Question 1
What led to the eventual collapse of Enron under Lay and Skilling?
The eventual collapse of Enron under Lay and Skilling was caused by lack of leadership charisma of top management and bad corporate governance that contributed to the fallout corporate culture of the company. It was not the doing of just one person but many were involved and on top of that ineffective system too added to the matter. The implementations done by Lay and Skilling is difficult to prove that they were violating laws, but it is in fact that the two of them had crafted the corporate culture that reveals their beliefs, knowledge and instill them into the corporation. However, the way Lay and Skilling runs the practice in the corporation is a total opposite with Enron’s Code Of Ethics.
Enron’s ethical code was based on four major concepts, which are respect, integrity, communication and excellence. The core of these ethics was to enhance trust and ensuring transparency to the public in order to gain their confidence through the integrity of its workforce. The actions of top management, especially Lay and Skilling, not only did not adhere to the values of respect, integrity, communication and excellence stipulated in the Enron Code of Ethics but also totally emasculate the foundational values of Enron Code of Ethics. The problem does not lie within the Code of Ethics of Enron; in fact, the code of ethics of Enron is well structured and strong, but is that the Lay and Skilling did not walk the talk by adhering to the Enron’s Code Of Ethics.
Lay and Skilling conducted the business of Enron under their own corporate culture. That is with greed and pressure. The Lay and Skilling were constantly pushing their employees to meet the sales target regardless of ethical conduct. There is the culture of making the numbers even if one steal, if one cheats, just don’t get caught. If one do get caught, beg for second chance, and one shall get it. This aggressive earnings management style influences employee to try to achieve targets regardless of moral and ethical values. The leadership of Enron plays an important part in defining it employee’s ethical behavior. A perception that if everyone is doing and is being rewarded then it is fine is often practiced, it is not about illegality but about the morality and ethics of all of those involved. Lay and Skilling has made it a corporate culture where it swayed employee into believing that what they were doing was legal although it was immoral and unacceptable.
Besides that, Enron’s CEO Jeff Skilling also implemented a very harsh and intimidating performance evaluation process for all Enron employees known as the ‘rank and yank’. This evaluation process uses peer evaluations and each of the company’s divisions need no particular reason to fire the lowest ranked employees. This situation has created a divided corporate culture as employees would frequently under rank their peers in order to enhance or maintain their own positions in the company. Employees became very aggressive towards each other as the working environment became very competitive. Besides that, Enron sets up a compensation plan that was seemed to benefit the company’s executives rather than generating profit for shareholders. Employees were encouraged to be creative and thinking out of the box; breaking rules, and inflate the value of the contracts even though there was no actual cash made. As a result, the integrity of the company was smeared.
Enron also practices decentralization whereby isolating employees and the separation of different business units and other division in order to control information flow within the company so it will became limited and blurry. Only a hand full of executive in the company would have the complete outlook of the company’s operations. This decentralization created an information irregularity that lead to the inefficient and ineffective management, accountants, auditors and lawyers. Instead of empowering employees with information, Lay and Skilling separated and alienated the workforce so that they would be able to manipulate the employee easily which is against Enron’s Code Of Ethics.
As mentioned, the problems was caused by the leadership from Lay and Skilling that creates the corporate culture full of aggressiveness, intimidation and greed that lead to the collapse of Enron.
Question 2
How did the top leadership at Enron undermine the foundational values of the Enron Code of Ethics?
The top leadership at Enron undermines the foundational values of the Enron Code of Ethics by not doing what it is supposed to do accordingly. The Code of Ethics of Enron was mainly stressed on respect, integrity, communication and excellence.
First of all, the top management defies the value of respect by promoting the aggressive peer evaluation. There was no room for failure. Those who fails will immediately be replaced. Top management was abusive and ruthless in their decision making. Example of this is the implementation of the rigorous and threatening performance evaluation process that is done for all Enron employees. This process alienated everyone as employees tend to rank their peers lower in order to enhance their own position or to their own benefit. The value of respect was not present in the working environment in Enron.
The second core value of Enron’s Code Of Ethics, which is integrity, has been totally disregarded. The value highlights on open, honest and sincere relationship with customers and future customers in achieving their needs however in reality, the employees of Enron were told to do otherwise when it came to practical application. Management created a culture where they led employees to believe that there are no such things as too much risk or there is nothing that cannot be done. This working environment not only did not promote integrity of employees but also urge employees to unethically and immorally boost up the financial numbers.
Thirdly, is communication. Enron’s Code Of Ethics stated that everyone in Enron need to listen and exchange information with fellow employees, as it believes information is vital for the company to further expand. But in reality, the top management decentralized the operations to keep information from flowing. Only certain people know what is going on in Enron. Because of this, communication was not fluid which further resulted in operations and financial controls did not work efficiently and effectively as expected. The limited or hard to obtain information, created a gap in the actual financial position of the company to the employees. Employees were kept in the dark about Enron’s financial standing. That is why, when Enron crumbled down, most employees were shock as they had no idea that the company was in debt and could not grasp that all their life saving is lost.
Lastly, excellence is also part of the Code Of Ethics of Enron. The particular code is supposedly to inspire continuous learning and expects the very best from its employees. Top management however did not walk the talk. There were no further education, training no team building projects, nothing. All the management did was decentralized and intimidate employees and brainwash employees to accept it is alright that what they are doing is unethical as long as it is legal. An example is the compensation plan that Enron created. The plan seems to be oriented in enriching executives more rather than maximizing shareholders wealth. Furthermore, this plan actually encourages the use of non-standard accounting practices to inflate figure of the deals in the company’s books. Lay and Skilling had the power to shape the company’s corporate culture to their liking and there was no regulators aware for the dealings was due to close relationship it had with its auditors and bankers. As the corporate culture was the management to shape, the values of the code of ethics were undermined. These values were underm
ined though the leader’s emphasis on decentralization, employee performance appraisal and compensation program. Thus, the actions of Lay and Skilling were a total contrast on the vision and expectation of the Enron’s code and ethics.
Question 3
In retrospect: given Kenneth Lay’s and Jeff Skilling’s operating beliefs and the Enron Code of Ethics, what expectations regarding ethical decisions and actions should Enron’s employees reasonably have had?
From the operating beliefs of Lay and Skilling and the Enron Code of Ethics, the employees of Enron would reasonably believe that what they were doing was legal even though it was totally immoral and quite unacceptable did not worry them at all. Lay and Skilling’s action were a total contrast of the Enron Code of Ethics, but employees that follow the lead of Lay and Skilling were rewarded where as the other were either fired or was not able to get a promotion. This corporate culture created by Lay and Skilling made employee of Enron disregard morality and ethical decision by rewarding them with financial gains and acknowledgement. Like the unwritten statement, employees were expected to perform, disregard what methods and ways it takes. Management was just interested in results and not excuses. In retrospect, Enron’s employees should have the qualities of a good employee that is to have integrity and honesty, strong work ethics and professionalism. Even though with the pressure given by top management, employees should not succumb to pressure knowing that it is unethical and immoral. Employees reasonably should have a strong work ethics, which is in addition to working hard; employees are expected to work smart. It is important to care about the task and job that is being carried out and not just follow instruction to the word regardless of the actual intention. For example, if you find out that some of the figures in the books do not seem right, it is the responsibility of employees to point out to management and inquire the nature of the transaction. Do not simply close an eye because it is the corporate culture of the entity. Employees must be confident in voicing out their concern. If the manager does not address the problem, bring the problem to the higher management until someone acknowledges the problem. Employees need to be proactive in solving problem and not passive just because it is the norm. Other than that, honesty and integrity is should be one of the core values that employees should have. It is the employees’ responsibility to use their own individual judgment in evaluating the sense of moral and ethical behavior when working and serving others within the job scope. As
mention before, one should not just give into peer pressure. Last but not the least,
professionalism should be always be conducted by employees. Employees like auditors and regulators should maintain their professionalism at all times. Meaning they need to be objective and independent in making sound decision by exercising their professional judgment. A professional and responsible employee would be like Cynthia Cooper in the case of Worldcom. Employees of Enron should reasonably have had the qualities of the above and more. Sometimes it is hard to voice out opinion when the crowd is so stuck on their comfortable believes, but it is the responsibility and duties of employees to correct any wrong doing of the employers. Integrity and honesty should be hold closely to the heart of every individual, as it is every individual’s responsibility to use their own judgment in decidingethical issue and not just bend to the pressure of wrong doers.
Question 4
How did Enron’s corporate culture promote unethical decisions and actions?
Enron’s corporate culture promoted unethical decisions and actions by implementing aggressive management style, aggressive earnings management and ignorant employees. The corporate culture that is formed by Lay and Skilling is a very aggressive goal orientated and performance driven environment. Not only does employees are expected to perform, they were also expected to not ask questions. The aggressive management style occurs from the implementation of the strict, meticulous and threatening performance evaluation. The management emphasized heavily on results, and the performances of the employees are constantly under the evaluation of their peers. Any underperforming employees would besacked and replaced. This creates a very aggressive environment by nature and pushes employees to be hard headed on results, regardless of any ethical issue. When there is fear of losing the job driving the workforce, employees tend to make any decisions that would bring profit into the company. The corporate culture created by Lay and Skilling made, or I
would say, force employees to forgo their moral and ethics in order to bring in profit to the company. Many of the employees acknowledge the fact that their actions may be unethical, but as long as it is legal they have no problem with it. Intimidation and fear is one of the few factors that drove the unethical decisions and actions of Enron’s employees. Other than that, the corporate culture of Enron has been described as having a culture of arrogance that led to people believing they could handle greater risk without any danger. That resulted in aggressive earnings management, in which resulted the employee manipulating and inflating the valuations of contracts. Due to the compensation plan, employees are encourage to be creative in adjusting and inflating and even rule breaking when it comes to financial figures, because the performance of the contract would in turn yield financial benefits to them. The
compensation plan is seemingly drafted towards enriching employees more than to
maximize shareholders wealth. Unethical behavior and actions is widely seen throughout the company as it was a norm to hide financial losses so that they need not own up to the responsibilities. Lastly, ignorant employees also resulted in the unethical behavior. Lay constantly made rosy result to employees through internal announcement system, and because of his charismatic and inspirational words, Lay is able to pull the trust of the employees to believe that the company is in fact doing very well. This lead employee to believe that the every act they are doing now, although unethical, is profiting the company and thus enriching themselves as well. The worries of any unethical behavior or actions would be instantly resolved as the fact that the company is making progress. This is how the corporate culture shaped by Lay and Skilling led to the unethical behavior and action of its employees.
Question 5
How did the investment banking community contribute to the ethical collapse of
Enron?
The investment banking community contributed to the ethical collapse of Enron by assisting disguises to the company’s deteriorating financial position. The banks either colluded or work together to the questionable transactions. Enron was able to lie to investors about its financial standing because it has assistance from its bankers. The banks were mainly Citigroup, JP Morgan and Merrill Lynch, and instead of protecting the stakeholders’ interest, the banks colluded with Enron to commit fraud (Epstein, 2003). The banks not only willingly participant knowing the implication but also made a handsome profit from it.It all started off as a close relationship between Enron and the banks, most notably Citigroup and JP Morgan. The two have been good friends and very closely related to Enron from its early days, hence the diminishing of independence. Because of the close relationship, Enron had an advantage over competitors in loans and is able to avoid takeovers. The independence of the bank was questionable right from the start as the banks gave preference loans and provided advice on the company on its businesses. Not only the banks assist Enron financially, they also assist them in increase income or removing losses fr
om balance sheet, cooking the books for Enron so that they have a tidy and steady profit along the way. One of the findings from the news is that, these banks helped Enron camouflage more than $8 billions of dollars in loans, all without disclosing them to shareholders. Other than that, it was found that one of the banks intentionally misrepresented one of the transactions with Enron in the records of the deal so that accounting standards could be ignored and Enron is able to hide its true financial position. Not only did the banks understand the intention of Enron in fraudulent activities, they actively assisted them as well so that in return, the banks also manage to earn a handsome profit and other continuous profitable dealings.
Due to the nature of relationship between the banks and Enron, the banks have already known that Enron was not performing as well as it was stated in the New York Stock Exchange (NYSE). So in order to safeguard the investment that they lend to Enron, these banks hedge various dealing that they transacted with Enron with other insurers so that the insurers company would bare all the risk if Enron ever goes under. For example, Citigroup started up complex financial instrument that acted like an insurance policy (Epstein, 2003). When Enron stay health, investors of the instrument would receive dividends or returns. On the other hand, if Enron goes bust, Citigroup stop paying the returns and keep all the investors’ initial investment and pass Enron’s debt to them. This means that investors are the owner of Enron and would receive steady return, but when during a downturn, these same investors are liable for all Enron’s debt. Not only did the banks collaborated with Enron in to misleading shareholders, they profited by trading with insider information on the actual financial condition of the company, and the worst thing is that, knowingly that the company is losing money, in order to safeguard their own investment in Enron, the banks actually drew up complex financial instrument to mislead investors to take over the liabilities they have. The banks were unethical and immoral. There was no sense of responsibility towards the shareholders and stakeholders, bankers were only operating under the intention to safeguard themselves and profit from the mishap of others. They were greedy and selfish. Banks actually empowered Enron to be more daring in cheating shareholders money by collaborating in assisting Enron to cook the books to their advantage