Unethical Business Practices:
A Case Study of the Downfall of
Two Major Corporations
New Jersey City University
Unethical Business Practices2
The following pages will tell the story of how two very successful companies met their
downfalls at the hands of some very greedy top executives and boards of trustees that
chose to look the other way all because of one common denominator - greed. The
tremendous pressure by stockholders and board members that is put upon companies and the executives that run them to out-perform the competition in an extremely competitive global marketplace can influence top executives and some board members to participate in unethical practices.
Keywords: downfall, ethics, greed.
Unethical Business Practices3
In the late 1990’s and early 2000’s, Enron and WorldCom seemed to be on the top of the ‘business’ world. Wall Street was singing their praises, stockholders and employees were giddy with excitement about how much money their companies were making, and top executives and other key players got ridiculously rich. But in a few short years, the façade would come tumbling down for each of these companies and the world would see how unethical behavior and greed destroyed Enron and WorldCom.
Knowing what is morally acceptable, the difference between right and wrong, good and bad, and doing the right/good thing when it is very tempting to do the wrong/bad thing defines ethical behavior. Business ethics does not have a special set of rules that differ from ethics in general. As defined in text book, Management – Challenges for Tomorrow’s Leaders, “business ethics is the application of the general ethical rules to business behavior” (Lewis, Goodman & Fundt, 2004, p. 25). The stress that corporate leaders feel to outperform their competitors can possibly lead a once moral, ethical person to conduct his or herself in an unethical manner.
One of those corporate leaders, Jeff Skilling, former CEO of Enron, apparently felt that pressure. Or was it greed that paved the way to his and Enron’s demise? At its peak of success, Enron was the seventh largest company in the world, employing 25,000 people worldwide. The deregulation of the energy industry in the late 1970’s presented endless opportunities for companies. Enron was formed in 1985 by Kenneth Lay by merging two traditional gas pipeline companies, InterNorth and Houston Natural Gas. This merger formed the largest natural gas pipeline system in the U.S. In the mid-1980’s, Skilling encouraged Lay to take advantage of the gas deregulation and advised him how to go about it and was rewarded for his keen insight in 1990 when Lay Unethical Business Practices4
appointed Skilling head of Enron finance. Skilling then hired Andrew Fastow from Continental Illinois Bank to help Enron develop their gas bank business and to obtain and manage the debt and equity capital to fund its third-party finance business. Gas bank was a system to provide funding for smaller gas producers so they could invest more in exploration and development and also provide Enron with reliable sources of natural gas to feed its system. Fastow was rewarded for his efforts when he was promoted to Chief Financial Officer in 1998. (Swartz, 2003)
Enron had a business practice known as ‘rank or yank’ which meant at the end of each quarter the bottom 105 performers were let go. There was extreme pressure to meet targets and compensation was linked to deals done and profits booked in the previous quarter. Emphasis was placed on getting deals done without worrying about how they would be managed in the future.
In 2000, the top 200 employees’ salary, bonus and stock option packages totaled $1.4 billion compared with reported profits of $970 million. The board was also compensated well beyond the normal levels of...