Ethical failure and the collapse of Enron corporation

¶ … Fall of Enron: Lessons for Ethical Leadership

The significance of ethics in leadership cannot be overemphasised. Indeed, ethical conduct is an important determinant of organisational outcomes (Ciulla, 2004). Organisations can collapse when their leaders disregard ethics. An ethical leader makes ethical decisions and in the best interest of the various stakeholders an organisation serves. They create a culture of ethics, recognise ethics as a core organisational value, and act as role models for ethical conduct. Real life instances of organisations crumpling due to ethical deficiencies are not rare. One such organisation is Enron, a powerful American corporation in the 1980s and 1990s. Corruption and fraud led to the collapse of the organisation in 2001. The Enron scandal goes down memory lane as one of the most renowned and systematically planned corporate scandals in the history of the U.S., with ethical failure being a major contributor. This paper focuses on the collapse of Enron and the role of ethical failure in the downfall of the organisation. First, a brief background of the organisation is provided. Next, events leading to the collapse of the organisation are highlighted. Finally, with reference to John Maxwell\'s laws of leadership, attention is paid to the contribution of ethical failure to the firm\'s downfall. Recommendations for ethical leadership are also offered.

Organisational Background

Enron was an American firm that primarily operated in the energy industry. The firm was involved in diverse products ranging from oil and gas to petrochemicals, electricity, steel, as well as pulp and paper. The organisation was also involved in shipping, financial management, and broadband services. Though its history goes back to the 1920s, the organisation was founded in 1985 following a merger between two energy firms, Houston Natural Gas and Internorth (Mclean & Elkind, 2013). Under the leadership of its founder, chairman and CEO Kenneth Lay, Enron grew rapidly to become one of the largest firms in the U.S. and worldwide. By the time the organisation was collapsing, it had more than 20,000 employees and had operations in the U.S. and other parts of the world including Europe, Latin America, and Asia Pacific. With revenues exceeding $100 billion in the beginning of the 2000s, Enron was at the time the 7th largest firm in the U.S. and a powerful giant in the global energy industry (Fox, 2003). The firm was also a name to reckon with as far as innovation is concerned, with Forbes severally naming it as America\'s most innovative firm (Mclean & Elkind, 2013).

The Collapse of Enron

Towards the end of 2001, shocking revelations about Enron were made. It was discovered that the firm\'s financial statements had been systematically and creatively fabricated throughout the 1990s, resulting in one of the worst accounting frauds in the history of the U.S. (Mclean & Elkind, 2013). In conjunction with its accounting firm, Arthur Andersen, Enron deployed irregular accounting procedures through which its debts and losses were omitted from its financial reports. The company created special purpose entities (SPEs) to hide its liabilities, resulting in deceptive and misleading financial statements. The scheme made the firm appear highly profitable while it was indeed losing money. Its stock price grew rapidly, enabling executives to trade the stock based on insider information (Fox, 2003). The executives made hundreds of millions of dollars at the expense of shareholders.

In the wake of the scandal, however, the firm\'s stock declined drastically, from a peak of about $90.75 in August 2000 to less than a dollar in January 2001 (Mclean & Elkind, 2013). The company would soon file for Chapter 11 bankruptcy, one of the largest bankruptcy filings of its kind in the U.S. history (Fox, 2003). In 2006, the firm sold its last assets, marking the end of a deceptively prosperous firm. The firm\'s executives were found guilty of conspiracy, insider trading, and fraud, among other grave financial crimes. Events at Enron were instrumental in the passage of the Sarbanes-Oxley Act in 2002, which was aimed at preventing or minimising similar events in the future.

Ethical Collapse at Enron

The Enron scandal has been the subject of ethical discourse in the last one and a half decades or so. Unethical conduct has extensively been cited as the major cause of the company\'s downfall (Cruver, 2002; Fox, 2003; Johnson, 2003; Mclean & Elkind, 2013). Led by the CEO, executives at the company engaged in accounting fraud at the expense of investors and other key stakeholders. Keen on their selfish interests, they misused their authority, distorted information, and failed to ensure proper oversight. The executives also participated in tax avoidance and bribery in foreign countries. It was indeed evident moral failure. The firm collapsed largely due to its leader\'s unethical practices. Top executives, especially CEOs, Kenneth Lay and Jeffrey Skilling, as well as chief financial officer (CFO), Andrew Fastow, and his top aide Michael Kopper, failed to pass the ethical dilemmas often presented by leadership. Their failures entailed abuse of power, excess privilege, deceit, inconsistent treatment of employees and outsiders, misplaced and unfulfilled loyalties, and irresponsible behaviour (Johnson, 2003).

Johnson (2003) describes both Lay\'s and Skilling\'s exercise of power as ruthless. Lay would often eject those who questioned his ways or threatened his power. On his part, Skilling would eliminate rivals and intimidate subordinates. Lay and Skilling portrayed extensive abuse of power that would later cost the firm immensely. The board also failed in its use of power as it did not effectively fulfil its role as the overseer of executives. In fact, the board hardly ever challenged the decisions of the management. Majority of the directors were chosen by Lay, and transacted business with Enron or stood for non-profit organisations that were significant beneficiaries of the firm\'s funds, further exacerbating the abuse of power (Fox, 2003).

Enron\'s executives abused not only their power, but also their privilege. Lay, brought up in a modestly humble background, was once quoted saying that he wanted to be world-class rich, not just rich (Johnson, 2003). He reportedly gave his wife $2 million to decorate a house the Lays bought in Houston. The couple owned properties worth tens of millions of dollars, in large part acquired using the firm\'s money. At one point, the couple even took debt amounting to $75 million from the firm, which they repaid using stock (Cruver, 2002). Lay\'s abuse of his privileges as the CEO of the firm was further evidenced by the lavish perks he offered his employees (Fox, 2003). During days of Lay\'s glory, employees at the firm enjoyed extravagant office parties, free taxi rides, and concierge services.

Leadership positions come with immense power and privilege. The power and privilege, however, should be exercised not for the benefit of individuals, but the benefit of key stakeholders (Ciulla, 2004). This is particularly important in a profit-oriented organisation such as Enron. The firm\'s executives ought to have used their power and privilege to do the right thing or make the right decisions. They, however, exhibited autocracy and selfishness in the discharge of their power, marking an undeniable ethical failure on their part.

The ethical failure of Enron\'s executives was further heightened by deception. This was perhaps the biggest ethical failure of the firm\'s top leadership. Motivated by selfish interests, Lay and his colleagues fabricated financial information with the intention of misleading the public. Both directors and executives even alleged that they had no knowledge of the SPEs established and run by Fastow and Kopper to conceal the firm\'s liabilities (Johnson, 2003). However, as revealed by investigations, Lay and Skilling as well as the board had been warned about the firm\'s accounting practices. The firm\'s leadership ignored the organisation\'s code of ethics, particularly the conflict of interest section, which would have stopped the creation of the SPEs. Aware of the management\'s deceptive practices, employees at the organisation quickly emulated their ways. They concealed expenses, forged profits, and lied to regulatory authorities (Johnson, 2003).

The manner in which Enron\'s employees copied the deceptive practices of the management brings to light an important aspect of leadership -- influence. In his 21 laws of leadership, Maxwell (2007) lists the law of influence as one of the laws. Leadership is all about influencing others, whether negatively or positively. Leaders influence their followers through various ways, including the way they behave. Indeed, leaders serve as the role models of an organisation\'s desirable behaviours and attitudes. Accordingly, like in the case of Enron, followers are likely to be unethical if the leader is unethical. If Lay had created and enforced a culture of positive ethical behaviour, his followers are unlikely to have engaged in unethical practices such as hiding expenses.

Maxwell\'s (2007) law of magnetism can also be applied to Enron. This law asserts that leaders attract people with the same qualities as themselves. In fact, the meaning of the law of magnetism is quite close to that of the law of influence. The same way a leader influences their followers with their behaviours and attitudes is the same way they attract people with behaviours and attitudes similar to theirs. Lay and other top officials were unethical, which explains why they also attracted unethical employees. As mentioned earlier, most board members were handpicked by Lay, meaning he chose individuals with little or no regard for ethics just like himself. If Lay was ethical in his ways, he would have attracted ethical individuals as well.

By mastering the art of deception, Enron\'s executives prioritised their loyalty over that of everyone else interested in the fate of the firm -- employees, shareholders, business partners, foreign governments, local communities, and so on (Johnson, 2003). Essentially, they betrayed the trust of every stakeholder. In fact, in the few weeks preceding the collapse, the CEO continued encouraging his employees to talk positively about the firm\'s stock and investors to purchase it while at the same time liquidating his own stock secretively (Fox, 2003). This projects an immense sense of betrayal, which was further compounded by the loss of jobs and wealth on the part of employees and shareholders. An ethical leader shows loyalty to the interests of the stakeholders they serve.

Another ethical failure of Enron\'s executives stemmed from how the leadership treated insiders and outsiders. There were serious inconsistencies in how employees and external constituencies were treated (Johnson, 2003). Ordinary employees, for instance, were compelled to acquire the firm\'s stock as part of their retirement plans, but were prevented from liquidating their shares when the firm\'s stock price started declining. Conversely, top executives could freely sell their stock whenever they wished. There were also instances of top officials receiving hefty retention bonuses and at the same time laid off employees receiving only a meagre proportion of the severance compensation promised (Fox, 2003). This further shows the leadership\'s self-centredness.

The employer-employee relationship is often an important aspect of focus in discourses relating to ethics and leadership. Indeed, balancing between the needs of employees and those of the organisation usually places leaders at a significant ethical dilemma. Firms may often choose to focus on profits at the expense of their employees. Instances of firms subjecting workers to poor pay, inflexible work schedules, excessive workload, and other intolerable working conditions are not uncommon. Such tendencies are hallmarks of unethical behaviour on the part of leadership. An organisation committed to ethics acknowledges its employees as valuable assets and prioritizes their needs while at the same time prioritising its own needs. Indeed, as per Maxwell\'s (2007) law of sacrifice, effective leaders are those that sacrifice their self-interests in favour of other people\'s interests.

While Enron treated employees quite unfairly, the organisation could at the same time afford royal treatment for not only top officials, but also outsiders, especially politicians and regulators. Enron was renowned for its generous contributions to political campaigns and government agencies (Johnson, 2003). Lay was particularly a major funder of George Bush\'s presidential campaign. He also made donations to Congress members from both sides of the political divide. Enron\'s generosity towards the political class saw the firm gain favour with federal agencies such as the Federal Energy Regulatory Commission (FERC) and the Security Exchange Commission (SEC) (Johnson, 2003). Federal officials pushed Enron\'s projects in foreign countries and the firm influenced policy in the energy industry.

The incidence of firms seeking favours from lawmakers and regulators is not unique to Enron. Many other organisations in diverse industries have done it, and continue doing it. This practice has actually attracted intense scholarly and policy debate due to the ethical issues it raises. When firms sway politicians and governments to act in their favour, unethical practices may result. Policies that reflect selfish or individual interests as opposed to public interests may be enacted. In the case of Enron, for instance, federal policies that supported further deregulation of the energy market were established (Johnson, 2003). Additionally, anyone that showed unfriendliness to the firm\'s interests could face retribution. This further illustrates the firm\'s ethical failure.

Finally, Enron executives failed in their ethical conduct by exhibiting irresponsible behaviour. This is evidenced by their reluctance to ensure effective oversight, take the required correction action, and take responsibility for the serious, evident ethical inadequacies in the firm (Johnson, 2003). Some directors did not even have knowledge of the firm\'s operations or numbers, warnings of accounting malpractices were ignored, and managers failed to exercise the required level of supervision on employees, creating an ideal opportunity for employees to fabricate financial figures. Following the downfall of the firm, none of the executives was quick to step down as any ethically upright leader would do. They instead sought defence in Fifth Amendment provisions and even alleged they were unaware of financial improprieties going on at the firm (Fox, 2003). This demonstrates inexcusable irresponsible behaviour.