Enron - Business Ethics - Case Study Example

? ENRON: BUSINESS ETHICS (In the context of organizational culture) of the Date Submitted: Introduction The financial debacle that was Enron was quite unprecedented in its scope and in terms of the complicity of its top people. It brought out the worst kind of corporate governance when a company management throws out business ethics through the window. Fortunes were lost, many people lost their careers and reputations, relationships ruined irreparably and a clear example of the excesses of corporate greed when business ethics fail because of an organizational culture in which unethical behavior was encouraged, tolerated, and even rewarded. It is a cautionary tale of how to destroy a seemingly good corporation at the very peak of its success in the highly- competitive world of energy trading in a liberated but loosely regulated environment. Many things had connived to cause the unraveling of Enron, one of which was its wrong bet on the direction of the energy market. Prices were going south and so a desperate effort of covering up was undertaken, primarily that of off-balance sheet financial commitments. It was the perfect storm, so to speak, a confluence of negative events finally brought Enron down and taken positively, the failure of Enron brought about many positive changes in governance. A few examples of this benefit are today's increased vigilance, passage of the Sarbanes-Oxley Act, and reforms in the banking and financial sectors through stricter accounting reporting standards. Hopefully, Enron is the last of its kind of case, but one never knows for sure it will not repeat. This paper is a critical appraisal of the business ethics at Enron within the context of its organizational culture and how its leaders influenced and shaped that particular culture which in a way ultimately led to its spectacular end. Many things went wrong at Enron then but in a strange twist, no one raised a howl until it was too late. Enron is a classic case in business ethics. Discussion There are many different definitions of organizational culture, and several examples of its definition are given here. This is to give a general conceptual background of what it is and in a sense, what it is not. Organizational culture is the abstract but dynamic phenomenon observed in organizations that influences the people within that particular organization (Schein, 2010, p. 3) to think and act in certain prescribed ways acceptable to majority of its members. In this meaning of organizational culture, there is a certain emphasis on how culture is created through a series of constant exchanges between people, re-enacted and reinforced by our interactions with the other people that are in turn shaped by our own conscious behavior. With this in mind, organizational culture implies a certain kind of rigidity that builds up stability within the organization, because it has coercive power on how people should feel, act, speak, think and do things in an acceptable manner that creates social order. In other words, organizational culture demands conformity. A slightly different meaning of organizational culture is the formal system of all shared meanings, values and viewpoints within an organization by which all members abide by (Divedi, 1995, p. 9); it positions the organization as something different from other similar organizations as it helps to define the basic or intrinsic nature of the said organization. Organizational culture can be structural in terms of its enduring characteristics which differentiate it as an organization, it can be subjective, in the way employees and members feel about the organization as a group, and lastly, it can be synthetic, which is a combination of both structural and subjective elements. It is the perceived subjective influence of the formal system within the organization, and coupled with the informal system of how its leaders and managers act and think, with all other factors. Another meaning of organizational culture, as viewed within a private business firm, or entity, is corporate culture. It is defined by the single most important characteristic, which is its ability by which groups share their values, beliefs, norms, behavioral patterns and the like, in the way how these important things are held in common (Herzog, 2010, p. 58) by everybody. In this context, organizational culture is the pattern of shared basic assumptions, together with artifacts (ceremonies, rituals, hierarchy, stories, anecdotes, myths, legends, arrangements, protocols and language in it) in consonance with behavioral norms practiced by old-time employees and taught to new hires as a “correct way of doing things around here” or how expectations about behavior are shared by the same social group. Put differently, but along the same vein, organizational culture is a collection of social principles, philosophies, and practices that determine the standards for appropriate types of attitude, what is considered as legitimate behavior and what is not appropriate or abnormal. It guides people on how to do things in order to be accepted. To borrow a literary term, organizational culture can also be considered as a metaphor, a substitute of what is considered as important to the organization as a whole and how it perceives or frames the outside world (Alvesson, 2002, p. 16), which in turns helps define an organization. However, it must be conceded that getting a precise definition of organizational culture can often be quite difficult, as the word “culture” is intrinsically difficult to define to begin with. This is an acceptable fact, as even the social science of anthropology cannot exactly define what culture is. In other words, organizational culture can be defined in a very broad manner as to encompass all possible definitions of what constitutes culture itself; however, the drawback to this approach is a tendency to cover everything and consequently, in inherent danger of not defining anything at all. With all the above examples, the case of Enron can now be better discussed and understood. Organizational Culture at Enron – there is a strong relationship between the kind or type of leadership existing in an organization and the eventual culture that develops within it. This is because the top leaders of an organization can imprint their values and beliefs on the rest of the organization, in terms of its direction, what is considered as important, and how it handles various challenges and situations. In other words, the personal beliefs, attitudes, and values of a leader will filter and trickle down to the rest of the organizational hierarchy. The leader exerts a strong influence in terms of corporate governance, and hence, its implied corporate culture too. It is therefore not surprising that strong and dynamic leaders leave their footprints on organizations that they had handled, sometimes even long after they left, as protegees continue their work. A good leader can perpetuate himself through a strong legacy consisting of organization systems, viewpoints, attitudes, values and beliefs inherent in the organizational culture. In other words, the leader stamps his imprint on everything the organization does because he is the leader and as long as he has that credibility, people will instinctively follow his ideas and suggestions. It is therefore imperative for any organization to have good leaders at their helm to guide it through the challenges it will face; there is an intimate relationship between leadership and culture. Before its spectacular collapse, Enron was viewed as a model for the deregulated energy industry and was the darling of the financial world and the media. This company began with the merger of the Houston Natural Gas with the InterNorth Corporation back in 1985, and thus started a culture that was at once super-competitive and considered highly toxic, around personal values of Jeff Skilling and Ken Lay (its top leadership); they started a cycle of business practices and market strategies that were questionable and unethical (McCann & Selsky, 2012, p. 148). Just as there is a close relationship between leadership and culture, it is the same kind of a correlation between culture and strategy. The leadership influences organizational or corporate culture, and in turn formulates the firm's corporate strategies, what is called as its strategic intent. This intent determines the future direction a company will adopt to pursue its mission and vision. For Enron, its insatiable drive to corner the energy market made it commit a combination of the worst possible unethical business practices, ranging from the borderline accounting practices of using mark-to-market valuations (to inflate assets) and hiding corporate debt by the off-balance sheet special purpose entities (SPEs). The obsession inherent in a toxic culture was largely a self-perpetuating pressure on its people, no different from that of a feeding frenzy by sharks. One man does it, and the rest also follow doing it, and this was what drove Enron to be the seventh-largest American company in its brief sixteen years of existence (1985-2001) and the sixth-largest energy company of the world within that short span of time. When a lower-ranking employee does something wrong or unethical, it may not have a large impact on the company but when the very leaders charged with formulating strategies are the ones who are doing wrong, it is only a matter of time before that company will collapse. The leadership at Enron did not care too much about business ethics, all they want is growth and market share. The pervading culture then was contribute something to the firm in profits, no matter what or how it is done. Enron before its collapse had a very destructive culture, and many who were guilt stricken and could no longer stomach it, decided to leave, instead of becoming whistle-blowers to raise alarms. Management practices at Enron were downright dysfunctional, from an interview with its former vice president for training, Alan Warnick (Madsen & Vance, 2009, p. 217). Role and Responsibility of Leadership – the top leadership and senior management at Enron were largely concerned on building up the company as fast as possible. To achieve this, it encouraged a different but dysfunctional corporate culture, shaping and influencing its culture in a negative direction utilizing a variety of questionable business and accounting practices. Instead of fostering a healthy culture of honesty, transparency and accountability, the leadership had in many ways disdained this approach and focused instead on how to circumvent energy industry regulatory environment without catching attention. When a corporate leadership that is supposed to set down ethical policy directives is instead the one that tried to circumvent what are generally accepted accounting practices in connivance with its external auditor, it then sets in motion the very culture which contains the seeds of its collapse as its practices are not sustainable. A culture of accountability was lost, and internal auditing controls were lost along the way too. The fraud at Enron became bigger and got institutionalized instead (Free, MacIntosh & Stein, 2007, p. 1); the leadership was amiss because it failed to set the moral tone in terms of business ethics. In a way, the operations at Enron were fueled by an incentive to commit fraud through pressure, as employees who do not go along with its practices are instead told to get out of the way as they become a hindrance to its objectives of attaining growth by all means. Adverse Consequences – the way Enron operated was really no different from a Ponzi scheme or a giant corporate pyramid scam, where its operations will continue only if prices of energy will keep rising but if energy prices go down south, then it will inevitably collapse, despite all the supposed good governance controls it had put in place. Fraud at Enron became a widespread practice as top leadership connived with opportunities and attitude to commit fraud. Human Resource Management – the human resource department at Enron take direction from its executive leadership in terms of guidance, policy direction and management philosophy. It can try to promote good governance by formulation of a code of ethics, but this must have the approval and imprimatur of the top management. Without this support, it can only do so much in terms of encouraging a healthy attitude towards business ethics as a whole. It can try to shape its organizational culture by hiring people with the right attitude during the interview process, as an example, but its actions are largely limited by the type of leadership in place at Enron at the time. It must be remembered that organizational culture is largely influenced by its leadership in place; a human resources department doing things differently would be in an off-tangent endeavor. Those who cannot stomach the unethical practices at Enron found it appropriate to just resign rather than fight a corporate culture that encourages malfeasance (Meisinger, 2012, p. 1). The human resources department can foster an ethical culture by asking people to report any or all kinds of misconduct, protect whistle blowers and letting employees feel they belong to a firm, as what was done by former Enron CEO Richard Kinder who promoted a family-like culture. Conclusion There are many causes of the Enron debacle, but in the final analysis, it all boils down to putting the right people in the right places, in positions of leadership and authority. Corporate culture that is lax or even permissive by not taking drastic actions against fraud will ultimately be a drag on company performance or in the case of Enron, cause its collapse. The informal culture at Enron like its very competitive nature (Fox, 2003, p. 5) had a pervasive influence on how people view wrongdoing (Sims & Brinkmann, 2003, p. 243) more than a formal code of ethics. References Alvesson, M. (2002). Understanding organizational culture. Thousand Oaks, CA: Sage Publications Limited. Divedi, R. K. (1995). Organizational culture and performance. New Delhi, India: MP Publications Private Limited. Fox, L. (2003). Enron: The rise and fall. Hoboken, NJ: John Wiley & Sons, Incorporated. Free, C., MacIntosh, N. & Stein, M. (2007, July-August). Management controls: The organizational fraud triangle of leadership, culture, and control in Enron. Ivey Business Journal Online. Retrieved from http://wwwold.iveybusinessjournal.com/article.asp?intArticle_ID=701 Herzog, P. (2010). Open and closed innovation: Different cultures for different strategies. New York, NY: Springer Books. Madsen, S. & Vance, C. (2009). Unlearned lessons from the past: An insider's view of Enron's downfall. Corporate Governance, 9(2), 216-227. McCann, J. & Selsky, J. W. (2012). Mastering turbulence: The essential capabilities of agile and resilient individuals, teams, and organizations. Hoboken, NJ: John Wiley & Sons, Incorporated. Meisinger, S. R. (2012, June 11). Examining organizational ethics. Human Resource Executive Online. Retrieved from http://www.hreonline.com/HRE/view/story.jhtml?id=533348507 Schein, E. H. (2010). Organizational culture and leadership. Hoboken, NJ: John Wiley & Sons, Incorporated. Sims, R. R. & Brinkmann, J. (2003). Enron ethics (or: Culture matters more than codes). Journal of Business Ethics, 45(3), 243-256. Read More