The Failed Corporate Culture of Enron
High risk accounting, inappropriate conflicts of interest, extensive undisclosed off-the-books activity, excessive compensation these are some of the headings of the report prepared by the U.S. Senate's Permanent Subcommittee on Investigations titled "The Role of the Board of Directors in Enron's Collapse." (Permanent Subcommittee on Investigations, 2002) In February, 2002, Enron's former Chief Executive Officer Jeffery Skilling had testified before members of the Senate Commerce, Science and Transportation Committee that Enron was a financially sound company the day he resigned in August 2001, just months before the company's financial implosion. But the Enron debacle has, as the Houston Chronicle put it, "all the earmarks of classic tragic drama in which hubris causes the fall of the mighty," (Ivanovich, 2002) and, Mr. Skilling's sworn testimony to the contrary, the decisive role that Skilling and the company's other top executives played in the bankruptcy of this $63 billion company now seems incontrovertible. Indeed, from the point of view that the business culture at Enron contributed importantly to the company's demise, the blame for this financial tragedy can be pretty squarely placed on Skilling's shoulders, and the values he promoted among top and mid-level management during his five year stewardship of the company from 1996 to 2001. What was it about the ethos Skilling created among Enron's employees, particularly upper management, that made, in hindsight, the demise of the company nearly inevitable? Skilling, who in Senate testimony has described the reason for Enron's collapse as a "classic run on the bank," had for years focused on "taking profits now and worrying about the details later," as one former employee claimed. (Fowler, 2002) Whereas former Chief Operating Officer Rich Kinder from 1990 to 1996 had demanded his managers focus on cash flow and meeting earnings targets, another former employee and a longtime lobbyist for Enron, George Strong, said, "It was a well-known fact that Skilling didn't care what the expenses were so long as the margins looked good. When Kinder left and Skilling took over the presidency, I started feeling that people were not looking at the longer-term perspective." (Fowler, 2002) In their indictment in January, 2004 of Andrew Fastow, the chief financial officer of Enron, prosecutors characterized the top management of Enron as "single-mindedly and at any cost" intent on "meeting or exceeding analysts' earnings estimates without fail' and "producing 15 percent to 20 percent earnings growth every year." (Seba, 2004) Although it may have been possible to achieve such lofty earnings goals in the short term, as a long term strategy pursuing such goals was bound to fail. Throughout the 1990s, Enron's corporate prospects had seemed bright. Fortune magazine named Enron "America's Most Innovative Company" for six years running. In a little over 15 years, Enron had gone from being the largest natural gas distribution company in the United States in 1985 to a major trader in both gas and electricity, as well a number of other unrelated businesses. For example, having conducted its first electricity trade in 1994, Enron was just six years later the largest trader in electricity in the country. From 1990 to 2001, the price of a share of Enron grew from around $10 to as high as $90, and the company's market value rose from around $3 billion to almost $80 billion. In becoming such a dominant force in the market in electricity, Enron had pioneered the idea that market competition in energy in the deregulated environment of the 1990s could lead, not just to high profitability for firms able to take advantage of such a market, but also to lower prices for consumers who could take advantage of the new-found competition in the energy market: Enron envisioned gas and electric power industries in the U.S. where prices are set in an open...
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Financial Accounting Standards Board
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