorial system without checks and balances.
Kenneth Lay also instituted a reward system that created an internally competitive culture in an already existing externally competitive environment (Free et al., 2007). This internal competition further weakened interpersonal relationships leading to a weak culture. Information exchange between different levels of the organization deteriorated and the company was very vulnerable to changes in the external environment.
The next biggest shift in the culture of Enron occurred when Jeff Stilling took over the CEO seat from Richard Kinder (Madsen & Vance, 2009). Kinder had tried to change the culture of the company in a positive manner by giving his employees a voice and improving interpersonal relationships. His goals were realistic, and he placed the highest priority in cash management within the organization (Free, et al., 2007). This changed when Stilling took power and instituted policies aimed at pushing Enron to the top of its industry.
During his term in office, Stilling changed the business model of Enron towards a more Wall Street compatible business platform that not only dealt with energy, but also handled a wide array of financial wares. By the time the company was collapsing, 99% of all income originated from trading operations. Skilling was responsible for designing a culture that worshipped risk taking, took a mercenary attitude to profit making, and embraced a trading approach that only considered the end goals but disregarded the consequences (Free, et al., 2007). Stilling also controlled all the major aspects of the company, particularly those concerning accounting processes, which he constructed to manipulate financial reports in order to meet the expectations of analysts.
All these negative practices on the part of the leaders led to the development of a weak organizational culture that was unable to react to unethical business practices. The weak culture that resulted from poor leadership also caused a lack of checks and balances leaving Enron vulnerable to unscrupulous activities.
Human Resource Management at Enron
Human resource management is an organizational function designed to optimize the performance of employees (Johnason, 2009). HRM is mainly concerned with how employees are managed, focusing on systems and policies. Human resource management at Enron could have created a culture that was more accountable and transparent. One of the main problems at Enron was that employees could neither voice their opinions, nor communicate any perceived problems effectively. The presence of HRM could have bridged the gap between the top executives and the employees.
HRM could also have played a very important role in succession planning. The succession method at Enron involved picking candidates on the orders of the outgoing executive. This created a situation where ineffectual leaders chose successors with similar failings taking the company in a negative direction. HRM could have vetted prospective leaders, initiate them into their positions, and communicate their elevation to other employees.
Human resource management could also have investigated instances of business malpractice and managed them before they became problematic for the company as a whole. Fraudulent financial reporting at Enron only occurred due to poor checks and balance systems within the organization. HRM has the power to look into matters that seek to endanger the company, and as such, could have investigated and reported the executives to relevant authorities.
The collapse of Enron was not solely because of fraudulent activities, but also due to a weak organizational culture. At Enron, successive leaders instilled negative values into the organization leading to a weak culture that was unable to handle the test of time. The organizational culture that existed was weak, ineffectual, and outright destructive to the effectiveness of the internal operations of the company. Despite having assets of over $63 billion, Enron filed for bankruptcy in December 2001 becoming the largest bankruptcy case in U.S. history. Ultimately, the failures of the company occurred due to a weak and ineffective organizational culture.
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Anthony, P. (1994) Managing Organizational Culture. Buckinghamshire: Open University Press.
Cameron, K., & Quinn, R. (2011). Diagnosing and Changing Organization Culture: Based on the Competing Values Framework (3rd ed.). San Francisco: Jossey-Bass Publishers.
Dembinski, P., Lager, C., Cornford, A., & Bonvin, J. (2006). Enron and World Finance: A Case Study in Ethics. New York: Palgrave Macmillan
Free, C., Macintosh, N., & Stein, M. (2007). Management Controls: The Organizational Fraud Triangle of Leadership, Culture and Control in Enron.” Ivey Business Journal Online.
Johnason, P. (2009). HRM in changing organizational contexts. In D. G. Collings & G. Wood (Eds.), Human resource management: A critical approach (pp. 19-37). London: Routledge
Madsen, S. & Vance, C. (2009). Unlearned Lessons From The Past: An Insider’s View of Enron’s Downfall. Corporate Governance, 9(2), 216-227.
Needle, D. (2010). Business in Context: An Introduction to Business and Its Environment (5th ed.). London: Cengage Learning