Good Leadership as an Act of Ethical Transformation of People - Essay Example

ethics and organization: An Examination of Enron’s ethical failure By: Introduction Business ethics isa form of professional ethics that scrutinizes ethical principles, and ethical and moral problems that arise in the business environment (Ferrell, Fraedrich & Ferrell 2008, and p.10). Business ethics applies to all sections of business conduct and it is pertinent to the conduct of organizations and individuals. Business ethics is an important code that all business organizations stick to. Business ethics reflects the philosophy of a business (Ferrell, Fraedrich & Ferrell 2008, p.18). Wisdom traditions that reflect on the history of human civilization consider right relationship as their principle value. The hallmark of the noble spirit of humanity demands that each and every tradition enjoins their leaders and citizens to greater compassion and tenderness towards each other. According to Clegg (1997, p.56), the concept of leadership has been that the main objective of leaders is to increase production and maximize profits. However, this traditional view of leadership is slowly fading away as the current theories assert that leaders are also responsible for moral and ethic conduct (Clegg 1997, p.65). It is for this reason that some people refer to good leadership as an act of ethical transformation of people. Ethical leadership Ethical leadership does not only apply to individual leadership but also to the corporate society. Albert Einstein is well known for the powerful simple statement which was instrumental in explaining the way firms must operate in an increasingly competitive global market. Doing business is like participating in a contact sport (Clegg & Hardy 1999, p. 34). However, as the sporting spirit demands, winning at all cost is not winning at all. Further more, cutting the ethical corners for a win is not necessary at all. Several studies have revealed that firms with strong ethical cultures perform better than those whose ethical culture is compromised (Ferrell, Fraedrich & Ferrell 2008, p.13). In Harvard Business Review, Tony Simons stated, “Organizations where employees strongly believed their managers followed through on promises and demonstrated the values they preached were substantially more profitable than those whose managers scored average or lower” (Ferrell, Fraedrich & Ferrell 2011, p.132).  Shaping the culture of an organization is a vital leadership task. In regards to ethics this involves: Modeling ethical leadership, particularly during the tough times when conducting business, can be regarded as leading ethics and modeling the values of the firm (Ferrell, Fraedrich & Ferrell 2008, p.60). Promoting ethical culture of transparency and openness, and clear intentions and motives (Gilliland Steiner & Skarlicki 2007, p. 32). Maintaining vigilance to avoid risks associated with ethics through including a structured risk assessment process mostly in developing markets (Clegg & Hardy 1999, p. 55). It is vital for business leaders to embrace a strong ethical culture. By maintaining universal ethical values and being sensitive to the customs and laws of the global business environment, a firm can attain competitive advantage over its competitors (Ferrell, Fraedrich & Ferrell 2008, p.87). Business leaders must make decisions that will not just be beneficial to them, but they should consider other people/factors when making these decisions. In the recent times, there has been a lot of concern about ethical leadership within the corporate business, not forgetting the numerous scandals at Enron, Parmalat, WorldCom and big Irish banks such as Allied Irish Bank (AIB) and National Irish Bank (NIB (Ferrell, Fraedrich & Ferrell 2008, p.102). The problems and devastation that resulted from accounting fraud at the investment company operated by Bernard Madoff will not fade from people’s memory, nor will the frauds from Enron be forgotten. This has threatened the position of senior management in the respective companies and has also put the financial survival of these companies in jeopardy (Ferrell, Fraedrich & Ferrell 2008, p.133). Before discussing what motivated the unethical behaviors as witnessed in Enron, let focus on the firm itself. ENRON’S BACKGROUND Enron was formed in the year 1986 following the merger of natural gas pipeline companies Intermorth and Houston Natural Gas (Fox 2002, p.12). Fifteen years later after the formation, the company had diversified to produce products and services related to electricity, natural gas and communications (Fox 2002, p.15). By the time Chapter 11 bankruptcy protection was being implemented in 2nd December 2001, Enron operations included the transportation of natural gas through pipelines, transmission and distribution of electricity, development and operations of power plants that generates energy, and delivery and management of energy capabilities and commodities to commercial and industrial sectors. The failure of the company started in the 3rd quarter of 2001 when the investors and the general market lost confidence in its asset-write down and profit as stated in McLean & Elkind (2003, p.41). Consequently, the loans became due as a result of collapse of the stock market collateral hence difficulties in borrowing. However, it is worth noting that the lost in confidence was not the reason that hastened collapse but rather it was a sign of bad things to come. The company failed because its expected earnings and assets which ensured its spectacular rise residence in the destiny top ten were largely and by far illusive, while the financial deals and tangled web of its competitors had a huge burden of debt (Swartz & Watkins 2003, p.7). Enron’s market power and extensive accounting practices ensured its safe secret, but this was in the short term. This company has been the most sort after corporate in America: a fortune 500 top ten players, supported by the global biggest banks and top rated by the top stock exchange markets globally. As stated above, Enron’s downfall was as a result of complex corporate web of financial dealings (Swartz & Watkins 2003, p.13). ENRON’S PRACTICES THAT LEAD TO ITS FALL Enron was a major contributor to both political parties in the USA. Its influence was majorly felt in Washington and Texas, and at the same time its executives were closely linked through the entire levels of government and society (Fox 2002, p.66). It is therefore a fact to claim that the company’s core business of commodities became a reality as a result of the deregulation in the market and exemption from oversight by the CFTC (Community Futures Trading Commission) (United States 2002, p.39). . This prompted the analysts to back the company giving buy ratings even when the stock had shown some elements of falling (McLean & Elkind 2003, p.11). Because of its market share, any analyst who shied away from grading the company would experience a strained relationship with his employer-especially those analysts who are linked to the network of investors and banks which were responsible for selling Enron’s stocks (Swartz & Watkins 2003, p.19). Enron employed Andersen as its principal auditor. The auditor also undertook the work of consultancy and internal audit, which lead to the question of conflict of interest and loss of independence. Since the emergence of Enron’s scandal, all the big 5 accounting firms have stopped to act both external and internal auditors for a single client (Swartz & Watkins 2003, p.51). This shows that the scandal did not only affect Enron but the entire market and any other company that it was linked to. The audit work done by the principal auditor, Andersen, faced a lot criticism and Andersen allegedly succumbed to bullying tactics from Enron when the former’s workers raised concerns about the accounting principles and methods applied to the audit (McLean & Elkind 2003, p.87). This resulted to some Anderson’s employees loosing their job and senior managers and partners allowed themselves to be persuaded in issues concerning accounting, and through corrupt means Enron’s view was represented to the FASB and SEC (McLean & Elkind 2003, p.91). The Board of Directors is the leading structure when it comes to welfare of the company’s shareholders. They should act as the guardians of the ethical code of conduct and efficiently in touch with the business for proper functioning. This was not the case to be in regards to Enron’s board of directors (McLean & Elkind 2003, p.81). The board was not briefed on the extent of the partnership, and what they did was just to take around fifteen minutes to review some parts of dubious transactions that was fundamental to the rush forward of the earnings. From the statement above it is clear that the board failed in its primary obligation and failed to direct the company accordingly, hence contributing to the fall of the company (Salter 2008, p.18). It is not the board of directors alone who failed to execute their ethical mandate to the company. Executives and senior management are the core determinant of the ethical culture of a firm. In terms of principality, the company claimed to have subscribed to a morally set of values such as integrity, excellence, communication and respect, as stated in its mission statement (Swartz & Watkins 2003, p.92). However, it is clear how the company’s code of ethics was compromised so that Fastow could run partnership, and how Lay lied to staff about the company’s state. In addition, inside accounts revealed how the risk-taking culture of Enron and how the employees were encouraged through bonus incentives in order to manipulate profits estimates (Salter 2008, p.71). This was an encouragement of unethical practices contrary to the company’s code of conduct as written in its mission statement. As explained above, it is clear that Enron had some of the trappings of corporate governance well developed. This included the audit committee and code of ethics as stated in its mission statement. However, neither of these corporate governance practices worked for the company (Ferrell, Fraedrich & Ferrell 2008, p.90). There are several and divergent opinions held on the importance and the implications ethical behavior in regards to the case of Enron. One of the views may be that it is just another of the many corporate bankruptcy, even though it was the 7th largest company in the USA (Salter 2008, p.5). In fact, while some might feel sorry for the investors, the shareholders who lost their investments after the fall, invested on the understanding that share prices is prone to fluctuations. Another vital argument is that; the collapse of the company has lead to the revelation of some philosophical issues that have been a threat to our basic understanding and trust to in the economic system. This must lead to the evaluation of how parts of the system work. WHO WAS TO BLAME FOR THE FALL OF ENRON It is a widespread concern among employees that what happened at Enron Corporation’s employees can happen to them. For Americans, the story is still new-in fact 1/3 says they haven’t heard much about the fall of the company. However, for those with an option, it is quite clear their direction. Majority of those who have heard about the story believed that Enron executives did something wrong that perpetuated the collapse. Executives In my opinion I believed there are several reasons and people to blame for the fall of the company. First of all, I believe that the top executives should be faulted for the fall of the company-mainly Skilling and Lay. As the most powerful and influential leaders within the company, Skilling and Lay were sure able to lead an effective and efficient company. These two executives motivated a competitive environment that crushed any little creativity employees had, and as a result the employees were just worried about their jobs. As Enron’s employees, many were making a decent living. As a result they shut themselves off the corruption practices they witnessed in the company. This was fostered by laxity and unethical leadership among the top executives of the company (Ferrell, Fraedrich & Ferrell 2008, and p.19). The top executives within the company also sold their own company stock while limiting most employees from selling theirs. The executives are also at fault again for approaching the government for assistance as this showed that they were unable to run the affairs of the company appropriately. The collapse of the company was not static but rather dynamic as it started and progressed slowly with no one able to notice and overlook the resultant effects (Clegg & Hardy 1999, p. 88). It is therefore clear that the collapse of the company was as a result of the failure in all its system starting with the board of directors all the way to the internal and external auditors. The company top executives failed to implement the general code of ethics hence the ultimate failure characterized with scandals and malpractices (McLean & Elkind 2003, p.109). The role of ethics in business cannot be ignored and its importance can be well explained by those companies who have enjoyed success as a result of its implementation. The financial community and credit agencies The company’s overstatement in earnings was permitted by a shadowy accounting rule used by the energy companies and their trading partners (Clegg & Hardy1999, p.55). The company exploited the failure in the accounting system, and that enabled it to boost its current net income with gains that might not be collected for a longer time period. Because of these murky accounting rules, the company was not forced to disclose key details such as the amount of profit they receive and how they value their side contracts. At Enron, it was apparent that these illusionary gains accounted for more than half of its $1.41 billion of originally reported profit for the year 2000. However, the revelation was an ugly at the time of disclosure. Theoretically, firms cannot get away with cooking their books because independent, honest accounting firms are looking over their shoulders while at the same time performing their obligations of protecting the public. The laxity in the accounting structure allowed Andersen to manipulate with Enron’s accounting books for their own benefits (Trevino & Weaver 2003, p.163). This was immoral in regards to accounting principles. The financial community should have overseen this shortcoming considering how influential the company was in the financial markets. Instead, they allowed themselves to be manipulated with Enron’s financial power and influence. This explains why some brokers in the financial markets overvalued Enron’s share prices (Trevino & Weaver 2003, p.159). Politicians of both parties The politicians who took the money from the company and did its bidding are also to blame for the collapse. They included: Republican Tom DeLay and Democrat Sheila Jackson Lee, in the House. In the Senate, they comprised of Democrat Chuck Schumer and Republican Kay Bailey Hutchinson (Clegg & Hardy1999, p.217). The White House No matter how much President Bush wants to distance himself on this issue, he simply cannot. This is because he was number one beneficiary of Enron’s campaign largesse. His administration was filled with the company’s former lawyers, officers, advisers, consultants and shareholders. He even ensured that Enron was allowed access to the highest levels of decision making. As the President, his administration would have ensured proper protection of the Enron’s stakeholders (Fox 2002, p.151). WHAT CAN BE LEARNED FROM ENRON’S CASE? a) Corporate Moral and Ethic Responsibility: Theoretical explanation Before looking at the ultimate lessons learned from Enron’s situation, let us talk about theoretical views concerning corporate moral responsibilities (Fox 2002, p.129). This will enable us to link theoretical perspectives with what are required for a firm to be morally responsible. There has been a widespread view, since 1970s, concerning to the practice of corporate moral responsibility (Trevino & Weaver 2003, p.1). The collectivists and the individualistic theories dominate this topic. The collectivist theory is based on the ontological assumption that a company is a distinct entity from its corporate members which moral responsibility can be accredited to (Trevino & Weaver 2003, p.63). Collectivist claim that moral correct actions are those carried out by actors with righteous characters. On its part, the individualistic theory argues that attributing moral responsibility to an organization’s employees is an elementary logical mistake (Trevino & Weaver 2003, p.59). They claim that corporations are collection of people where morally responsibility lies entirely with the corporate members who act on behalf of an organization. However, both the theories agree that there is only one ultimate criterion of moral conduct. The well acknowledged criteria might be a single rule or a set of principles (Clegg & Hardy1999, p.67). According to Immanuel Kant, an action’s rightness is determined according to whether it is carried out for principle reasons, as opposed to either munificence or even self interest, or for regard to consequences (Trevino & Weaver 2003, p.10). The Kantianism claims that duty is not defined by its content but as a formal moral principle. Good behavior does not lie in being dutiful to rights, rules and responsibilities, or rather good behavior lie in the notion of character. It is for this reason that firms should try and maintain moral responsibilities when undertaking their duties. To be held morally responsible a corporation must be causally responsible and must also possess an intention to act (Mendonca & Kanungo 2006, p.60). The collectivist theory ascertains that intentions and performance of a corporate activity are majorly attributed to the organization itself and constitutes the corporation as a distinct moral entity from its other corporate members (Trevino & Weaver 2011, p.33). However, this concept is criticized on the basis of methodological individualism which claims that collective responsibility is simply unattainable. In fact Velasquez, core proponent of individualistic view, argues that a corporation cannot act intentionally for a simple reason that intentions that an individual can deduce from a firm’s policies and procedures are undertaken by separate entities, which are the corporate members (Trevino & Weaver 2011, p.124). Despite some conceptual difference between the two theories, the linking concept is that actions carried out on behalf of the corporate are taken as the intentional actions of those individuals hence moral responsibilities lie entirely with the company. b) Lessons from Enron’s case It is an interesting fact to see how the law and the society have become more acceptant of criminal liability and attributions of intentionality to corporations. The fall of Enron is clear demonstration of this fact where the company was found liable to many ethical violations when undertaking its business. Some socially irresponsible behaviors by some corporations arose from negligent and reckless behaviors which are unintended; a large amount of corporate behavior can be considered blameless (McLean & Elkind 2003, p.22). The design and structure of an organization is very important in the implementation of code of ethics. If an organization is characterized by a flawed structure, like in the case of Enron, then its employees will fail to oversee the impact of their individual actions combined hence collective fall of the entire organization (Mendonca & Kanungo 2006, p.48). Financial scandal is one of the drivers of change in company law. In Enron’s situation, the lawmaker’s response during the time of the fall of the company in 2001 was far-reaching and immediate. The fall of the company should be viewed in a wider context. As the fortune of the company rose, it was celebrated in the financial press and in business field because it was seen to exemplify an agenda for modernization of the corporation. However, during the fall the company received a much heavier criticism; much heavier then the praise it was getting when it was performing better (McLean & Elkind 2003, p.97). It should be noted that much of the news which hurt Enron had nothing to do with breach of no-conflicts rule. Members of the company’s senior management team enjoyed tens of millions of dollars as profit in their share option at a time when Enron’s share price was falling and its future looked uncertain (Salter 2008, p.19). This is a lesson to other firms that it must constitute a more ethical management team not those who are corrupt and money hungry. This takes us back to the concept of ethical leadership. Ethical leadership is leadership that is characterized by the act respecting the dignity and the rights of others while leading. Ethical leadership focuses on the way leaders ultimately use their social power in making key decisions, actions they undertake and their moral influence on the people that surround them (Salter 2008, p.67). As explained by Swartz & Watkins (2003, p.135), Enron’s affair raises quite a number of fundamental issues concerning the current course of Anglo-American Capitalism, specifically the role deregulation in destabilizing financial markets and energy markets. The objective of making the task of non-executives a more reliable one is associated with the wider issue of how to describe the objectives of corporate governance. Salter (2008, p.56) asserts that, the laser focus on shareholders value did not help the board neither did it helped its shareholders. It is heterodox to argue that directors should be the stewards of the firm’s assets with an aim of ensuring its long term sustainability as compared to simply representing the shareholders (Salter 2008, p.99). A more valid lesson that can be learned from Enron’s scenario is that: until power of the shareholder value norm is broken, effectual restructuring of corporate governance will be on hold (Swartz & Watkins 2003, p.62). Conclusion A failure in ethical leadership gives way to a reasonable account of the corporate scandals and hence firms face an uphill task if business leaders fail to embrace ethical ideals and practices in an active manner. Dominance of individualism within post-enlightenment discourse and practice can give a much highlighted explanation of the failure in ethical leadership. This does not mean that enlightenment should be completely abandoned, but just to argue that the process of collective and social-self reflection should be encouraged (Clegg & Hardy1999, p.77). At the beginning of the 20th Century, the concept of enlightenment has been substituted by a pre-occupation with the centrality of rationality and individualism and this explains why social self-reflection is deemed by few people as problematic. Enron’s scenario shows that corporate corruption can have an insightful influence in undermining the confidence of the general public in the underpinnings a nation’s economic institutions. Enron’s business was founded on the basis of trust and the extent to which market analysts are in the wrong is, so to say, an interesting point (Swartz & Watkins 2003, p.112). The company’s employees who knew that everything was not okay may have based their trust on the analysts, believing that analysts must be well informed about things they did not know. For this reason, it is possible that the analysts and the investors might have started a business that was beyond their own understanding; any caution was limited due to aggressive accounting and financial manipulation (Clegg & Hardy1999, p.198). Rewards were lavished to those who cooperated while those who opposed were persecuted. This clearly shows that moral ethics cannot be undermined in business; failure to which the company will ultimately collapse no matter how profitable it might seems like. References Anderson, J. A., & Englehardt, E. E. (2000). The organizational self and ethical conduct: Sunlit virtue and shadowed resistance. London, Thomson Learning. Clegg, S. (1997). Handbook of organization studies. London [u.a.], Sage. Clegg, S., & Hardy, C. (1999). Handbook of organization studies. Theory & Method Part 1, Studying organization. London, SAGE. Crowther, D., & Rayman-Bacchus, L. (2003). Perspectives on corporate social responsibility. Aldershot, Hants, England, Ashgate. Ferrell, O. C., Fraedrich, J., & Ferrell, L. (2008). Business ethics: ethical decision making and cases. Boston, Houghton Mifflin Co. Ferrell, O. C., Fraedrich, J., & Ferrell, L. (2011). Business ethics: ethical decision making and cases. Mason, OH, South-Western Cengage Learning. Fox, L. (2002). Enron the Rise and Fall. Hoboken, John Wiley & Sons. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=469398. Gilliland, S., Steiner, D., & Skarlicki, D. (2007). Managing social and ethical issues in organizations. Greenwich, CT, Information Age Pub. Inc. McLean, B., & Elkind, P. (2003). The smartest guys in the room: the amazing rise and scandalous fall of Enron. New York [u.a.], Portfolio. Mendonca, M., & Kanungo, R. N. (2006). Ethical leadership. Maidenhead [u.a.], Open Univ. Press. Salter, M. S. (2008). Innovation corrupted: the origins and legacy of Enron's collapse. Cambridge, Mass, Harvard University Press. Swartz, M., & Watkins, S. (2003). Power Failure The Inside Story of the Collapse of Enron. Colorado Springs, Doubleday Imprint. Trevin?o, L. K., & Nelson, K. A. (2011). Managing business ethics: straight talk about how to do it right. New York, John Wiley. Trevino, L. K., & Weaver, G. R. (2003). Managing ethics in business organizations: social scientific perspectives. Stanford, Calif, Stanford Business Books. United States. (2002). The fall of Enron: how could it have happened? : hearing before the Committee on Governmental Affairs, U.S. Senate, One Hundred Seventh Congress, second session, January 24, 2002. Washington, U.S. G.P.O. Read More