Enron Company’s Bankruptcy

Ethical Leadership Behavior

Enron’s bankruptcy is considered to be one of the largest company bankruptcies ever: the company’s CEOs, Kenneth Lay and Jeffrey Skilling were convicted of fraud and conspiracy, as they had cashed millions of dollars in stock before the company eventually collapsed, thus taking the earnings of thousands of employees (Rijsenbilt & Commandeur, 2013). Ethical implications for individuals included decreased trust in companies and future employees. The organization has lost its value, and its image was severely damaged as well. Society, in general, could view this situation as evidence that large, billion-worth corporations are led by CEOs who engage in fraud and are ready to exploit their employees for their own profit.

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Terminal and Instrumental Values

Terminal values that could guide the leaders’ decision-making were social recognition, a sense of accomplishment, security, and a comfortable and exciting life (Gamble & Gamble, 2012). By using specific schemes to embezzle vast amounts of money, the CEOs of the company could be socially recognized for their top-ranking position and expensive purchases, thus creating a sense of accomplishment (“I have achieved more than the majority in this country”), ensuring financial support for them in the future, and spending that money on residencies and other property for a comfortable life.

Instrumental values, such as ambition and independence, could lead to such unethical behavior. It is possible that Lay and Skilling assumed they would be able to get away with the fraud (ambition), and due to their ties to the U.S. Administration and other highly influential people could secure themselves from an investigation (independence).

Applicable Ethical Theory

Virtue ethics would be the most applicable theory because it would have eliminated the early issues that led to bankruptcy from the beginning, such as various fraud schemes, lying to investors and other stakeholders, and mixing or changing accounting information so that the company’s investments and profits would appear rising rather than crumbling. If the leaders of Enron placed the interests of the company and stakeholders/shareholders first, respected their followers, and would not engage in deceptive behavior, the company would be able to make profits, although not as large as presented in reports. Neither the CEOs themselves, nor employees, nor stakeholders would have to endure such damage after the company’s bankruptcy. However, if Lay and Skilling were virtue leaders, one can assume they would not have founded Enron at all since its primary purpose was to enrich the founders only.

Different Culture’s Perspective

The concepts of lie, fraud, and deception are universal, e.g., they are understood in a similar way across cultures. Usually, such behavior would be considered unethical. However, depending on the context, some cultures could perceive them differently. For example, May (2016) points out that the CEOs’ decisions would be perceived as less immoral if observers believed that the leaders were pressured to do so. Additionally, it is possible to assume that some would not perceive it as unethical as others because systems for fraud detection, responding, and reporting do not exist in some countries, and therefore it might not be viewed as a serious issue by the general society (May 2016). However, as the actions of the leaders were deliberately unethical and only focused on personal profit, it is unlikely that they would be considered as entirely ethical in any culture.

Sissela Bok’s Model

Bok’s model implies that a leader should ask themselves whether planned actions are right if there is a possibility to achieve the goal without raising ethical issues, and how taken actions will affect others (Gamble & Gamble, 2012). If Lay and Skilling used this model, they would have understood that their planned actions were not right or ethical. Seeking alternatives, they could decide not to continue the functioning of the organization at all since it hardly made any profit without fraud schemes, as stated by Rijsenbilt and Commandeur (2013).

This decision would lead to serious and mass unemployment, but at least employees’ earnings would not be affected. Alternatively, Lay and Skilling could leave the organization as it was but refrain from stealing money from employees and cashing it in stock. This way, the company would possibly go bankrupt again, but employees’ work would not be compromised, and the leaders themselves would not be sentenced to many years of imprisonment. At last, the understanding of the effect of their decision-making on the CEOs, employees, and stakeholders would probably result in more ethical and effective actions as Lay and Skilling would not be as reckless.

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It is more than likely, of course, that both Lay and Skilling understood what consequences their actions could have but apparently hoped for a better outcome (for them and not for others). Therefore, the application of Bok’s model would have ensured a better future for the organization, the leaders, and employees, although one can admit that the CEOs would probably not cashed so much money as they did. However, as they were unable to use these profits and were imprisoned for stealing, ethical decision-making could still be a better option for them.

Strategies for Accountability

One of the strategies used in my organization is the requirement for detailed and relevant feedback. For example, leaders are asked to provide written reports about the outcomes of a project/a task they have completed with the team, and this data often includes financial statements, time spent on the task, the number of business trips conducted, etc. At the same time, this feedback is compared to employees’ feedback, and the employees are provided with the opportunity to submit these reports anonymously to the supervising manager. These feedbacks always contain the following questions (among others): “Do you believe that this decision was ethical?”, “Would you suggest other, more ethical approach to [a task]?”, “Were there any actions you are disturbed with?”, etc. As the leaders are aware of this feedback, they prefer not to engage in unethical decision-making as it is strictly penalized in the organization.

Before they are assigned to the position, all leaders are required to participate in workshops about ethical leadership. The effectiveness of these is then tested in the workplace environment, and leaders are obliged to take oral tests or case-study examinations related to ethics each six to nine months (depending on the leader’s scope of responsibilities). As the organization strives to build a culture of accountability, its executives always ensure that the consequences of unethical leadership are explained as clearly as possible to employees (Steinbauer, Renn, Taylor, & Njoroge, 2014). If unethical leadership is reported and there is evidence that it actually occurred, the company uses reprimands or administrative leaves at first. If the behavior is repeated, the company reduces the leader’s wage. After that, if repetition is again reported and investigated, the leader is likely to be fired. Although not ideal, this system of controlling the adherence to ethical principles works effectively.

Conclusion

Enron’s bankruptcy occurred due to the CEOs’ ambition and desire to lead a comfortable and exciting life. If they decided to apply ethical leadership principles to their planned actions, the company’s outcomes could be much better. Additionally, employees and stakeholders would not be so severely affected by this bankruptcy as well. It is advisable for leaders to either refer to ethical theories or apply Bok’s model if they are not sure whether their decision-making is ethical.

References

Gamble, T. K., & Gamble, M. W. (2012). Leading with communication: A practical approach to leadership communication. Thousand Oaks, CA: SAGE Publications.

May, O. (2016). Fighting fraud and corruption in the humanitarian and global development sector. New York, NY: Routledge.

Rijsenbilt, A., & Commandeur, H. (2013). Narcissus enters the courtroom: CEO narcissism and fraud. Journal of Business Ethics, 117(2), 413-429.

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Steinbauer, R., Renn, R. W., Taylor, R. R., & Njoroge, P. K. (2014). Ethical leadership and followers’ moral judgment: The role of followers’ perceived accountability and self-leadership. Journal of Business Ethics, 120(3), 381-392.

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"Enron Company’s Bankruptcy." StudyCorgi, 9 Jan. 2021, studycorgi.com/enron-companys-bankruptcy/.

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StudyCorgi. (2021) 'Enron Company’s Bankruptcy'. 9 January.

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