Enron: The Smartest Guys in the Room Reaction Paper

Enron was the sixth largest energy company in the world at its height. Claims of over $100B revenues with 20,000 employees, Enron became the seventh largest corporation in America, and represented a new breed of business. But in just a matter of 24 weeks, all accomplishments fell apart as the company filed bankruptcy, employees lost jobs, Enron’s stock dropped rock bottom, and billion dollar pensions disappeared. Is CEO Jeff Skilling the only one to blame? Does Enron’s organizational culture promote such malpractice and unethical culture? If so, is the whole organization accountable for the company’s failure?

There were a lot of issues that contributed to Enron’s downfall. The biggest issues can be summarized into the following:

1.       Accounting Fraud

 

At the top and start of the organization, CEO Jeff Skilling took advantage of accounting loopholes and questionable practices to project to the public increased profits. Just because he had legal go-ahead from the SEC to use mark-to-market accounting, does not mean it was an ethical or advisable thing to do. Mark-to-market accounting allowed Enron to post profit from deals down the road on their current books. One example is that Enron posted a multi-million dollar profit from a deal with Blockbuster Video as soon as they announced it. The deal never materialized, neither did the profits. Although it mark-to-market was legal, Enron’s use of it certainly wasn’t ethical.

Assuming GAAP allowed Enron’s mark-to-market accounting practice and the stock did not fall, it’s still considered unethical because the company was not being transparent about its debt levels, therefore projecting that false image of a healthy balance sheet to the public, that could lead to increased stock prices. The lack of transparency was a problem within the organization since publicly-listed companies are required to disclose accurate financial information. Maximizing profits became the top priority of Enron’s executives, which resulted in dishonesty in disclosing real financial information of the company. Moreover, whistleblowers were being dismissed by managers to protect the name of the company. However, if the company does not intend to commit fraud, Sherron Watkins will be at fault since she has no right to share confidential information without the permission of the organization.

 

2.       Price Manipulation

Energy traders in the organization exploited California’s deregulation of the power market shut down reduce power and raise prices. The documentary shared taped conversations of traders talking about jacking up the prices on “Grandma Millie” just because they could. One trader was recorded calling a power plant and asking them to shut down power for a couple hours. The result: energy prices skyrocketed, rolling blackouts plagued California. They seek out loopholes in California’s energy deregulation regulations to create arbitrage that would push energy prices abnormally high.

Enron’s corporate culture had a tremendous influence on employee’s ethical decision making due to the tremendous imbalance in power in the employer-employee relationship. When there are explicit pressures to achieve sales or profit goals this can promote unethical behavior, over-riding an employee’s intrinsic ethical values or personality characteristics, such as their level of Machiavelliansm, or tendency to manipulate situations for personal gain. In this type of environment—particularly when few checks and balances existed—corporate values were stronger than individual standards. Enron explicitly communicated the message that profit at all costs was the priority.

 

 

Clearly, Enron executives and employees did not live out the motto they were claiming: Respect, Integrity, Communication and Excellence.

 

Based on the information given in the case, Enron’s CEO Jeffrey Skilling and CFO Andrew Fasto should be morally responsible for Enron’s collapse. Together with Arthur Andersen, they set up multiple special purpose entities to hide Enron’s debt levels to the public and made profits out of this practice. They not only misled Enron’s board of directors and audit committee on high-risk accounting practices, but also pressured Andersen to ignore the issues. Arthur Andersen should also be blamed for tolerating and assisting Fastow to this accounting fraud. In addition, they also destroyed documents relating to its partnership with Enron, making this an unethical behavior.

Analyzing the situation using the Markkula framework, the Enron executives and employees decisions are only beneficial from a utilitarianism perspective, as they would have thought about it and never would have predicted their shortcomings. As the CEO would tell their employees, “you just have to make profits and I don’t care how you do it as long as we’re profitable”. This clearly reflects the ideology of utilitarianism, “the end justifies the means”. But Enron only thought about the benefit they will gain from their unethical actions and disregarded looking at the other perspectives: rights & duties, justice & fairness, virtue, and care.

Enron built an organizational culture that focused on profit. It rewarded employees that created profit, regardless of how they did it, with huge bonuses.  And every year, Enron laid off 10-15% of its lowest performers. The culture became aggressive and tough where risky behavior became normative. The documentary states that Enron’s flaw was pride. They truly believed that they were “the smartest guys in the room.” Maybe if they hadn’t been as smart, maybe if they had perceived their shortcomings, they would have foreseen the importance of organizational culture and motivation.