Enron Ethics

Only available on StudyMode
  • Download(s) : 469
  • Published : March 20, 2007
Open Document
Text Preview
This article tries to show how the company's culture had profound effects on the ethics of its employee? And particularly in this case: how did Enron lose both its economical and ethical status? This question makes the Enron case interesting to us as business ethicists. Enron ethics means that business ethics is a question of organizational "deep" culture rather than of cultural artifacts like ethics codes, ethics officers and the like.

BackgroundAt the beginning Enron faced a number of financially difficulty years. In 1988, the deregulation of the electrical power market took effect and Enron redefined its business to energy broker and got a thriving company. The company became a "matchmaker" in the power industry, bringing buyers and sellers together. Enron embraced a culture that rewarded "cleverness". Pushing the limits was considered a survival skill; the motto of the CEO Jeffry Skilling was "Do it right, do it now and do it better". This culture admires innovation and unchecked ambition and publicly punishes poor performance can produce big return in the short term. However, in the long run, achieving additional value by constantly "upping the ante" becomes harder and harder.

A lot of smoke and mirrorsWith Enron's spectacular success, the business community rewarded Enron for its cleverness and Enron's executives felt driven by this reputation to sustain the explosive growth of the late 1990s, even when they logically knew that it was not possible. In order to indicate that the company was not as successful as it appeared, Enron entered into a deceiving web of partnerships and employed increasingly questionable accounting methods to maintain its investment-grade status.

PartnershipsTo push the value envelope, Enron created "special purpose vehicles" (SPV), pseudo-partnerships that allowed the company to sell assets and "create" earnings that artificially enhanced its bottom line. Enron exaggerated earnings by recognizing gains on the sale of assets to SPVs. An example is the partnership with Blockbuster which was intended to provide movies to homes directly over phones lines. In this case Enron recorded $ 110.9 million in profits prematurely, even if these profits were never realized as the partnership after only a 1,000-home pilot. Therefore booking earnings before they are realized were rather "early" than wrong. The culture at Enron was quickly eroding the ethical boundaries of its employees.

Keeping debt off the balance sheetTo avoid that a highly leveraged balance sheet would threaten its credit rating, Enron parked some of its debt on the balance sheet of its SPVs and kept hidden from analysts and investors. This can be read as another example of ethical erosion, but Enron's decision makers saw the shuffling of debt rather as a timing issue and not as an ethical one.

Partnerships at "arm's length"Enron enlisted help from its outside accountants and its attorneys to guarantee that the Securities Exchange Commission (SEC) did not consider its partnerships as Enron subsidiaries. Enron crafted relationships that looked (legally) like partnerships, although they were (in practice) subsidiaries. A closer look at the partnerships would have revealed that the outside investments came from companies that were owned by Enron.

Conflicts of interestEnron officials obviously had close ties with its partnerships. For example, the CFO war partial owner of two of the most important partnerships. The culture of cleverness at Enron started as a pursuit of excellence that devolved into the appearance of excellence as executives worked to develop clever ways of preserving Enron's infallible façade of success; for the good of the company, Enron's executives also began to bend the rules for personal again. Once a culture's ethical boundaries are breached thresholds of more extreme ethical compromises become lower.

The self-reinforcing decline of EnronThe sum of incremental ethical transgressions produced the...
tracking img