Ethical Issues in Enron

Introduction

After any form of company failure, governments, regulators, stakeholders and academicians often readdress their focus on various aspects of corporate governance, including the responsibilities of stakeholders and organizational ethics. One of the aspects of corporate governance that continues to be the focal point of any investigation following a company’s failure relates to organizational ethics. The focus is on the fact that the fall of some of the leading entities in the United States and across the globe are connected with illegal and unethical business practices. Additionally, there is consensus in the academic and business environments that ethical business practices contribute to an entity’s performance (Johnson, 2012). Consequentially, entities embracing and signifying ethical conduct are much more likely to perform better or be successful than entities with unethical conduct. Enron Corporation is an apt example of American corporations that collapsed due to illegal activities and unethical practices. Before entering bankruptcy in 2001, Enron had over 32,000 employees and was considered a global player in the energy sector (Dembinski, Lager, Cornford, & Bonvin, 2006). Additionally, it was one of the most innovative energy-based companies. Unpredictably to stakeholders, academicians and industry regulators, the company entered bankruptcy at the time when it had assets totaling over $70 billion and ranked at position seven among the largest corporations in the United States. Employee and organizational behavior is largely shaped by organizational culture, whereas the actions of leaders shape ethical behavior. Enron’s scandal changed the relationship between corporations and the American public with regard to employment contracts, whistleblowing and public relations. Arguably, Enron’s failure was due to an organizational culture marked by greed, which induced unethical behaviors across all the levels of the company’s organizational structure, whereby leaders abused their powers and privileges. This paper explores various ethical issues in Enron, including employment-at will, the role of whistleblowers, and the role of marketing and public relations in mending reputational damage.

Enron’s Ethical Issues

Decisions about a right and wrong action permeate business activities and strategies. In other words, ethics concern all levels of business activities, including acting appropriately as individuals, leading responsible businesses and making an organization ethical. Ethics provides entities with a set of standards for behaviors helping them to decide how they should act under various situations. In this case study’s sense, Enron’s ethics concern making choices and justifying them. Typically, an entity’s ethical tone is set at the top of the leadership hierarchy (Cheney, Kent, & Debashish, 2011). The chief executive officer (CEO) plays the most significant role in cultivating a sense of ethics within an organization. That is to say, CEOs have a unique responsibility acting as models. What they do and the principles under which they operate are often emulated downwards. Therefore, the culture in Enron was a reflection of the top management. This argument does not deprecate the important role played by the middle management. Normally, an employee’s immediate supervisor has a direct effect on a worker’s choices (Zimmerli, Klaus, & Holzinger, 2007). However, direction from the peak influences the middle management’s role in instilling ethical practices across an organization. The argument at this point is that Enron’s organizational ethics was largely influenced by the top management, which faced ethical dilemmas in various strategic decisions.

Enron’s Ethical Dilemma

Ethical issues arise at different levels of an entity and move from an individual to organizational level. Moral relativism and utilitarianism are philosophical terms relating to ethics. In Enron’s case study, moral relativism implies that morality is relative to the organizational culture of an entity. In other words, what is perceived as right or wrong for a particular leader and company may be inappropriate for other companies and leaders (Johnson, 2012). Normally, legal requirements are ethical minimums, but individual ethical standards often exceed legal standards. That is to say, laws are ethical issues marked by socioeconomic implications (Johnson, 2012). Typically, the law fails to prohibit all wrongs or bad behavior. The rationale is that conduct may be morally reprehensible and unethical, but still be legal. In other words, ethics and morals are one thing, and the law is another one.

Making ethical decisions requires sensitivity to ethical issues and a framework for exploring all the possible ethical variables of a decision, while weighing factors that should affect the choice of a leader or organization’s course of action. Grounded on conventional divisions of normative ethical theories, two frameworks can be used to guide ethical decisions, including the Duty framework and the Consequences framework (Johnson, 2012). Using the Consequences framework, Enron leaders should have focused on the future effects of the available course of actions. In the same context, the masterminds should also have considered the impact of their decisions on employees and investors. For instance, the whistleblower considered the desirable outcomes after noting irregularities. In contrast, Enron’s top leaders failed to consider what would have led to the best consequences for all stakeholders. By using the Consequences framework, Watkins desired to produce the best outcome for Enron and its stakeholders. One of the advantages of this framework is that it is helpful in a scenario involving many people because the majority of them are likely to benefit. On the contrary, it is impossible to foresee the consequences of a decision; hence, it became evident that some of the actions projected to produce good outcomes harm the involved people. For instance, Watkins faced resistance from various fronts.

As per the Duty framework, leaders and their companies should focus on obligations and duties that are predefined or emerge in a situation. For example, it was the duty and obligation of Enron’s leaders to report the financial health of the company without hiding the debts and losses. In the same context, leaders and their followers must consider their ethical obligations (Johnson, 2012). In Enron’s case study, ethical conduct meant completing one’s duties in the right way, and the aim was to ensure that the correct action was performed. One of the advantages of this framework is that it ensures that a company creates a system of rules that are consistent with the expectations of its stakeholders. In other words, if an employee’s action is ethically correct, it should also apply to other employees in a similar situation. For example, all Enron’s employees were obliged to report any misconduct or illegal activities because this duty and obligation was stipulated in the company’s Code of Ethics.

An ethical dilemma is perceived as a complex scenario involving apparent critical conflict between moral imperatives, whereby obeying one may lead in contravening another (Johnson, 2012). In other words, an entity is presented with two equally options, but the correct decision is not instantly apparent. The blame for the ethical misdeed and illegal financial activities in Enron can be placed at the feet of the founder Kenneth Lay, chief financial officer (CFO) Andrew Fastow and then CEO Jeffrey Skilling. These leaders failed to meet ethical dilemmas or challenges of leaderships. Some of their failures relate to abuse of power, deceit and excess freedom. In regard to power, both Skilling and Lay cruelly wielded power. In fact, the top leaders abused power. For instance, Skilling not only disregarded corporate rivals but also intimidated subordinates. Power abdication was an ethical challenge or dilemma in Enron. For example, at times, managers failed to understand what their immediate subordinates were doing and how Enron operated.

Enron’s board also failed to properly oversee the company. Additionally, the Board rarely challenged Enron’s management decisions. Most of the board members were appointed by Lay. Some of the members did business with Enron and represented other non-profit entities that gained from Enron (Dembinski, Lager, Cornford, & Bonvin, 2006). Interestingly, Lay had a modest life before becoming the chairman and CEO of Enron. During the heyday of Enron, Lay had much of the company’s power, as exemplified in his earnings and appointments. In regard to deceit, the top officials conspired with auditors to manipulate Enron’s financial information to protect the interest of the top management and deceive the public. The extent of deceit was undetermined because even the board members claimed that they were unaware of Enron’s off-the-official-books partnerships. Both the CFO and the CEO were informed of the irregularities but chose to give the warning a deaf ear as they were protecting their interests. Enron’s board also waived the company’s conflict of interest clause in Enron’s Code of Ethics, which would have thwarted the formation of the controversial partnerships. Employees also failed to point the problem as they were following the lead of the company’s top officials. For instance, they helped their leaders to hide expenses, deceive energy regulators and claimed non-existent profits.

The Role Played by Whistleblowers in the Exposure of Enron

Whistleblowers are employees or entities that bring illegal activities or unethical practices to the attention of relevant individuals or bodies. In Enron, the accountant Sherron Watkins brought the wronging at the company to the attention of Kenneth Lay, the then chief executing officer, through a memo (Pasha, 2006). However, by the time Watkins blew the whistle, irreversible damage had been done, and Enron’s employees and stakeholders had lost much. Therefore, it is logical to create an organizational culture and structures that not only encourage employees to highlight wrongdoings but also protect them from persecution. Additionally, such culture should encourage employees to pinpoint any issue and confront any illegal or unethical practice within an organization as soon as it is detected. Hereby, Watkins could have made the bigger deal of the problems she had identified in 1996. Further, the company should also ensure that a timely action is taken to prevent further damage. In other words, companies should have an organizational culture that encourages whistleblowing.

Sherron Watkins, a former vice president in Enron, was praised for her pivotal role in exposing greed and deception at the core of the United States seventh largest corporation (BBC NEWS, 2006). The gravity of the irregularities in Enron’s books prompted her to send an anonymous memo to the company’s founder Kenneth Lay in August 2001. Watkins was also motivated to pursue the issue following the sudden resignation of the then CEO Jeffery Skilling. To note, Watkins sent Kenneth Lay a detailed memo after Skilling’s resignation, but she did it anonymous until Enron’s all-employee meeting held on 16^th August 2001 (Pasha, 2006). Despite her role, she noted that she could have not predicted what would happen to Enron, which was declared bankrupt in late 2001 after discovering that the company’s executives had deliberately used structures to hide millions of debts and losses. It is important to note that there were many villains in the company’s scandal that Watkins was made a heroine. The seven-page memo provided for Lay contained documents collected from various Enron’s business units illustrating the company’s engagement in shady dealings (Pasha, 2006). Therefore, it is arguable that Watkins involved many other employees in presenting evidence about irregularities in the company’s financial records. As an accountant and having worked for the company since 1993, Watkins noted that despite Enron’s rapid growth, all was not well. Thus, this is an illustration of the fact that most ethical misdeeds are much likely to be identified and brought to light by internal constituents.

As the preceding discussion illustrates, whistleblowing, especially to external entities such as government agencies and the media, might be hazardous for both the whistleblower and the organization. Uncertain attitude towards whistleblowers leads to a scenario when, even under legal protection, whistleblowers tend to face retaliation in various ways, including close supervision, alienation and being spurned by co-workers (Cheney, Kent, & Debashish, 2011). For instance, in 1996, Watkins made her concerns known to Arthur Anderson, Enron’s auditors, but was cold-shouldered (BBC NEWS, 2006). At that point, she was reprimanded for getting involved in accounting matters, while she was in the finance department. As a result, she almost left Enron but later on moved to international operations. This example demonstrates the challenges whistleblowers face, irrespective of their good intentions. Therefore, companies should encourage whistleblowing to preclude external whistleblowing and probable damage to an organization (Zimmerli, Klaus, & Holzinger, 2007). In that regard, Enron would have had an internal whistleblowing program to encourage courageous employees such as Watkins to bring any identified or suspected legal violation and ethical misdeed to an internal authority. To that end, action could have been taken in time, and the ethical issues could be resolved. As much as credit is given to Watkins, it is arguable that she might have taken long before writing the memo to the CEO due to the lack of an effective internal whistleblowing program. Therefore, this is an explanation of the fact that most unethical practices are underreported.

The Impact of Employment-at-Will on the Employees and the Company

Being at-will employee implies that an employer can terminate employment for any cause and at any time with or without notice. Enron’s employees suffered the same fate after its collapse. Only those who signed employment contracts that had clauses indicating that they could not be terminated without good cause engaged the company in a legal battle after the collapse. The company fired 5,000 workers on the first day after filing for bankruptcy (Dembinski, Lager, Cornford, & Bonvin, 2006). As a result, this group lost their jobs, savings and healthcare. The company fired more employees while closing its business units. Laid-off employees received only $4,500 as a severance payment, irrespective of the years they had worked for Enron. The company also cancelled medical and health insurance for the laid-off staff. Consequently, some of the workers had to cancel surgery. These actions illustrate that unethical misdeeds of a few individuals can have a detrimental effect on the lives of many people. As per the federal law, Enron was obliged to continue providing health care for the laid-off staff for the next 18 months. However, the company failed to communicate to the laid-off staff on how they could sign up for continued health care. By preventing workers from selling its stock held in the regulatory 401(k) savings accounts, thousands of workers lost their life savings. The economic security of Enron’s employees’ funds became worthless with the fall of the company’s stocks (Frontain, 2010). The bottom line is that the collapse of Enron was an avoidable incident; thus, it is imperative to understand what happened to avoid such scenarios. Before filing for bankruptcy, Enron had incurred visible financial losses due to greed and arrogance of the top leaders. If one of the leaders had courage to report and end it, thousands of employees would not have suffered. Additionally, the company would still be among the largest energy-based companies in the United States.

The Efficacy of the Company’s Marketing and Public Relations in Mending the Damaged Reputation

Enron is a classic example of unethical leadership behaviors and poor crisis management. The reason is that even after filing for bankruptcy, the company failed to effectively manage the situation through its communication division. The denial of the top leadership depicted Enron and its management as not only irresponsible but also obsessed with financial gains at the cost of the stakeholders. Despite the disclosures, Enron’s top leaders acted irresponsibly by deliberately failing to take immediate action and responsibility for illegal activities in the company (BBC NEWS, 2006). The Chief Executive Lay deliberately downplayed the warning from Watkins memo. Additionally, some of the board members could not understand the company’s fiscal figures but failed to communicate the irregularities to both internal and external constituents. Occasionally, Enron’s managers encouraged employees to secrete figures by any means possible. Following the company’s collapse, none of them stepped forward to carry the blame as means of demonstrating accountability and responsibility. In fact, the management team assumed the damage and publicly denied their wrongdoings.

After emerging from bankruptcy in 2004, Enron was approved for reorganization. One of the measures taken was to rename from Enron Corporation to Enron Creditors Recovery Corp (ECRC). The change of the company’s name was a strategic decision because it represented its immediate purpose of restructuring and liquidating some of Enron’s operations and assets prior to its downfall for the benefits of creditors (Frontain, 2010). From the author’s perspective, this decision was not only a strategic but also moral and ethical necessity. The company had to demonstrate that creditors were given priority by changing the name and committing its efforts through continuous and timely communication. In the company’s effort to improve the damaged reputation, it also sued financial entities that helped the original Enron Corporation to deceive the American public. To recap, communication ethics and effective public relations require employees or the organization to choose actions that may be accepted as appropriate not only by the stakeholders but also by regulators (Cheney, Kent, & Debashish, 2011). In this end, Enron would have preserved the company, employees’ concerns and customer relationships. Additionally, the communication network within Enron should have been restructured to improve transparency in all its formal and informal processes.

Conclusion

Enron’s ethical failure was largely due to an organizational culture that enabled top leaders to abuse their privileges and power. The top leadership team manipulated information, while engaging in inconsistent treatment of both internal and external stakeholders. The leaders placed their personal interest above those of the public and employees. Additionally, the leaders failed to properly oversee and take responsibility for ethical failure. Unfortunately, their followers or subordinates blindly followed their example. Enron’s case study presents numerous lessons for enlightening organizational ethics, with a focus on leadership ethics and communications ethics. The blame for Enron’s failure should also be shared by educators and industry practitioners. In that regard, it is essential to integrate ethics in educational curriculum and employee trainings. Furthermore, there is a need to continuously highlight ethical responsibilities of leaders or managers and followers, while addressing both contextual and individual parameters that breed fraud. At the organizational level, companies must recognize and cultivate credibility and trust in the leader-follower or manager-subordinate relationship.