From all facts and appearances, those Enron executives gave lip service to ethics, then went on their own way, making as much profit as they could while the company teetered on collapse.
One final example from Enron's "Code of Ethics" is titled "Twenty-Twenty Hindsight" which carries its own irony without delving into its points. Lay writes on page 10 that if any employees' security activities or transactions "become the subject of scrutiny," those transactions will be viewed "after-the-fact with the benefit of hindsight" (Lay, p. 10). And so, the section continues, "...before engaging in any transaction you should carefully consider how regulators and other might view your transaction in hindsight" (Lay, p. 10).
Looking Deeper into Ethical Standards and Conduct
Craig Edward Johnson is the author of the book Meeting the Ethical Challenges of Leadership: Casting Light on Shadow (Johnson, 2008). Anyone even remotely familiar with the Enron mess knows that there were some shadowy activities within the executive ranks at Enron. But Johnson makes a case that everyone has a "shadow side." On page 4 of his book Johnson notes that psychotherapist Carl Jung was the first social scientist to identify the side of the human personality called the "shadow side." Jung was alluding to and studying the subconscious in this context, and looking into both positive element ("creative," and "the desire for achievement") in the subconscious and the negative, or dark element ("greed, fear, and hatred") (Johnson, p. 4). Other psychologists equate the shadow with "destruction," Johnson writes, but most psychologists agree on this point: "If we want to manage or master the dark forces inside us, we must first acknowledge that they exist" (Johnson, p. 4).
Johnson goes to great lengths to examine the shadow side of executives and leaders in a number of instances, including Jim Jones (People's Temple) who led a mass suicide in Ghana a few years ago. But the focus on Enron is particularly effective in terms of a reader attempting to understand what went wrong in the minds of those who committed the illegal and contemptible actions that led to Enron's downslide and eventual demise. The more power we have, Johnson goes on, "...the more likely others are to comply with our wishes" (Johnson, p. 7). The author discusses the "five power bases" in an attempt to explain how power can become corrupted.
Coercive power" is a system based on "penalties or punishments" like salary reductions, suspensions of students in high school or college, "physical force" or "embargoes against national enemies" (Johnson, p. 7). "Reward power" comes in the form of praise, cooperation, trust, "bonuses, health insurance" or grades, while "legitimate power" comes with the position, not the person (examples include judges, cops, parents and supervisors) (Johnson, p. 7). "Expert power" is based on the knowledge of the individual, the skill level, certification and education of the person, Johnson continues on page 7. And the fifth kind of power is "referent (role model) power," which rests "on the admiration one person has for another" (Johnson, p. 7). Johnson explains that leaders most often draw on more than one power source, and in the case of Enron one can certainly deduce that "coercive power" and "reward power" played significant roles.
Meantime, Johnson (p. 29) asserts that Enron's executives "cast shadows" in several ways, in terms of ethics. Those executives certainly exhibited an "abuse of power," and the story of their abuse of ethics can be capsulated through the activities of Jeffrey Skilling (Lay's replacement who didn't stay long). Skilling "wielded power ruthlessly," Johnson explains. Skilling frequently intimidated subordinates while Lay simply "demoted" underlings who disagreed with him. Another shadow cast by Enron leaders vis-a-vis ethics was through "excess privilege"; the executives simply spent wildly with money that truthfully did not belong to them. Lay told a friend, "I don't want to be rich; I want to be world-class rich" (Johnson, p. 29). Even as the 401K accounts of their employees were being "wiped out" Lay and his colleagues were unloading their shares and profiting by multiple millions of dollars.
A third "shadow" that was cast by Enron executives was "mismanaged information" - which Johnson (p. 29) says is a process that deceived the public and the board members. They set up partnerships "off-the-books" which is an illegal way to manage corporate books. A fourth shadow mentioned by Johnson was "Inconsistent Treatment of Internal and External Constituencies"; this breach of the company's own code of ethics amounted to Lay and his executive colleagues giving five hundred Enron officials "retention bonuses" of over $55 million while lower-level employees were being laid off with tiny little severance paychecks (Johnson, p. 29). The fifth breach of ethics from Johnson's perspective was "Misplaced and Broken Loyalties" which occurred because Lay and his cohorts placed loyalty within themselves and were thoroughly disloyal to stockholders, business partners, local communities, ratepayers and even foreign governments.
Author Johnson, who is professor of leadership studies (Ph.D) at the University of Denver and director of the Doctor of Management program at George Fox University, also lists "irresponsibility" as one of the shadows cast by Enron's top people. The last shadow needs no further enumeration. The Enron executives who led their company down the path to darkness and scandal had ethical lapses, for sure, but they also had "warped minds," Johnson asserts on page 37 of his book. He plucks "warped minds" from a survey of corporate psychologists - found in USA Today - a survey that concluded "insatiable desires of out-of-control CEOs have less to do with money and more to do with the following: "poor self-image" (they try to make up for feelings of "inadequacy" by constructing "monuments to themselves"); "The 'I Deserve it' Myth" (executives believe sometimes they deserve all the credit); "Unchecked Fantasies" (they can live out their fantasy by spending and exerting power with unchecked enthusiasm); "Society's Blessing" (as long as they produce results, some executives believe the public allows they to do whatever they want to do); "Competitiveness Gone Awry" (out of control egos strive to out-do their competition in a fanatical way); "Lonesome Soldier Syndrome" (expensive things take the place of friends; high-powered executives find it hard to make friends because they fear the "friend" just wants to be close to power); "Boredom" (at the top of their games, many executives invent "new challenges" that end up being illegal); and "Power Corrupts" (some CEOs "lose the sense of what is rightfully theirs and what isn't...treating others like peasants and claiming all that they see" (Johnson, p 37).
The accounting scandals at Enron and ethical attitudes in general are the subject of an article in Social Science Quarterly (Conroy, et al., 2006) titled "Changing Ethical Attitudes: The Case of the Enron and ImClone Scandals." In other words, how did the Enron disaster affect the way Americans feel about ethics? The authors note at the outset of the piece that while "ethical attitudes do appear to change over time," previous research has not been able to exactly identify the "stimulus for such change" (Conroy, p. 396). When there are legal consequences associated with a corporate scandal, and it becomes a major media event night after night on television and in the newspapers, society also suffers, as society did with the Enron collapse, Conroy explains. As to the American public's response - in ethical terms - to Enron's messy aftermath, the degree to which the public rejected the corruption was "...driven by the realization that such actions cause significant harm to innocents" (Conroy, p. 397).
The article presents surveys of public attitudes tapped into during and following the Enron scandal. The Pew Research Center tested public opinion, according to Conroy, in December 2001, and asked Americans if they had been following news of the Enron collapse "very closely" or "fairly closely." The response was that 34% in December 2001 admitted to listening "very closely" or "fairly closely" but by January 2002 that percentage went up to 43%; in February, 2002, the news media was swarming all over the Enron story and as a result 61% of those polled admitted to following the scandal.
Japanese reporter Atsushi Nakayama asked the executive director of the Markkula Center for Applied Ethics Kirk Hanson, who was referenced earlier in this paper, what he meant when he claimed that the Enron debacle will become the "morality play of the new economy" (Hanson, 2002). Hansen replied that the "most important ethics lessons" to be learned from Enron are the following five lessons: One, money is to be made the old fashioned way - by "providing goods or services that have real value"; two, cleverness in financial dealings is not a substitute for "a good corporate strategy"; three, investors should see a "red flag" whenever corporate executives exhibit "arrogance" and present themselves as the "best and brightest"; four, paying executives too much money makes them believe that they are above the rules and they can make up their own ethical standards; and five, government should…
Executive Stock Option Plans
"If the company does not do better than its competitors, but the stock market goes up, executives do very well from their stock options. This makes no sense." Discuss viewpoint. Can you think of alternatives to the usual executive option plan that take the viewpoint into account?
Executive stock options are performance-based incentive plans that became popular in the 1950s and 1960s. They declined due to the stock