How leadership and corporate culture destroyed Enron

¶ … Enron: How Leadership and Corporate Culture Impacted an Organization

This paper discusses the case of Enron in the light of how leadership and organizational behavior impact culture, and how culture in turn impacts employee attitudes. The paper shows that the poor leadership decisions by Enron\'s CEO, COO and CFO led the company down a path of self-destruction: the leaders promoted deception instead of transparency, and the Board was not privy to accurate reporting of the policies and practices of the company\'s actual accounting tricks. The paper concludes that recommendations for Enron would be to have implemented a better, virtue ethics-based organizational culture and to have a policy of reporting that would have encouraged employees to come forward with knowledge about immoral and unethical practices that they saw.

The Case of Enron: How Leadership and Corporate Culture Impacted an Organization

Introduction

As Schyns and Schilling (2013) have shown, poor leadership can have an extremely negative impact on an organization\'s culture, morale, and behavior. Leadership is a vital element of organizational success, and it can also be major factor in organizational failure. In the case of Enron, one sees this quite clearly. The company transformed itself from a mid-tier energy business to a large-scale energy-finance giant using complex and misleading book-keeping tactics that hid the actual nature of the organization\'s business (Elkind, McLean, 2013). Its leaders promoted a get-rich-quick culture that gradually came under the scrutiny of investigators and eventually led to a catastrophic crash of the company\'s publicly-held shares. This paper will discuss the role that ethics played in the downfall of Enron, how Enron\'s leadership impacted the corporate culture, and what recommendations could be made that would have helped Enron right the ship before it was too late.

Ethics and Leadership

Resnick (2011) defines ethics as the \"norms for conduct that distinguish between acceptable and unacceptable behavior\" (par. 1). The problem with this definition is this: what happens when bad or unethical practices become the \"norm\" within a company\'s culture? -- the delineation of acceptable and unacceptable behaviors is no longer possible based on the assumption that the \"norm\" will always be what is ethical. In reality, ethical behavior may not always be the norm and can, in fact, be hard to come by -- especially in the corporate world where so many scandals have been uncovered. From Archer Daniels Midland\'s price-fixing scandal to Bernie Madoff\'s hedge fund Ponzi-scheme scandal, the corporate world is replete with behaviors that would cause a pessimistic person to view unethical behavior as the norm.

However, there are qualities and characteristics of ethical behavior that can be identified regardless of what the norms of the day are: these characteristics are universal and include the qualities of trust, transparency, honesty, communication, team work, care, goodness and preservation. In recent years, organizations have develop platforms to indicate to stakeholders that they are in fact engaged in ethical dealings -- these platforms are known as Corporate Social Responsibility (CSR) programs and range from organizations working with community leaders to advocate policies important to the community to environmentally-friendly policies. In other words, organizations show through CSR that ethical conduct is important to them and to their stakeholders. CSR policies by and large demonstrate the qualities of trust, transparency, honesty, communication, etc. The idea behind CSR is that, ultimately, the corporation is helping to create a \"better world\" (Friedman, Miles, 2002, p. 1). Enron was believed by many to be doing just this -- at least for investors -- as it ascended to the top of Wall Street\'s beloved stock picks in 2000. The unfortunate reality was the Enron had no CSR whatsoever. Its orientation was completely self-centered.

As Pink (2011) notes, one of the biggest indicators of ethics is one\'s orientation -- whether one is self-centered or other-centered, whether one\'s focus is on enriching one\'s own life or on helping to enrich the lives of others, from employees to customers to stakeholders and members of the community. This fits in with the idea of CSR and how CSR appeals to communities seeking to find a \"human\" element in an otherwise business-driven and seemingly inhuman corporation. Pink (2011) describes good ethical practices as being rooted in the idea of likeability: good leaders are likeable leaders who appeal to people who share like-minded principles, who are human, caring, positive, and reachable. A corporation that makes itself likeable by taking its community\'s interests to heart is a corporation with leaders who are concerned about how their performance will impact stakeholders.

The problem that arose at Enron was not that its leaders were unlikeable, however: they were very likeable. Jeff Skilling, Andy Fastow and Ken Lay all demonstrated popular appeal. The problem was that they demonstrated the wrong kind of likeability. They were likeable miscreants -- much in the same way that Shakespeare\'s villain Iago is a likeable villain: they were witty, energetic, clever, driven, and thirsty for profits. Their followers were motivated by these leaders\' creative ways of making money. Their fatal flaw was that their energy was not rooted in ethical practices but rather in deceptive ones: Skilling and Fastow advocated structured financing tactics in order to hide the company\'s debt in shell companies that were then passed off as vehicles of investment and growth; Lay -- as head of the company -- looked the other way when it was brought to his attention (Eichenwald, 2005). It was essentially a Ponzi-scheme but one that employees were happy to participate in, as the documentary film by Alex Gibney (2005) showed when energy traders conspired with local energy providers to shut down grids to drive up and subsequently crash the price of energy shares so as to profit the company. Likewise, Elkind and McLean (2013) saw immediately when they began analyzing Enron\'s financials that they \"didn\'t make any sense\" (p. 127) and that far from making profits hand over the fist the company was actually more than $30 billion in debt when its stock price was at its highest levels ever. The leaders of Enron, as Senator Fitzgerald stated, placed \"earnings before scruples\" (Gibney, 2005). They were not interested in transparency: their practices were deceitful and ultimately brought legendary accounting firm Arthur Andersen down as well.

Instead of cultivating a culture of openness and honesty, Enron promoted a culture of \"innovation\" -- a word that was used in place of deception. Skilling and Fastow saw the possibilities of mark-to-market accounting and the opportunities to mask liabilities as \"revalued\" or fair-market-value assets. Mark-to-market accounting was in fact becoming a norm and everyone on Wall Street seemed to embrace it, as it allowed firms to transform their balance sheets to make them look more appealing to investors (Elkind, McLean, 2013). The problem, of course, was exactly as Fitzgerald put it: there was no honesty at work in these dealings; profits came before people; money came before scruples; power came before ethics. It was a recipe for disaster that seduced everyone from traders like Louis Bourget and Thomas Mastroeni to Enron employees who colluded with Fastow to make their shell companies appear authentic to accountants at Arthur Andersen, who feared rocking the boat and damaging Enron\'s rapid rise as a premier investment vehicle (Gibney, 2005). As Anand, Ashforth and Joshi (2005) note, Enron\'s leaders justified their unethical behavior by rationalizing it ahead of time: in doing so, they were able \"to forestall guilt and resistance\" and convince others that their deeds were not deceptive but rather ingenious, creative, bold, inspired, visionary, energetic, innovative and pioneering (p. 11). They cast their deceptions in a favorable light and sold them to the Board and to employees in management positions at lower levels. They continued on with these deceptive rationalizations even after the company began to come under increasing scrutiny from both the press and the authorities: they continued to lie and paint the organization\'s rapid ascent as rosy \"to ease misgivings about one\'s behavior\" (Anand et al., 2005, p. 11). Enron\'s corporate culture was based on deception -- and when the deception was finally exposed -- the company crashed: the culture propping it up could no longer sustain the exposure.

Enron\'s Corporate Culture

Leadership is essentially responsible for creating a corporate culture. At Enron, the culture was set by Lay (founder, chairman and CEO), Skilling (President and COO), and Fastow (CFO). One former executive at Enron, Amanda Martin-Brock, described the culture in vivid terms: \"The fatal flaw at Enron . . . was pride -- and then it was arrogance, intolerance, greed\" (Gibney, 2005). Lay demonstrated arrogance alongside Skilling and Fastow when he told the energy traders working under them to \"please keep making us millions\" -- a winking nod to the dubious practices of the traders that anyone familiar with the world of Wall Street will surely understand (Gibney, 2005). Lay knew that the company was not making money based on the traditional business model it had utilized in years prior: he knew that under Skilling the company was taking a wholly new direction into the world of derivatives and that under Fastow the company\'s accounting practices were wholly incomprehensible to anyone who did not examine them closely with an eye out for fraud. Lay was not interested in creating a culture founded on responsibility and transparency. He had already led a company with such a culture and success had been middling at best. He had his eyes now set on a bigger prize: when he brought Skilling aboard to help identify how the company could grow and increase its profits, Skilling looked not at the company\'s fundamentals, values and mission but rather at new accounting practices and easing regulations on Wall Street that could be used to transform the company from an energy organization into essentially a hedge fund. Lay did not question Skilling\'s ideas because the dollar signs they produced in his mind and Skilling\'s own ability to \"sell\" the idea displaced any qualms he should have had about this ingenious new approach to business. Even when Lay\'s top traders were found guilty of fraud and given jail sentences, the CEO refused to question the culture he had helped to create. Instead, he continued on the path of pride, arrogance and greed, refusing to tolerate any misgivings that might change the company\'s trajectory.

One woman who sought to bring attention to the corrupt culture that Fastow in particular was helping to cultivate was Sherron Watkins, an Enron whistleblower who penned a scathing letter to Lay about the corrupt practices that Fastow was using to create his Ponzi-scheme with the company\'s debts and \"assets\". Instead of investigating Watkins\' claims, Lay set the letter aside and encouraged her to take a vacation (Eichenwald, 2005). Watkins went along with Lay\'s recommendation because ultimately she had, like many of the other employees, a natural inclination and need for feeling a sense of \"belonging\" among Enron\'s leaders (Swartz, Watkins, 2003, p. 2). Watkins herself pointed out that her main goal at the company in 2000 was to not \"be taken for a loser\" by her managers: she saw the corruption -- which is why she warned Lay -- but she also wanted to fit in and be seen as a good team player (Swartz, Watkins, 2003, p. 2). This desire to fit in, moreover, is one that is consistent with research on the way that corporate cultures are created: the tone that is set at the top is the tone that is followed by workers at the bottom (Schyns, Shillling, 2013). The workplace is like a family and belonging to a family is a natural compulsion -- which is why creating a family based on solid values and virtues is so important: the culture is what leads to how an organization will succeed. Lay and Skilling tried to keep a positive face on their endeavors and to get everyone to go along with them: to appear openly deceptive and without scruples would have been to risk losing team players like Watkins completely (Schyns, Schilling, 2013). Thus, they rationalized their new approach to business in the manner described by Anand et al. (2005). Over the years, however, the deceptions accumulated regardless and prompted Watkins to take action -- to an extent. In her letter to Lay, Watkins pleaded for the company\'s leadership to take responsibility and right the ship before it injured all employees: \"My eight years of Enron work history will be worth nothing on my resume, the business world will consider the past successes as nothing but an elaborate accounting hoax\" (Swartz, Watkins, 2003, p. 2). Clearly she was concerned that the practices of the company were going to bring nothing but harm for those the company employed. She implored Lay to correct the culture that was fostering these bad accounting practices -- but she did not go so far as to remove herself from the company: she still believed in the vision and in the success -- even as both were unraveling under investigators\' analysis of the company\'s accounting.

Afterwards, Watkins would admit that the \"spirit\" at Enron had been completely divorced from sound economic policy. She would go on to \"find God\" after the fall of Enron, an expression that coincides with her reflection that an organization ought to embrace a system of workplace ethics in order to be successful (Watkins, 2008). This correlation supports the view of Barnett, Bass, and Brown (1996), that religiosity can affect a whistleblower\'s decision to report. Considering this view and the perspective of Tsahuridu (2011), it may be argued that a sense of \'God\' and/or \'virtue ethics\' can have a positive impact in risk management strategy. For Watkins, the importance of a genuine, right \'spirit of mission\' was not realized until her organization collapsed.

Enron\'s corporate culture was developed by Lay and Skilling primarily. Fastow was the individual who, inspired by what they were promoting, developed the technique to make it happen. Lay viewed himself as a visionary and thought of Skilling in the same manner. Likewise, employees at Enron were encouraged to view Skilling and lay in the manner that they viewed themselves: Skilling was seen as a kind of \"prophet\" who showed the company \"the way\" -- the way to make money through dubious and eventually unlawful means, that is (Gibney, 2005). Rather than adhering to the model of providing natural gas to buyers through pipelines, Enron became a buyer of natural gas and began trading derivatives based on its own acquisitions.

The attitudes and perspectives of its top leaders shaped the organization and the \"trader\" culture that grew out of its new focus. Indeed, one of Skilling\'s favorite books was entitled The Selfish Gene, which described human beings and human nature as being guided inherently by the forces of \"competition and greed\" (Gibney, 2005). By simply accepting these as principles of right human behavior, Skilling was responsible for creating a corporate culture that was antithetical to universal ethics. Competition and greed acted as an unofficial corporate culture imperative at Enron. This imperative was, moreover, guided by pride -- the pride of its leaders. Skilling was particularly susceptible to this pride, which he demonstrated even before becoming COO at Enron. In Harvard Business School he had been asked by a professor whether he was smart; Skilling had said in response, \"I\'m fucking smart\" (Eichenwald, 2005). Skilling\'s \"smarts,\" as he called them, would not be enough to keep Enron afloat, unfortunately. Had Skilling also developed a better sense of ethics to guide his obvious leadership abilities, Enron may have had a much brighter future. Instead, he and Lay imagined that \"smarts\" was all that was needed.

Enron finally lost all credibility when it became public knowledge that its mission had failed and that it was far too over-leveraged to ever possibly repay all its debts, with creditors calling. Although Skilling denied any wrongdoing, several persons pointed out that the wrongdoing occurred on his watch and that he, in fact, promoted a culture that fostered the sort of duplicity exercised by Fastow in the role of CFO. Lay, too, had to take responsibility for the way in which the company ultimately failed. However, neither Skilling nor Lay were willing to admit guilt. Only Fastow pled guilty when brought before the law.

One of the few people who tried to help Enron by bringing its unethical accounting practices to the attention of Lay, Sherron Watkins, went on to enjoy a career as a public speaker, warning her audiences about the dangers of corporate cultures that failed to be based on virtue ethics. As a whistleblower at Enron, she demonstrated the problem of how employees who see corruption within their workplace are supposed to report on the matter. She herself went straight to Lay and then later began speaking to the media about the issues that Enron had under Fastow in the accounting department. If Enron had had a culture that was open to reporting on corruption and practices that went against its core values, it might have been more willing to address the issues. Enron\'s leaders were not open to such a culture, however; they were eminently devoted to their own \"smarts\" and the idea that only they could really know in which direction the company should ultimately be directed. A whistleblower like Watkins was not someone whose input was valued. This detachment from actual values was the underlying reason Enron finally perished.

Recommendations

Organizations needs to be guided not by a system of modern ethics, which can easily be reduced to legalistic rationales for why \"greed is good\" (as Skilling, Lay and Fastow essentially showed), but by a moral initiative -- a traditional, universal sense of ethical practices. In modern terms, what is good is often debated and can open the door for leaders and cultures to be develop that are inherently selfish. Skilling\'s favorite book showed that he was not oriented to the issues of corporate social responsibility in a way that stakeholders would prefer. Instead of focusing on virtue ethics, he focused on the \"ethics of greed,\" so to speak.

Nor is Skilling alone. The Enron case is just one example of many incidences wherein leaders have taken a self-centered approach to leadership and ultimately caused chaos and harm for all stakeholders. When an organization\'s ethical culture finds itself in a deplorable condition, it is typically because its leaders have traded an ethical spirit of mission for a type of club rule that is based on greed, pride, self-centeredness and other unfavorable characteristics (Schyns, Schilling, 2013). When a company is guided by club rule mentality leaders who also oppose the role that watchdogs, reporters and whistleblowers can play in keeping the organization on an ethical footing, the organization is in danger of failing. Such leaders create an environment in which tensions can arise between an individual\'s moral code and the organization\'s unspoken cultural code. This happened at Enron -- but had the company\'s leaders placed ethical leadership and corporate social responsibility at the top of its priorities (instead of making money hand over fist in an era of de-regulation) it would likely have succeeded and still be in a successful mode of operation today.

Moral objectives are imperative in any society, and a system of discipline that embraces a culture of morality -- not just of ethics -- is what should have been recommended for Enron\'s leaders. Had the company adopted a culture in which transparency, honesty, and servant leadership were characteristics of its workers, it would never have gone down the path it took. The main recommendation that could have been made to Lay at the outset of the 1990s would be that organizations which foster individual responsibility and a right, genuine spirit of mission are organizations that ultimately prosper.