Business ethics in the Enron scandal and employee investment risk

Business Ethics

In the case study, Enron is taking advantage of the tremendous amounts of deregulation in the electric, natural gas and water utility markets. This has made the firm one the largest suppliers of electricity and natural gas to the State of California during the late 1990s. However, to increase their profit margins the firm began hiding their losses from investor in off the books partnerships. The basic strategy was that as the price of the common stock moved higher, individuals who were holding these investments would receive this kind of compensation. This would help to offset the losses that these entities were taking.

Moreover, the firm began to use market to market accounting practices as way to bid up the price of energy. This helped to create the electric crisis that California experienced in the early 2000s. To compensate employees' the firm encouraged them to take lower salaries in exchange for receiving company stock. This helped to keep Enron's costs low and to attract some of the best talent. Once the economy slowed, is when this scheme fell apart resulting in the bankruptcy of the company. In the case of employees, many lost their retirement savings from investing everything into Enron stock.

Should businesses, like Enron, encourage employees to buy stock in their own companies? Why or why not? What are some of the risks involved in permitting such practices?

Sometimes, in Enron's situation, executives knew that they were making false statements to regulators and investors. The fact that they were encouraging employees to buy the stock is a sign that management has no morals. As a result, the company should have never encouraged the employees to purchase stock. However, there are other situations where employees of firms such as: Google, Apple or Microsoft have received similar compensation packages and benefited from this arrangement. In this aspect, offering employees company stock will help them to build for retirement. The biggest risks are that employee 401ks and other retirement accounts will experience tremendous amounts of volatility. This can hurt the returns of the portfolio over the long-term.

Although legally not all information must be disclosed, should companies be obligated to disclose the true nature of investor risk? Or are investors responsible for determining such risk?

Yes, under the Securities and Exchange Act of 1934 all firms must provide material changes in their financial condition to regulators. However, investors also need to understand that investing in common stocks entails more risks in comparison with CDs or U.S. Treasuries.

Did Enron's overstating of profits amount to a manipulation of investors? Was the manipulation intentional? Should investors assume a high level of risk unless told otherwise?