Leadership Failures of Enron

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Many have heard of the Enron Scandal of 2001. A scandal, by definition, is an event that involves allegations of wrongdoing, disgrace, or moral outrage. In other words, a scandal is caused by shortcomings in ethics. Enron’s Ken Lay, Jeffrey Skilling and Andrew Fastow each engaged in unethical practices in their various leadership positions at Enron and caused thousands of Enron employees and investors to lose their savings. (Smartest)

Kenneth Lay showed all the signs of a transformational leader early in his career. Lay began as and forever remained a staunch advocate for free markets and deregulation of markets. He had a vision of a free energy market that would be more profitable than the encumbered government-regulated market. (Jelveh; Biography) Kenneth Lay made use of considerable political clout derived from his friendship with the Bush family to further his deregulation agenda. (Smartest) Lay’s vision of a deregulated market, it would seem, would cloud his ethical judgment in the future.

Lay seemed to have no trouble moving up in the business world. In 1974, he became an executive of the Florida Gas company and became president of the company in 1981. In 1982, he returned to Houston to run Transco Energy Co., and in 1984 took the helm of Houston Natural Gas. Houston Natural Gas then merged with InterNorth in 1985, and the combined company became Enron with Lay as CEO. (Biography)

The first signs of Lay's ethical shortcomings came in 1987 with what became known as the Valhalla Scandal. Lou Borget, a trader of Enron Oil Trading, was convicted of money laundering and fraud costing Enron shareholders about sixty-four million dollars. Lay testified that he was shocked by the illicit tactics used by his oil traders, but evidence, including the word of the former Enron Oil vice chairman Mike Muckleroy, seems to indicate that Lay understood what was happening the whole time. Auditors told Lay that his oil traders were manipulating earnings destroying records and gambling Enron money far beyond their means. Lay changed nothing after being warned by the auditors and in fact only encouraged Borget to keep making money by any means necessary. (Smartest) Lay's ethical shortcomings in this case include not being honest or trustworthy and facilitating the reckless gambling away of the shareholders' money.

Much later, Lay’s dishonest tendencies were brought to public attention once again in the year 2000. Lay was found to have been selling his stock in Enron from November 1 of that year. (SEC Charges Kenneth) Because of what Lay must have known about the state of Enron at the time, this is a breach of ethical conduct. Lay was selling his own stock that he knew would drastically diminish in value and at the same time encouraging employees and brokers to buy Enron stock. (Smartest) Lay managed to sell approximately $100 million in Enron stock before the collapse of the company. (SEC Charges Kenneth) This is inconsistent with a leader’s ethical and legal obligations to be honest with stock holders.

Enron’s Jeffrey Skilling was, like Kenneth Lay, considered a forward-thinking executive with revolutionary ideas about how to run the Enron Corporation. Under Skilling, Enron was able to be approved for a special type of accounting called “mark to market.” This type of accounting allowed Enron to file anticipated future profits from any deal as if they were already made. This allowed Enron to exaggerate or even outright lie about their earnings. This is cited by many to be the catalyst to behavior that led to Enron’s eventual collapse. (Smartest)

Skilling’s role in the scandal of Enron was unquestioned by SEC Enforcement Division Director Stephen M. Cutler, who said "In this scandal, as in others, we are by now all too familiar with executives who bask in the attention that follows the appearance of corporate success, but who then shout their ignorance when the appearance gives way to the...
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