Enrons Rigorous Performance Evaluation Standards - Essay Example

?Enron’s Collapse due to Ethical Issue Introduction Enron Corporation used to be the leading energy companies based in Texas, USA. Enron employed around 20,000 employees before filing for bankruptcy in 2001. By Fortune, it was listed as “America’s most innovative companies” consistently for 6 years and in 2000, it reported its annual revenue of more than $100 billion. Illegal and unethical practices led to the collapse of the company. Factors leading to unethical behavior of Enron The culture of Enron contributed to the basis of the scandal of ethics. Enron was a condescending and harsh company, which focused on its financial goals and competition. Each year, the company rates 20% of its employees below their requirements and ultimately, they were asked to leave the company (Jennings, 2009, p. 288). This rating system brought more harm to company than benefits. First, Enron’s rigorous performance evaluation standards and competitive environment resulted in a deceptive culture. Since employees began to have job insecurity, they emphasized only on how to make their performance look better. They ignored the ethical norms and began to focus on achieving their financial goals. Few employees started to cheat on their work. The only way to halt them was to cheat more. Very soon, every other person in the company was cheating and it became a prevalent conception since they were left with no choice and were also surrounded by those co-workers who were doing the same. This caused a deceptive culture of the company. Employees were evaluated on their ability to cheat. Second, such competitive environment led to covering of the mistakes and cheating, because employees seldom communicate with each other and were very un-cooperative. Employees were not encouraged to ask questions because asking question was considered as humiliating. In addition to that, they were also less willing to share information and resources because they were competing with each other. Therefore, in Enron, no one was asking anyone any questions and no one wanted to answer any questions. In this way, the employees of Enron began to ignore mistakes and errors and just focused on making their work look good. Such ethical problems had ripple effect and contributed to Enron’s ethical scandal. At Enron, both employees and executives behaved in an unethical and illegal manner since they were encountered with conflicts of interest. They all were self-interested and greedy. Major Causes of Enron’s Collapse After the fall down of the company, people started making its synonyms as corporate fraud and corruption. At one hand, the company contributed to charity with huge amount of money but systematically, on other hand, in 1990s, it swindled its financial statements along with an audit firm, named as Arthur Anderson. Enron’s method was systematic and creative. Its accounting practices and financial statements were not clear. For instance, the company made its practices of noting costs of those projects that have been cancelled as assets. Nevertheless, on other hand, there was no explanation as official letter, which states that the project has been cancelled. Such practices had ‘snowball effect’. Moreover, it has also created special reasons for raising profitability and avoiding taxes. It gave liberty to the management to hide losses and move currency. The CFO, Andrew Fastow was the mastermind behind the arrangement of all these practices. Such arrangements enabled him, his family and friends make millions of dollars at the cost of their stakeholders. Some of the actions of this reputable and responsible company were just like gambling. In the year 2000, the share price of Enron was at its peak i.e. at $90. Enron’s Executives already knew what was happening inside the company therefore; they started to sell their shares. On 5 March 2001, Article of Bethany McLean “Is Enron Overpriced?” further reduced the stock price of the company. She played a vital role in revealing the huge debt of Enron. Slowly and gradually, the stock price began to fall and at the end of 2001, the stock price of the company was reported as $1. Many of the company’s senior executives were sent to jail. This incident not only resulted in the collapse of Enron, but also in the dissolution of one of the 5 top auditing company, Arthur Anderson. If Ethics had been prioritized If a common person sees the situation of Enron and places himself as an employee of the company, how would he consider this situation? One may feel that there are some major problems by having questions depending on business intuition and condition of the company. Utilitarian Theory In Utilitarian Theory, philosophers John Mill and Eremy Bentham states that, “resolution of ethical dilemmas requires a balancing effort in which we minimize the harms that result from a decision even as we maximize the benefits.” This theory explains that while taking a decision, a decision maker must consider the interest of all the stakeholders who will be influenced by that decision and therefore, such actions must be selected which maximize the benefits for overall society. In this theory, a maximum good for maximum number of people needs to be done. Here comes an ethical dilemma, whether you should look after your own interest from a possible harm of investors, or protect the interest of stakeholders and let go of personal short-term interest. According to Utilitarian Theory, “you cannot use others in a way that gives you a one-side benefit.” Jennings, 2009, p.6 Utilizing the commandments of Utilitarian Theory, the company’s executives and employees should have considered the interest of all the associated stakeholders, which include the shareholders of the company, employees, creditors as well as public. The company did the other way round. Irrespective of considering the interest of stakeholders, the company emphasized on achieving their desired financial goals and in doing so, it even ignored the ethical and legal norms, which resulted in a disaster for the company. Self-Evaluation Blanchard and Johnson (1985) have mentioned a small test in their book, “The One Minute Manager.” The authors state that one must ask themselves three questions; i. “Is it legal? ii. Is it balanced? iii. Does it make me feel good?” (Blanchard and Johnson, 1985) If I would be an employee at Enron, I would have thought about the answer for the above-mentioned three questions first. Firstly, according to my intuition, I would have felt that the company is involved in committing fraud. It is unlawful to hide fraudulent activities. Moreover, it also involved its audit firm in hiding its fraudulent practices. Secondly, if I would have revealed this information to public, I would have lost my job yet I would have done that because even at Enron, my job was not secure. If I would have hidden the information, more people would suffer, which includes stockholders and investors of the company. Lastly, I would have disclosed the unethical practices of the company to public and would have tried my best to stop fraud at Enron. Hiding truth from stakeholders makes me feel guilty. Conclusion We can clearly see weaknesses of human beings in case of Enron. Executives of Enron were very smart but they destructed the empire that they had created in 16 years and it also hurt many investors. The fundamental cause of this collapse is lack of ethical ideas. Therefore, when senior executives confront with ethical dilemma, they selected the wrong way, one, which seem to be in their interest. In order to avoid another such case, three suggestions must be considered in today’s business environment. First, companies must carefully examine their corporate culture. Second, company must construct vigorous ethical standards and should follow them on daily basis. Lastly, companies must learn ethical models and theories since they are the only way, which can help them in fairly coping with ethical dilemma. Works Cited Blanchard, Ken and Johnson, Spencer. (1985). The One Minute Manager. Washington D.C: Penguin Group (USA) Incorporated. Srikanth, R. (2010). Ethics and Enron. Retrieved from: http://business.wikinut.com/Ethics-and-Enron./v.8-0q2p/ Marianne M. J. (2009). Business Ethic Case Study and Selected Readings (6th Ed.). Salt Lake City, UT, U.S.A.: Cengage Learning. Read More