Business Ethics Analysis: Enron - Case Study Example

Business Ethics Case Study: Enron Name Institution Date Business ethics case study: Enron Introduction Business ethics refers to the critical examination of how business organizations should behave. It is an analysis of whether certain business practices should be accepted (Ferrel et al, 2011). High ethical standards demand the conformance of businesses and people to sound moral principles. The application of ethics to businesses requires consideration of some special aspects. To begin with, every business requires profits to survive. However, realization of these profits through misconduct shortens the life of the organization. In the present business world, shareholders and governments have demonstrated more interest in both environmental and ethical issues. This has called for the need by business organizations to comply with acceptable standards and practices. The case of Enron is a great example of what happens to a business with no true culture of complying with business ethics. This paper shall present the case of Enron as a case study of business ethics; investigating how the various payers in the company demonstrated ethical misconduct. Business Ethics According to Wenzhong and Limin (2012), business ethics refers to professional ethics that are used to examine ethical problems that may arise within a business environment. This implies that it is the application of standard moral behaviours in business situations. An increasing number of businessmen have realized that businesses cannot be purely profit oriented and succeed in the present global market since customers are becoming more and more aware of ethics. On the other hand, many companies find themselves stuck in ethical dilemmas. Such situations include bribery as one of the most notorious ethical problems in the business world. Other problems that have been reported to exist in the business behaviours include harassment, abusive behaviour, conflicts of interest, accounting fraud, employee theft, and sell of defective products. Ethical concerns raised by stakeholders determine whether certain business decisions and actions are considered ethical or unethical. In cases where the government is involved with the community and society, a case that is just an ethical issue could turn out to be a legal case and eventually the law. In most cases, ethical conflicts with perceived dangers turn out to be litigation. In addition, stakeholders will often bring up ethical issues by exerting pressure on the businesses to make decisions that will serve their specific agendas. For instance, corporate shareholders frequently demand that decisions are made by managers to bolster short term earnings and thus maintain or increase the value of stock shares that they own in the firm (Ferrel et al, 2011). Ethical decisions are made by people after the realization that a certain issue had an ethical component. Therefore, ethical awareness is an important step in understanding business ethics. The emergence of ethical issues comes from conflicts among the personal moral values and philosophies of individuals, the culture and value of their working environment as well as the culture and value of the society where they live. Various potential ethical conflicts arise from the business environment. For instance, the efforts by the company to attain its objectives may conflict with the desires of individuals to achieve their personal goals. Similarly, the desire by consumers to get safe high quality products may conflict with the need by the manufacturer to earn sufficient profits. Top executives may have the ambition to have high increases in compensation and this may conflict with shareholders’ desires to increase the value of the corporation and control costs. To settle the ethical issues in the organization, business decisions have to be taken. Ferrel et al (2012) argued that when an issue is considered to be unethical, it does not necessarily mean that the problem is unethical. By this, an ethical issue is a situation or problem that requires thought and discussion before a decision is made. In fact, the changing and dynamic business world presents new ethical issues time and again. The case of Enron Enron had been considered by both investors and the media as the company for the future. However, its fall clearly indicated that it was not a modern business organization, especially not in its ethics approach. Berenbeim (2002) reported that on the surface of it, the company appeared to have rejected progressive innovation in ethics and governance programs and instead, it circumvented systems that had been designed to protect the company and shareholders. Enron had a detailed code of ethics in its books. For instance, the ethics codes were based on respect, communication, integrity and excellence. In addition, the company was ethically literate since it gave out huge amounts of money to charity. The question that is asked is how such a company go down when it had all the laid down codes and ethical awareness. The answer to the question is found in a combination of various factors. To begin with, it is the failure of Enron’s top leadership to fulfill their fiduciary duties. The board of directors waived the ethics code of the company by allowing the CFO of the company to be general partner for partnerships that the company used in conducting much of its business. The company’s management owes the duty of full disclosure and good faith to the company’s shareholders. The CEO of the company, Mr. Jeff Skilling, announced that the stock of the company would rise and did not disclose that he was selling stock. The CEO had a revolving credit of about $7.5 million. Investigations revealed that the sale off of the stock was done so as to repay the money that was owed to the company by the CEO. He was also indicted on 35 counts of conspiracy, securities fraud, wire fraud and for making false financial statements as well as insider trading. Various other company top leaders faced criminal acts that showed the nature of their unethical behaviour. For instance, the former Treasurer of the company, Mr. Ben Glisan, faced two dozen counts of fraud, conspiracy and money laundering. I fact, during one of the charges, Glisan described Enron as being a “house of cards.” The former CFO, Andrew Fastow, had 98 counts of fraud, money laundering and conspiracy connecting the improper partnerships that he ran. All these activities raised questions on how closely the top executives adhered to the company’s values of integrity, respect, excellence and communication. Their behaviours did not match the vision and values that were expressed by the company. Enron’s corporate culture also demonstrated ethical issues. The company was described to have had a culture arrogance which made people believe that it could handle greater risk and not encounter any danger. The unspoken message in the company was that they should make the numbers always and if they stole or cheated, they should not get caught. The corporate culture of Enron did not do enough to promote the values of integrity and respect. These company laid emphasis on decentralization, its compensation program and on employee performance; thus undermining the values. Each business unit and division within the organization was separated from others and this led to very few people having a perspective of the operations of the company. A rigorous and threatening process of performance evaluation, called the “rank and yank” was implemented by Jeff Skilling. This led to employees ranking their peers lower so that they enhance their positions within the company. In addition, the compensation plan seemed to enrich the executives rather than create profits for shareholders. The investment banking community also colluded in ensuring that the scandals at Enron. Many Wall Street firms like Citigroup, J.P. Morgan and Merrill Lynch were part of the scandals. The complicity involved use of prepays as loans that the company would use as the operating cash flow. New prepays were secured by Enron so as to pay off the existing ones as well as support expanding investments by the company into new businesses. Enron did not support the culture of whistle blowing. A strong ethical compliance culture favors whistle blowing. At least one of the whistle blowers at Enron was fired by the company. While whistle blowing is a controversial issue, Pierson et al (2007) argued that the practice helps organizations in correcting unsafe practices or working conditions within the organization and curbs wasteful and fraudulent practices. Why Enron is considered to have had ethical issues The case of Enron is considered to be a case of ethical issues for several reasons. To begin with, the company had a set code of ethics that were supposed to guide the operations of individuals in the company. Even so, the structure of the company did not favor full exercise of the values. Top executives were the main culprits in the case for the collapse of the company. This demonstrates that the top executives did not follow the values that were laid down by the company. The culture that had been created within the company favoured a lack of respect for shareholders and employees within the company. Standard business practices require that a business stays faithful to its set values. It also advocates for respect to all employees and shareholders. Demps and Baker (2009) stated that business integrity has to be observed when dealing with employees, clients and shareholders. In addition, communication is seen by many organizations as a way to set everything clear before all concerned (Borgerson et al, 2009). In fact, good communication is advocated for organizations’ best practices. Shortage in communication between the top executives and other employees was a clear demonstration of certain bad practices existing within the system of the company. The complicity of Enron with other Wall Street companies to broker deals that were beneficial to the “clique” of companies does not represent value of stakeholder interests by Enron and the other Wall Street firms. The right practice for business partnerships requires that the partnership favours the stakeholders of the involved companies. Corporate performance in environmental and social areas is as important to the public as is the financial performance of the company (Hurst, 2004). Conclusion The code of ethics at Enron and its foundational values of integrity, respect, communication and excellence did not create a culture of ethics at the company. While the full cause of collapse for the company has yet to be explained, various acts by top level management revealed a loop hole in ethics within the company. This is a demonstration of how ethical practices can help sustain a company. A company that makes doing the right thing its priority demonstrates strength in its ethical culture. ERC (2009) stated that when a company has a strong ethics culture, the employees will not have any pressure to compromise the standards set by the company, as was seen in the case of Enron. References Berenbeim, R. (2002). “The Enron Ethics Breakdown.” Executive Action. No. 15. Borgerson et al, (2009). “Corporate Communication, Ethics, and Operational Identity: A Case Study of Benetton.” Business Ethics: A European Review, 18(3), 209-223. Demps, J. and Baker, E. (2009). “Evaluating Ethical Integrity: Organizational Downsizing in Northeast Florida during an Economic Recession.” Journal of Academic and Business Ethics. Pp. 1-7. Ethics Resource Center (2009). The Importance of Ethical Culture: Increasing Trust and Driving Down Risks. USA: National Business Ethics Survey. Ferrell et al, (2011). Ethical Decision Making and Cases. 8th Ed. USA: South-Western Cengage Learning. Hurst, N. (2004). Corporate Ethics, Governance and Social Responsibility: Comparing European Business Practices to those in the United States. USA: Santa Clara University. Pierson et al, (2007). “Whistle Blowing: An Ethical Dilemma.” American Journal of Information Systems. Pp. 58-62. Wenzhong, Z. and Limin, F. (2012). “A Case Study of Siemens’ Violation of Business Ethics in Argentine Based on Stakeholder Theory.” Global Journal of Management and Business Research. Volume 12 Issue 13. Pp. 75-82. Read More