Examining a Business Failure of Enron Corporation - Essay Example

? Examining a Business Failure of Examining a Business Failure It is agreeable that running a business, whether large or small, is very risky and the possibility of failure is relatively high. Over the years, there are numerous instances of business failure by large organizations (Robbins, 2004). Large organizations such as Enron, Daewoo Motor America, Chrysler LLC, and Tyco International Ltd have experienced business failure at certain time. Business failure can be caused by a single factor or a combination of factors. In simple terms, business failure can be defined as a situation whereby a company or an organization ceases operations due to inability to make profit or because it can no longer be able to bring in sufficient revenue that can cover the expenses it incurs. Studies have shown that business failure can be caused by the following factors: increased competition; poor implementation of strategies; outdated technology; poor management; poor leadership; financial problems; and economic challenges (Hatch, 2006). In order to have a better understanding of business failure, this paper will discuss the failure of Enron Corporation. Enron Corporation was one of the leading players in the energy market; actually, in the year 2001, it was the United States ’ seventh Largest Corporation in terms of revenues (Mclean and Elkind, 2003). However, it suffered a catastrophic collapse as a result of financial scandal (famously known as Enron Scandal) which involved its accounting firm (Arthur Andersen), Enron’s management and leadership. The scandal involved fraudulent accounting procedures and practices which occurred during the 1990s and the beginning of 21st century. These fraudulent activities included manipulation of the Enron’s stock price. This scandal eventually led the Corporation to file for bankruptcy in December 2001 (Fox, 2003). Robbins (2004) argues that whereas events leading to business failure of an organization often take different dimensions, the contribution of the organization’s management, leadership, and organizational structures towards the failure cannot be ruled out. As a matter of facts, he notes that this contribution is usually central to business failure in any given organization. So, how did Enron’s leadership, management, and organizational structures contribute to the failure of the organization? Fox (2003) observes that the trials relating to Enron scandal showed that, indeed, the Corporation’s leadership contributed to its failure. Enron executives were charged with criminal acts that include insider trading, money laundering, and fraud. What became clear was that the Corporation’s leadership only focused on influence, greed, power, and profits and paid little attention to the Corporation’s Code of Ethics (Mclean and Elkind, 2003). Their focus made them to make wrong and deceiving decisions, as well as conspiring with Arthur Andersen auditors to engage in illegal accounting activities and methods. Jeff Skilling, Ken Lay and Andrew Fastow are the most notable top-level leaders of Enron whose behaviours greatly contributed to the collapse of the Corporation (Fox, 2003). For example, Andrew Fastow who was the Corporation’s chief financial officer engaged in improper partnerships, fraud, and money laundering activities. Jeff Skilling engaged in conspiracy, insider trading, made false financial reports, and in fraud. Ken Lay made misleading statement and got involved in fraudulent activities (Mclean and Elkind, 2003). As leaders of the Corporation, Fastow, Skilling, and Lay were expected to adhere to and uphold Enron Code of Ethics that called for integrity, excellence, communication, and respect. However, they engaged in activities that challenged the Corporations ethics code’s foundational values. The top leadership as well as the Corporation’s senior management contributed to the failure by attempting to create a conglomerate in the energy industry that was aimed at increasing the wealth of their stakeholders and shareholders (Fox, 2003). This, however, turned out to be counterproductive because the moment it was revealed that the Corporation was engaging in unethical behaviours, its stock value declined. The management is culpable of acquiring unethical accounting schemes in a bid to make the Corporation’s shares more attractive to potential and existing investors (Mclean and Elkind, 2003). The organizational structure of Enron also contributed significantly to its failure. Initially, the organizational structure of Enron was such that it made people to believe that the Corporation was in a position to handle increasingly bigger risk. However, the organizational structure was inherently incapable of handling increasingly bigger risk and actually contributed to the failure of the Corporation (Fox, 2003). The structure was such that the Enron business and division unit were separate from the others, a situation which made very few people with the Corporation to have a bigger perspective of the Corporation’s operations. Also, the structure had insufficient financial and operational controls. In addition, the compensation plan of Enron seemed to be skewed towards enriching executives instead of generating more profits for the shareholders (Mclean and Elkind, 2003). This kind of an arrangement encouraged top executives to break basic rules without fear of reprisal and to inflate the contracts’ value even when there is no actual cash that has been generated. Similarly, the bonus program of Enron encouraged the use accounting practices that are non-standard and the inflation of deals valuation on the company’s books. The malpractice of deal inflation was widespread within the Corporation and this enabled creation of partnerships in order to hide losses and subsequently avoid the consequences (Fox, 2003). It should be noted that Enron’s organizational structure entrenched a culture of conformity within the organization. Individual employees within the organization were not in a position to out the executives who were suspected of wrongdoing. Whereas the organizational culture of Enron was very individualistic, it promoted groupthink in the organization as well as conformity. The Corporation’s employees were loyal and wanted to be viewed as part of the team and to partake in the organization’s benefits (Mclean and Elkind, 2003). As has been noted, the executives focused on influence, greed, and profitability; this was reflected throughout the organizational structure and particularly among the employees. Specifically, employees were focused on the bottom line of the Corporation and sought to promote short term solutions that seemed to be financially sound at the immediate period. However, it is these solutions that were a recipe for future failure of the organization. The ethical misconduct became the barrier to the organization’s success (Fox, 2003). The organizational structure tends to promote personal greed and structure which overshadowed corporate and individual ethics thereby resulting to the failure of the organization. The business failure of Enron would have been predicted through organizational behaviour theory. Systems theory would have predicted this failure by analyzing the functioning of various processes and practices of the organization towards achieving the organizational goals. Systems theory focuses on the common code of the organization, perspectives of individual units, and the interrelationships of elements within an organization (Robbins, 2004). Through this theory it would have been evident that the business and division units were separate from the others. Besides, it would have shown that there was a disharmony in the interrelationships of elements within the organization and this was negatively impacting on the processes of the organization towards attaining its objectives (Hatch, 2006). Therefore, systems theory would have helped the organization to focus on streamlining its elements and processes towards attaining short and long term goals of the Enron. The second organizational behaviour theory that would have helped to predict the failure of Enron is the organizational culture theory. This theory entails concentration on cultural values, beliefs, attitude, and experiences that belongs to the organization and is shared by people within the organization (Hatch, 2006). As has been noted, organizational structure and culture was one of the factors that contributed to the failure of Enron. It did this by promoting conformity and compromising adherence to Enron’s Code of Ethics. This theory would predict that the values and behaviours of the leadership and management would lead to the failure of the organization. This theory would have helped the organization and the people in it to rethink their attitudes, values, and beliefs towards the short and long term goals of the organization (Robbins, 2004). References Fox, L. (2003). Enron: The rise and fall. New York: Wiley. Hatch, J. (2006). Organization Theory: Modern, Symbolic, and Postmodern Perspectives. Oxford University Press Mclean, B and Elkind, P. (2003). The Smartest People in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Penguin. Robbins, P. (2004). Organizational Behaviour - Concepts, Controversies, Applications. Prentice Hall Read More