Waste, Abuse, Fraud and Corruption

Waste, Abuse, Fraud and Corruption in Enron The images of executives being led out of their offices in handcuffs are images that have become increasingly more common in our society over the past decade. Executive fraud and corruption has been seen in many companies like WorldCom, Tyco, Adelphia Cable, Parmalat, and -- of course -- Enron. Executives were taking home millions of dollars each year in salaries and bonuses while their companies were struggling to survive.

Shareholders and employees and retirees as well were all losing money while the executives led lavish lifestyles. While employees were being given pay cuts, executives were being given profitable stock options. All of these examples show us that we live in a society where money is valued above and beyond all else -- including the welfare of others.

Organizations like Enron reflect what is going on in our culture: an ethos of consumption, excess, and competition; a society where bending -- or, rather, breaking -- the rules is encouraged when it comes to achieving one's ambitions (Burke & Cooper 37, 2009). The world is a different place Post-Enron, however, there is still the question as to how Enron (and other organizations like Arthur Anderson and WorldCom) could allow and cover the fraud, waste, corruption and abuse in their companies for so long before their final collapse.

Enron was too severe a case for us to take a "bad apples" or "bad barrels" approach to the topic -- that is, the corruption that we saw in Enron was more than just a few corrupt individuals who just happened to be in positions of power. Rather, Enron is the result of our increasingly greedy culture and the social systems that have been set up in society.

Enron's case is one of fraud, waste and excessive abuse, but is it one of corruption? This all depends on how one views corruption, as it is a personal as well as a cultural difference in definition that will answer the question. Bratsis (2003) argues that at the center of our Western idea of corruption lays the misuse or abuse of the office, emphasizing the subversion of the public good by private interest.

A prime example of this can be seen in the way Andrew Fastow, CEO of Enron, funded an excessive and eye-catching lifestyle through illegal dealings and accounting vehicles (Fleming & Zyglidopoulos 4, 2009). The executives at Enron were driven by greed, and their acts come at a high price to society: there are psychological costs to friends and family, of course, but there is also an increased amount of cynicism and a lack of trust among the general public that does not go away.

Since the Enron scandal, people have changed the way that they think about corporate bigwigs. No longer are they viewed as businessmen, but rather, they are viewed as "bad apples," criminals who have made their way into our corporate culture. They are viewed as the enemy, the ones who take away from those who can't bear to lose, and they keep more than they can want for themselves.

The "bad apples" approach is one way of explaining human behavior when it comes to the Enron, Tyco, WorldCom -- and other - fiascos. This approach reflects the old dichotomy in making sense of human behavior as the result of free will or social determinism (Burke & Cooper 104, 2009). To understand this, a good example to refer to is the story of Oedipus Rex -- a basically good man -- who is led to committing some of the worst acts, according to ancient Greek morals, by fate (Fleming & Zyglidopoulos 110, 2009).

According to the bad apple argument, "one can attribute organizational unethical behavior to the personal characteristics of individuals" (104, 2009). This type of explanation can be very comforting to people because it tells us that there are only a few bad "apples" -- or individuals -- out there and when we find them, we then punish them, and then everything in the world will be fine once again.

In the case of Oedipus Rex, he committed two very serious crimes, but the question comes down to, was he really guilty of those crimes? Some would say no, since he did not know what he was doing and he couldn't have done otherwise. "Therefore, according to the principle of alternate possibilities, 'a person is morally responsible for what he has done only if he could have done otherwise" (Frankfurt 829, 1969). This bad apple approach is way too simplistic in the case of Enron.

The approach that must be taken in the case of Enron has to do with social systems in which certain individuals become corrupt. This social systems approach can be understood by looking at some experiments in social psychology that illustrate random people within the appropriate setting as being capable of the most ferocious acts (Burke & Cooper 104, 2009).

For example, Milgram's (1974) famous obedience experiments showed that randomly chosen individuals, when assured by white-robed scientists that their acts were meant to benefit scientific progress, were more than willing to inflict obviously lethal electric shocks to others. Or, as Zimbardo (2007) reports on his famous Stanford experiments, he was able to turn ordinary college students into sadistic guards in less than a week, simply by asking them to play the role of guards in a hypothetical jail setting.

Zimbardo reports that the students became so cruel towards their fellow students, who had been randomly assigned the role of prisoners, that he had to stop the experiment after only a couple of days, even though it was supposed to run for a week (Burke & Cooper 104-5, 2009). These experiments are disturbing because they imply that virtually anyone can become corrupt under the right circumstances and the right situation. It may be too extreme to say that anyone is vulnerable to corruption.

However, the magnitude of Enron's corruption shows us, perhaps, that the corporation is inherently inclined towards illegality if it is given half a chance (Fleming & Zyglidopoulos 1, 2009). Enron was not the only corporation accused of misrepresenting their financial status and taking part in bribery -- among other acts. Corporate crime is different from other forms of crime, however, because the corporation as a whole entity benefits from the illegality, rather than just specific people in the firm.

There are organizational ends that are pursued and, in the case of Enron, executives knowingly took part in acts that were supported by operational norms and organizational subcultures (Simpson 7, 2002). This can be seen in the documentary film Enron: The Smartest Men in the Room. "The dialogue gives a flavor of how ruthless and downright nasty the Enron culture had become in its pursuit of profits" (24, 2009).

While California was dealing with a heat wave, Enron's West Coast trading desk decided to tinker with the market by simply turning off the power generators for a few hours. The company also came up with a plan to make more money by buying cheap price-capped energy, channeling it outside the state and back into California, selling it at inflated prices (24, 2009). The profits that Enron made were huge.

"Here we witness" [in the dialogue from the film] "vindictive agents gaining pleasure not only from tremendous illegal profits, but also from the distress and discomfort caused to consumers" (24, 2009). The guys at Enron had a special dislike for people in California and their joy from taking away their electricity is apparent. When a fire broke out in the sun-scorched state, taking down a major electricity line, a trader can be heard relishing in the misfortune: 'Burn, baby burn, that's a beautiful thing'.

Another trader remarks, 'Just cut 'em off…They should just bring back…horses and carriages…lamps…kerosene lamps (Fleming & Zyglidopoulos 24, 2009). Looking at the blatant disdain the Enron traders had for Californians, it may be more logical to take a middle way between the bad apples and the social systems approaches when trying to understand the corruption of Enron. This would mean that corruption occurs and escalates within an organization as a result of the positive feedbacks between an individual and circumstance (Burke & Cooper 105, 2009).

We can look at the environmental systemic pressures and argue that along with individual choice, various personality characteristics and beliefs, along with a propensity for rationalization, it contribute towards the escalation of corruption within organizations (105, 2009). The decision to not "act otherwise" is vital when trying to understand the immoral person and the kinds of corruption committed in Enron.

In the case of the California electricity scandal, did not one person think, "doing this to people is wrong…perhaps we shouldn't do it?" Not one person decided to "act otherwise." This could be simplified as peer pressure, but there is more at the heart of the problem than peer pressure.

Fleming and Zyglidopoulos (27, 2009) note that investigative research has been done on the types of people that are more prone to corruption, concentrating on the decisions they make, "or more precisely the decision-making processes they employ as unethical agents." While there are factors like peer pressure and authority that come into play, some research claims to have isolated significant features of an individual's character that make them more likely to commit acts of fraud, bribery and falsification in the corporate context (27, 2009).

For example, those people with "high levels of ambition were more likely to transgress moral codes, competitively stab colleagues in the back and make dubious decisions relating to asset-stripping, disinvestment, and so on" (27, 2009). Trevino's (1986) work is relevant when it comes to understanding individuals and corruption. There are a couple questions regarding moral personality that come up: first of all, whether or not a person sees an event or issue as a moral problem; the second is how they decide to act in relation to that problem.

Kohlberg's theory of cognitive moral development emphasizes the cognitive or reasoning aspect of moral-decision making (604, 1986). Trevino builds upon Kohlberg's theory to understand ethical decision-making and how it is related to personality structure (Fleming & Zyglidopoulos 28, 2009). According to Kohlberg's theory of cognitive moral development, there are three different levels to ethical development and within those levels are two stages each that a person passes through -- advancing from childhood to adulthood as they become more moral. The third level is the "principled" level.

This is the level where we have "an awareness of differing moral positions, and freely choose to endorse certain ethical ideas, even if that is considered by others to be a minority position" (28, 2009). According to Kohlberg, only 20% of American adults make it to the final stage of moral development; most American adults stay in level two for perpetuity (28, 2009). Extending the individual-centric approach to unethical and corrupt behavior, Trevino (1986) adds other character variables that pin down the dispositional make-up of the bad apple.

Important here is whether someone acts consistently with their moral dispositions… If a senior executive at Siemens felt it was morally wrong to establish illegal slush funds in order to win contracts through bribery, would they act in accordance with that conviction? The individual variables addressing this question are ego strength, field dependence and locus of control. If our Siemens executive has robust ego strength then they are able to stick to their convictions and guide their actions accordingly (Fleming & Zyglidopoulos 28-9, 2009).

Basically, those with high ego strength are more likely to do what they feel is the right thing to do (Trevino 609, 1986). Enron came as a shock to many. Before the Enron scandal came out, Andy Fastow's characteristics were praised in the business press as "the guiding spirit of a new type of corporate executive" (Fleming & Zyglidopoulos 32, 2009). It's only when we look back now that we can see him for what he really was: the epitome of the organizational Mephistopheles (32, 2009).

We cannot look at the Enron scandal with a "bad apple" approach to corruption because it makes decision-making the main feature of ethical reason. In some scenarios, the situation is organized in a manner that ethical issues or dilemmas fail to make it onto the radar. "If the corrupt activity becomes normalized within the operating system of the firm over time, as it did in Enron, it ceases to pose a dilemma because it is lost in 'business as usual' rituals" (Fleming & Zyglidopoulos 32, 2009).

Post-Enron, the world is a much more cynical place. Business leaders are now rated lower than lawyers and politicians (something that was at one time nearly impossible to think). Business leaders, to many, represent bad apples, in bad barrels, in bad forests (Burke & Cooper 37, 2004). Paradoxically, it is the scandals exposed by the break down of American capitalism -- the acknowledged bad apples -- that have exposed the weaknesses in the system -- the barrel (Gandossy & Sonnenfeld 126, 2004).

Chief executives are now paid exorbitant amounts of money; the average CEO's compensation has risen from 42 times that of the average worker in 1980 to 420 times in 2001 (126, 2004). Undoubtedly, the rise can be related to executive stock options. Gandossy and Sonnenfeld (127, 2004) note that when executives are paid based on the appreciation in the momentary price of a stock (perception) rather than the enhancement of the intrinsic value of a corporation (reality), the temptation for management to hype stock prices is apparently overwhelming (127, 2004).

Yet, evidence suggests that corporate illegality cannot simply be dismissed as the result of a bad apple who inadvertently slipped into the corporate barrel (127, 2004). Individuals who commit corporate crimes are not somehow especially bad or immoral people. Corporate crime results from a confluence of an individual's willingness to commit crime and her incentives and ability to do so.

Any large group of people (such as a publicly held corporation) contains people who will be willing to break the law if the gains from doing so are large enough (Gandossy & Sonnenfeld 201-2, 2004). The "bad apples" and "bad barrels" of and in companies like Enron are very often arrogant, greedy to no end, and convinced that they deserve every penny they get, but in a way, the whole.