“What’s he building in there? What the hell is he building in there?” rings the opening lines of the documentary Enron: The Smartest Guys in the Room. These lines portray the mystery and ambiguity that surrounded Enron through their 16 years of operation as a wholesaler of gas and electricity. Enron’s famous tagline “ask why” became ironic as inquiries of how Enron had gained its success brought forth its demise. The corporation, that was once the seventh largest in the nation, went bankrupt in twenty-four days, and the questions that came after revealed the many immoral, unethical practices Enron implemented to create a facade of success. One specific example brought to light after Enron’s bankruptcy was their use of structured finance to hide the corporation’s debt. This practice can be analyzed using utilitarian and deontological ethical theories and the ethical traps of money and conflict of interest.
Andy Fastow, Enron CFO, was charged with the seemingly impossible task of keeping Enron’s stock price up by concealing Enron’s thirty billion dollars of debt from stock purchasers (Enron). The way to do this was to create companies in which Enron’s debt could be hidden, and as Enron’s debt increased more companies were created to conceal it (Enron). This created the illusion for investors that Enron was profitable, when in actuality, it had massive amounts of debt hidden away. It seemed as though Fastow conjured up this scheme himself; however, according to Jeff Skilling, “Arthur Andersen and our lawyers had taken a very hard look at this structure and they believed it was appropriate” (Enron). Jeff Skilling, Ken Lay, and the Board at Enron had also signed off on funds for Fastow’s most ambitious company called LJM (Enron). Evidently, many leaders of Enron and even outside entities were involved in Fastow’s scheme to disguise Enron’s billions in debt from the outside world.
Most people can recognize that what Enron did to hide their debt was unethical in many ways. First, this practice can be analyzed in reference to utilitarian ethics, which is credited to John Stuart Mill (Mann, Roberts 30). According to Mill, “a correct decision is one that maximizes overall happiness and minimizes overall pain, thereby producing the greatest net benefit”, thus a decision that yields the greatest good for the greatest amount of people (Mann, Roberts 30). According to utilitarianism, stashing Enron’s debts in specially created companies was a clear breach in ethics. The leaders of corporations have a fiduciary duty to act in the best interest of shareholders. Fastow, as Enron’s CFO, took on this duty. One could say that by keeping Enron’s stock price up he was carrying out this obligation, but Fastow knew hiding debt was not something he could do forever. As stated by attorney Bill Lerach in the documentary, “People pressured by the need to keep the stock price up begin to cheat a little bit, but then the next quarter comes along and you have to cheat a little more to do the new cheating to make up for the old cheating, and before long, you’ve created a momentum that now you can’t stop” (Enron). Fastow had to have known that his house of cards would eventually come tumbling down; leaving thousands of stockholders out of the money they had invested into Enron. Essentially, he assisted in deceiving the stock market as a whole and influenced people to invest in Enron based off of falsified information. In the short term, Fastow helped a great number of people by allowing Enron’s stock price to continue to rise. However, in the end, he hurt a higher number of people when Enron went bankrupt, which lead to 20,000 people losing their jobs, thousands of stockholders losing money, and two billion dollars vanishing from pension and retirement funds (Enron). According to the documentary, “The Enron executives started selling their stock, and by Enron’s collapse, Ken Rice had sold 53 million, Ken Lay had sold 300 million, Cliff Baxter 35 million, and Jeff Skilling 200 million” (Enron). These were the only people who benefited from Enron’s high stock price because they had inside information knowing to sell when the stock price was soaring. Everyone else, blind to this information, ended up losing out on their investments. Overall, the decision to conceal Enron’s debt did not provide the greatest net benefit because it benefited a few executives while hurting countless others.
Deontological ethics, credited to German Philosopher Immanuel Kant, can also be used to analyze Enron’s practice of structured finance. This theory highlights that the result of a decision does not justify the reason for the decision, or put more simply the ends do not justify the means (Mann, Roberts 30). The theory also depicts the categorical imperative in which Kant argues, “You should not do something unless you would be willing to have everyone else do it, too” (Mann, Roberts 31). In the documentary, Fastow’s actions are described as “a magic trick” that “defied laws of financial gravity” in order to cover up the “financial fantasyland” Enron had become (Enron). All of these words and phrases have a direct connotation to deception or deceit. Most people would not be okay with being deceived. Therefore, under deontological ethics, the deceiving of others, no matter the reason, is unethical. Even though, the companies were created in an attempt to save Enron’s stock from plummeting, the result of the decision is not taken into account in analyzation through deontological thinking.
People don’t typically fall into immoral practices for no reason; many ethical traps draw a person to make unethical choices. Perhaps the most predominant ethical trap in the Enron scandal was money. Money is believed to be a symbol of power, success and happiness. Almost every decision made by Enron executives was motivated by money. Per the documentary, “Skilling, Lay and the Enron board had signed off on Fastow’s LJM funds. They saw benefits of letting Fastow do deals with himself. It is in Enron’s best interest because Enron needs the capital” (Enron). This shows Enron’s drive for money no matter the means of obtaining it. Fastow was also able to materialize forty-five million dollars for himself through his creation of LJM (Enron). This was surely a motivator for Fastow to make the decisions he did.
Another prevalent ethical trap in the hiding of Enron’s debt was the conflict of interest it created for Fastow. According to the textbook, “For everyone, the bias created by a conflict of interest tends to be unconscious and unintentionally self-serving” (Mann, Roberts 36). Fastow was both the head of the funds he created to defer Enron’s debt and the CFO of Enron (Enron). This generated a clear conflict of interest for Fastow. When Fastow was gaining money from his LJM fund how could he be objective about Enron and act in the interest of its shareholders?
Enron’s downfall was ultimately one plagued by unethical practice in accordance to both deontological and utilitarian theories. The ethical traps of money and conflict of interest brought temptation to take immoral action and create a smokescreen of success. In the end, Enron couldn’t keep up the act and their empire came crumbling down. From this it is clear that ethicality is an important practice in business that should not be ignored in decision making.