Defining Moments: Enron: the Smartest Guys in the Room

Topics: Enron, Kenneth Lay, Arthur Andersen Pages: 5 (1689 words) Published: October 15, 2010
Defining Moments: Enron: The Smartest Guys in the Room

The Enron Corporation was one of the most successful firms in the United States in the 1990s. The company grew very quickly, its value rising to an all-time high in 2000. Shortly afterwards, however, Enron faced the scandal which ended its reign at the top of the US energy market. The company was investigated by the US Securities and Exchange Commission (SEC) for unethical practices and fraud, which resulted in their bankruptcy. By the end of 2001, Enron was in ruin. The source of the problem with Enron and the ethical considerations behind their decisions is not simple to identify. In fact, a number of correlating decisions (and, thereby, defining moments) made by the company’s executive team led to the disaster in 2001. This essay serves to examine this series of defining moments and the ways in which the leaders of Enron developed their principles of doing business and applied them in real life. The scenario uses scenes illustrated in the film Enron: The Smartest Guys in the Room (Gibney, 2005), and utilizes the ethics practices set out in the book, Defining Moments, by Joseph Badaracco (1997) in order to assess these moments.

The underlying principle of his book, as noted by Badaracco (1997), is the idea of right versus right, and choosing between actions at the point he calls a defining moment. Badaracco (1997) demonstrates that the majority of people in a leadership position at one point or another have to make the decision to choose what is right for them on a personal level and what is right for the company on a business level. Neither of these ideas of what is right are necessarily wrong, but ultimately there is a responsibility that runs beyond one’s own interests and beliefs, and that is one’s responsibility to the company’s owners or shareholders, and also to the company’s stakeholders at large. In the case of Enron, however, the battle between two different versions of what could be seen as right was likely never at odds.

As the film illustrates, there were difficulties in the competitive and regulatory environment which precipitated the radical approach taken by Enron Founder Ken Lay and CEO Jeffrey Skilling. The first of the problems behind Enron’s poor choices was related to changes in government regulation. Although the energy industry in the United States had been run as a monopoly for many years, in the 1980s the US government recognized the need for additional energy sources and decreased prices for consumers. At the same time, companies had to rely on existing gas pipelines for their supply, which meant that companies in this industry had to look at different ways of decreasing costs. The result of this was that companies in the industry had to look critically at how they would provide value to shareholders in such a tightly-controlled industry.

Applying Badaracco’s (1997) concept of right versus right, it is clear that doing the right thing by shareholders, in other words providing financial value, would require decreasing costs because raising prices was not going to be competitive. The structure of the industry made it difficult for companies, even those with deep pockets, to make a profit. This meant that the right thing to do for the shareholders was to try to make a profit at all costs. At the same time, for Enron to choose to pursue more creative forms of organization and accounting to ensure that they were sustainable financially would not necessarily be the right thing to do.

This is what Badaracco (1997) calls a defining moment. The company had to make a decision early on as to how they would manage the business. They had to choose to do things by the book, meeting all governmental and accounting regulations, or choose to push the envelope. As the film notes, part of the reason that Enron’s leaders chose the latter path is because of the fact that they felt they had a very strong relationship...

References: Badaracco Jr., J. (1997). Defining Moments. Cambridge MA:
Harvard University Press.
Gibney, A., Dir. (2005). Enron: The Smartest Guys in the Room.
Los Angeles: Magnolia Pictures.
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