The Enron Corporation Scandal as a Moral Scandal: Examining Enron from an Ethical Perspective - Research Paper Example

Running Head: Enron and Ethics The Enron Corporation Scandal as a Moral Scandal: Examining Enron from an Ethical Perspective (Instructor) (Date) Abstract The organizational collapse of the Enron Corporation in 2001 signaled the need for a more pronounced executive awareness of ethical principles in business. Enron was the seventh most successful company in America, valued at almost $7 billion at the time. As the corporation’s operations expanded during the 90s, various questionable practices were initiated by key personnel, ultimately leading to a subsequent investigation and the corporation’s eventual bankruptcy. What lies at the heart of this scandal is an ethical issue, pertaining primarily to what counts as the ethical conduct of business. In this paper, the author examines the Enron Corporation scandal by looking at some ethical principles and theories. By using such frameworks, it is hoped that a deeper analysis of business practices can be arrived at, one that clearly outlines the need for asking pertinent questions about moral conduct in a sector of society that is undeniably susceptible to unethical behavior. The Enron Way The Enron Corporation initiated various corporate means that, at the time, were seen as bold and perhaps even revolutionary. This was especially true when Jeffrey Skilling, former Enron CEO, came on board upon impressing founder and deregulation advocate, Kenneth Lay, with his consultancy capabilities. Prior to the Skilling phase of the company, Enron’s traders had been gambling without restraint using company funds, but with the knowledge of Kenneth Lay. Even with investigations and reports of misappropriation of funds, Lay intimated to traders to further continue generating money for the company. However, as is the nature of “gambling”, luck is bound to change. Enron’s traders soon gambled all of the company’s reserves. Nevertheless, the company survived and went on to employ Skilling. It was Skilling’s idea to utilize mark to market accounting, that is, the use of future projections to book earnings on deals that actually never made anything. This idea essentially opened up the company to unscrupulous practices, paving the way for fraudulent profit reports. Enron was also one of the first companies to form what they called, a Performance Review Committee, whose job it was to ensure that all employees were delivering the results that the company expected from them. This had the effect of pressuring employees to perform well, but had the unsavory consequence of pushing employees to adopt and utilize “less than ethical” conduct. By positioning itself as a kind of energy broker, Enron put up a number of businesses that, in reality, were not generating as much profit as was expected. However, despite the actual losses that the company was experiencing, the stock market value of Enron was rising. This anomaly was in a sense orchestrated by Andy Fastow, Enron’s Chief Financial Officer, who had to find ways to keep the stocks rising while the company was losing money. At the time, Enron already had about $30 billion in debt. In other words, the company was actually losing money but it was reporting profits. This was done through hundreds of special companies that were specifically put up to hide Enron’s debts. Andy Fastow was essentially making business with himself. The effect of all these factors was the eventual compliance of several banks into investing stocks. Ultimately, the truth about the real health of Enron could not be kept, and it was only a matter of time before the company had to declare bankruptcy. The numerous business infractions committed by one of America’s most successful ventures can be meaningfully examined vis-à-vis ethical theories. Business Ethics Business ethics is the application of ethical principles and theories to the nature, conduct, and practice of business. As such, there are important questions that need to be raised: What is the nature of the business itself, and how should it be conducted accordingly? What is the moral responsibility of the company to its shareholders, employees, and clients? What is the extent of disclosure and transparency that must be exercised by management? If, indeed, Enron executives are guilty of deception, misinformation, and withholding of pertinent information through falsified reports, why exactly are these acts instances of unethical behavior? In other words, what makes certain business practices wrong and immoral? A key concept in this discussion is the concept of moral responsibility. In his book, Business Ethics: Concepts and Cases (1988), Manuel Velasquez writes: First, an individual is morally responsible for those wrongful acts he performs (or wrongly omits) and for those injurious effects he brings about (or wrongly fails to prevent) when this is done knowingly and freely. Second, moral responsibility is completely eliminated (excused) by ignorance and inability. Third, moral responsibility for a wrong or an injury is mitigated by (1) uncertainty, (2) difficulty, and (3) minimal involvement … but the extent to which these lessen one’s responsibility depends upon (4) the seriousness of the wrong or the injury: the greater the seriousness, the less the three factors mitigate (p. 39). Kenneth Lay and Jeffrey Skilling quite expectedly tried to downplay their responsibility for the eventual downfall of Enron by appearing to be rather ignorant of what has been transpiring in the company, but the sworn testimonies of various executives who were involved further strengthened the evidence of fraudulent practices attributed to the two top executives of Enron. In other words, Lay and Skilling, among others, could not deny moral responsibility for their actions. The latter proved to be aversive to numerous stakeholders, yet such actions not only were known to the company executives, but perceivably endorsed by them. As mentioned earlier, the fundamental question is, What makes particular practices and/or acts wrong and unethical? The notion of moral responsibility is intricately embedded in the larger area of ethics, and it should be realized that even corporate strategy is within the scope of ethics. This last point is important because what makes the Enron scandal so reprehensible is the moral dimension related to corporate deception and fraud, all stemming from the strategies employed by its executives. In the book, Corporate Strategy and the Search for Ethics (Freeman & Gilbert, 1988), the authors write: We have taken care to show that ethics is no mere adjunct of, and no mere afterthought to, corporate strategy. Strategy, as purpose, relies as precedent of ethical reasoning. By converging on the matter of meaning of purpose, we have given the first glimpses of how ethics provides a meaningful framework for corporate strategy… Ethics is neither merely having good intentions nor feeling sensitive… ethics is about action in association with others (p. 60). Ethics, then, involves moral reasoning about human actions as it pertains to actions that involve values and principles that ultimately affect other volitional beings. In the case of Enron, it is undeniable that the actions of its top executives are moral acts in the sense that they tend to involve moral decisions that affect a multitude of people. However, an important question needs to be raised. What is the basis for moral justification, and consequently, of moral evaluation? Where do values derive their worth? Two theories are pertinent to this discussion. One framework emphasizes duties, and the other examines consequences. Duty Ethics and the Utilitarian Principle Duty ethics attempts to provide moral justification by looking at the intrinsic value of particular acts. In a sense, acts have inherent value and ought to be examined in those terms. Velasquez writes: A more satisfactory foundation for moral rights is provided by the ethical theory developed by Immanuel Kant (1724-1804). Kant in fact attempts to show that there are certain moral rights and duties that all human beings possess, regardless of any utilitarian benefits that the exercise of those rights and duties may provide for others. Kant’s theory is based on a moral principle that he calls the ‘categorical imperative’ and that requires that everyone should be treated as a free person equal to everyone else. That is, everyone has a moral right to such treatment, and everyone has the correlative duty to treat others in this way (1988: p. 90). In the sense of duty or Kantian ethics, the acts of deception perpetrated by Enron executives regarding the corporation’s actual health and use of funds should be understood as inherently wrong. The fact of the matter was that the Enron stocks were rising but the businesses themselves were in fact losing money. What aggravated the situation was that the executives began selling their stocks, while creating the illusion that everything was going excellently. This implied that the executives themselves were well aware of the critical condition that the corporation faced, yet were intentionally leading the public, particularly the stakeholders, to believe that the corporation was healthy. What made this act wrong is the fact that deception was involved, and that deception is inherently wrong. What would make deception intrinsically wrong? For Kant, an act is wrong if it cannot be universalized. An act is not universalizable if by doing so, it would result in a logical contradiction. Deception cannot be universalized because, as Kant pointed out in the concept of “promise keeping”, the concept itself would collapse if everyone were to subscribe to not telling the truth. In other words, the fact that Enron manipulated the profit reports was in and of itself, wrong. As far as truth telling is concerned, what makes the deception and fraud morally reprehensible is the fact that Enron executives had a moral obligation to truthfully inform their stakeholders of the actual profits and the actual health of the organization. By misinforming the former of the actual state of affairs, Enron is actually turning away from its inherent duty. In doing so, its corporate acts lost moral worth. The blatant conspiracy between Enron traders and energy suppliers in California likewise point to the unethical strategy of raising energy prices. The rolling blackouts in California apparently were the result of traders conniving with the energy suppliers in order to generate more revenue. In Kantian terms, this is unethical because the manipulation of a monopolized market is inherently wrong, since it implies abuse and the subsequent treatment of actual human beings as means to an end. Again, regardless of the negative consequences, the act is itself wrong. Utilitarianism, on the other hand, examines the consequences of actions in order to determine the rightness or wrongness of actions. The right course of action from an ethical point of view would be to choose the policy that would produce the greatest amount of utility… When the utilitarian principle says that the right action for a particular occasion is the one that produces more utility than any other possible action, it does not mean that the right action is the one that produces the most utility for the person performing the action. Rather, an action is right if it produces the most utility for all persons affected by the action (Velasquez, 1988: p. 70). It can be seen that from a utilitarian perspective, the actions that were undertaken and the corporate strategies that were employed by Enron during its run have undeniable moral problems. The consequences of employing mark to market accounting treatment ultimately paved the way for hidden and manipulated financial figures. Acts of conspiracy are unethical precisely because they tend to undermine the integrity of an institution. Upon discovering the anomalies in Enron’s corporate activities, it was inevitable for the public to not only express disgust but distrust as well, especially since even stock market analysts were taken in by the façade that was put up by Enron executives such as Andrew Fastow. What made matters worse was that various accounting firms and investors were essentially bribed with business ties to Enron. As a result, the integrity of the investment banks and accounting firms were effectively undermined. The accountancy firm Arthur Andersen closed down as a result of its involvement with the Enron scandal. It becomes clear that there are more aversive consequences than beneficial ones resulting from the various corporate actions of Enron. The rolling blackouts in California are a good example of explicitly negative consequences stemming from Enron’s corporate decisions. Not only is the integrity of energy suppliers put into a doubtful light, but the citizens of California are made to suffer unnecessarily and unjustly, all for the benefit of a select few. Thus, if the utilitarian principle of the “greatest good for the greatest number” is applied, it can be seen that the California blackouts is ethically unjustifiable. The utilitarian principle states: An action is right from an ethical point of view if and only if the sum total of utilities produced by that act is greater than the sum total of utilities produced by any other act the agent could have performed in its place (p. 69). Of course there are objections to this formulation, considering that the principle seems to imply that utilities can be measured accurately. Notwithstanding such a criticism, it can still be argued that given the consequences that came about as a result of the rolling blackouts, the actions cannot be justified from a utilitarian point of view. Conclusion The events that transpired in the life span of the Enron Corporation illustrate the necessity for a clear understanding of ethical principles. There is a need to outline the concept of moral responsibility, in order to better frame corporate actions. In the case Enron Corporation, it appears that the downfall of the organization cannot be explained away simply as a case of greed, but rather as a consequence of unethical decisions and strategies. By looking at both Kantian or duty-based ethics and utilitarian ethics, it can be seen that the actions undertaken by Enron’s top executives cannot be morally justified. While it cannot be denied that the nature of business itself involves the primary concern for profit, it is likewise important to note that there is also a balance that needs to be struck in the conduct of business. Therein lies the importance of an ethical framework to ensure that though business is primarily profit-oriented, it still inevitably involves human relations. As such, it is important to bear in mind the role of virtues in human affairs. There is a need to recognize the intrinsic value of human beings as volitional beings, as well as moral beings. Though necessitating an entirely separate argument, it can be argued that it is man’s nature as moral beings that highlight his humanity. In the end, the point is that Enron Corporation collapsed as a result a failure to keep in mind the value of ethical relations. What eventually brought about its downfall is the neglect for basic rights and duties, as well as sensitivity to what may comprise the common good. References Freeman, E. & Gilbert, D. (1988). Corporate strategy and the search for ethics. New Jersey: Prentice-Hall. Thomas, C. B. (2002, June 18). Called to account. TIME, Retrieved May 15, 2012, from http://www.time.com/time/business/article/0,8599,263006,00.html Velasquez, M.(1988). Business ethics: concepts and cases. New Jersey: Prentice- Hall. Read More