Prior to the scandal, Enron had established an international reputation for corporate responsibility and economic stability. Despite this reputation, executives at Enron hid a scandal that sacrificed the life savings of many of the company’s employees (YouTube, n.d.). A few months prior to the scandal surfacing, many Enron executives began selling shares they held in the company. Estimates suggest that Jeffery Skilling, Enron’s former CEO made $66 million from the sale of his shares (Sims & Brinkman, 2003). Within three months of executives selling their shares, Enron filed for bankruptcy (Time, 2002). Employees had been heavily encouraged to invest in Enron, as a way of securing their economic future. Although Enron executives may have been able to cash out their shares of the company, many employees found that it was too late to salvage their investment. The corporate culture, employee practices and ethics at Enron will be explored in order to determine how these attributes led to the collapse of Enron.
As a large, publically trade company, Enron had a wide array of shareholders. Employees that invested their futures in Enron were adversely impacted by Enron’s bankruptcy (YouTube, n.d.). Employee’s lost both their jobs and investments, directly hindering their financial stability. The public, which purchased shares of the company believing that Enron would continue to prosper were also adversely impacted. Enron executives that were not in on the scandal also suffered from the company’s actions. In detailing how much money shareholders lost, Enron shares closed at $75.09 on February 20th 2001. On December 2002, Enron shares closed at .26 cents per share. However, few shareholders saw Enron’s collapse coming, as the company had been widely regarded as “the mightiest of them all” (YouTube, n.d.). From this standpoint, it could further be argued that Enron’s scandal and collapse, negatively impacted publically owned companies, as many investors questioned whether or not the information that companies were reporting was accurate.
Analysis Based on Ethical Theories
The unethical behaviors of Enron’s employees directly influence the collapse of Enron. Prior to the company’s collapse, Enron began altering the books by “special purpose vehicles (SPVs), pseudo-partnerships that allowed the company to sell assets and ‘create earnings’” (Sims & Brinkman, 2003, p. 245). In understanding the behaviors of Enron executives, the Agency Theory provides a strong theoretical background, explaining these behaviors. According to the Agency Theory, “self-serving employees will choose the options that are in their own best interests” (Brooks & Dunn, 2009, p. 342). The creation of SPV’s allowed Enron executives to profit immensely by making the company appear profitable. In return, the price of the stock rose and Enron executives made money. It could further be argued that Enron employees also fell prey to this scheme, in believing that Enron would provide them with a sound future if they invested in the company. Yet, the competitive organizational culture present at Enron may have influenced the company’s need to alter the books. According to Sims & Brinkman (2003) “if corporate leaders encourage rule-breaking and foster an intimidating, aggressive environment, than it is not surprising that the ethical boundaries at Enron eroded away” (p. 247). It is further feasible that the ethical values and boundaries slowly diminished. As employees were continuously pushed to strive for growth, they needed to go to great lengths in order to meet this demand. Overtime, the implementation of ethics was adversely impacted by this organizational culture.
The GONE Theory can further be applied to explain the behaviors of Enron’s executives. The Gone Theory stands for Greed, Opportunity, Need and Expectation (Brooks & Dunn, 2009). Enron executives were inherently greedy and saw an opportunity to increase their wealth. As a result, executives established the need to do whatever it takes to expand on their wealth. The behavior of Enron’s executives is further consistent with the GONE Theory, as Enron executives did not intend on being caught. Despite this assumption, Enron’s scandal eventually came to light. Although Enron executives went to great lengths in order to hide debt, accountants eventually found what were initially believed to be errors and reported them to the Federal Trade Commission (Sims & Brinkman, 2003). However, the continued need to focus on opportunities and to do whatever it took to take advantage of these opportunities likely impacted the organizational culture. Although many companies strive for growth, the inability to consider any other factors is one aspect that sets Enron apart from other failed companies.
Conclusion & Recommendations
Enron once appeared to be a prosperous company, with a bright future. Despite this appearance, Enron’s executives were engaging in unethical and illegal practices as a way of making the company appear more successful. As a result, numerous shareholders were adversely affected, watching their investments diminish. In understating the role Enron’s organizational culture had on the company’s collapse, two ethical theories were used. The Agency Theory assumes that employees will go to great lengths in order to capitalize on opportunities. In contrast, the GONE Theory focuses on attributes that executives displayed. Although both these make different assertions, they both emphasize the role of executives in establishing what behaviors are acceptable and how far employees should go to meet the company’s goals.
In reviewing the Enron case, multiple recommendations can be made. This case highlighted the importance of executives within the company and the importance they place on achieving success. From this standpoint, it could be argued that executives directly influence the practices employees engage in and the organizational culture present within the organization. Although success is a viable part of any business, executives within the company need to understand the role their actions have on the lives of others.
- A Cautionary Tale (n.d.) YouTube. Retrieved November 23, 2014 from: http://www.youtube.com/watch?v=zSt9Ovt9ksY
- Brooks L.J., Dunn P. (2009) Business & Professional Ethics for Directors, Executives & Accountants. New Jersey: McGraw & Hill.
- Chronology of Collapse (2002) Time. Retrieved November 23, 2014 from: http://content.time.com/time/specials/packages/article/0,28804,2021097_2023262,00.html
- Sims R., Brinkmann J. (2003) Enron ethics (or: Culture matters more than codes). Journal of Business Ethics 45 (3) 243- 257.