The failure of Enron Essay
The failure of Enron
1) What were the individual factors that contributed to the failure of Enron? Briefly explain two key factors.
Enron collapsed in large part because of the unethical practices of its executives. Egoism (Self interest) was one of the major factors contributed to the failure of Enron. Enron’s executives put their own interests above those of their employees, company and the public, and failed to exercise proper oversight or shoulder responsibility for ethical failings. They allowed themselves to be motivated much more by what would benefit themselves than what would truly benefit the company. Money, greed, arrogance and hubris led company executives to lose focus on working for the good of the company and to act unethically (Gini,2004). Abuse of power to make decisions which were beneficial economically and politically to themselves and the company, was one of the key factors that led to Enron’s failure.
Company leaders used insider information and traded millions of dollars in company stock, borrowed from subsidiaries with no intent to repay the loans (Wilke, 2002) , and avoiding federal taxes even though some of its subsidiaries, like Portland General Electric, collected tax payment from customers (Manning & Hll, 2002). Such behaviors of moral failure at the top and irresponsible behaviors led to the collapse of Enron. The unethical behavior of Enron’s leaders appears to be the product of both individual and situational factors. Greed was the primary motivator of both managers and their subordinates at Enron (Cruver, 2002).
Optimistic earnings reports, hidden losses and other tactics were all designed to keep the stock price artificially high. Lofty stock values justified generous salaries and perks, deflected unwanted scrutiny, and allowed insiders to profit from their stock options. Greed was not limited to top Enron executives, however. Meeting earnings targets triggered large bonuses for managers throughout the firm, bonuses that were sometimes larger than employees’ salaries. Rising stock prices and extravagant rewards made it easier for followers as well as leaders to overlook shortcomings in the company’s ethics and business model.
2) What were the organizational factors that contributed to the failure of Enron? Briefly explain two key factors.
Leadership, Culture and Management controls were the key organizational factors that contributed to the failure of Enron. Company executives and managers directly impact the ethical direction of a company. When the executives and managers are ethical, employees are more likely to act ethically. When a company lacks committed ethical leadership, as did Enron, ethical standards will not be maintained. Because Enron lacked ethical leadership, it experienced a breakdown in its corporate structure and culture (Gini, 2004). Eventually, the entire company collapsed as a result. Enron created a culture obsessed with the bottom line and not with ethical behavior. The company culture demanded conformity and penalized dissent. Consequently, employees adopted and complied with the culture demanded by the company’s leaders.
Once leadership has crossed the line to unethical behavior, unethical acts can become accepted in daily activities and employees have many reason for remaining quiet. The system (a harsher variant of one used at many companies) encouraged cutthroat competition and silenced dissent. Followers were afraid to question unethical and or illegal practices for fear of losing their jobs. Instead, they were rewarded for their unthinking loyalty to their managers (who ranked their performance) and the company as a whole (Fusaro & Miller, 2002). The maximization of profit was aggressively taken to such an extreme that the leadership trait of integrity became a non-factor within the culture at Enron.
This lack of integrity was a serious flaw within the organizational structure and culture of the company for while important group members, like Andrew Fastow, began encountering situations requiring the honest disclosure of financial information; few employees or group members were provided with the external motivation from Skilling’s leadership to tell the truth about Enron’s real financial situation. Those individuals that did have the integrity to speak honestly about Enron’s financial losses were dismissed, demoted, or summarily fired by those in power in a process known in the Enron lexicon as “rank and yank”
3) What were the social factors that contributed to the failure of Enron? Briefly explain two key factors.
From a group perspective, Enron’s executives and employees were influenced by groupthink. Groupthink involves group members hiding or discounting information to maintain group cohesion. The group members collectively overestimate the group’s morality and ability, ignore contradictory information, and pressure each other to preserve conformity. The company hired and promoted individuals who were highly motivated by monetary rewards and promotions.
Enron then provided the employees with incentives to take risks and focus on making profits, no matter the means. Anderson audit firm also played part in the downfall of Enron. When the accounting firm found out about the scandal, they should have said “NO” to Enron and should have reported SEC. Instead, they took their share of money to help to cover Enron’s debts and losses. Enron’s collapse was devastating in many regards. Thousands of people lost their jobs and their retirement savings, the energy industry was greatly affected. The greatest damage was to people’s trust in businesses and their leader.