Enron and Pitfalls in Organisational Culture - Essay Example

?Enron and Pitfalls in Organisational Culture [ID Index Introduction . . . 2 Definition of Culture . . . 2 Application to Enron . . . 2-6Cultic Analysis . . . 6-9 Introduction The Enron debacle has captured the public imagination and has proven to be a fertile ground of analysis for scholars, economists and politicians alike. We hear about corporate greed, bad accounting practices, malfeasance at Arthur Andersen, but what we don't often hear is an analysis of the ways that the Enron organisational structure and culture was destined to lead to collapse. The salient features of organisational structure and culture that led to Enron's malfeasance and collapse included cultish elements of the organisation, deregulation and its toxic effects on the behaviors and impressions of Enron executives, a feeling of unlimited success, close ties with enabling political organisations and regulatory agencies, the morality-averse nature of the decentralized power market in general, using company stock in 401(k) portfolios to effectively silence criticism and concerns by the rank and file, a culture that mocked and ignored ethical compliance issues, and numerous other elements that reduced their effective impulse control, morality, concern over their actions and ability to perceive the inevitable consequences of their actions. Definition of Culture Schein defines culture thusly: “a pattern of basic assumptions...developed by a given group as it learns to cope with its problems of external adaptation and internal integration...considered valid and, therefore, to be taught to new members as the correct way to...think” (1985, p. 9). Culture can be considered to be separate from but clearly intertwined with institutional characteristics. Institutional decisions to scuttle external auditing and accounts is an institutional decision. The sentiments behind that decision that laugh at external controls and view them as unnecessary is a cultural trait of the organisation. Application to Enron The thing most interesting about Enron from the perspective of ethics and organisational culture analysts is that its malfeasance was not transparent. It seemed on its face to actually be a leader in terms of ethical behavior. “Not long ago, the same company had been heralded as a paragon of corporate... ethics – successful, driven, focused, philanthropic and responsible” (Sims and Brinkmann, 2003). Just as the company had seemed to be the darling of Wall Street and invulnerable to failure, it also seemed to be a truly responsible company. Of course, it is important to note that not everyone bought into Enron's golden story. Greg Palast, an investigative journalist for The Guardian, had been writing exposes on Enron for years (2004). Palast in a retrospective on Enron in 2002 argued that Enron's collapse was predictable due to a combination of lackluster media criticism that continued after the crisis, a culture of political irresponsibility and a sense of political entitlement, arrogance, and other factors: One tabloid...called Baxter a "hero"...[T]his is the Baxter who last year quietly crawled out of Enron...then dumped his stock on unsuspecting buyers... There have been a lot of misplaced tears in the Affair Enron. The employees were shafted, no doubt about it. But the shareholders? I didn't hear any of them moan when Enron stock shot up through the roof when the company, joined by a half dozen other power pirates, manipulated, monopolised and muscled the California electricity market a year ago...Enron and half a dozen others skinned purchasers for more than $12bn in excess charges....Enron sold 500 megawatts of power to the state for delivery over a 15-megawatt line...[T]he company knew darn well the juice couldn't make it over the line, causing panic in the state - customers would then pay 10 times the normal cost... The federal regulator caught that one. Within weeks of taking office, George Bush demoted the troublesome official. Lay boasted to one candidate expected to replace the sacked regulator that President Bush had given Enron veto over the government appointment... Enron used legal but sick-making use of political donations, consultancies and lobbying to twist contracts, rules and regulations to their liking. Many factors are identified by Palast as causes for the collapse. First: The failure of shareholders. While many shareholders may not have paid much attention to Enron's behavior or briefly glimpsed over trade journals or the Wall Street Journal and used that to stay invested, not all did. Further, isn't part of the problem when a powerful company has shareholders that don't reign in its excesses? The media focus on the way shareholders were lied to in the auditing scandal ignores, then, that shareholders contributed to the demise of the company by allowing it to run roughshod for so many years over the law and deregulation. Second: Deregulation. It is not just the deregulated market that is the problem, however, but corporate cultures that thereby encourage exploiting that market and lead to a culture of orgiastic excess. Third: Media inaccuracy and bad loyalties. When media trumpet companies for doing things that are morally reprehensible or fail to investigate when they lavish praise onto companies, they encourage malfeasance. Fourth: The failure of regulators and enabling by government. The sheer arrogance expressed by the idea that Enron had bought veto power in government is a sign of the institutional culture that reigned at the time. Enron is not the only company that has that mix. Other companies who act as energy brokers in a deregulated market are likely to behave that way. Both Palast and others identify the failure of Arthur Andersen to remain independent (Sims and Brinkmann, 2003). But it wasn't just Arthur Andersen, as we've seen, but also government regulators, their political bosses, the failure of the SEC to perceive Enron's shell game with its subsidiaries and to perceive obvious conflicts of interest, etc. (2003). Enron had created an internal culture where any kind of “innovation” in accounting and gaming the market, no matter how dubious, was heralded as progressive and forward-thinking. The same values that made the company so beloved were responsible for its downfall. Cultic Analysis But to a great extent, it wasn't Enron's exclusive fault. Like cult leaders who often find that their perhaps-deceitful claims of divinity or infallibility soon eclipse their own reason because of the effect of being in a wind-tunnel of only positive reinforcement, Enron found itself in a situation where numerous watchdog groups such as the media, NGOs, and political and private economic regulators all failed to do their jobs due to conflicts of interest, being bedazzled by the Enron charm, or Enron's direct or indirect controls (Tourish, 2005). Large companies like Enron can be engines of change and innovation, but they have to be checked in against their own profit-seeking impulses that can devolve into pathology by their shareholders, accountants, auditors, regulators, and all of the immune systems that capitalism has evolved to survive (Berenbeim, 2002; Ringmar, 2005). They were not. In fact, there is a body of literature that connects Enron's failure to the consistent failures and missteps of cults and thus ties in the Enron collapse theoretically with cultic studies. “[M]any of the dynamics found within Enron resemble those of organisations generally regarded as cults..the existence and the downsides of charismatic leadership, a compelling and totalistic vision, intellectual stimulation aimed at transforming employees’ goals while subordinating their ethical sense to the needs of the corporation, individual consideration designed to shape behaviour, and the promotion of a common culture which was increasingly maintained by punitive means” (Tourish, 2005). Skilling and others had used their substantial charisma, the aura of being the “smartest guys in the room”, and the way that they were lionized by the press to gain the charismatic leadership of cults. Enron's promises were like “heaven on earth”: Unrestrained wealth and success could be the purview of its employees! Its vision, combined with methods of indoctrination and association of one's success and self-esteem with company success through their 401(k) system and the grueling training system which broke down resistances and made acolytes out of people who needed to retain individual thought, was powerful. And the promotion of an Enron culture and “soft” and hard punishments for deviation of that culture made it so that whistleblowers would be ignored. Schuler concurs, and argues that, “[I]t appears that many people were aware of the company’s questionable financial practices...that Enron’s corporate culture was out of control. Whistle blowers are never very common, but a corporate culture that makes it hard for ethical objections to be heard...is a corporate culture that is already failing...[E]thical people remain silent when they see the most highly rewarded people...are the ones who commit some of the worst violations” (Schuler, 2002). Just as cult leaders, by punishing dissent and rewarding sycophancy, encourage an environment of yes-men who fail to keep the leader in check or hedge against excesses and failed enterprises, Enron had discouraged a concern over ethics, and because leadership no longer could count on people to provide ethical or practical correctives, there was no voice of reason to brake the company's decline. Another predictable way that Enron caused its own collapse was its focus on size as a goal in and of itself. “Enron’s corporate culture also seemed to embrace a value - massive size - that is not so much a value as it is a strategy through which to achieve a larger mission. This dedication to sheer size, left unchecked, made the company prone to use of its size to bully...Enron became arrogant” (Schuler, 2002). The company could have embraced becoming leaner, turning in a poor statement to its shareholders and explaining that not every year can be a year of perpetual growth. But the company had become a victim of its own size and its own overblown image of endless success. It could not imagine shrinking or admitting fault, and so had to do increasingly irrational things to avoid being caught for increasing malfeasance covering up their mistakes. Berenbeim (2002) identifies several primary factors in the Enron collapse. Investors and the media once considered Enron to be the company of the future, but.., it was in reality not a particularly modern business organization, especially in its approach to ethics...[I]t appeared to reject progressive innovation in governance and ethics programs and instead sought to circumvent systems that were designed to protect the company and its shareholders...[S]imply having a detailed code of ethics on the books (as Enron certainly did) is not enough. Organizations need to infuse ethics and integrity throughout their corporate culture as well as into their definition of success. After all, being ethically literate is not just about giving large sums of money to charity—something that Enron did. It is about recognizing and acting on potential ethical issues [preemptively]... This circumvention of systems that are designed to keep companies in check was accomplished not only through the means thus far mentioned but also gifts, side deals, payoffs, firing whistleblowers instead of working with them, ignoring product liability and embracing trading in commodities when it had no experience (a decision made by an increasingly arrogant corporate culture), and numerous other mechanisms (Berenbeim, 2002). Further, even Enron's non-punitive measures were increasingly questionable. “Enron Corporation created a set of retirement plans full of booby traps for unsophisticated workers...Enron insulated itself from any criticism of these arrangements through lobbying, campaign contributions, and political relationship building. Internally, more than one Enron executive had expressed misgivings about the effects of the company’s accounting practices on its stock price—a critical element in valuing its 401(k) retirement plan...But none of these qualms were disclosed to rank-and-file employees. Taking company officials’ relentlessly optimistic assessment of Enron’s future at face value—and having little alternative, since the company contributed to the plan only with stock—Enron employees concluded that their best chance for a secure retirement was to work hard for the company...” (Laursen, 2002). Thus, theoretical models of cultic behavior, “artifacts” of organisational structures and processes that guaranteed failure, espoused values that lead inevitably to ethical breakdown and assumptions about the company like its perpetual success and the need to embrace its size led to its downfall. Unfortunately, if Palast and others are right, Enron is far from the only bad apple in the barrel: Other companies in the deregulated power market are likely to behave as pathologically. Works Cited Berenbeim, R. 2002, “The Enron Ethics Breakdown”, Executive Action, no. 15, February. Maclean, B. 2001, “Is Enron Overpriced?”, Fortune, March. Laursen, E. 2002, “401(k): Too Good A Deal For Employers”, Z Magazine, June. Leopold, J. 2003, “Ripping Off California”, Z Magazine, March. Palast, G. 2002, “Enron: not the only bad apple”, Greg Palast.com, Available at: http://www.gregpalast.com/enron-not-the-only-bad-apple/ Palast, G. 2004. Best Democracy Money Can Buy. Ringmar, Erik. 2005, Surviving capitalism: how we learned to live with the market and remained almost human, Anthem Press. Santa Clara University. 2002, “What Really Went Wrong With Enron? A Culture of Evil?”, March 5. Schein, EH. 1985, Organizational Culture and Leadership, Jossey-Bass, San Francisco, Schuler, A.J. 2002, “Does Corporate Culture Matter?”, Available at: http://www.schulersolutions.com/enron_s_corporate_culture.html Stone, G. (2008). Tourish, D. (2005) “Charismatic leadership and corporate cultism at Enron: The elimination of dissent, the promotion of conformity and organizational collapse”, Available at: http://www.rickross.com/reference/general/general782.html 1.This paper should be judged for its ability to precisely determine which elements of Enron were problematic in terms of corporate culture and critically analyse the degree to which the corporate culture was responsible for its collapse.  2.I will specifically analyze cultic characteristics and charismatic leadership, market structure, the failure of regulators and auditors, the failure of institutional and business controls, and arrogance and commitment to unsustainable size and success.  3.Schein's definition of theory, cultic studies and analysis, and Ringmar's theory of restrained capitalism.  4.The Enron debacle has captured the public imagination and has proven to be a fertile ground of analysis for scholars, economists and politicians alike. We hear about corporate greed, bad accounting practices, malfeasance at Arthur Andersen, but what we don't often hear is an analysis of the ways that the Enron organisational structure and culture was destined to lead to collapse. The salient features of organisational structure and culture that led to Enron's malfeasance and collapse included cultish elements of the organisation, deregulation and its toxic effects on the behaviors and impressions of Enron executives, a feeling of unlimited success, close ties with enabling political organisations and regulatory agencies, the morality-averse nature of the decentralized power market in general, using company stock in 401(k) portfolios to effectively silence criticism and concerns by the rank and file, a culture that mocked and ignored ethical compliance issues, and numerous other elements that reduced their effective impulse control, morality, concern over their actions and ability to perceive the inevitable consequences of their actions.  5.Thus, theoretical models of cultic behavior, “artifacts” of organisational structures and processes that guaranteed failure, espoused values that lead inevitably to ethical breakdown and assumptions about the company like its perpetual success and the need to embrace its size led to its downfall. Unfortunately, if Palast and others are right, Enron is far from the only bad apple in the barrel: Other companies in the deregulated power market are likely to behave as pathologically.   E1. The main issues of the study are: Analysis of the “smoke and mirrors” Cultural history of the company and how that explains its collapse Problematic pseudo-partnerships Conflicts of interest and incestuous interactions with auditors and accountants (the way Andersen was not a “partner at arm's length” but a bona fide collaborator in the schemes) Incremental ethical lapses leading to increasing spiral Leadership mechanisms: Role modeling, rewards, etc. Conclusions from this E2. Theoretical perspectives used in the study are scant: It focuses mostly on the actual behavior of Enron. They do provide, in Table 1, a theoretical analysis of stages of ethical behavior for companies: Moral preconventionalism (e.g. undisguised greed), “window-dressing” ethical behavior that tries to provide a thin facade of morality, moral role-modeling and a collective moral conscience. Enron can be considered either Type I or Type II (ethical business tools MAY have been used sometimes, arguably, but the internal culture was unquestionably rotten). They also deploy Schein's argument about corporate culture and leadership: “Schein’s (1985) last mechanism by which a leader shapes a corporate culture, describes how a leader’s decisions about whom to recruit or dismiss signals a leader’s values to all of his employees. The selection of newcomers to an organization is a powerful way of how a leader reinforces culture. Leaders often unconsciously look for individuals who are similar to current organizational members in terms of values and assumptions. Some companies hire individuals on the recommendation of a current employee. This tends to perpetuate the culture because the new employees typically hold similar values. Promotion-from-within policies also serve to reinforce organizational culture. E5. An example of analysis is found above. Similarly, they analyze here: “In the long run, Enron’s executives could not “rob Peter to pay Paul”. Even if the Enron culture permitted acts of insignificant rule bending, it was the sum of incremental ethical transgressions that produced the business catastrophe. Although Enron’s executives had believed that everything would work successfully in the long run, the questionable partnerships left the company extremely vulnerable when financial troubles came to light” Immediately thereafter, they describe: “As partnerships began to fail with increasing regularity, Enron was liable for millions of dollars it had not anticipated...” Similarly: “A company with humble beginnings, Enron began as a merger of two Houston pipeline companies in 1985. Although Enron faced a number of financially difficult years, the company managed to survive. In 1988, the deregulation of the electrical power markets took effect, and the company redefined its business from “energy delivery” to “energy broker” and Enron quickly changed from a surviving company to a thriving one. Deregulation allowed Enron to become a “matchmaker” in the power industry, bringing buyers and sellers together”. Read More