Enron & Sox Corporate Governance - Essay Example

? Enron & Sox Corporate Governance Essay Enron & Sox Corporate Governance Essay The Enron Case study basically revolves around the fact of the deliberate and calculated financial and managerial improprieties that were behind the collapse of the firm. The evidence adduced from the different case studies point to the fact that the company sought to build a false image of growth and performance in order to give an impression about its stature, which would be used to deceive the shareholders (Hanilton, 2003). The deliberate manipulation of the company’s balance sheets was meant to sustain its image as one of America’s rapidly growing companies that had stepped out of the conventional ways of doing business to engage new and revolutionary practices that were apparently effective (Topping, 2005). Various factors played together towards the eventual collapse of the firm. Many of these forces were structural while others were strategic (Topping, 2005). Other analysts have pointed to the fact that the macro-economic and micro-economic factors contributed to the eventual collapse of the firm. It might be argued that some of the actions and strategies initiated by the different managers of the firm eventually developed into multiple challenges that led to the collapse of the firm (Hanilton, 2003). Market forces, cultural differences, financial strategies and other factors worked together to contribute to factors that systematically brought down a firm that analysts had endorsed as a model of growth. Fraud and Inside Trading Under the stewardship of Jeff Skilling, Enron manipulated its accounting records so that they did not reflect its liabilities (Hanilton, 2003). This had the effect of enhancing the growth of its stocks price. Some of the most obvious symptoms of corporate fraud in Enron revolved around inflated profits and assets. Records surveyed by the United States Congress also revealed that some of the assets and profits reflected in the financial statements were entirely non-existent (Hanilton, 2003). Furthermore, the company adopted a policy of shielding itself from accusations of accumulated debts by seeking aggressive judicial measures for all and any individuals or institutions that sought to challenge their alleged market strength (Topping, 2005). Critics have often pointed at this as acts of intimidation and outright unprofessionalism. Through such practices, the company sued several lawyers and the media, which attempted to reveal the true nature of the company (Kluyver, 2009). Another feature of corruption in the company involved the posting of profits and losses in entities that were off-shore. There was also the deliberate concealing of affiliate firms that made losses while only including those firm that were fairly successful. As such the entire financial position of the company was a misrepresentation of facts. From another dimension, there was rampant inside trading at the company. The management of the company gave away confidential and privileged information to firms that had special relation to Enron and other firms that were related to the management (Hanilton, 2003). As a result of these preferential inside trading practices, Enron had adverse effects on trading practices of the American corporate sector. Analysts have pointed out that the culture of Pride, arrogance and intolerance were to blame for the managerial challenges and unprofessional conducts that affected Enron (Gibney, 2005). According to the same analysts it took sixteen years to build their assets from 10 to 65 billion but only 24 days to go bankrupt. The culture of managerial arrogance was also attributed to the fact that most of the personnel at the institution were former nerds, and that they sought popularity by compromising on ethics and professionalism to achieve their goals. While stepping out of the traditional forms of business management and organizational strategies, the firm did not adequately engage with the internal challenges of dissent and the cultural challenges of initiating new organizational strategies (Hanilton, 2003). As such there resulted some element of mismatch between the methods employed and the existent structures. Some opinions have pointed to the direction that Enron required some kind of overhaul before engaging in the kind of changes that were brought about by the different managerial systems (Kluyver, 2009). The bankruptcy situation was, therefore, an obvious eventuality. Available evidence suggests that the firm failed in a number of areas, which are pertinent to the efficient management of firms of its size and presence (Hanilton, 2003). While many analysts continue to question the strategies employed in the rapid expansion plan of the firm, others point at the different features that tell of a firm with a decidedly disorganized growth strategy and boardroom intrigues, which eventually resulted in its collapse (Hanilton, 2003). Many times firms fail to take advantage of the inward synergies and talent to develop a unified strategy of growth. Instead they engage in processes that are contradictory to the very aspect of growth. As a result of the underhand strategies, Enron secured significant confidence from the wider public that invested in its stocks basing on the false signs and signals that had been orchestrated within the ranks of the management (Topping, 2005). The operational structures used were not sustainable. However, the weak financial systems were held in place by aggressive marketing campaigns that sought to mark out the company as one of the most successful on the market (Topping, 2005). There were no internal and external robust monitoring and auditing mechanisms that could be engaged to provide the much-needed safeguards against the eventual collapse. The consequence of these actions was the creation of a company that lacked sufficient stability, and which eventually yielded to bankruptcy. Conflict between Rebecca Mark and John Skilling on matters of strategy was another determining influence to the challenges that faced Enron (Topping, 2005). The conflict between the two managers was centred on the matter of supply and generation versus matters of supplying. In the opinion of John Skilling, Enron stood more chances in supplying energy. This he thought would be more profitable and less strenuous to the company than the traditional systems. On the other hand, Rebecca was of the view that more investments should be done in traditional assets. The assets were used for the generation and supply of gas. Rebecca though that such a strategy was less risky than the one proposed by skilling. Some analysts of Enron’s chequered business profile have argued that the differences were brought about largely by the sharp differences in ideology. By nature, Skilling was regarded in some corporate American sector as an individual who was always ready to change in line with new situations (Gibney, 2005). He was regarded by his supporters as innovative and daring although his critics think that he made his decisions without sufficient fall-back strategies and exit clauses. Those who supported Rebecca’s strategic positions believed that she was driven by the desire to maintain stability through implementing the tried and tested methods. It was in line with this kind of thinking that rifts emerged within the establishment with forces coalescing around the two corporate protagonists (Gibney, 2005). In the very end, Enron adopted a hybrid of strategy that incorporated the ideas of Skilling while also embracing those that were supported by Mark. Ultimately, the company embarked on an aggressive campaign of purchasing new assets while at the same time enhancing the opportunities of doing business in the region. Naturally, the company felt the same kind of strain that affects businesses that pursue split strategies. Lack of harmony at the level of leadership often affects the stability of business by imposing heavy expenses on the business (Gibney, 2005). There is also the aspect of internal destructive competition, which tends to eat into the business. The competition results from the element of rivalry and lack of cooperation as the two camps involved tend to out-perform each other with the long-term objective of seeking preferential treatment from the top management (Gibney, 2005). The competition between the supply strategy and the production strategy placed heavy expenses on Enron hence forcing the company to shrink and shift expenses from other sensitive areas towards the dual strategy. According to corporate analysts, uncoordinated competition is more destructive than necessary in the modern corporate world. One reason adduced for this is that such competition usually fosters feelings of antagonism within the various layers of the management and the work force. In the very end, there is usually an internal fall-out that affects the primary objectives of the company (Gibney, 2005). For instance, the antagonistic element in the dual strategy had the effect of denying the workers the necessary sense of cohesion and process ownership, which is necessary for the sustainability of any firm. The competition that affected the performance of Enron could be said to have involved some element of struggle of power. As such, it would be argued that the organizational structure of the company had some significant impact on the negative occurrences that affected the struggle of power in the company, which eventually yielded the negative repercussions that followed. One of the ethical factors involved in the Enron case is that the management deliberately conspired to provide misleading information to the public in ways that endeared them to invest in the company (Gibney, 2005). Two major issues are involved in this complicity. The first issue relates to the fact that the company deliberately misinformed the stocks investors. The second issue is that the deliberate distortion of facts dampened the confidence of investors in the market as a general fact (Gibney, 2005). Obviously, the repercussions of Enron’s bankruptcy were felt beyond the company to other areas of commercial interconnectivity. The situation caused ripples on the stocks market in ways that affected other companies and investors as well. In a more direct sense, the bankruptcy of Enron led to joblessness and loss of financial stability to the score of people, who had invested significant amounts of money in the firm (Gibney, 2005). As such, it might be appropriate to conclude that the collapse of the company had direct and adverse impacts on the socio-economic stability of a significant section of the American public. A more comprehensive assessment of the social and economic devastation brought about by the collapse of the company might be assessed from the point of view of relationships between economies in a highly liberalized American commercial environment (Gibney, 2005). Market forces and trading practices played a significant role in the challenges that affected Enron (The United States Senate, 2003). Analysts have observed that some trading practices engaged by the firm were entirely experimental. According to these analysts, practices such as volumetric production payments had some significant impact on the direction of business in the company. Many of these practices lacked a practical backing or precedence. Those who hold onto this opinion argue that the practice exposed the firm to multiple perils on the market and other insecurities, which eventually impacted negatively on the growth and profitability of the firm (Topping, 2005). Recommendations One of the strategies that would have shielded Enron from collapse is the splitting up of the firm into semi-autonomous subsidiaries. Such a move would have ensured that the firm does not collapse totally. Each individual unit would be independent in such a way that is not directly affected by the failings, corruption issues, or managerial challenges of sister units. Such moves have been known to work and shield firms from possibilities of collapse. Furthermore, Enron should have engaged the services of external auditors and encouraged a culture of transparency. By so doing, it would be possible to shield the company from any adverse consequences because the auditors would have exposed and forewarned of the dangers of some of the financial improprieties that were practiced by the firm. References Gibney, A. (Dir). (2005). The Smartest Guys in the Room. (Movie). Hanilton, S. (2003). The Enron Collapse. Values and the Virtuous Manager. PDF. Kluyver, C. (2009). A Primer on Corporate Governance. New York: Business Expert Press. The United States Senate. (2003). The Senate Subcommittee Report. PDF Topping, P. (2005). Managerial Leadership. New York: McGraw-Hill Professional. Read More