Business Ethics and Organizational Culture of Enron - Case Study Example

Business Ethics and Organizational Culture of Enron Business Ethics and Organizational Culture of Enron Business is needed by people to earn money as money is involved in the selling of goods and services. Selling is not the only aspect of business because many processes are needed to conduct a business. Entrepreneurs and customers are not the only people involved in business as huge businesses like malls and corporations require employees to run the whole businesses. In having employees working for a company, ethics and culture mold them to work together towards the organizational goals. Ethics and culture are parts of the corporate world, but both of them are also found outside of the business and corporate context. It would help to define both concepts as they will both guide the discussion later on about a controversial company and how both ethics and culture were bended and changed. The first concept is that ethics which is part of philosophy that serves as guide on how to live in terms of the concept of goodness or between right and wrong (Pojman and Fieser, 2012, p. 2). The action is being judged as the motive affects the action and the outcome is checked as to whether it is good or bad. As people spend time to learn and explore the world, they seek the truth which gave birth to philosophy and pursues the integrity of the actions as Socrates said, “the unexamined life is not worth living,” (Pojman and Fieser, 2012, p. 2). The focus of ethics is the reflection and study of actions and motives as seen in the famous quotation of Socrates. With that pursuit, ethics is correlated with morality or moral philosophy as they deal with the right and wrong conduct, but ethics is larger than morality as the latter is just a portion of the former (Keim, 2000, p. 180). Since ethics affects decision and choice as guided by whether an action is good or bad, it can shape the culture of people. Culture allows men to survive as deals with the physical and sociological realms of life as people of the same group have the same behavior (Ayisi, 1992, p. 2). In short, culture is a way of life as people respond for learning and survival in their everyday lives. According to Hofstede, another definition of culture is “the collective programming of the human mind that distinguishes the members of one human group from those of another,” (Wagner, 2009, p. 2). Culture is said to be a mindset of a group of people as they adapt to their environment and as they interact with one another. The way of life is then governed by traditions and beliefs that lead to creation of norms that serve as standards to be followed by people. For example, the issue about sex differs from one culture to another as for some cultures; it is part of showing love even outside of marriage while other cultures only allow sex within the context of marriage. Culture is then separated by layers: national culture, business culture, company culture, and individual behavior. National culture pertains to the beliefs and traditions shared by a country while the business culture is the mental attitude shared within the business sector. Company sector is then a subdivision of business culture that focuses on employment and corporate world. Lastly, the individual has his own behavior and decision that affects the culture in general (Hollensen, 2007 as seen in Wagner, 2009). For the purpose of the paper, the focus is on business and organizational culture as it is related to business ethics. Business ethics emerges as businesses have increasing competition sometimes to the point of violating the laws or the freedom of people. With that in mind, it became part of business curriculum for students. Also businesses are required to follow the code of ethics that serves as guidelines toward proper conduct in doing the business (Paliwal, 2007, p. 2). Sometimes the pursuit for profit can put some strains on the proper behavior in business that requires ethics to be observed. Some of the good examples are the following: Should a salesperson omit facts about a product’s poor safety record in a sales presentation to a client? Should an accountant report inaccuracies that he or she discovered in an audit of a client, knowing the auditing company will probably be fired by the client for doing so? Should an automobile tire manufacturer intentionally conceal safety concerns to avoid a massive and costly tire recall? (Ferrell, Fraedrich and Ferrell, 2008, p. 5). The examples shown illustrate how proper conduct becomes thin in the world of business. Sometimes the corporate people tend to hide the flaws they see just to save or earn money. With the presence of ethics, the actions can be corrected. The ethics is then linked to organizational and business culture as both will be explored further using the case of the company called Enron. Enron is an energy company located at Houston, Texas which became one of the biggest companies worldwide and it became controversial when it announced the reduction of the equity of shareholders and after-tax net income (Benston and Hartgraves, 2002, p. 105). Before the controversial rose, Enron soared high in stocks as it increased by 311% by the year 1998. If further went high until the year 2000. Because of the record it showed in the market, it was named by Fortune magazine as the most innovative large company in United States of America (Healy and Palepu, 2003, p. 3). It became a sensationalized achiever until it went downward quickly and became the biggest bankruptcy in American history. The victims of the bankruptcy were the employees and shareholders of the company because of its unstable system (Bratton, 2002, pp. 1276-1277). The instability of a system was not the original plan of the company as it experienced reorganization that led to the controversy. The controversial Enron was not talked about by people before as it was starting as a company as a result of the merging of Houston Natural Gas and Inter North Corporation. Inter North Inc. was already a big company on natural gas and was founded in the year 1931. It covered the vast areas of central United Stated with its pipelines (Warnick as seen in Madsen and Vance, 2009, p. 217). The merger of the two former corporations was the idea of Kenneth Lay. The idea in 1980 about the contracts should be take-or-pay or predetermined amount is sold at a given price, but the way of natural gas transaction changed in the middle of 80s allowing a more flexible arrangement. The next big thing was the spot market transactions that by 90s. More than half of gas sales were sold at spot prices instead of contracts (Healy and Palepu, 2003, pp. 4-5). From the changes that happened in the transactions, the actions in Enron happened step by step until the whole system or new business model that it was working on was exposed and several defective accounting and financial reporting like auditor independence and SPEs had been the frontline of the issue. The whole scandal occurred as a result of mismanagement and the control systems that reflected on the culture and leadership in Enron (Free, Macintosh, and Stein, 2007). Digging from the very source of the problem, the leaders decided to diversify the business of the company instead of focusing on Natural Gas distribution only. It started to get participate in trading not only in natural gas but also in electricity, paper, water and broadband (Healy and Palepu, 2003, p. 5). With the desire to boost the earnings, fraud occurred by manipulating the core pillars of the control system of Enron which are risk-assessment and control group, performance review, and code of ethics (Free, Macintosh, and Stein, 2007). A risk-assessment and control group is responsible for the evaluation of the danger of losing money when it comes to business and develops ways on how to minimize the risk. On the other hand, performance review is about the study and evaluation on the productivity of the company and its employees. Lastly, code of ethics is the core values of the organizations that every member must follow. Possibly the hype that drove the employees in the company led to its downfall. The focus of getting high profits quickly harmed the real productivity of Enron. Employees were not aware of the real scheme as they were held by the management through hype. Also the focus is on making deals and giving high incentives to those who can close big deals (Madsen and Vance, 2009). The existence of the problems can be rooted from the “ideology, rewards and punishments, intimacy, power and status, boundaries and language,” (Schein, 1984, p. 6). The ideology is too much on making profits that might have misled the company into diversifying its line of business and focusing on fast cash. Next, the rewards and punishments were mostly on high rewards and gratifications for those who can make big deals. Intimacy might not be on the real welfare of the employees, but for personal gains of the leaders. Power and status were almost everything as greed consumed them. Skilling is said to be the CEO of Enron who made dangerous risk-taking by “winning at all-cost approach,” (Free, Macintosh, and Stein, 2007). Such practice became detrimental to the company as there was no balance between the profits that can be made from trading and the money that would be shelled out by the company. Also hypes were done by focusing on material wealth to motivate the employees in trading (Free, Macintosh, and Stein, 2007). Unrealistic goals may add up to the hypes that might have damaged the company and the employees by being overstretched. References Ayisim, E. O. (1992). An introduction to the study of African culture. Nairobi: East African Educational Publishers. Benston, G. J. and Hartgraves, A. L. (2002). Enron: what happened and what we can learn from it. Journal of Accounting and Public Policy 21, 105-127. Retrieved from http://bbs.cenet.org.cn/uploadimages/200311294124115529.pdf Bratton, W. (2002). Enron and the dark side of shareholder value. Tulane Law Review Association 76, 1275-1361. Retrieved from http://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=1508&context=facpub&seiredir=1&referer=http%3A%2F%2Fscholar.google.com.ph%2Fscholar%3Fq%3Denron%26hl%3Dtl%26btnG%3DHanap in#search=%22enron%22 Ferrell, O., Fraedrich, J.and Ferrell, L. (2008). Business ethics: Ethical decision making and cases 7th ed. New York: Houghton Mifflin Company Free, C., Macintosh, N. and Stein, M. (2007). Management controls: The organizational fraud triangle of leadership, culture, and control in Enron. Ivey Business Journal Online. Retrieved from http://proquest.uni.com. Healy, P. M. and Palepu, K. G. (2003). The fall of Enron. Journal of Economic Perspectives 17(2), 3-26. Retrieved from http://itrevizija.ba/materijal/JEP.FallofEnron.pdf Keim, W. D. (2000). Ethics, morality, and international affairs. Maryland: University Press of America. Louis P. Pojman, L. P. and Fieser, J. (2012). Ethics: Discovering right and wrong 7th ed. USA: Cengage Learning. Madsen, S. and Vance, C. (2009). Unlearned lessons from the past: an insiders view of Enrons downfall. Corporate Governance 9(2), 216-227. Retrieved from http://proquest.umi.com. Paliwal, M. (2007). Business ethics. Maharashtra: New Age International. Schein, E. H. (1984). Coming to a new awareness of organizational culture. Sloan Management Review. 25(2), 3-16. Retrieved from http://proquest.umi.com. Wagner, T. (2009). Foreign market entry and culture. Germany: GRIN Verlag. Read More