Analysis of Factors Leading to Failure of Enron - Essay Example

?Introduction In the contemporary era of rapid globalization, advancing and recessive environment, various internal and external factors significantly impact performance outcome of organizations. While success of firms always relies on business strategies, the tangible and intangible issues within and outside the firms may become the major contributing factors for its failure. The failure of big companies like Enron, WorldCom, General motors, AIG etc raises pertinent issue of leadership crisis within organizations. They highlight not only poor leadership and lack of visionary perspectives but also unethical leadership that is driven by greed and vested interests. The paper would discuss the myriad aspects of Enron that led to its failure. Brief summary of the case Enron Enron was a major American firm in the areas of energy and related products that had a global presence. Enron was founded in 1985 through merger of Houston Natural Gas and Internorth, the two major natural gas pipeline companies. In 2000, it was named ‘America’s Most Innovative Company’ by Fortune magazine (Fox, 2004). But in 2001, it was found that institutionalized fraud was behind the projected financial condition that was escalated to deceive public through imaginary transactions. The manipulated accounts and audit reports gave it market credibility which was exploited by the corporate to borrow capital from financial institutes. Its stock plummeted to nearly zero and it emerged as the major financial scam that shook foundation of corporate America. Situation analysis Enron was a high revenue gas pipeline company that had a niche market in America. The deregulation in the gas prices allowed Enron to be more flexible in its arrangement with producers and pipelines. It was allowed it to pursue its diversification strategy and entered into other areas like electricity power, fiber optics, coal, steel, paper and pulp. Its foray into international market was offset by undertaking projects in construction and management of energy facilities across the globe. Indeed, its exponential growth was very impressive that influenced the capital market. It exploited its expertise in physical logistics to evolve a complex network of risky trading business. The volatile market, deregulated gas prices and transport infrastructure to deliver the gas were vital risk areas that required huge funding, government alliances, expertise in areas that were virgin to it. The political risks in developing economies like India and China also emerged as critical issue that could jeopardize its projected success rate in developing effective energy capacity. Most importantly, the wide network of complex system of gas trading provided it with huge leeway to maneuver accounts. The long term contracts required future prediction of prices and short term contracts allowed it to manipulate prices. Both were risks that were managed by accounting systems through contrived earnings and balance sheet that was inflated and designed to influence the capital market (Healy and Palepu, 2003). There was lack of transparency and control which facilitated massive corporate fraud and corrupt practices in the higher hierarchy leading to its failure. Another crucial issue was its strategic decisions that were based on high ambitions of exploiting opportunities in emerging economies without analyzing its internal strengths, vis-a-vis expertise in different areas where it had diversified and the accounting system that required complex transactions of long term contracts in volatile market. Analysis of factors leading to its failure Organizational culture is a vital factor that promotes defined code of behaviour amongst the workers to inculcate sense of stability and desired motivation for improved outcome. Mullins (2007) believes that it emphasizes behavioural regularities, which is distinct in its language, custom and traditions and the way workforce reacts to the situations. Enron’s higher hierarchy in human resource not only lacked leadership initiatives but was also unethical in its business practice. The management culture promoted outcome at the cost of ethics. It lacked accountability, responsibility and reliability that are necessary for creating sustainable environment of credibility for their trade and investment. Parker (2003) argues that it is the responsibility of auditors and other gatekeepers that disclosure of pertinent information is important to boost the confidence of various stakeholders. The corporate governance gatekeepers are people who are in position to influence the decisions making process for higher productivity. They also serve as major motivators for improved and ethically delivered objectives and goals of the company. The key gatekeepers of a firm are: independent and proficient board; independent and competent auditors; objective and competent legal council; and expert financial advisors. They identify and evaluate external and internal environment to apprise the management with critical information regarding various aspects of business activities and processes. Enron lacked such a system of effective monitoring body. The board of directors and auditors of Enron were hand in gloves in committing fraud. Moreover, centralized decision making contributed to corrupt practices and provided higher hierarchy with powers that were misused for vested interests. Shapiro, Slywotzky and Tedlow (1996), affirm that strong leadership enables firms to sustain their performance through hard times. Dynamic strategies equip the leadership with strong tools to exploit business opportunities. The ethical considerations and transparency within the system promotes conducive environment of shared goals and motivation. The various mechanisms of responsibility and accountability in actions and decision making processes rely on effective communication and dissemination of information. Thus, organizations must be responsive to the impact their decisions, actions and behaviour have on the society at large. In United Kingdom, Turnbull report and revised guidelines for corporate governance have become the guiding principles for the firms to strengthen internal controls to reduce risks to stakeholder and shareholders. These guidelines are important principles and not legal acts but promote voluntary disclosure that significantly strengthens corporate image and thereby its business goals. Conclusion Indeed, effective corporate governance and efficient framework of social responsibilities allow the firms to integrate issues and policies that encourage welfare of the people. It needs to be evolved as long term corporate strategy that can incorporate the environmental changes to address the challenges of time. The various stakeholders and shareholders comprising of investors, employees, general public, business partners etc. are intrinsic part of firms whose interests are significantly influenced by managerial decision making. The workforce must therefore, become proactive participant in decision making. As such, disclosures of pertinent information and transparency in business processes become essential issues for developing confidence among the various stakeholders. Sarbanes Oxley Act 2002 of America is an exemplary example that promotes integrity in financial management reporting. Its stringent ethical parameters and accountability of action are designed to protect the interests of the taxpayers and boost their confidence in the government. (words: 1083) Reference Fox, Loren. (2004) Enron: The Rise and Fall. London: John & Wiley. Healy, Paul, M. and Palepu, Krishna G. (2003) ‘The Fall of Enron’, Journal of Economic Perspective, vol. 17, no. 2, pp. 3-26. Mullins, L. (2007) Management and Organizational Behaviour, 8th edition, Oxford: FT/Prentice Hall. Parker, Christine. (2003) The Open Corporation: Effective Self-regulation and Democracy, NY: Cambridge University Press. Sarbanes – Oxley Act 2002, [Online], Available: [12 June 2012]. Shapiro, Bensen P.; Slywotzky, Adrian J.; and Tedlow, Richard S. (August 1996). ‘Why Bad Things Happen To Good Companies’, Strategy and Business, 2nd quarter, no. 3. Read More