Problems that Led to the Downfall of Enron - Case Study Example

Enron Case Study Name: Institutional affiliation: Executive Summary The main purpose of this case study is to find out the problems that led to the downfall of Enron. It also aims at finding the alternative solutions and offer appropriate recommendations. Enron was founded in 1986 and became one of the leading companies in energy sector. However, in 2001, the company went bankrupt when the market lost confidence in it after major profits and some of its resources were written off. There a number of factors that led to the collapse of Enron, including unfavorable corporate culture, poor leadership, and conflict of interests, especially when it come to auditing and consultancy services that was offered by one company, Arthur Andensen. Some of the individuals that are blamed for the downfall of Enron include its former CEOs Jeff Skilling and Ken Lay due to their self-enriching behavior. The board was also blamed for not for not adequately playing their oversight role on the management. The company had a deceitful culture where both employees and the management cheated their way through in order to get financial benefits. Any employee who opposed the immoral and unethical behaviors that was taking place in the company was either dismissed or silenced. The unethical behaviors in the company were unsustainable, which led to the collapse of Enron. Findings Unfavorable Organizational Culture Enron culture was the main factors that led o the many problems that the company faced that led to its collapse. The company laid a lot of emphasis on competition and financial goals that led to the unethical behaviors among senior and junior employees (Johnson, 2003). Consequently, the unethical practices and behaviors in the company were also associated with the deceptive culture that also affected the genuine performance of junior employees. Therefore, poor organizational culture was the main problem that made Enron to file for bankruptcy. Enron internal stiff competition environment that was accompanied by intense employee performance evaluation led to the culture of deception in the company (Li, 2010). Due to stiff evaluation of the performance of employees, they feared losing their jobs and they only concentrated on ways of making their performance look good. Since Enron majorly focused on financial goals, employees were forced to shun the ethical standards that were put in place and only focused on financial achievements (Currall & Epstein, 2003). Consequently, employees started cheating on their works, as this was the only way they could secure their jobs and look good in the eyes of senior management that was obsessed with financial performance of the company. Workers were evaluated based on their ability to cheat. Unfortunately, people who were not able to cheat did not find a place in the company and they were fired or regarded as odd employees who did not deserved to work at Enron. As a result, the culture of deception that was in the company accelerated its collapsed, as it was not sustainable in the long run. The culture of deception led to the covering of errors, which later led to the collapse of the company. Senior management discouraged junior employees from airing their views and thoughts the condition of the company, especially financial performance. At the same time, workers could not question the decisions made by the senior management even when they knew they were not good for the company (Pavel, Encontro & Mve, 2013). Besides, because of internal competition among employees, they found it hard to share ideas and resources as they competed with one another. The poor working environment significantly reduced the employee performance because only a few of them fully understood their work. Consequently, they ended up hiding their errors and they workers were not ready to learn from one another. The nature of working environment led to more errors and cheating in the company. Therefore, employees were left to alone to carry out their roles so long as they meet the financial targets set by the top management. Even though employees are able to define their roles and needs, they need a leader to give them direction on what should be done. However, in the case of Enron, employees were left to prescribe their own moral and ethical behaviors. Therefore, according to Freudian theory of conflict resolution, top management at Enron lacked conscious moral leadership that was required shape the actions and behaviors of employees. The culture of the company also majorly focused on the financial goals (Moncarz et al., 2006). Only employees that could attain the budget numbers were regarded as heroes of the company. As a result, both the management and the staff concentrated on maximizing the profits for their own interests by making good financial numbers rather than improving the productivity of all sectors of the company, which would lead to general good performance of Enron. The management paid little attention to the social, economic, and psychological needs of employees. The primary focus was financial goal, which was only meant to benefit the senior managers like Jeffrey Skilling. In addition, the company also had the culture of arrogance that made employees and the management to believe that they could handle any kind of risk without facing any major danger (Dembinski et al., 2005). As a result, employees were made to believe that they could easily make numbers to boost the performance of the company. Enron corporate culture did not encourage values of respect and integrity that are necessary to enhance the success of any organization. Integrity and respect were significantly eroded because the decentralization, strict employees performance evaluation, and the uncontrolled desires to meet the financial objectives. Therefore, lack of truthfulness by both the management and employees led to the downfall of Enron. The top management deceived both the public and employees that the company was on the side of the angel yet Enron was heading in the wrong direction. At the same time, employees were only concerned about protecting their jobs, which made then to deviate from telling the truth. Consequently, there was lack of transparency and accountability at Enron, which accelerated its collapse. Conflict of Interest The major conflict of interest was the one that was involving Arthur Andensen who played a conflicting role of auditor and consultancy services to Enron Company, which led to accounting irregularities that enhanced the collapse of the firm. Interestingly, Arthur Andensen also played the role of internal and external auditor to Enron. It was Arthur Andensen that helped the top management of Enron to cheat on the financial statements. A firm offering internal audit services cannot offer external auditing services because of conflict of interest that is likely to emerge between the two services (Dharan & Bufkins, 2008). As a result, he violated the accounting and auditing standards that led to false financial statements that did not reflect the true position of Enron. Hiring of external auditor to carry out internal auditing led to fraudulent financial reporting. Apart from the conflict of interest that emanates from Arthur Andensen, the top managers were also divided on whether to serve the company or the interests. They seemed to serve two masters at the same time. Both Skilling and Lay wanted to ensure that their maximize profits for their shares while at the same time they wanted to improve the general financial performance of Enron. At the end, they gave more weight to their personal interests than the interest of the firm, which led to the collapse of Enron. Lay was trying to encourage investors to invest in the company while the same time he was selling his shares so that he could earn high profits. Poor Leadership Even though many scholars and analysts argue that dubious accounting practices led to the collapse of Enron, the bad practices were steered by top leaders, especially Jeffrey Skilling and Kenneth Lay who served as CEOs of the company. Many investigations concluded that the two leaders contributed a lot to the downfall of Enron (Monahan, 2012). Their actions made stakeholders to lose confidence in the company. Therefore, poor leadership at Enron led to its collapse because its leaders were not morally and ethically responsible. Skilling and Lay lacked honesty and integrity as they engaged in worst form of self-promotion that led to the downfall of the company. The unethical top management led to the unfavorable culture that destroyed the company as it encouraged employees not to still to the rules so long as they meet the set financial target that was set by the executive (Kennedy, 2012). This encouraged employees to adopt the unethical behaviors to meet the target. Leaders only focused on short term financial target and encouraged employees to engage in malicious practices to attain the set objectives. Therefore, it was the top leaders who were responsible for the development of deceptive cultures and internal competition among employees that led to the downfall of the company. The top leaders such as Skilling and Lay were also serving their own interest instead of concentrating the interests of the company, which portrays them as selfish leaders. This was evident when both Skilling and Lay started selling their shares of stock after realizing that Enron was bound to fall. Interestingly, they were encouraging investors to continue investing in the company when knew that the company was heading in the wrong direction. Initially, Lay portrayed himself as a transformational leader and both employees and investors developed faith in him and continued to be dedicated to the company. However, he later became a bureaucratic and authoritative leader who totally disregards the interests of other stakeholders to serve his interests. This was seen when he sold a significant amount of his shares that enhanced the collapsed of Enron. At the same time, Skilling was the leader who was responsible for the overestimation and inflation of financial statements. The unethical behaviors of Skilling and Lay, therefore, led to the culture of fraud and cheating at the company that ended up affecting the moral and ethical behaviors of the entire organization, including junior employees (Tourish & Vatcha, 2005). Therefore, both Skilling and Lay portrayed transactional type of leadership because they were motivated by extrinsic motivators like financial benefits. The two leaders decided to shortchange profits for values, which made them to turn blind eyes to the problems that were facing the company. The top management of Enron paid little attention to intrinsic motivations that play important role in motivating employees and enhancing the general performance of any organization. Therefore, there was miscommunication of values by leaders. The top management led by Skilling and Lay was also deceitful as they manipulated information to serve their own interests. Greed was the primary factor that motivated top management, which led to irresponsible behaviors. Consequently, both Skilling and Lay failed to take the necessary actions to the problems that were facing Enron. The leaders also commanded misplaced and broken loyalties from employees and other stakeholders. As a result, the relationship between top management and other stakeholder like employees and shareholders were marked by inconsistencies. The leaders did not offer any clear direction that was to be followed by stakeholders to minimize the collapse of Enron (Dudzinski, 2002). Instead, they created extreme performance-oriented culture that encouraged unethical behaviors. Therefore, it can be concluded that Enron collapsed due to bad leadership that was shown by its key leaders. Skilling and Lay can be described as incompetent, toxic and intemperate leaders. They are toxic leaders in the sense that they created a culture in the organization benign followers who did no question their actions, behaviors and leadership styles. They are incompetent due to the mass failure that was witnesses in the company that was once dominating the market. In addition, the leaders were also intemperate because they could not control their interests and desires that led to the downfall of Enron. Discussion Summary of Major Problems Unfavorable culture was the main problem that led to the collapse of Enron. Both the top management and junior employees engaged in the deceitful practices and behaviors that eroded their ethical and moral responsibilities. The deceitful culture was major caused by the nature of employee evaluation system that was put in place by the top management. The uncontrolled desires to attain financial goal forced employs to engage in cheating to prove to the management that they can achieve the set financial goals. The management was also coercive and intimidating, as it only rewarded workers who managed to achieve goals and fired those who could not meet set objectives. As a result, employees were involved in cheating and other unethical behaviors to please their bosses. Unfortunately, the culture was initiated by leaders who only relied on extrinsic motivations, as they only focused on the financial goals. In addition, Enron was dominated by unethical and immoral leaders who paid little attention to honesty and integrity. The leaders were only interested in meeting their own interests instead of serving the interest of shareholders and investors who pumped their money into the company. Therefore, poor leadership was the second major problem that led to the collapse of Enron. The third major problem was the conflict of interest, especially in the auditing of the financial performance of Enron. The top management hired one firm, Arthur Andensen, to offer both internal and external auditing, which is against the accountancy and auditing standards. The same firm was tasked with the responsibility of offering consultancy services (Dudzinski, 2002). As a result, the company helped in misrepresenting the financial statements of the company. As a result, stakeholders did not know the true condition of the company. Conflict of interest was also seen among managers and employees who were keen to satisfy their interest and the interest of the company, which negatively affected the performance and productivity of Enron. Therefore, poor corporate culture, poor leadership, and conflict of interests are the major problems that led to the collapse of Enron. Alternative Solutions Solutions to Unfavorable Corporate Culture The first solution to unfavorable corporate culture is to have visionary leaders because it is them who have a major role to play in setting the vision. The leaders must have a dream and the capability to influence their followers to support the dream. However, leaders should not only have a dream, but also put in place a clear framework that helps in executing the dream. Therefore, in order to cultivate a favorable culture at Enron, its leaders must come up with appropriate values, attitude, and new ways of doing things. One of the advantages of having visionary leaders at Enron is that they will engage employees and other key stakeholders by sharing their ideas, thoughts, and ideas on where the company is headed. The second advantage is that such leaders are able to promote creativity, innovation, and a beneficial relationship between employees and the management with the aim of achieving the set goals and objectives. However, having a visionary leader may also be disadvantageous because they focus a lot on the future, which may hinder the implementation of the present plans. Visionary leaders may also not focus a lot on the present problems facing the company. Secondly, the company must eradicate authoritarian-hierarchical culture, deceptive, arrogance culture, and dishonesty-corruptive culture that brought Enron to its knees. Instead, it should adopt healthy corporate cultures like progressive-adaptive culture, purpose-driven culture, and people-centered culture. Therefore, Enron require cultural transformation. The company should work hire experienced consultants to come up with the favorable predominant culture after conducting inclusive and comprehensive research involving all stakeholders. One of the advantages of cultivating healthy corporate culture in the company is that it enables leaders to articulate the purpose of the company effectively to enable all stakeholders to have a common purpose and a shared vision. Secondly, it assists all stakeholders to know and internalize the core values and priorities of the company. Thirdly, healthy corporate culture leads to high motivation of workers, which helps in enhancing their performance. However, developing healthy culture in a company requires a lot of sacrifice and it is time consuming because it takes relatively longer time to be fully implemented and become operational. At the same time, employees are more likely to resist new culture. Cultural transformation, therefore, need to be embraced by both the management and staff to ensure successful implementation. Thirdly, the favorable and effective culture can be cultivated in the company by not only focusing on the financial goal, but also other goals like technological development, human capital, and social-spiritual capital. The deceptive culture can be reduced by developing human capital by enhancing the knowledge, skills, and expertise of employees. This will ensure that employees are able to achieve the set target without deception. The unfavorable culture can also be solved through social-spiritual development of all employees that will help in enhancing the moral and ethical behaviors in the entire organization. Solutions to Poor Leadership Transformational leadership is the main solution to poor leadership styles that led to the collapse of Enron. This leadership style is important because it enable leaders to inspire followers to achieve more by concentrating on the values, desires, and needs of followers. A transformational leader is able to improve the productivity of an organization by inspiring employees to effectively and efficiently achieve the targets that are set by the top management. Therefore, developing transformational leadership style at Enron will ensure that leaders motivate employees to meet the set objectives without violating the ethical and moral standards that are in place. Transformational leadership style also enhances job satisfaction and organizational commitment that was lacking in the top management of Enron. A transformational leader dedicates most of his time and resources to an organization. Therefore, one of the advantages of developing a transformational leadership style is that leaders will be able to use their beliefs to motivate and inspire employees to be more productive without coercing them. Secondly, a transformational leader is able to bring all stakeholders on board in order to implement corporate strategy and planning. Transformational leader is able to develop employees because they are closely in touch with them. In addition, transformational leaders are able to retain employees and get the best out of them, which helps in improving the performance of a company. However, transformational leadership is also disadvantageous because leaders may misuse their influence, which may negatively affect an organization. For instance, transformational leaders take a lot of risks that can be destructive and detrimental. The second solution to poor leadership is to overhaul the top leaders to come up with leaders who are committed to the company and stakeholders. The company should get rid of senior managers who have been in the company for a long period of time but do not add significant value to the firm (Abbas & Asghar, 2010). Overhauling the top leadership is advantageous because Enron will bring new breeds of leaders who can transform its fate. However, this may be disadvantageous it may take new comer a long time to understand the business environment. Solutions to Conflict of Interest In order to reduce the conflict of interest, Enron should hire different firms to conduct internal and external auditing. Hiring different firms will enhance accountability and transparency in the financial statements that will help in showing the true status of the company (Kendall, 2003). At the same time, it will reduce the chances of rogue managers to use auditors to manipulate the financial statements (Dembinski et al., 2005). However, hiring different auditing firms may be more expensive compared to one firm offering all the services. Secondly, the conflict of interest can be reduced by preventing top managers from owning large amount of shares. Shares owned by top managers should be limited to enable them to concentrate on the management of the firm. This will ensure that managers serve the interest of investors and owners of the company. However, the move may not motivate managers to put more efforts towards maximizing the profitability of the firm. Conclusion The collapse of Enron was mainly due to poor leadership and unfavorable corporate culture. The leaders, especially Skilling and Lay indulged in immoral and unethical behaviors that led to the downfall of Enron. They were mainly motivated by extrinsic factors, especially the desire to accumulate more wealth at the expense of the company. Poor leadership also led to unfavorable corporate cultures, especially deceptive culture that affected the whole organization, including the management and staff. Conflict of interest was another major problem that led to the collapse of Enron. The company relied only on Arthur Andensen to offer both auditing and consultancy services. The problems at Enron can be solved by employing visionary leaders, cultivating healthy corporate culture, and encouraging transformational leadership style. The problems can further be solved by hiring different firms offering auditing and consultancy services. Therefore, the problems at Enron can be solved by enforcing appropriate strategies. Recommendations The first recommendation is to hire different companies to offer internal and external auditing services to ensure that the company adheres to the accountancy and auditing rules and regulations. A company is only able to improve its performance it understands its weakness, especially when it comes to financial performance. Investors are only interested in the financial status of the company and they can completely shun companies that give false financial statements. Enron, therefore, can only win the trust of investors through accurate financial reporting. Secondly, I recommend that the company should undertake a robust corporate cultural transformation. Corporate culture plays an important role in defining the success of any company. It should engage consultants to carry out research in the best corporate culture it can adopt to enhance its performance. The management should be committed to the cultural transformation and it should involve all stakeholders in defining new cultures. Adopting healthy culture is the best way of changing the deceptive culture that is already rooted in company. Implementation To improve the financial reporting and to reduce conflict of interest, Enron must terminate its contract with Arthur Andensen. Thereafter, it should look for reputable auditing firms that can offer internal and external auditing. Secondly, the board should offer adequate oversight to ensure accurate financial reporting. Internal auditing should be carried out before external auditing to compare the results and to determine the discrepancy that may occur during auditing. Any inconsistency will be investigated and reported before releasing the financial report shareholders. Cultural transformations should be carried out after a thorough research has been conducted that to determine the most suitable culture. The research will be done by external consultants in cooperation with management. The research to determine the best culture should be completed within a year. The implementation of the new culture will be spearheaded by the top managers who must be committed to the new culture. The new corporate culture should be fully enforced within three years after it has been identified. Both the management and staff will be required to be gradually but consistently subscribe to the new corporate culture. References Abbas, W., & Asghar, I. (2010). The Role of Leadership In Organizatinal Change: Relating the successful Organizational Change with Visionary and Innovative Leadership. Currall, S. C., & Epstein, M. J. (2003). The Fragility of Organizational Trust:: Lessons From the Rise and Fall of Enron. Organizational Dynamics, 32(2), 193-206. Dembinski, P. H., Lager, C., Cornford, A., & Bonvin, J. M. (Eds.). (2005). Enron and World Finance. Palgrave Macmillan. Dharan, B. G., & Bufkins, W. R. 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