This article tries to show how the company’s culture had profound effects on the ethics of its employee? And particularly in this case: how did Enron lose both its economical and ethical status? This question makes the Enron case interesting to us as business ethicists. Enron ethics means that business ethics is a question of organizational “deep” culture rather than of cultural artifacts like ethics codes, ethics officers and the like.
BackgroundAt the beginning Enron faced a number of financially difficulty years. In 1988, the deregulation of the electrical power market took effect and Enron redefined its business to energy broker and got a thriving company. The company became a “matchmaker” in the power industry, bringing buyers and sellers together. Enron embraced a culture that rewarded “cleverness”. Pushing the limits was considered a survival skill; the motto of the CEO Jeffry Skilling was “Do it right, do it now and do it better”. This culture admires innovation and unchecked ambition and publicly punishes poor performance can produce big return in the short term. However, in the long run, achieving additional value by constantly “upping the ante” becomes harder and harder.
A lot of smoke and mirrorsWith Enron’s spectacular success, the business community rewarded Enron for its cleverness and Enron’s executives felt driven by this reputation to sustain the explosive growth of the late 1990s, even when they logically knew that it was not possible. In order to indicate that the company was not as successful as it appeared, Enron entered into a deceiving web of partnerships and employed increasingly questionable accounting methods to maintain its investment-grade status.
PartnershipsTo push the value envelope, Enron created “special purpose vehicles” (SPV), pseudo-partnerships that allowed the company to sell assets and “create” earnings that artificially enhanced its bottom line. Enron exaggerated earnings by recognizing gains on the sale of assets to SPVs. An example is the partnership with Blockbuster which was intended to provide movies to homes directly over phones lines. In this case Enron recorded $ 110.9 million in profits prematurely, even if these profits were never realized as the partnership after only a 1,000-home pilot. Therefore booking earnings before they are realized were rather “early” than wrong. The culture at Enron was quickly eroding the ethical boundaries of its employees.
Keeping debt off the balance sheetTo avoid that a highly leveraged balance sheet would threaten its credit rating, Enron parked some of its debt on the balance sheet of its SPVs and kept hidden from analysts and investors. This can be read as another example of ethical erosion, but Enron’s decision makers saw the shuffling of debt rather as a timing issue and not as an ethical one.
Partnerships at “arm’s length”Enron enlisted help from its outside accountants and its attorneys to guarantee that the Securities Exchange Commission (SEC) did not consider its partnerships as Enron subsidiaries. Enron crafted relationships that looked (legally) like partnerships, although they were (in practice) subsidiaries. A closer look at the partnerships would have revealed that the outside investments came from companies that were owned by Enron.
Conflicts of interestEnron officials obviously had close ties with its partnerships. For example, the CFO war partial owner of two of the most important partnerships. The culture of cleverness at Enron started as a pursuit of excellence that devolved into the appearance of excellence as executives worked to develop clever ways of preserving Enron’s infallible façade of success; for the good of the company, Enron’s executives also began to bend the rules for personal again. Once a culture’s ethical boundaries are breached thresholds of more extreme ethical compromises become lower.
The self-reinforcing decline of EnronThe sum of incremental ethical transgressions produced the business catastrophe. As partnerships began to fail with increasing regularity, Enron was liable for millions of dollars it had not anticipated losing.
The financial implosionThe partnerships that once boosted earnings and allowed Enron to prosper became the misplaced card that caused the Enron house to collapse. The very results Enron had sought to prevent – falling stock prices, lack of consumer and financial market confidence – came about as a direct result of decisions that had been driven by Enron’s culture. The Enron case of ethical failure consists of more than a series of questionable business dealings. Enron employees, who had been encouraged to invest heavily in the company, found themselves unable to remove and salvage their investments. The company culture of individualism, innovation, and aggressive cleverness left Enron without compassionate, responsible leadership.
Leadership mechanisms and organizational culture at EnronLeadership is the critical component of the organization’s culture because leaders can create, reinforce or change the organization’s culture. According to Schein (1985) there are five primary mechanisms that a leader can use to influence an organization’s culture: attention, reaction to crises, role modelling, allocation of rewards, criteria of selection and dismissal.
AttentionIf the leaders of the organizations focus on the bottom line, employees believe that financial success is the leading value to consider. Enron executives’ attention was clearly focused on profits, power, greed and influence; “Profits at all costs”. As Stern has suggested, if the organization’s leaders seem to care only about the short-term bottom line, employees quickly get the message too.
Reaction to crisesSchein asserts, that a crisis tests what the leader values and brings these values to the surface. With each impending crisis, leaders have an opportunity to communicate throughout the organization what the company’s values are. Enron was facing a crisis of how to sustain a phenomenal growth rate. Leaders reacted by defending a culture that valued profitability, even when it was at the expense of everything else. The mantra at Enron seems to be that ethical wrongdoing is to be hidden at any cost; deny, play the dupe, claim ignorance, lie, quit. It appears that the truth and its consequences have been a part of the Enron culture.
Role modeling (how leaders behave)Actions speak louder than words – therefore- modeling behaviour is a very powerful tool that leaders have to develop and influence corporate culture. Employees observe the behaviour of leaders to find out what is valued in the organization. Perhaps, this was the most significant shortcoming of Enron executives. Enron’s leaders’ primary message about their values was sent through their own actions. They broke the law as they concentrated on financial measures and used of the creative partnerships.
It also sent a message to employees that full and complete disclosure is not a requirement, or even recommended. If the company achieved short-term benefits by hiding information, it was acceptable. The leadership of Enron almost certainly dictated the company’s outcome through their own actions by providing perfect conditions for unethical behaviour. Just as the destiny of individuals is determined by personal character, the destiny of an organization is determined by the character of its leadership.
Allocation of rewardsThe behaviour of people rewarded with pay increases or promotions signals to others what is necessary to succeed in an organization. To ensure that values are accepted, leaders should reward behaviour that is consistent with the values. Enron’s reward system established a “win-at-all-costs” focus. The company’s leadership promoted ant retained only those employees that produced consistently, with little regard to ethics. “The moral of this story is break the rule, you can cheat, you can lie, but as long as you make money, it’s all right”. The company’s compensation structure contributed to an unethical work culture, too – by promoting self-interest above any other interest. Enron’s reward system rewarded individuals who embraced Enron’s aggressive, individualistic culture and were based on short-term profits and financial measures.
Criteria of selection and dismissal (how leaders hire end fire employees)The selection of newcomers to an organization is a powerful way of how a leader reinforces culture. Leaders often unconsciously look for individuals who are similar to current organizational members in terms of values and assumptions. This tends to perpetuate the culture because the new employees typically hold similar values. The CIO of Enron (Skilling) perpetuated a focus on short-term transactional endeavours from the very beginning by hiring employees that embodied the beliefs that he was trying to instil: aggressiveness, greed, a will to win at all costs, and an appreciation for circumventing the rules.
The way a company fires an employee and the rationale behind the firing also communicate the culture. Some company deal with poor performers by trying to find them a place within the organization where they can perform better and make a contribution. At Enron, fifteen to twenty percent of producers were let go or fired after a formal evaluation process each year.
Final comments and suggestions for future work”Consequences of unethical or illegal actions are not usually realized until much later when the act is committed”. Enron’s culture is a good example of groupthink where individuals feel extreme pressure not to express any real strong arguments against any co-workers’ action. Employee were loyal in an ambiguous sense of the term, they wanted to be seen as part of the star team and to partake in the benefits that that honor entailed. Two of the most important lessons to learn from the Enron culture history is that bad top management morality can be a sufficient condition for creating a self-destructive ethical climate and that a well-filled CSR (corporate social responsibility) and business ethics toolbox can neither stop nor compensate for such processes. Enron is a case of deceiving corporate citizenship and of surface or façade ethics.
A typology with moral cultures can be draft with two dimensions: ethicalness of an organization culture and presence of business ethical tools of artifacts (ethics officers, codes of ethics, value statement).
Enron looks at first sight like “type I”, like a classical business ethics case, with a typical mix of “amorality” and “immorality”. But the thesis of the authors is that Enron is an at least as good illustration of “type II”, of window-dressing ethics, with talking instead of walking, ethics as rhetoric. While “type II” looks modern, “type III” looks like the old-fashioned type of moral business ethics, CSR, marketing and public relations were invented with collective moral conscience as consistent label and content, perhaps additionally communicating moral humbleness, with a touch of British understatement. “Type IV” refers to a moral role business culture in the age of marketing and public relations, with walking the talk, with showing and confessing openly its collective moral conscience.
http://www.springerlink.com/content/p712j1555807774r/ Enron Ethics (Or: Culture Matters More than Codes) – Ronald R. Sims, Johannes Brinkmann