Agency And Stakeholder Theories To The Enron Debacle

Business and Society Review 110:1 59– 76

Applying the Agency and
Stakeholder Theories to the Enron Debacle: An Ethical
Perspective

Blackwell
Oxford,
Business
BASR
©
0045-3609
O
1
110
BUSINESS
CULPAN riginal 2004 Center
UK
Article and and
Publishing,
and
TRUSSEL
Society for SOCIETY
Business
Ltd.
Review
REVIEW
Ethics at Bentley College

REFIK CULPAN AND JOHN TRUSSEL

INTRODUCTION

W

e examine the infamous Enron debacle from an ethical perspective by defining its theoretical underpinnings and analyzing the unethical conduct by top executives at the company in the areas of accounting, finance, and management.
After discussing the Enron bankruptcy from the perspectives of various stakeholders, we evaluate the implications of the Enron case and unethical managerial behavior in light of the agency and stakeholder theories.
The Enron case is important for a number of reasons. It was one of the largest bankruptcy cases in U.S. business history. In 2001, it was the fifth largest company on the Fortune 500, and the market leader in energy production, distribution, and trading. Despite
Enron’s rating as “the most admired company” six years in a row by
Fortune magazine, many shareholders and employees experienced considerable losses. The case shows how the outside auditing firm likely cooperated with Enron’s leadership in covering up in wrongdoings in a complex network of partnerships. Meanwhile, the government agencies and investment brokers failed to catch the financial

Refik Culpan is a professor of Management and International Business, and John Trussel is an associate professor of Professional Accountancy, both at the Pennsylvania State University at Harrisburg.

© 2005 Center for Business Ethics at Bentley College. Published by Blackwell Publishing,
350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

60

BUSINESS AND SOCIETY REVIEW

FIGURE 1 Enron’s Financial Growth

conspiracy at the company or to warn the public about ongoing
accounting

References: Clark, R. C. (1995). Agency costs versus fiduciary duties. In J. Pratt and R Donaldson, T. and Preston, L. (1995). A stakeholder theory of the corporation: Concepts, evidence, and implications, Academy of Management Review, 20 (1): 65 – 91. Dugan, I. J., Berman, D. and Barrionuveu, A. (2001). On camera, people at Andersen, Enron tell how close they were, The Wall Street Journal, Dutton, J. E. and Ashford, S. J. (1993). Selling issues to top management. Eisenhardt, K. (1989). Agency theory: An assessment and review, Academy of Management Review, 14: 57–74. Fama, E. (1980). Agency problems and the theory of the firm, Journal of Political Economy, 88, 975 – 990. Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Gruley, B. and Smith, R. 2002. Anatomy of a fall, keys to success left Kenneth Lay open to disaster, The Wall Street Journal, April 26, A1 and Hill, C. W. and Jones, T. M. 1992. Stakeholder–Agency theory, Journal of Management Studies, 29, 134 –154. Hitt, G. and Schlesinger, J. M. 2002. Stock options come under fire in wake of Enron’s collapse Heugens, P. P. M. A. R., Van den Bosh, F. A. J., and Van Riel, C. B. 2002. Quinn, D. and Jones T. 1995. An agent morality view of business policy, Academy of Management Review, 20(1), 22–42. Sethi, S. P. 1995. Introduction of AMR’s special topic form on shifting paradigms: Societal expectations and corporate performance, Academy of Management Review, 20(1): 18 – 21. Shankman, N. 1999. Reframing the debate between agency and stakeholder theories of the firm. Journal of Business Ethics, 19(4): 319–334.