Ethical Leadership Failure: Lessons from the Enron Scandal

Introduction

Enron is the story of prideful, arrogant, greedy leadership. From CEOs Ken Lay and Jeff Skilling to CFO Andy Fastow, these leaders managed to turn a modest energy company into a financialized house of cards that collapsed spectacularly in a matter of days, after seeing its share price rise into the stratosphere over the course of a few years. That rise was due to fraud, manipulation, and a failure of leadership. Lay was responsible for putting Skilling into power and for turning a blind eye to the questionable tactics Skilling sought to employ. Skilling, in turn, turned a blind eye to what Fastow was doing to mislead investors. They were all guilty of hiding the company's debt and losses through shell company partnerships — but in this they were supported by the prestigious auditing firm of Arthur Andersen, which collapsed just as spectacularly as Enron in the wake of the scandal.

In fact, this was a story of leadership failure at virtually every level of administrative oversight. Numerous large banks invested in Fastow's shell companies, which were set up to do business solely with Enron. All of them should have known better — and they, too, bore some responsibility for what happened. To suggest that only Enron's leaders are to blame is to miss the wider conspiracy: the eagerness with which so many stakeholders were willing to participate in the fraud is staggering. For the purposes of this paper, however, discussion will be limited to the specific behaviors Enron's leaders engaged in that precipitated its downfall, how employees reacted to senior leadership's conduct and attitudes, and whether the leaders could have been stopped and how.

Behaviors of Enron's Leaders

In spite of their bad actions, Enron's leaders were actually likable individuals: they were popular within the company and exuded charm and charisma. The problem was not their likability; rather, it was that they appealed to something devious in their followers. There was a rebellious, cavalier spirit among Enron's senior leadership — they were going to do things no one had ever done before, celebrate all the way to the bank, and no one was going to stop them.

Enron's leaders — particularly Skilling and Fastow — were full of energy and ambition; they were driven, playful, and fun. But they did not ground their energy in an ethical foundation. Fastow had a "Cheshire cat smile" that beguiled investors. Their authentic selves were not full of virtue but rather of pride and a willingness to engage in deceptive practices. Skilling, to this day, believes his conduct was honorable; Fastow, on the other hand, knew that his tricks were trouble, and he paid a heavy price for cooking the company's books.

Whether Skilling ever genuinely believed his lies is unclear. After Bethany McLean's article critiquing Enron's value appeared in Fortune, he acknowledged that she had called the company a "black box," and then said, "I'm sorry, it's true; it's just difficult for us to show people the specifics of how money flows through, particularly the wholesale business." What he was doing was engaging in a limited hangout — acknowledging that Enron's lack of transparency was an issue without making it seem like anything to worry about. Was it incompetence? Negligence? An unwillingness to accept the facts? Or outright dishonesty? Regardless, Skilling should have been more alarmed by what he himself was saying: when transparency is missing, it is a giant red flag and usually an indication of fraud. And when there is fraud, there is reason to worry — Enron's stock was overvalued because the company was massively in debt.

Lay chose not to see this, nor to listen to whistleblowers like Sherron Watkins, who came forward with serious concerns. Skilling played the part of a captain going down with the ship, adamant to the last that he had guided it nobly and fairly. Fastow played the part of the scapegoat — yet he had helped engineer the fraud. In truth, they all had. They did so with unabashed shamelessness. Skilling, Lay, and the Board all signed off on Fastow's deals with his own shell companies because they believed the accounting was permissible under existing law. The banks bought in as well. Fastow argued that the shell company deals would provide capital for Enron — but that was only half true: he was manipulating accounting figures, and the capital was never really there except on paper, in columns of hypothetical arithmetic.

Conclusion

Enron's leaders created a toxic environment of hubris and fraud that began, it may be said, with self-deception and a failure of accountability. Lay and the Board entrusted the company to newcomers Skilling and Fastow and bought into a phony vision promising enormous profits. The leaders exploited deregulation to engage in financial tricks — and no one outside the company questioned them. Everyone turned a blind eye while the money was good. Some employees feared the worst. Others — like the banks and the accounting firm — enjoyed the ride while they could. In the end, Enron's leaders failed because they lacked the ethical foundation necessary to be accountable — to their employees, their shareholders, and themselves.

References

Enron: The Smartest Guys in the Room. https://en.wikipedia.org/wiki/Enron:_The_Smartest_Guys_in_the_Room