Decision Making and Enron’s Control
Decision Making and Enron’s Control
Introduction – Students, analysts and critics of modern business practice will always consider the colossal Enron collapse as an important text book case about how a lot of different things inside the company can trigger a nearly overnight downfall of a once prestigious company. If there was any Cinderella story in the world of blue chip trading and high portfolio business, Enron was the ultimate opposite, if not the witch herself who was killed by her own lethal potion. The Enron collapse resulted in the formulating of many different opinions pointing to the many different possible reasons why Enron – with all the promise and potential that it has a few years before it went south – made the nosedive that made it one of the worst disasters in the history of trade, commerce and business.
There is no doubt that most of the opinions that surfaced explaining the reason why such an eventuality befell Enron placed the blame on the wrong things that the top management echelon did for the company; they are after all the one which is responsible for the present and the future of Enron. Critics looking at the Enron debacle scrutinized what happened leading to the collapse using many different perspectives and considering many different factors, both in the professional capability of the company’s leaders as well as the impact of the surrounding factors beyond Enron’s control.
One of the most important facets in the debate regarding the fall of Enron is decision making. Evidently, a lot of wrong decisions were made, with one every wrong decision acting as a building block that eventually became an insurmountable wall of consequences all borne out of wrong or faulty decision making processes that yielded results that did the company more harm than good. Indeed, the decision making linchpins significant to the establishment of the case that the Enron collapse was due in some extent to the decision making aspect of the leadership strata of the company can be
identified easily as it is scattered throughout the timeline of Enron’s very near and not so distant past leading to the eventual fall of the company that hid behind the façade of the building the ugliness created by the qualities of its leaders that caused the chaos that burned down Enron down to meager, worthless ashes.
This paper will pick the significant moments wherein the decision making capabilities and abilities of its top management leaders were at play and use these moments to establish the ethical and other considerations coming to play during the analysis of the decision making efforts of the leaders and why the outcome of such exercises led to the fall of Enron and not towards the company’s betterment, which is the main task of the company’s top executives. The paper will utilize these occasions to stress its argument regarding the role of effective, ethical and sound decision making of top executives leading to either the success or bankruptcy of companies, in this case that of Enron, and discuss key aspects of this line of thought. The paper will not criminalize the actions of the executives of Enron; rather, it will infuse inputs from other professionals regarding important aspects in the discussion of corporate decision making (ethics, result-orientation, etc).
Background – Various angles have already been explored by many different individuals every time the topic of analysis is Enron and its collapse. Because of this, the paper is moving to focus on an aspect that is focused more on Kenneth Lay and the rest of his top executive clique’s personal characteristic that could have played an important role in the outcome of Enron’s operation. Decision making is both a personal characteristic as it is a professional credential, even an asset. Some people are being paid handsome amounts of money for their ability to transform decision making moments into an opportunity that provides a positive result and expected outcome for the company. Ehringer (1995) puts it simply: ‘The ability to make good decisions is the defining quality of our lives’ (Ehringer, 1995, p. 1). When Lay, Skilling, Fastow and other Enron bosses were placed in their respective positions, they were expected to exercise a high level of intuitiveness, business acumen and professional foresight so that every decision making opportunity is met with the company’s best interest long term and short term in mind.
They were where they were because those who placed them there believed that they can make decisions to which the company can benefit from. When Enron collapse, many people and organizations criticized the questioned the decision making capabilities of the top executives – was the collapse an effect of the result of the decision that they made? Was the decision made putting the benefit of the company and the employees first, or are the decisions shaped so that it benefited them first? How bad was the breach in the ethical considerations that a professional should take every time he or she makes a decision that puts the future of the company on the line? These are just some of the questions that may also be present in the minds of those who followed the Enron case.
Sure there were varying degrees of deception and fraudulent acts from the part of many select individuals who sinned against Enron and its employees, but these cases would have been minimized or even averted altogether if the important decision making privileges was limited to a select few, or if the future-altering decision making capability is disseminated largely among a huge group of people that can provide a check and balance system for Enron. Roberts (2004) explained that ‘ if it is possible for others to make the decisions for a unit, then new options arise to design the decision-making process as well as the incentive schemes to get better performance on both dimensions. For example, the design might specify that a decision about a project arising in one unit that affects another would be implemented if and only if both units agree to it,” (Roberts, 2004, p.151). Enron is an energy trading firm which was performing well in the early part of its existence. By the start of the 21st century, the problems that the bosses were trying to hide from the public and from the employees started to stank.
Soon, events unfolded like dominoes falling one after the other as a consequence of information spilling out into the public’s attention. Before 2004, the public already had a clear idea about how Enron bosses were supposedly the one responsible for the defrauding of the employees and their company shares and other benefits, as well as the one responsible for the bankruptcy of Enron. One by one, key company officials stepped out of the light and implicated a new name, which will in turn implicate a much bigger name, until the dragnet sent out to see who was accountable for the fraudulent acts in Enron caught its top bosses, including Lay, Skilling and Fastow. Many individuals faced criminal charges, and many more simply went home not just jobless but are robbed of lifetime investments which Enron bosses manipulated and soon lost because of the wrong decisions they made on how to run the company and make it prosper and grow. Examples of how Enron management made wrong decisions during decision making moments abound in the history of the company.
Take for example what happened in 1987 – instead of declaring the $190 million loss the company experienced, they concealed it instead, leading to criminal charges. This habit of Enron for opting to conceal losses instead of declaring it became a dangerous vice; when Fastow was aboard Enron, the same outlook affected the decision making of Enron, leading to increase in pile of cases wherein Enron through its top management consciously made actions that defraud the employees and the public. There was also the case of poor public relations by Enron which fanned the flames of panic that removed any possible opportunity for Enron to remedy the financial situation without creating hysteria that saw many stockholders selling their stocks due to the continued falling of the stock value of Enron.
Statement of Problem – The most important decision that Enron’s executives faced was not the decision on whether or not to publicly announce about the bankruptcy; in fact, there was no decision making factor during that instance since the predicament of the company has already been decided regardless of what the top executives might have opted for: they were flat out broke and the public needs to know about this, that was the situation. The true decision making moment for Enron’s bosses was the time when they were deciding what the best option to take is with regards to the financial aspect of the company, including taxes, earnings and financial loses.
It was a matter of facing a decision making task that provided the Enron bosses with two options – to do the right thing, or to opt for something that is morally and ethically inappropriate. The decision reached in this particular decision making instance was laced with the hope that the option they took would be free from serious repercussions and give them enough time to fix it all up again. Unfortunately for Enron, things did not work out as planned, and the criminal liability of the Enron bosses stemmed from the fact that they decided to do something which they consciously knew was detrimental to the welfare of the Enron company and its employees. During that particular instance, Lay could have opted to do
the right thing and faced the consequences – by coming clean, he may have a more sympathetic public to support him in whatever efforts he may wish to undertake to revive Enron, and not be faced with the collapsing stock value since those who can sell theirs sell it in a frantic phase to rid themselves of the stock of the company which is nearing imminent bankruptcy. This showed how the people do not give second chances to those who squander their decision making privileges by making decisions bereft of the consideration of the good of the greater many. Decision making – John Hintze (2006), in his discussion about making smart decisions during decision making, used the case of the Enron collapse to open his discussion and establish the fact that problems are something that is foreseen, something that happened nonetheless owing to bad decision making. Hintze wrote, ‘should we have seen 9/11 coming? What about the Enron collapse? The Signs were there; people pointed them out, but the appropriate steps were not taken by those in a position to do something. Why is this? Politics? Greed? Those certainly contributed, but there was something else at work here, too: A failure of common sense in decision making’ (Hintze, 2006, p. 123).
Enron: Bad decision making – Nothing can prove more about how bad the decision making went inside Enron camp more convincingly than the fact the company transformed from prosperous to poor overnight. This was the general characteristic of Enron through the traits shown by its leaders that reflect the Enron personality. There were earlier discussions in the paper about snippets on instances pointing to Enron’s penchant for making bad decision or for going to the resolving of a problem utilizing an option that is more questionable. Fox (2004) explained that ‘Enron believed that its expansion into international projects were positive initiatives simply because they put the company in more potential markets. In truth, Enron made bad business decisions that weren’t supported by the deal’s economics. The bad business decisions piled up, stretching from India to Brazil, pressuring the company to do something about its finances’ (Fox, 2004,p. 307).
At least at this point, Fox is not pointing at the unethical aspect of the Enron decision making machinery, just the fact that they made decisions that were bad for the future of the company, but not to the extent of deliberately sabotaging the company or putting the company in danger with all known risk for personal gain. For Fox, it was a bad call plain and simple. But the matter of the fact is that not everyone sees it the way Fox does, and there are those who believe that there were ethical breaches in the decision making in Enron among its top bosses. The (absence of) Leaders in decision-making – Decision making in retrospective is one of the common line of thinking used when investigating events that led to growth or debacle. It is because decision making played an important part in shaping the future of the company; it is here where the foundation, or lack of it, was created via the decisions the bosses made or failed to make.
To trace the problems or mark significant actions resulting from decision making which eventually resulted to either the success or failure of the company, it is not only the decision making events that are looked back to; the persons that made them were also put under the microscope, and among the qualities scrutinized is their decision making ability and their other characteristics that affect their decision making attitude and behavior. Professionals debate about the idea of a good decision, a bad decision, good intentions and bad intentions and how the good and bad effect that comes into play afterwards account for the overall accountability of a person wielding the power to make decisions that will have a tremendous impact on the future of the company, something which happened in Enron via Lay, Skilling, Fastow and the rest of the top figures of the company. Acuff (2004) explains that ‘if they make a decision that might not have been the decision I would have made, and they come and talk to me about it, we look at it and discuss it.
There are a lot of different ways to skin the horse. I don’t go saying my idea is the only one that will get you where you want to go. I hold people accountable for good decision-making. If a bad outcome results from a bad decision – that’s a problem. But if a bad outcome results from a reasonable decision, then that’s business, and it could happen to anyone” (Acuff, 2004, p. 187). This was the predicament of those who are trying to evaluate the decision making actions of Enron top executives – did they make decisions, even bad decisions – with the sake of the company in mind, and gambled with their careers because they know that if their plans and actions go well, it is extremely beneficial for the company, in a very Machiavellian approach towards getting things done regardless of the means by which they did it, or were they just plain guilty of fraudulent actions? People who are burdened by the decision that impacts a lot of people is not always amenable to taking the high and moral grounds, that is why the adage about the end justifying the means, about getting things done at what ever cost, about delivering against the odds became popular because of people like the Enron bosses who (probably) acted upon their decision making duties by risking what can be a popularly bad decision.
Indeed, it may be easy or even convenient for most people adversely affected by the Enron collapse to attribute the colossal corporate debacle to the top management figures of the company by criticizing their decisions as well as their faculty for sound decision making. While it is true that Enron’s top executives are responsible for the collapse of the company, it is not that easy to measure the level of ethical decision making attributes of Enron’s top brass.
Goethals et al (2004) pointed out that “the complexity associated with ethical decision making and behavior, especially as it applies to leadership and the workplace, makes the construct extremely difficult to research”, adding that “Measuring an individual’s level of ethical decision making is challenging, particularly because the measurement instruments that are available have problems with priming and social-desirability effects; that is, questionnaires or other similar modes of data collection cue respondents to give answers that they believe are socially acceptable rather than answers that truly reflect their own actions or opinions (Goethals et. al., 2004, p. 461).”
Proof of which is the fact that all of these executives in question are career corporate leaders even before they joined Enron; their credentials played an important role regarding their selection for a corporate position as high as theirs. Because of this, as well as the factors that affect the credibility of the ability for identification of the real public pulse regarding the persons involved in the issue, ethical decision making levels of the persons involved is hard to ascertain, making claims for questionable ethical decision making consideration of the people lose important ground and stand on insufficient set of stable legs for proof and justification. Still, there are those who believe that the level of ethics that influences the decision making capabilities of the Enron bosses are without a doubt questionable, and this includes Mimi Swartz and Sherron Watkins who was quoted in the book edited by Kathy Fitzpatrick and Carolyn B. Bronstein.
In the article, it mentions about how Swartz and Watkins “blame Ken Lay, former CEO of Enron, and other company executives for privileging greed and arrogance over ethical business decisions” (Fitzpatrick and Bronstein, 2006, p. 179), the gist of the published work co-authored by the two individuals. Nalebuff and Ayres (2006) wrote that ‘the problem often arises because people ignore the costs and benefits that their decisions have on other people. We call this approach “Why don’t you feel my pain?” The more technical term for these effects is externalities. Decision makers who ignore externalities are bound to make bad decisions” (Nalebuff and Ayres, 2006, p. 67). This explanation greatly tarnishes the ethical value of the decision making ethics of Enron bosses because it shows that they are prone or inclined to make decisions even if the result of such decisions lead to negative effects that other people will experience.
Niskanen (2005) believes that Lay, one of the top bosses of Enron, “should be judged on the basis of his personal actions, directions to subordinates, or the actions of subordinates that he implicitly condoned by knowing about it without attempting to correct – not on the basis of what he should have known” (Niskanen, 2005, p. 6). Lay’s condoning of actions is a result of a personal and professional decision that he made – or failed to make – and because of that, Niskanen believes that Lay is answerable for any criminal charges that would result from that particular action (or inaction). Watkins was thinking of the company and its employees and their future and hers as well, when she made the decision to let her superiors, particularly Lay, know about the possible accounting problems and the making public of the current and real financial and trade status of the company. This clearly illustrates the difference in ethics when it comes to decision making.
Decision making, ethics and public perception – Decision making in business is not merely a power or a privilege that one can use at will without thinking of the consequences that might happen should the decision resulted into something that is considered as adversely negative and detrimental to the welfare of the employees, their jobs and the company they work for. Those who are provided with such amenity to go along with their job description should consider that it is also their responsibility to make sure that their employees and subordinates do not think that they are squandering away their decision making privilege and everything that goes along with it. This was the prevailing attitude or outlook of the Enron employees especially nearing the imminent collapse of the company.
The absence of ethical consideration resulted to the losing of the credibility of the bosses of Enron because they were not careful with how they undertake their decision making tasks. While bankruptcy is something that is very difficult to accept and impacts greatly in the lives of the employees especially the rank and file blue collar workers, there is a sense of adding insult to injury during occasions wherein the employees are starting to realize that all of the unfortunate things that happen in the company and in their careers are all a result of the faulty, incompetent and unethical decision making of the top management echelon and not because the company was helpless in the onslaught of a devastating economic problem, like how companies closed down during the Great Depression despite the efforts of American businessmen to keep the different industries alive and breathing.
During the collapse of Enron, the US is experiencing a very stable economy far from that which characterized US economy during the Great Depression, and is shielded securely from the impact of whatever it was that was happening in the global economic and business landscape, and so during the Enron collapse, the collective finger was pointing an accusing index digit to Enron bosses and majority of the cause of their indignation originates from the sloppy decision making capabilities of Enron bosses who lost their credibility the moment they lost Enron. Brazelton and Ammons (2002) wrote in the book they co-wrote: “The Ethics Resource Center conducted a survey in 2000 in which it learned that 43 percent of respondents believed that their supervisors are generally poor examples of honest managers, and the same number were pressured to compromise their own integrity or that of their organization during decision making.
The survey also identified a strong connection between employees’ perceptions of their supervisors and their own ethical behavior (Brazelton and Ammons, 2002, p. 388).” Enron decision making: the two-pronged factors – It can be pointed out that one of the problems that happened to Enron is the ineffective of decision making among top executives – first, their top executives failed to make correct decisions when they are required to do so, and second, Enron was not fully complimented with a set of professionals which could have contributed to the decision making process, and in the process provided the possibility of infusing new or different ideas that could have altered the outcome of the decision making process. Fitzpatrick and Bronstein (2006) did not look exclusively on Enron’s bosses and the decisions they made in the management of Enron and the company’s money and asset, rather, the two editors focused on the absence of a key top management personnel and took the presence of such a void as a sign that Enron is not even prioritizing the welfare of the company and its employees.
The book Ethics in Public Relations: Responsible Advocacy, which includes the Enron case as one of the important case studies to point out the importance of the role of public relations, explains that “perhaps the governance of these companies was such that they did not care about their publics, and did not want the advice of senior-level public relations officer playing an active or dominant role in organizational decision making” (Fitzpatrick and Bronstein, 2006, pg 179). Conclusion – Niskanen (2005) summed up the Enron case on its characteristic of thriving in bad decisions made by its corporate leaders by saying in the book that ‘the most important lesson from the Enron collapse, however, is that Enron failed because of a combination of bad business decisions, not because its accounts were misleading’ adding that ‘the major business decisions that most contributed to its collapse were a series of bad investments, most of which were in the traditional asset-rich industries; the failure to reconcile two quite different business models; and the decision to focus management objectives on reported revenues and earning rather than on the present value of future cash flows’ (Niskanen, 2005, p. 6).
Are they poor in decision making, or was the decision making adversely affected by other concerns and priorities outside of Enron that the results of the decision made for Enron looks like those who made the call did not even think about how this course of action will affect Enron? There are no sufficient proofs to point that the case was the latter; for a company that became seventh all in all in the Fortune 500 at least once, it is unthinkable how there will be conscious efforts to sink the company by making wrong decisions, deliberately or not.
The point of the paper is not the assertion of the guild of Skilling, Lay or even Fastow, it’s the establishing of the point that decision making, when not handled properly, can turn even the most profitable company into a nose-diving wreck in a short period of time, that decision making plays an important role in how a person defines his or her life and how he or she leads a company and that because of these factors, no one should have an excuse why decision making was taken lightly and without much thought or care. All the people can see is a group of people who made wrong decisions several times, the resulting web and how they got trapped in that web, that is assuming that there was no malice or hidden agenda that the bosses perpetrated in lieu of Enron’s collapse. In the end, only Lay (now deceased) and the elite circle of the Enron executive clique will be the ones who would really know about the truth regarding ethics and the decision making in Enron leading to the collapse of the company.
Many would ask, and some would presume, the reasons as well as the level of guilt of these leaders when it comes to breaching the ethical requirements needed when undertaking decision making for a company. Regardless, the decisions they made created far reaching ripples and altered the lives of many individuals who invested not just their time, strength and life’s savings into the company but as well as their but as well as their faith and trust, which are not in shattered pieces because of the bad decisions that Enron executives made. Crawford (2006) further elaborated on the pointed by explaining that ‘bad decisions by a major company, however, cause major disruptions for all of the company’s stakeholders’.
He pointed at the case of Enron as one of his examples, saying that ‘the Enron disaster, as one example, certainly had devastating impacts on the lives of most of Enron employees (including the middle managers and professionals who invested in the company-sponsored Enron 401[K] plans) and also caused suffering for many individual investors who purchased Enron stock on the open market. Thousands of other Enron stakeholders, including Enron’s suppliers and customers, also suffered,’ (Crawford, 2006, p. 26). Indeed, Enron’s decision making had a hand in how the company turned out to be.
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University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 11 November 2016
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