Business Leadership

Business Leadership

Executive Summary

Enron envisions itself as a worldwide leader in the energy industry. After Enron’s collapse into bankruptcy in 2001, Enron is now considered the poster company of the biggest business ethics failure in corporate America. Enron involved itself in various complex transactions for the purpose of concealing its escalating debts mainly because of sweetheart deals. As such, the key reason for the collapse of Enron is because of the lack of an ethical culture within Enron. Lay, Skilling and Fastow all played critical roles in Enron’s downfall. Leadership is one of the most pressing issues in the corporate world which is made more difficult when ethicality and morality are put into the equation. Enron’s leaders exemplify the direct opposite of what an ethical leader is. Enron’s case affirms the need to have ethical leaders.

Table of Contents

 TOC \o "1-3" \h \z \u Executive Summary. PAGEREF _Toc295575998 \h 1

Table of Contents. PAGEREF _Toc295575999 \h 2

1.0 Introduction.. PAGEREF _Toc295576000 \h 3

2.0 Brief Outline of Events. PAGEREF _Toc295576001 \h 3

3.0 Literature Review.. PAGEREF _Toc295576002 \h 5

4.0 Leadership at Enron.. PAGEREF _Toc295576003 \h 8

4.1 Enron Leaders’ Accountability. PAGEREF _Toc295576004 \h 8

4.2 Emerging Trends and Best Practices. PAGEREF _Toc295576005 \h 12

4.3 Recommendations on Leadership Philosophy. PAGEREF _Toc295576006 \h 14

5.0 Conclusion.. PAGEREF _Toc295576007 \h 16

References. PAGEREF _Toc295576008 \h 17

1.0 Introduction

Leadership is the critical component of the organisation’s culture since they can create, reinforce or change the organisation’s culture. This applies not the least to an organisation’s ethical climate. Simply known as business ethics, business ethics perceive leadership as a social paradigm yet multi-dimensional. Business ethics also extends to financial aspect which is always thought to be free from ethical-burdens. Why be ethical? Is being lawful or righteous not enough? Would it be acceptable to do the lawfully right but morally wrong? These and other questions that centers on ethical governance are faced by virtually all companies; Enron is not an exemption.

How leadership and leaders affect the conduct of a specific company will be discussed in this report. Enron, which is the largest energy company in the US that went insolvent in December 2001, fell considerably because of incompetence and unprofessionalism of its leaders. How these Enron leaders, specifically Kenneth Lay and Jeffrey Skilling, contributed in the rise and fall of Enron will be the focus of this report.   

2.0 Brief Outline of Events

Pre-bankruptcy in 2001, Enron, which headquartered in Houston, Texas, was the leading provider of energy, commodities and services with revenues of $101billion in 2000. In fact, Enron was considered the largest seller of natural gas in North America in 1992 aside from being recognised as a world leader in electricity and communications. The company was basically involved in the transmission and distribution of electricity and natural gas. In lieu with this, Enron was acquainted in developing, building and operating power plants and pipe lines. The company owned large natural gas pipelines, stretching ocean to ocean and border to border from Canada to Florida. Named as one of Fortune’s “100 Best Companies to Work For”, Enron employed approximately 22,000 workers. Enron provided great benefits for its workers including a comprehensive long-term pension programme. 

It was suspected that the failure of penetrating the water utility market marked the start of incurring large sums of debt for Enron. In 1998, Enron created the Azurix Corporation which will be the water provider. While it part-floated in the stock market for a while, one of its major concessions in Buenos Aires incurred large losses. Such suspicions prompted the then CEO of Enron to pursue aggressive retribution against the critics. Enron set new standards to cover how it deals with accountants, lawyers and financial media. Financial flaws of Enron were revealed in August 2001 which encouraged investors of Enron to their sell stocks and bonds at relatively low costs. Nevertheless, Enron had already embraced fraudulent nature in accounting when Finance CEO Jeff Skilling hired Andrew Fastow in 1990.

Chief Finance Officer Fastow well understood the then escalating deregulated energy market that Skilling wanted to exploit during that time considering its pecuniary promises. Fastow introduced various instruments of limited liability to Skilling which are basically special purpose entities. Limited liability refers to the financial concept wherein the financial liability of a person is limited to a fixed sum while special purpose entities are legal entities created to satisfy narrow, specific and temporary objectives. Such a process allowed Enron to conceal its balance sheets by placing liability in a way that it would not be reflected, allowing the company to sustain growth in stock prices. Enron used the weaknesses of Generally Accepted Accounting Principles (GAAP) to its advantage, and with the role played by its auditor firm, Arthur Andersen. After its irregular accounting procedures and fraud were revealed, Enron filed for bankruptcy in December 2, 2001 which is considered as the largest bankruptcy in history.       

In brief:

Date		Event
1989		Enron begun to trade natural gas commodities
1990	June	Skilling joins Enron
1996	December 10th	Enron announces Skilling will take over as COO
1999	June 28th	Enron’s BOD exempts CFO Fastow from the company’s code of ethics
2000	August 23rd	Enron stock hits a record high of $90/share
	December 13th	Enron announces Skilling will take over as Chief Executive in February
2001	July 13th	Skilling announces desire to resign
	August 3rd	Skilling lays off 300 workers
	August 14th	Skilling resigned and Lay became the CEO again
	October 23rd	Lay professes support for Fastow
	October 24th	Enron ousts Fastow
	November 28th	Enron’s share plummeted to $1
	December 2nd	Enron files for Chapter 11 bankruptcy protection
2002	January 23rd	Lay resigns as Chairman
	January 30th	Stephen Cooper takes over as Enron CEO

 

3.0 Literature Review

Basic to leadership structures is the integration of good traits, socially acceptable behaviours, positive contingent factors, ethicality and values, all of which is a foundation of ethical leadership. According to Mendonca and Kanungo (2006), ethical leadership in organisations is prompted by the increasing social concern that it is unacceptable for organisation leaders to be indifferent to moral responsibility much less engage in unethical behaviour. All organisational members are responsible in ensuring that organisational objectives are achieved in a manner that is consistent with these ideals and serve their own welfare as well as the larger interests of society. However, it is the primary duty and responsibility of organisational leaders to provide the proper direction and the high standards of performance. It is the leaders’ moral principles and integrity that give legitimacy and credibility to the vision and sustain it.

As such, organisational leaders need to be more responsible not just to the stockholders but also to the stakeholders which include consumers, employees, suppliers, government and local communities. Although businesses undeniably need profits, the sole preoccupation with profit at the expense of other considerations is no longer acceptable. Profit, which is one the be-all and end-all of businesses, is now viewed as instrumental in serving the larger interests of the society which in turn implies that business decisions should be based on high standards of both economic and ethical performance (Mendonca and Kanungo, 2006; Bellingham, 2003). 

Fruther, Garnsten and Hernes (2008) mentioned that the issues that capture the attention of the leader will also the capture the attention of the organisation and will become the focus of the employees. When leaders focus on the bottom line and employees were made to believe that financial success is the leading value to consider. Such a concept deliberately considers rules and morality as hindrances which impede the achievement of bottom line financial success. Landy and Conte (2009) said that ethical leadership is demonstrated by behaviours and not by personality. Thus, the personality characteristics will make a difference only if they translate into ethical behaviours that can in turn positively influence the behaviours of those in lower positions (p. 561).

When leaders ignore and then seriously deny problems with the business transactions and were more concerned about their personal financial rewards than those of the company. Salter (2008) affirms that the ethicality in leadership concerns the personal agenda and deportment of the chief executive. Such behaviour is far more influential in defining an organisation’s character and ethical predisposition than any policy issued over a CEO’s signature. Mendonca and Kanungo mention that it is not enough for leaders to have the intellectual capacity to distinguish between morally good or evil acts (2006). Leaders must take the initiative to habitually incorporate moral principles in their beliefs, values and behaviour. 

McCoy states that the main issue here is not about the technical aspects of laws and regulation but the deliberate committing of fraud (2007). Fraud is a state of mind and a state of mind is beyond the scope of the legal system. Fraud thereby has the face of an honest man. Further, leaders should have a moral compass within which they would set limits and establish controls. There should have been transcendent goal that arises over annual bonuses and momentary success.

Evidently, there was hubris or the emblematic of having too much faith in power among business leaders. Unethical behaviours and actions were because of the leaders’ own hubris. Such a type of behaviour is not sustainable since there would be genuine fulfilment in the process. Lesson is that: greed and self-interest may result in significant short-term financial gains, but it does not result in effective, enduring and fulfilled leadership (Sloan and Pollak, 2006).

As such, the leaders reinforce a culture that is morally flexible which opened the door to ethics degeneration, lying, cheating and stealing (Garnsten and Hernes, 2008). Ethical climate of an organisation is a significant element in organisational culture since it is its character or conscience that resolves issues of right or wrong (Peterson and Ferrell, 2005). This fails the notion of ethical leadership which is essentially transformational in nature, highlighting the self-transformation of both leaders and followers (Mendonca and Kanungo, 2006, p. 74).   

4.0 Leadership at Enron

When ethical leadership is being discussed, the case of Enron is considered the point of reasons. What makes Enron’s leaders namely Kenneth Lay and Jeffrey Skilling accountable for the downfall of the corporation are outlined in this section. For one, the fall of Enron is said to be because of unethicality of the leaders. Executives at Enron are otherwise demonstrated values that are but legitimate and credible. Salter (2008), in his own words, said that, “it is perhaps the easiest to define ethical leadership by pointing to the crippling effects of its absence” (p. 327). Combined with short-term financial pressures, there had been personal opportunism evident on the corporation’s executives.

4.1 Enron Leaders’ Accountability

While Skilling and Lay shared the same ideals when it comes to profit, Goethals, Sorenson and Burns (2004, p. 437) noted that Lay ultimately stood at the centre of Enron scandal. Johnson (2004) stressed that excess typified Enron’s top management and particularly Lay. Lay was caught saying that he wanted to be rich – to be a world class rich. Aside from personal motives, Lay is also deemed as a responsible leader since he and Skilling was warned that the firm’s accounting tactics were suspect by the Senate Permanent Subcommittee on Investigations. The Committee noted that ‘much that was wrong with Enron was known to the board’ (p. 29). Lay downplayed warnings of financial improprieties and some of the board’s members did not actually understand the company’s finances or operations (Johnson, 2004).

Williams (2005, p. 14) termed Lay’s leadership style as a counterfeit leadership to which he defined as not necessarily deceitful but the kind of actions are irrespective of Lay’s intentions. Lay was a considerable man of knowledge and expertise who drove Enron to more than $65 billion market capitalisation and $82 share price in 1999. He already knew about the sweetheart deals but covered them up hence his behaviour was deceptive, even criminal. This is more so because he fired an employee who brought to him important [financial] information to his attention. As a counterfeit leader, Lay used his power to avoid reality.

Hamalainen and Saarinen (2007) took notice of the conflict between Lay’s Christian values and those required in moral leadership and suggest  how such conflict, when repressed, may have undermined his moral integrity and motivated immoral behaviour in his followers. Being a son of a Baptist teacher, Lay, by convention of virtue ethics, is a good man as well as intelligent analytically and socially. While Lay acted altruistically and represented age-old work virtues, Lay has a decisive weakness. He tended to avoid tough decisions that can make people go mad. Evidently, Lay was constantly drawn into conflicts with his beliefs when confronted with situations that required tough decision making which represents a transactional leadership though he was initially a transformer. What seemed at first a rational choice between two alternatives brought to surface a deep conflict with his own decision making and value structure (pp. 170-174). 

On the other hand, Goethals, Sorenson and Burns (2004) assume that Lay’s culpability remains a matter of debate. In spite his reassurance to investors and employees in the face of mounting evidence of financial fraud, experts wonder if Lay was truly informed about or even truly understood the corporation’s elaborate techniques for concealing debt and inflating its own financial performance. Lay claimed to have been unaware of the sweetheart deals to which were entirely brainchild of Skilling and Fastow (Garsten and Hernes, 2008). As argued though, Lay should have known what was going on because he was ultimately responsible for Enron’s legal, ethical and financial behaviour.

Focusing on Skilling, Garsten and Hernes (2008, p. 107) affirm that one of the former executives of Enron described Skilling as a leader driven by profits. Skilling would always say that all that matters is money; you buy loyalty with money (as cited in Garsten and Hernes, 2008). Thereby, the attention of Enron’s leaders was too focused on profits which led to the cultivation of hunger for power, greed and influence. Skilling communicated his priorities to his employees overtly in both word and deed. As such, clear signals were sent to the employees at Enron and what is important for its leaders – profits at all costs (as cited in Garsten and Hernes, 2008).

When the scandal broke, Skilling’s reaction was telling that despite his Harvard Business School degree and business experience he claimed that he neither knew of nor would understand the intricacies of the Enron accounting deals. Ironically, Skilling had so much faith in his own intellect and the power of that intellect to convince himself and many others that the Enron strategy would be key in dominating the marketplace. Other than this, even before the scandal, there were hints that Skilling was willing to abandon the company, saving his own skin (Garsten and Hernes, 2008, p. 108; Sloan and Pollak, 2006). 

Fastow, the Chief Financial Officer, was the one who continued to emphasise reported earnings while stonewalling regarding returns on capital from the trading business with the decisions coming from Skilling. As such, Fastow also misled the investors on greater heights by inflating the value of the corporation’s assets artificially while hiding a large sum of debts through special purpose entities. Fastow and his staff earned millions of dollars while overseeing these entities, Along with Skilling, Fastow continued to defend his behaviour and avoided prosecution in the process (Goethals, Sorenson and Burns, 2004, pp. 439-441).

Kellerman (2004) said that Fastow deeply admired Skilling and Skilling tried to please him; Skilling, in return, relied on Fastow to protect the value of the company at all costs. Nonetheless, Skilling was perceived to be a hands-on, down-to-the-details manager. Skilling was also perceived to be complementary to Lay’s more detached, more congenial and highly political leadership style. Skilling transformed Enron into a New Economy intermediary for the energy industries from a fairly standard natural gas supplier (Knaap, 2008). 

In sum, there are two basic reasons why Skilling and Lay were at fault for the collapse of Enron. The first leadership fault at Enron was rooted in the failure of Skilling and Lay to fully understand the source of Enron’s institutional vulnerability, and its potential costly outcome. Such a failure was accompanied by the failure to define and actively promote purposes and values towards becoming ‘the world’s leading energy company’. This statement does not necessarily warrant clear decision making premises and ethical guidelines for Enron employees (Salter, 2008). McCoy (2007) argues that the greatest crime at Enron is breaking of the public trust which is beyond ‘the unconscionable sums some Enron executives were paid in relation to their contribution to the society (p. 25).

Another leadership default was reflected in the fact that Enron’s espoused values of respect, integrity, communication and excellence which were enjoyed only superficial acceptance in its trading operations and financial office. With this, it is necessary to for leaders to prevent uncharacteristic behaviours through working constantly to infuse the organisation with values that have a disciplining effect on the attitudes and behaviours of all employees. This also extends to governing relationships with outside groups. Skilling and Kay failed to provide a strong guiding hand in institutionalising values unique to the operations of Enron (Salter, 2008).

4.2 Emerging Trends and Best Practices

Ethics is pluralistic. Ethical reflections are centred on issues on behaviour and decision-making and such issues focus on values, rights and responsibilities. The rhetoric of business ethics deals with how firms or organizations adhere to ethical principles and how they respond to moral or ethical dilemmas as it emerge in the business environment (Jones, Parker and Ten Bos, 2005).

Business ethics is either sentimental common sense or set of excuses for being unpleasant. The premise is that business ethics has failed to perform its central function. Business ethics failed to change the ways people think about themselves and their business practices.  Amongst the many business ethics violations in existence, ‘creative’ accounting is one of the most profound issues (Jones, Parker and Ten Bos, 2005).

Ethics of numbers proved to be the primary source of accounting scandals and basis for accounting rectification. Creative accounting refers to corporate practices that lag behind traditional practices of accounting while also adhering to the rule of standard accounting practices. Creative accounting digresses the spirit of these rules and comes in different forms. Earnings management, misleading financial analysis and reporting, executive compensation, bribery and kickbacks, facilitation payments and deferral in tax payments fall under the umbrella of creative accounting (Jones, Parker and Ten Bos, 2005; MacBarnet, 2005).

Diverse methods of creative accounting are evident on how companies manipulate their income, expenses, assets and liabilities. Creative accounting and fraud impact the erosion of currency accounting and the regulatory war of the fittest. Aside from it conflicts with current accounting standards, creative accounting impairs the effectiveness of the system. It appears that the more standards are reformulated, the more organizations find sophisticated forms of financial manipulation (MacBarnet, 2005).

Corporate ethics ensure that firms and organizations comply with the codes, regulations and laws applying to the business internally and externally. Corporate governance drives obtaining trust and meeting societal expectations by means of acting justly apart from initiatives to maintain high ethical standards, to ensure strong sense of social responsibility and to reinforce management transparency. 

Legal compliances have bottomline impacts. These are the key towards sustainable business. Organizations are now very particular with the implementation of uniform guidelines and adherence to different acts as part of eliminating legal risks. As this could add to their adversity, there is a growing concern to evaluate systems and processes within the organizations. The impact is high when it comes to dismissing the use of strict cutoff scores and schemes except when fully validated by authorities.

Likewise, the company faces challenges in coordinating and distributing organization-wide agendas when it comes to aligning green business objectives at the departmental and individual levels. Green business practices should be practiced entirely which means at all levels particularly at the “grassroots” level where employees should participate in while also soliciting/pooling from them recommendations on how a company can continuously commit on such green practices.

4.3 Recommendations on Leadership Philosophy

Although we can only speculate how different the outcome would be might there have been a different ethical base at Enron. There are basic rules which could have prevented the collapse of Enron. There are various ways by which Enron could have instrumentalised ethics and corporate social responsibility for mere façade purposes. The first typology is the clarification on the ethical stand of the corporation by which can also outlines the ethicality of organisational culture. For instance, there should be the presence of ethical business tools and/or artefacts. Examples of these are the ethics officer, the codes of ethics, value statements and the like. This forms the basis to which a firm can discredit unethical behaviours thus saying “this action/decision/strategy goes against our virtue of…”

To warrant ethical performance, performance management from top to low-tiers of the organisational structure should have been made efficient. Enron should have encouraged unethical behaviours of the employees via disincentives. Disincentives should have been applied on quantity over quality practices and also bottomline pressures of achieving profit at any cost, open door policies yet closed door practices and patterns of organisation-wide deception. The way performance was measured in Enron put pressure on the leaders to act for the short term than to choose what might have been the right approach for the organisation in the long run. There should also have been well written and well documented ethical codes despite the fact that there was no legal requirement whatsoever to behave ethically. The challenge for Enron could have been how to disseminate the contents of the ethical codes at all organisational levels.

Other than this, ethicality should have been also evident in the financial aspect. Enron should have an effective control measure which could be realised in terms of credit risk management. Transparency is a vision of ethical leaders. Credit risk refers to the risk of loss because of debtor’s non-payment of a loan or other forms of credit. As they default, delay in repayments, restructuring of borrower repayments and bankruptcy are also considered as additional risks. Enron is exposed to all of these risks as it involves itself in short- and long-term debts. Enron should set credit limits and security so that credit risk would be controlled. Control of credit risks should have been applied so that the company can recuperate from financial risks. 

Further, regardless of what decisions Enron leaders make – be it financially or otherwise –, there are 5Ps to ethical power: purpose, pride, patience, persistence and perspective. Purpose is the basis upon which ethical behaviours are founded. Pride is the making of organisational decisions a win-win reflection of attitudes. Patience is the demonstration of a virtue of trust that the organisational values and beliefs will manifest. Persistence is the long continuance of an effect and perspectives are the long-term goals.

Adhering to ethical standards, the decision-making process should have been also based on simple yet powerful questioning of: 1) Is it legal? 2) Is it balanced? and 3) How it will make me feel about myself. An alternative is asking the business ethics’ three questions of: transparency – am I happy to make my decision public; effect – have I fully considered the harmful effects of my decision and how to avoid them; and fairness – would my decision be considered fair by everyone affected by it.

5.0 Conclusion

Paradoxically, ethical lapses were exposed in times when the leaders are visioning a world leadership in the energy market. For the years to come, the Enron scandal will remain as an emblem of the cost unethical leadership to management, employees, suppliers, shareholders, communities, society and world. As such, deviation from ethical standards of business is largely determined by the presence of ethical and morally responsible leaders. Ethical leadership is largely determined by the content of moral values transmitted from the leadership to the followership. Without ethical leadership, ethical standards within an organisation will not be established, maintained and sustained.

References

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Williams, D. (2010). Real leadership: helping people and organizations face their toughest challenges. Berrett-Koehler Publishers.