Systemic Corporate and Individual Issues with Enron

This case discusses the story of Enron, the infamous American energy company that December 2, 2001 filed the largest bankruptcy case in US history, totaling losses around 66 billion US dollars, forcing 4,000 unemployed, and bringing down Arthur Andersen,  its auditing company. For many of the “bad” and publicly convicted Enron executives it has been the worst nightmare come true, a personal travesty. Cliff Baxter, an Enron executive, has committed suicide and Ken Lay, after being found guilty of conspiracy and fraud, died of heart attack.

We might ask, why did these people choose to risk so much?

Did they not consider personal responsibility? Did they not consider the possibility of prosecution and consequences of public hate? Did they not consider the pain and anguish their relatives and family would have to bear? Enron was one of the world's largest energy, commodities and services companies. Before its Chapter 11 bankruptcy filing, it marketed electricity and natural gas, delivered energy and other physical commodities and provided financial and risk management services to customers worldwide.

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It was America's seventh largest company and employed over 21,000 people in 40 countries.

Andersen, who were Enron's auditors, have come under criticism for their failure to disclose the true nature of Enron's financial position. There have also been criticisms regarding Andersen's audit independence, as they also provided consulting services to Enron. The SEC promulgated the current rules dealing with the independence of auditors in November 20005. Briefly, the rules provide that an auditor is not independent if a reasonable investor, with knowledge of all relevant facts and circumstances, would conclude that the auditor is not capable of exercising objective and impartial judgment.

The rules do not extend to a total ban on non-audit services, but identify circumstances in which their provision will impair auditor independence. The role of Enron's auditor in the failure of the company and regulations dealing with an auditor's independence are not dealt with in this paper. Another member of the panel will discuss these issues. Andersen and Enron also shredded thousands of documents connected to Andersen’s audits of Enron. Inquiries have revealed that Enron had been shredding documents up to early January 2002.

The Justice Department has now filed criminal obstruction charges against Andersen in relation to the shredding of audit documentation. At the heart of the Enron collapse are issues relating to corporate governance, including the structure of the board and the role of the internal audit committee and stock option plans held by executives. Although there were non-executive directors on Enron's board, it appears that there were little or no checks on the actions of executive members of the board.

It is alleged that, at Enron, the internal audit committee failed to hold the accounts and their preparers up to scrutiny. Enron executives cashed out more that US$1 billion in company stock when it was near its peak. Further, in November 2001, 600 employees regarded as critical to Enron's operations received more than US$100 million in bonuses. At Enron, the scale of the rewards generated for senior management by stock option plans was extremely large. What are the systemic, corporate, and individual issues raised by this case?

Compensation plans were tightly geared to the share price risk, providing a temptation to manipulate it. History knows many similar incidents where a system takes over, where people in disdain look in retrospect, saying, how could something like that have happened? In this respect Enron is no different; it is a testament to human nature, of the frail nature of human morale. At the same time it is a case about the system, about the social, and the affect that the system has on the individual. My objective here is to suggest some reasons why immoral and irrational behavior came to be in Enron.

I focus on Ken Lay’s leadership and speculate why he chose in favor of decisions that were non-systems intelligent in terms of the company’s long-term moral development. But rather than assuming immoral behavior at Enron having roots in the immoral character of the leader, I develop an outlook that attributes some of the problems in moral development to Lay’s emotional life. I discuss the possibility of a conflict between his Christian values and those required in moral leadership and suggest how this conflict, when repressed, may have undermined his moral integrity and motivated immoral behavior in his followers.