Business ethics is an important aspect of any organization, and all successful organizations adhere to business ethics. Business ethics ensure that organizations adhere to moral and ethical principles as they undertake their day to day operations. Business ethics ensure that organizations and employees conduct business while following ethical principles. It also enables organizations solve challenges they experience while following moral principles.
Corporate social responsibility is a component of business ethics and it involves a commitment by organizations to follow ethical principles while at the same time contributing to social and economic development to both their stakeholders as well as the neighboring communities (Goree 43-47). Corporate responsibility entails following regulations and rules which govern specific industries and fields as well as empowering local communities through economic assistance. Business ethics has been linked to long term success by businesses which have operated over time.
It is important to analyze the various ethical issues which may affect organizations in order to understand how to cope with ethical challenges. In order to do this effectively, an organization which has a corporate or ethical responsibility to a specific market or region should be studied and various issues which affect it analyzed. This will enable us to make recommendations on how businesses should deal with ethical challenges which face them and the importance of taking up ethical responsibilities. This paper will focus on Enron Corporation, a firm which faced one of the largest fraud scandals ever witnessed in history.
The role of ethical and corporate responsibilities by companies on stakeholders will be analyzed with regard to this company and appropriate recommendations made at the end of the paper. History of Enron Enron Corporation was founded in 1985 after two natural gas companies, Internorth and Houston gas merged. It gradually grew and began selling electricity to the America market. After deregulation of the natural gas market, Enron was able to sell gas at a higher price, which translated to higher profits. Although local governments and producers complained about the high prices, Enron and its competitors was able to prevent regulation hrough lobbying (Collins 25-31).
In the early 1990s, Enron was the biggest natural gas merchant in North America and it had earnings of over $120 million before tax as at 1992. Enron later embraced the diversification strategy and it engaged in operating pulp, gas pipelines, paper plants, electricity plants, broadband assets and water plants, and this led to a huge increase in both market share and profits made. This also led to an increase in share price with Enron’s share price increasing by more than 300% between 1990 and 1998.
However, the company began facing financial difficulties soon after and these were linked to several fraudulent schemes. The financial statements of Enron were non-transparent and could not reveal its finances and operations to analysts and shareholders. In addition, its business model was very complex and this forced accountants to alter the company’s balance sheet to reflect a positive performance. This falsification of documents continued for many years until it became strongly rooted to the company. The overstatement of income and understatement of liabilities eventually led to the collapse of the company due to bankruptcy in 2001.
Ethical responsibility of Enron to stakeholders As a large corporation, Enron had a responsibility to all its stakeholders who included shareholders, government, suppliers, creditors, debtors and the local community. Enron is a large company which has an impact to these stakeholders and it has an ethical responsibility to undertake its operations while following a code of ethics. Companies have a responsibility to shareholders since they have invested in the company to realize wealth. The government also relies on companies for collection of tax, while creditors expect their payments after delivery of services or goods.
In addition, firms have a social responsibility to local communities and they usually implement corporate social responsibility programs which are geared towards empowering these communities (Dharan & William 101-103). Before the firm collapsed, it used to donate millions of dollars annually for several causes it believed in and some of these included cancer research and environmental conservation. As a large corporate firm, Enron Corporation also had a corporate social responsibility towards environmental conservation.
Large corporations such as Enron have this ethical responsibility since they greatly affect the communities and environments where they operate. Enron has a responsibility to conserve the environment since it is an energy producer and its products have an effect on the environment. The firm therefore strived to develop products which had less adverse effects to the environment. In addition, Enron invested in technology which reduced environmental pollution during the manufacturing stage of production. This made the firm accumulate goodwill from consumers over the years, leading to massive growth and profitability.
However, by indulging in corporate fraud and eventually going bankrupt, this corporation failed in this ethical responsibility. Enron’s management tolerated unethical practices such as corporate fraud and this led to the loss of goodwill by consumers and the eventual collapse of the firm. Its collapse affected all stakeholders including the local community. Employees lost jobs, shareholders lost wealth, the government lost its tax revenue and the local community was forced to close many projects which were being funded by Enron Corporation.
It is therefore important to analyze the Enron fraud scandal, understand why it occurred and give recommendations on how similar cases can be avoided in future. Enron fraud scandal As mentioned above, Enron collapsed in 2001 due to a series of fraudulent acts which involved financial misrepresentation and fraud. The accounting department used several accounting policies and procedures which were intentionally meant to hide the real financial position of the company.
This trend continued over several years and it began raising suspicion after the company hid its balance sheet from the public yet it was a public corporation. Soon after the CEO resigned and admitted that part of his reason for his resignation is the poor performance of Enron. After a few months, the public lost confidence in the firm and its share prices fell drastically. This led to a gradual process which eventually made Enron collapse. After Enron collapsed, shareholders lost over $70 billion in assets. Over 20,000 employees also lost their jobs as a result of the collapse of Enron.
In addition, creditors lost hundreds of millions of dollars in debt and most were unable to recover it, since sale of its assets was inadequate to cover the debts (McLean &Peter 45-49). In addition, several charities which were being funded by Enron as well as several environmental protection groups which received millions of dollars annually through corporate responsibility programs also lost funding. Causes of Enron’s collapse Management culture The management culture present at Enron was one of the factors which caused its collapse since this culture encouraged fraud and greed amongst the management.
Instead of the management creating wealth through ethical conduct, it intentionally allowed fraud and misrepresentation in financial accounts as a means of maintaining the share value. The CEO and senior managers knew of the company’s losses but instead of revealing this to stakeholders, they chose to use misrepresentation. When the top management condones misrepresentation and fraud, other employees view this as tolerable within the organization and they too are likely to engage in such unethical acts. Accounting problems There were a series of problems in the accounting department which caused the collapse of Enron.
Enron adapted several accounting systems and policies which were irregular and which misrepresented the company’s financial position (Racine 89-93). Enron had an ethical responsibility to stakeholders to give an accurate picture of the firm’s financial position. The firm’s accountants intentionally hid losses which the firms was making and they made Enron appear to be a profitable firm. The firm also hid its financial accounts from the public even though public corporations are required to make their financial statements available to the public.
Poor leadership Leadership plays an integral role in achieving long term profitability of firms as well as the realization of a firm’s core objectives. There are various leadership styles which organizations implement and one of the most effective is the participative leadership style. This is a leadership style in which employees participate in decision making and it has proved to increase employee motivation. When applying a certain leadership style, leaders should lead by example if they are to motivate employees to follow what the organization stands for.
Leaders should possess integrity if they are to motivate employees to be ethical. In the Enron scandal, leaders were part of the stakeholders participating in the corporate fraud, and this made employees lose faith in their ability as leaders. It also encouraged employees to further perpetuate fraud since it became “acceptable” after leaders began engaging in it (Salter 55-58). Analysis of causes Analysis of causes of the collapse of Enron with regard to ethical responsibility should be undertaken in order to understand how corporate fraud should be prevented in future.
As earlier discussed, Enron had a responsibility towards its stakeholders, including the local community. Enron Corporation was expected to create wealth for shareholders, pay salaries to employees, honor payments to creditors, pay tax to the government and support the local community. It failed in all these responsibilities after it collapsed due to mismanagement. Ethics ensures that organizations run their affairs with integrity and with a willingness to empower the general public through creation of wealth (Cruver 66-73).
However, for any organization to have integrity, its leadership should demonstrate ethical conduct. The top management should implement and follow the code of ethics if other employees are to do so. Enron management was aware of the unethical practices which were practiced by the accounting department, but it did not take any steps to discourage the vice. This made the organization fail in its responsibility to uphold ethics when carrying out its operations. It also encouraged subordinate employees to propagate fraud, which eventually led to the collapse of the firm.
The public lost faith in the company’s ability to achieve profitability in the long run after the corporate fraud scandal was highlighted by the media. This shows that all companies have to follow ethical rules of conduct if they are to maintain public confidence and achieve profitability in the long run. Conclusion and recommendation Corporations have an ethical responsibility to their various stakeholders, including the local community. It is important for them to uphold integrity when running their affairs in order for them to achieve their objectives to these stakeholders.
Corporate ethics and social responsibility are two important aspects which corporations and organizations in general should observe if they are to achieve long term profitability. Enron collapsed due to neglect of these two core principles. It collapsed after the management allowed fraud and misrepresentation by the accounting department. In order for organizations to discourage acts of fraud and misrepresentation, the first step should be to ensure that they hire employees with integrity.
When recruiting employees, they should carefully analyze their histories and resumes to understand the principles a person stands for. This will reduce the probability of employees committing unethical acts such as corporate fraud. The second step should be to ensure that the organizational culture strives to achieve the goals and objectives of an organization. The organizational culture should represent principles the organization stands for and these should include integrity and honesty. In addition, the practices in such organizations should be guided by a code of conduct.
Once these structures are in place, enforcement should be done by example and the top leadership should follow similar ethical conduct expected of employees. Enron collapsed due to reluctance by the management to observe ethical conduct while carrying out their activities and this encouraged many employees to follow suit and commit fraud. Finally, random audits should be carried out by both corporate managers as well as third parties in order to identify any unethical practices early enough and prevent the collapse of companies. If the Enron scandal was identified early, actions may have been taken to prevent its collapse.
Subject: Business ethics,
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 17 September 2016
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