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Enron Case Study

Author: Robert Jon Peterson


To provide a rendering of the rise and fall of the Enron organization.

This paper provides an overview of the rise and fall of the American energy company Enron.
The paper describes the political, historical, and economic conditions that led to Enrons rise
and fall from a variety of leadership and ethical perspectives. The paper also analyzes the
impact of policy responses to the Enron scandal and attempts to explain those responses
through two theoretical frameworks grounded in public policy.
Enron Case Study
Seven years after the fact, the story of the meteoric rise and subsequent fall of the
Enron Corporation continues to capture the imagination of the general public. What really
happened with Enron? Outside of those associated with the corporate world, either through
business or education, relatively few people seem to have a complete sense of the myriad
people, places, and events making up the sixteen years of Enrons existence as an American
energy company.
Some argue Enrons record-breaking bankruptcy and eventual demise was the result of a lack
of ethical corporate behavior attributed, more generally, to capitalisms inability to check the
unmitigated growth of corporate greed. Others believe Enrons collapse can be traced back to
questionable accounting practices such as mark-to-market accounting and the utilization of
Special Purpose Entities (SPEs) to hide financial debt. In other instances, people point
toward Enrons mismanagement of risk and overextension of capital resources, coupled with
the stark philosophical differences in management that existed between company leaders, as
the primary reasons why the company went bankrupt. Yet, despite these various analyses of
why things went wrong, the story of Enrons rise and fall continues to mystify the general
public as well as generate continued interest in what actually happened.
The broad purpose of this paper is to investigate the Enron scandal from a variety
perspectives. The paper begins with a narrative of the rise and fall of Enron as the seventh
largest company in the United States and the sixth largest energy company in the world. The
narrative examines the historical, economic, and political conditions that helped Enron to
grow into one of the worlds dominant corporations in the natural gas, electricity, paper and
pulp, and communications markets. Upon providing the substantive narrative of Enrons rise
and fall, the paper continues with an explanation of what went wrong based on two
frameworks provided by leadership and ethical theory. From the leadership framework, both
trait and transformational leadership theories have been identified as the appropriate
analytical tools for examining Enrons culture whereas the two ethical systems of egoism and
mixed deontology provide the philosophical foundations for analyzing the Enron matter from
an ethical perspective.
The third and final part of the paper examines the policy responses to the Enron
scandal. After providing an overview of the Sarbanes-Oxley (SOX) legislation, the policy

theories associated with the work of Frank Baumgartner and Bryan Jones (punctuated
equilibrium) and Murray Edelman (symbolic politics) will be applied in order to gain a better
understanding of Congress policy response to the Enron matter. It is hoped that via the
application of these two policy theories, future policy makers will gain a better appreciation
for how and why policy is created as well as the overall effect policy has on governance
issues within the private and public sectors.
Background Narrative
The Rise of Enron
Enron Corporation was born in the middle of a recession in 1985, when Kenneth Lay, thenCEO of Houston Natural Gas Company (HNG), engineered a merger with Internorth
Incorporated (Free, Macintosh, Stein, 2007, p. 2). Within six months of the merger, the CEO
of Internorth Inc., Samuel Segner, resigned leaving Lay as the CEO of the newly formed
company. Shortly thereafter, HNG/Internorth was renamed Enteron, a name which was later
shortened to Enron in 1986. The new company, which reported a first year loss of over $14
million, was made up of $12.1 billion in assets, 15,000 employees, the countrys secondlargest gas pipeline network, and an enormous amount of debt (p. 2).
In the initial years, Enron attempted to function as a traditional natural gas firm situated in a
competitive, yet regulated energy economy (Free, Macintosh, Stein, 2007, p. 2). Due to its
tremendous debt and early losses on oil futures, however, the company had to fight off a
hostile takeover and its stock did little to impress to the traders on Wall Street (p. 2).
Fortunately for Enron, things began to change in American governmental policy with respect
to the way the natural gas industry operated. At the core of Enrons historical rise to power,
lies the concept of policy-driven, market deregulation.
In the mid-to-late 1980s, the natural gas market was deregulated through a series of federal
policies, most notably Federal Energy Regulatory Commission (FERC) Order No. 436, the
Natural Gas Wellhead Decontrol Act of 1989 (NBGWDA), and FERC Order No. 636 of
1992. Each of these policies was designed to eliminate the regulatory constraints by the
federal government on the natural gas market, largely, to help avoid a repeat of the tough
economic issues resulting from the 1970s energy crisis (The History of Regulation, 2004).
Enron capitalized on the governmental deregulation of the natural gas market by providing
consumers with greater access to natural gas via their nationwide pipeline system. Due to
deregulation, as supplies increased and the price for natural gas fell by over 50 percent from
1985 to 1991, Enron was able to charge other firms for using their pipelines to transport gas.
Likewise, Enron was also able to transport gas through other companies pipelines (Culp and
Hanke, 2003, p. 8).
Around this time, Jeffrey Skilling, an up and comer working for the consulting firm
McKinsey and Company, began working with Enron. Beginning in 1987, Skilling started his
work in creating a forward market for Enron in the deregulated natural gas sector. To help
create this market, Skilling argued that Enron needed to set up a gasbank to help
intermediate gas purchases, sales, and deliveries (Culp and Hanke, p. 8). Skillings major
selling point to Enron CEO Kenneth Lay was that in an era of post deregulation, customers
needed risk management solutions in the form of a natural gas derivatives market or, a place
where consumers could purchase forward contracts to help alleviate price volatility
commonly found in the natural gas industry.

In this regard, Skilling was, according to Culp and Hanke (2003), functioning as a classic
entrepreneur. Skilling spotted an opportunity to develop new markets. By introducing
forward markets, individuals could acquire information and knowledge about the future and
express their own expectations by either buying or selling forward (p. 8). Lay eventually
went for Skillings concept of the gasbank and the Enron GasBank was established (McLean
and Elkind, 2003, pp. 35-37).
From an economic perspective, Enron was the market maker for natural gas derivatives in the
political era of deregulation of the late 1980s and early 1990s. Through their GasBank,
Enron was able to both buy and sell natural gas derivatives and effectively became, the
primary supplier of liquidity to the market, earning the spread between bid and offer prices as
a fee for providing the market with liquidity (Culp and Hanke, p. 9). The fact that Enron
also had physical assets in the form of natural gas pipelines further leveraged their position in
this new market and helped to control some of the residual price risks arising from its market
making operations, otherwise known as Enron Gas Services (EGS) and later Enron Capital
and Trade Resources (EC&TR). Risk management solutions were provided to customers, in
part, via Enrons knowledge of congestion points that were likely to impact supply and
demand within the physical system of gas pipelines. This allowed Enron to trade around
congestion points and helped them to exploit their knowledge of the surplus or deficit in
pipeline capacity. All of this was accomplished within a financial market based on futures
trading that Skilling had helped to create through his application of the gasbank concept as
Enrons market wholesaler (Culp and Hanke, p. 10).
During the 1990s, Enron began to delve into other aspects of the energy market such as
electricity, coal, and fossil fuels in addition to pulp and paper production. They did so by
utilizing what Skilling described as an asset light philosophy (Culp and Hanke, 2003, p. 1011). According to the asset light strategy, Enron would,
Begin with a relatively small capital expenditure that was used to acquire portions of
assets and establish a presence in the physical market. This allowed Enron to learn
the operational features of the market and to collect information about factors that
might affect market price dynamics. Then, Enron would create a new financial
market overlaid on that underlying physical market presence-a market in which Enron
would act as market maker and liquidity supplier to meet other firms risk
management needs (p. 11).
Based on this strategy of financial trading activity overlay, as well as the measured,
disciplined leadership provided by Enrons then-President and Chief Operating Officer
(COO) Richard Kinder, Enron Corporation was able to position itself as a dominant energy
company in the United States and one of major energy players in the world by the mid1990s. An example of Enrons innovative approach to the energy business was their
development of the hugely successful Teesside power plant in England, pushed through by
former Enron employee John Wing in 1992-93. Throughout its history, however, Enrons
consistent financial and market successes, like Teesside, took place only in the energy sector
or, a sector in which they held considerable physical assets. Although Enron attempted on
numerous occasions to repeat their financial successes in other markets such as water and
broadband, they were never able establish the comparative advantage they initially held in the
deregulated, natural gas sector (Culp and Hanke, p. 12).
Political Connections

Once established as a major player in the natural gas market, Enron began utilizing its
resources to exert its influence on U.S. political processes. For example, Kenneth Lay was
one of George W. Bushs key backers during Bushs early political career as the Governor of
Texas and this connection continued up through, and beyond, the younger Bushs run for the
presidency in 2000. (Hunnicutt, 2007, p. 5). Lays connection to Bushs presidential
campaign came in the form of significant campaign donations both to Bush, $113,800, and
the Republican Party, $1.2 million in 2000 (Gutman, 2002, pp.1-2). According to Hunnicutt,
Lay, after all, was for a long time one of Bushs most important political supporters (p. 2).
The Bush administration responded to Lays financial support by placing former Enron
executives in posts within the federal government (Gutman, p. 5). Lay, himself, was given
veto power over the important position of chairman of the FERC as well as a prominent
position within the highly secretive, Cheney-led Energy Task Force early on in the Bush
presidency (p. 5). When, for example, it became apparent that Lay did not agree with the
chairman of the FERC on key energy issues directly impacting Enron, Lay asked that the
chairman change his views or run the risk of being replaced. Needless to say, when the
chairmans term expired, he was not reappointed. Lay then provided a short list of new
appointees for the FERC to President Bush. Two of Lays choices were appointed after Mr.
Lay recommended them to Vice-President Cheney. One of them, Pat Wood, was appointed to
the post of chairman of the FERC on September 1, 2001, a position he held until his
resignation in 2005 (Gutman, 2002, p. 2).
Enrons political machinations were not, however, limited to President Bush and the
Republican Party. Apparently, during the Clinton administration of 1992-2000, under which
Enron flourished considerably, Enron contributed funds to the Democratic Party in excess of
$500,000 in addition to one time contributions of $100,000 and $25,000, respectively, to the
1993 Clinton inauguration and celebration (Smith, 2002). The Clinton administration
responded to Enrons lobbying presence by supporting the deregulation of electricity at the
federal level as evidenced by the U.S. Department of Energys failed deregulation bill of the
mid-1990s. Some states, like California, bowed to the political pressure created via Enrons
lobbying presence in their state legislature and eventually chose to deregulate, at least
partially, their publicly held electric utilities (Hauter and Slocum, 2001). The disastrous
consequences of this action, including Enrons involvement in the, gaming of the California
system, which led to the Western Energy Crisis of 2000 and 2001, have been well
documented (McLean and Elkind, 2003, pp.271-83).
A second response to Enrons support of the Clinton administration can be found in a trip
made to India in 1995 by then-U.S. Secretary of Commerce Ron Brown and Ken Lay. The
two men traveled to India to oversee the signing of the loan agreement by the Dabhol Power
Company with the U.S. Export-Import Bank and the independent U.S. government agency,
Overseas Private Investment Corporation (OPIC). Later in 1995, when the $3 billion Dabhol
project was in jeopardy due to local political opposition, then-U.S. Energy Secretary, Hazel
OLeary issued a warning to India that any actions in opposition to the Enron backed project
would discourage future foreign investment. According to Emad Mekay of the India
Resource Center (2003), Enron, regularly and aggressively called on staff from the
Treasury, the State Department, the Office of the U.S. Trade Representative, and the World
Bank to meet with foreign officials to favorably resolve its problems and disputes with their
governments (p. 1). In the end, the Dabhol Project turned out to be a financial disaster, both
for Enron and the Indian Maharashtra state in which it was located (McLean and Elkind,
2003, pp. 79-83).

This, however, did little to deter Enron and its political game playing as evidenced by the
continual lobbying pressure they placed on U.S. government officials to arrange deals and
help settle international disputes between Enron and nations like Turkey, Argentina, and
Brazil (Mekay, pp. 1-2). Regarding Enrons connection to the federal government, Tyson
Slocum, a research director with Public Citizen, a U.S.-based consumer group, stated (2003),
Enron, for its size, flexed an enormous amount of political muscleEnron used its money
and connections to distort government policies in a way that gave it free rein to cheat
consumers (pp. 1-2).
The Fall of Enron
In a way, Enron went bankrupt for the same general reason that all companies go
bankrupt: they invested in projects that proved too risky and, in turn, they were unable to
keep up with the debt obligations of the firm (Niskanen, 2005, p. 2). This does little,
however, to explain the specific reasons why Enron became the largest company to file for
bankruptcy in U.S. history. Although many will point to Enrons abuse of accounting and
disclosure policies such as mark-to-market accounting, utilization of SPEs to hide debt, and
using inadequately capitalized subsidiaries and SPEs for hedges to reduce earnings
volatility as the primary causes for bankruptcy, these abuses were merely symptomatic of a
larger problem at Enron: identity crisis. What eventually brought Enron to its knees was the
incompatibility of two competing ideological systems relating to how Enron was to operate
as a company and make its money.
Prior to the resignation of Richard Kinder in 1996, Enrons President and COO, a
contentious struggle for control was taking place within the upper tier of management at
Enron. Two individuals with vastly different leadership styles and management strategies
were competing for Ken Lays favor as his number two person in the company. These two
charismatic leaders at Enron were Jeffrey Skilling and Rebecca Mark. Each employed a
different strategy for doing business. Skilling was a proponent of the asset light strategy
discussed earlier. Mark, on the other hand, was a firm believer in the philosophy of asset
rich, or heavy, infrastructure development in areas such as energy, water, and
As President of Enron International (EI), Mark pursued a business strategy that involved the
acquisition or development of capital-intensive and high-debt projects such as the Dabhol
Power Plant (Niskanen, 2005, p. 3). As Enrons primary deal-maker for major power plants
and water companies, she believed that projects could be developed on the basis of their own
merit and that the return on an investment was a long-term process that needed to be
cultivated and realized over time. In effect, Marks philosophy was the antithesis of
Skillings asset light make money now strategy which involved financial trading activity
overlaying a minimal physical asset base in a deregulated market.
The conflict between Mark and Skilling became more apparent after Kinders
resignation in 1996. In 1997, Lay announced that Skilling was replacing Kinder as the
President and COO at Enron. This did little to quell the competitive atmosphere that had
developed at Enron between Marks EI and Skillings EGS and EC&TR. Mark continued to
advance her position and asset rich strategy within the company, investing heavily in overseas
projects like the Dabhol Plant in India and the Azurix operations in Argentina, Canada, and
Britain. Unfortunately for Mark, however, many of these projects never resulted in the
accrual of long-term profits for Enron. While Mark and her employees at EI were reaping

millions of dollars worth of compensatory benefits from developing these deals, seemingly
one after the other, few were aware of how heavily these failed overseas projects were
indebting the company. According to the former CEO of a major oil company, The failure
of Enron before all the accounting scandals can be seen in the results overseas (McLean and
Elkind, p. 71).
In the final analysis of the fall of Enron, one may pinpoint the ideological friction
between Skilling and Mark and the identity crisis that ensued, in addition to the resignation of
Rich Kinder whose obsession with the levels of cash flow at Enron had helped to keep the
company in the black during the early-to-mid 1990s, as central reasons why Enron went
bankrupt (Niskanen, p. 3). Skillings asset light model required that Enron maintain
sufficient equity capital and borrowing capacity to cushion the intermittent loss of cash flow
from its trading activities (p. 3). Initially, Skillings market maker, the GasBank, did quite
well. Over time, however, the wholesale markets for natural gas and electricity became more
competitive making it increasingly difficult for Enron Financial to post additional quarterly
earnings and continue gaining Wall Streets favor as a blue-chip stock (p. 3). As the margin
for error decreased within Skillings asset light model, due in large part to increased market
competition, the asset rich model employed by Mark, as has been demonstrated, was taking
on heavy losses at the international level with failed investments in water, power plants, and
As if an identity crisis at Enron werent already enough, high level managers in both Marks
and Skillings camps were taking advantage of huge compensation packages for having
completed deals and demonstrated quarterly earnings through, in many instances,
questionable trading and accounting measures such as mark-to-market accounting and the use
of SPEs. The compensation structure at Enron fostered a culture of narcissism that rewarded
individuals such as Chief Financial Officer (CFO) Andrew Fastow for creating illegal
schemes like Chewco to hide Enrons mounting debt and, ironically, provided generous
kickbacks for doing so. Coupled with the problems arising from Marks and Skillings
infighting over which business/economic model to follow, the accounting scandals that
publicly emerged in 2001 were enough to finally bring Enron to its knees. In the following
paragraphs, the paper will take a look at how and why Enrons organizational culture
developed and what went wrong from variety of leadership and ethical perspectives. In total,
four theories will be explained and applied as the lenses in which to more completely
examine the leadership that fostered the culture at Enron.
Leadership and Ethical Theories
Trait and Transformational Theories of Leadership
This portion of the paper focuses on two specific leadership theories that help to
explain how and why the Enron culture developed. Those two theories are trait theory and
transformational theory. To begin, the trait theory approach to leadership was one of the first
attempts by 20th century scholars to identify the qualities that made up leadership. It was
initially known as the great man theory due to the fact that many studies focused on the
universal qualities or characteristics that made leaders great in social, political, and military
arenas (Northhouse, 2004, p. 15).
By the mid-20th century, however, researcher and scholar, R.M. Stogdill, began
questioning the universality of leadership traits. What Stogdill found was that leadership

changed depending on the situations encountered by leaders and followers. In Stogdills

model of leadership, personal factors or leadership traits enmeshed with social situations and
group member behaviors to create an emergent sort of leadership that took on socially
constructed meaning. The core idea within this model was that leadership was not a passive
process but an active one involving leaders and group members working together in a variety
of co-determinous situations.
What Stogdill and other researchers later discovered was that there were five major
leadership traits that emerged from socially constructed situations encountered by leaders and
group members. The five traits identified were: intelligence, self-confidence, determination,
integrity, and sociability (Northouse, p. 19). In this model, each of the five traits worked
together to help provide effective leadership. When all five traits were present and
effectively functioning there was a balance between the individual leader and the situational
factors needed to both influence group member behavior and develop a healthy
organizational culture. If, however, one or more of the traits was significantly lacking in the
leader, problems could then arise in the construction of the situationally based social
exchanges between the leader and the group members impacting, in a negative manner, the
development of organizational culture.
In looking at the leadership that developed at Enron, one can see how the absence of a key
trait like integrity negatively impacted the development of the organizations culture.
According to Northouse (2004), integrity is an important leadership trait for it involves,
the quality of honesty and trustworthiness. Individuals who adhere to a strong set
of principles and take responsibility for their actions are exhibiting integrity. Leaders
with integrity inspire confidence in others because they can be trusted to do what they
say they are going to do. They are loyal, dependable, and not deceptive. Basically,
integrity makes a leader believable and worthy of our trust (p. 20).
Integrity was not a trait frequently exhibited by many of the executive leaders within the
culture at Enron. Jeffrey Skilling, for example, was a supremely confident, intelligent, and
determined leader. His ability to provide a vision for the company was, by many accounts,
amazing and inspiring. Skillings leadership style was one that exemplified and encouraged
creativity and risk-taking, especially as it related to the maximization of profit and Enrons
share value (Free, Macintosh, and Stein, 2007, p 5).
In the case of Skillings leadership style, however, the maximization of profit was
aggressively taken to such an extreme that the leadership trait of integrity became a nonfactor within the culture at Enron. This lack of integrity was a serious flaw within the
organizational structure and culture of the company for while important group members, like
Andrew Fastow, began encountering situations requiring the honest disclosure of financial
information; few employees or group members were provided with the external motivation
from Skillings leadership to tell the truth about Enrons real financial situation. Those
individuals that did have the integrity to speak honestly about Enrons financial losses were
dismissed, demoted, or summarily fired by those in power in a process known in the Enron
lexicon as rank and yank (Free, Macintosh, and Stein, 2007, p. 7). The overall lack of
integrity on the part of leadership helped to foster a me-first and dog-eat-dog attitude
within the rank and file of Enron. As time passed, those attitudes crystallized into cultural
values and norms heavily influencing narcissistic patterns of behavior demonstrated, most
vividly, by the cut throat environment of Enrons financial trading floor.

Transformational theory is another perspective from which to view the development of

Enrons culture via its leadership. According to Northouse (2004), transformational
leadership is,
a process that changes individuals. It is concerned with emotions, values,
ethics, standards, and long-term goals, and includes assessing followers motives,
satisfying their needs, and treating them as full human beings. Transformational
leadership involves an exceptional form of influence that moves followers to
accomplish more than what is usually expected of them. It is a process that often
incorporates charismatic and visionary leadership (p. 169).
The term transformational leadership was coined by Downton in 1973 but the concept
appeared, most significantly, in the work of political sociologist James MacGregor Burns and
his book entitled Leadership (1978). In the book, Burns identified two distinct types of
leadership: transactional and transformational. For Burns, transactional leadership
represented the majority of leadership models and involved exchanges that occurred between
leaders and their followers. Transformational leadership, on the other hand, was a leadership
process whereby the individual leader engaged with the follower in such a way as to create a
connection that increased the motivation and morality in both leader and follower alike
(Northouse, 2004, p. 170).
While many consider transformational leadership to be one of the most effective ways
of influencing others to follow a given path in pursuit of a common goal, there are criticisms
of the theory. One weakness is that it is elitist and antidemocratic. In this interpretation of the
theory, the transformational leader acts independently and places his or her needs above their
followers needs, leading to less than participative decision making processes and, potentially,
authoritarianism. Another criticism is that the theory suffers from a heroic leadership bias.
In this instance, it is the leader who initiates all of the momentum influencing followers to do
great things. Rarely, if ever, do the followers have the opportunity to reciprocate this
momentum and impact the leader in a genuine fashion. A final, and likely the greatest,
criticism of transformational leadership theory is its potential for abuse by leaders. In the
words of Northouse (2004), Transformational leadership is concerned with changing
peoples values and moving them to a new vision. But who is to determine if the new
directions are good and more affirming? Who decides that a new vision is a better vision (p.
In terms of assessing the development of Enrons culture, transformational leadership
theory offers a unique perspective. Clearly, Kenneth Lay, Jeffrey Skilling, and Rebecca Mark
were transformational leaders at Enron. They led the company to unprecedented heights that
few believed could be achieved by a natural gas company. Innovation, creativity, and risktaking were all positive cultural values imbued in Enrons workforce by its leaders. Even as
late as 1999, Enron was being hailed by Fortune magazine as, Americans Most Innovative
Company, No.1 in Quality of Management, and Skilling as, The #1 CEO in the USA
(Free, Macintosh, and Stein. 2007, p. 2). One must ask, however, for whose benefit and to
what ends were Enrons transformational leaders acting on behalf of? Outside of Rich

Kinder, how many of Enrons brass really thought about the impact their short-term personal
behaviors were having on the long-term health of the company and with it the lives and
futures of thousands of company employees, shareholders, and U.S. energy consumers?
Few will argue that Enrons hierarchy of leadership abided by the kind of moral standard,
other than making money as quickly as possible, that has become a central tenet of the
transformational leadership model. In this respect, the moral-less transformational leadership
present in Enrons organizational culture can be viewed as both an asset and a weakness for it
was primarily through the charismatic personas of Lay, Skilling, and Mark that the company
was driven to its greatest financial heights and deepest valleys. At Enron, however, this
morally absent form of transformational leadership became a double edged sword that
eventually cut off executive leaders like Lay from the financial reality existing around them.
This disconnect with reality, coupled with the general lack of integrity on the part of
leadership, ultimately fed into a culture of narcissism; a culture that permeated throughout the
entire organization.
Ethical Theories of Leadership
In the following paragraphs two ethical frameworks will be utilized to help explain
what was missing in the leadership at Enron that allowed its particular culture to develop.
From an ethical perspective, one need look no further than the tradition of ethical egoism to
help explain how and why a culture of narcissism emerged within Enron. According to
Pojman (2006), ethical egoism is loosely defined as, the doctrine that it is morally right
always to seek ones own self-interest (p. 81). Within the broad parameters provided by that
definition, Pojman argues that there are roughly four different types of ethical egoism:
psychological egoism, personal egoism, individual egoism, and universal ethical egoism (pp.
Of the four kinds of egoism proposed by Pojman, universal ethical egoism most closely
aligns itself with how Enrons culture developed. The theoretical basis for universal ethical
egoism consists of, a theory that everyone ought always to serve his or her own selfinterest. That is, everyone ought to do what will maximize ones own expected utility or
bring about ones own happiness, even when it means harming others (p. 87). In order to
become theoretically grounded, universal ethical egoism makes use of a sophisticated
argument that consists of individuals giving up their short-term interests in pursuit of longterm ones. At the core of the argument lies the concept that everyone is encouraged to seek
their own self-interest, however, in order to do so, some compromises are necessary. This
type of rationalized self-interest forms the basis of the universality of ethical egoism and
helps to conceptualize, at least from an egoist perspective, the basic foundations of
Hobbesian liberty.
Remarkably, the leaders at Enron (i.e. Lay, Skilling, Mark, et. all) were all complicit in the
propositioning of this inimitable form of ethical egoism. They surmised that the short-term
compromises promulgating the long-term development of self-interest within the companys
organizational culture were indeed derivative of ethical corporate behavior. At Enron, the
pursuit of rationalized self-interest was taken to such an extent that the concept of
compromise, even at the expense of other ethical considerations like integrity, became
nomenclature for how to do ethical business in a capitalistically based free market economy.
The effect of leaderships validation of this type of business philosophy was the development
of a narcissistic corporate culture. In an article by Gini (2004), business ethicist and

accountant John Dobson comments that in this way, Ethical guidelines are viewed in the
same way as legal or accounting rules: they are constraints to be, wherever possible,
circumvented or just plain ignored in the pursuit of self-interest, or in the pursuit of the
misconceived interests of the organization (p. 2).
The overt application of the universal ethical egoistic framework subverted any attempts
within Enrons organizational structure to maintain other ethical principles or the integrity of
accountability systems of management such as the Peer Review Committee (PRC). Selfinterest and ethical compromise provided the platform for Enrons leaders and employees to
justify behavior like the PRCs policy of rank and yank that should not have been
condoned. As mentioned above, integrity was a non-factor and a complete missing link for
leadership when it came to establishing a bottom line for subordinates, a bottom line based
solely on profit maximization and performance increase in the market share value of the
company. Without an honest system of accountability or practiced standard of ethics in place
within the leadership hierarchy at Enron, group members fell prey to a culturally reinforced
mentality of serving their own rationalized self-interests at the expense of the overall health
of the company and its shareholders.
Another ethical perspective from which one may view the development of the culture at
Enron is from the framework provided by mixed deontological ethics. The architect of mixed
deontology was the University of Michigan philosopher William Frankena. In Frankenas
philosophical model, the opposing systems of teleology and deontology were reconciled
through the principles of beneficence and justice (Pojman, 2006, p. 150). According to the
first principle, human beings were to strive to do good without demanding that there be a
measurement or weight put on good and evil. Frankena further provided four subprinciples
arranged hierarchically to help explain the principle of beneficence:
1. One ought not to inflict evil or harm.
2. One ought to prevent evil or harm.
3. One ought to remove evil.
4. One ought to do or promote good.
The second principle in Frankenas system of mixed deontology is the principle of justice
(Pojman, p. 150). In the words of Pojman (2006), the principle of justice, involves
treating every person with equal respect because that is what each is duethere is always a
presumption of equal treatment, unless a strong case can be made for overriding this
principle (p. 150). Of the two fundamental principles, the principle of justice is considered a
priori within the Frankenaian system.
Although Frankenas innovative approach provides fertile territory for the
reconciliation of the competing systems of utilitarianism and deontological ethics, one major
criticism of the theory rests with how one adjudicates between the two principles amidst a
moral conflict or ethical dilemma. In response to this criticism, Frankena offered an intuitive
approach to resolving moral conflict and competition between the principles of beneficence
and justice. Pojman states (2006), We need to use our intuition whenever the two rules
conflict in such a way as to leave us undecided on whether beneficence should override
justice (p. 151).

In the case of Enron and its cultural development as an organization it seems that the
principles of beneficence and justice were neither in conflict nor markedly present despite the
companys robust motto of, Respect, Integrity, Communication, and Excellence, and vision
and values statement of, We treat others as we would like to be treated ourselvesWe do
not tolerate abusive or disrespectful treatment. Ruthlessness, callousness and arrogance dont
belong here (Ruined by Enron, 2002). Enrons leadership simply did not live out the
ethics they claimed to have valued. Not surprisingly, this disconnect between words and
action developed into a major cultural problem for leadership within the organization. In
reference to ethical corporate leadership, Roger Leeds, the Director of the Center for
International Business and Public Policy at the Paul H. Nitze School of Advanced
International Studies at Johns Hopkins University, states that,
These are the individuals who set the behavioral tone for their legions of employees
Their personal behavior ultimately defines the ethical culture for everyone in the
company and they inflict untold damage when they fail to recognize the enormity of
this responsibility (pp. 78-79).
Overall, the ways in which Enrons leaders responded to the kind of moral conflict alluded to
in Frankenas hybrid system of mixed deontological ethics helped to define the cultural
atmosphere at Enron. Considering the complete absence of the leadership trait of integrity in
Skilling, the abuse of transformational and charismatic leadership by Lay and Mark, the
overindulgence of rationalized self-interest and universal ethical egoism on the part of the
traders, and the lack of either a utilitarian or a deontological system of practiced ethics at
Arthur Anderson, it should come as no surprise that an organizational culture deeply rooted in
narcissism developed at Enron. The corporate behavior engendered from this kind of cultural
environment compromised the long term health of the company and eventually led to Enrons
demise. In the following paragraphs the paper will examine the United States Congress
policy response to the implosion of Enron as well as identify and apply two policy theories to
help explain whether or not the legislative response in dealing with the development of this
kind of corporate culture was effective.
Policy Response
The Sarbanes-Oxley Act
The Sarbanes-Oxley (SOX) legislation came into being on July 30th of 2002 and
brought about major changes to corporate governance and financial practice in the United
States. The Act was developed in response to a rash of corporate scandals involving
companies like Enron, Tyco, and WorldCom and was named after the former U.S. Senator
from Maryland, Paul Sarbanes, and the current U.S. Congressman from Ohios Fourth
Congressional District, Michael Oxley. In addition to creating the quasi-public agency, the
Public Company Accounting Oversight Board (PCAOB), whose job it is to oversee, regulate,
and inspect accounting firms in their roles as auditors of public companies, the SOX
legislation established the creation of 10 other titles or sections addressing the oversight of all
U.S. public company boards, management, and accounting firms (The Sarbanes-Oxley Act
Summary and Introduction, 2006). The 11 titles can be categorized as follows:
1. Public Company Accounting Oversight Board (PCAOB)
2. Auditor Independence

3. Corporate Responsibility
4. Enhanced Financial Disclosures
5. Analyst Conflicts of Interest
6. Commission Resources and Authority
7. Studies and Reports
8. Corporate and Criminal Fraud Accountability
9. White Collar Crime Penalty Enhancement
10. Corporate Tax Returns
11. Corporate Fraud Accountability
Within these eleven titles, the most important sections in terms of compliance are sections:
302, 401, 404, 409, and 802 (The Sarbanes-Oxley Compliance, 2006). Section 302 appears
as a subsection to Title III of the SOX Act and deals specifically with the issue of Corporate
Responsibility for Financial Reports. Among the highlights of section 302 are certifications
requiring that CEOs and chief financial officers accurately disclose financial statements and
fairly represent the financial condition and operations of the company on a quarterly basis in
order to establish accountability. Organizations are also prohibited from circumventing the
certifications spelled out in section 302 by reincorporating or transferring their activities
outside of the United States. Furthermore, under section 302, there are criminal sanctions for
intentional false certification (Sarbanes-Oxley Section 302, 2006).
Section 401 appears within Title IV of the SOX Act and addresses the Disclosure of Periodic
Reports. A summary of this section reveals that, Financial statements published by issuers
are required to be accurate and presented in a manner that does not contain incorrect
statements or admit to state material information (Sarbanes-Oxley Section 401, 2006).
Also appearing in section 401 is language requiring that financial statements include all
material off-balance sheet liabilities, obligations, or transactions. Section 404 of the Sox
legislation is also listed under Title IV of the Act and pertains to the Management Assessment
of Internal Controls. In summary, section 404 states that, Issuers are required to publish
information in their annual reports concerning the scope and adequacy of the internal control
structure and procedures for financial reporting (Sarbanes-Oxley Section 404, 2006). In
section 409, the legislation clearly mentions that, Issuers are required to disclose to the
public, on an urgent basis, information on material changes in their financial condition or
operations (Sarbanes-Oxley Section 409, 2006). The final section of major importance in
terms of compliance with the SOX Act is section 802 appearing in Title VIII. Section 802
addresses the issue of Criminal Penalties for Altering Documents and states,
This section imposes penalties of fines and/or up to 20 years imprisonment for
altering, destroying, mutilating, concealing, falsifying records, documents or tangible
objects with the intent to obstruct, impede or influence a legal investigation. This
section also imposes penalties of fines and/or imprisonment up to 10 years on any
accountant who knowingly and willfully violates the requirements of maintenance of

all audit or review papers for a period of 5 years (Sarbanes-Oxley Section 809,
Reviews of the SOX Act have been mixed. Some believe that the changes made by
the legislation were necessary and helped to address some of the accounting issues that
surfaced out of the Enron, Tyco, and WorldCom scandals. On the other hand, some
legislators like Ron Paul have argued that SOX has been detrimental to U.S. firms and has
placed many American companies at a competitive disadvantage with foreign firms. The
following paragraphs will analyze the SOX legislation from two perspectives provided by the
policy theories of punctuated equilibrium and Edelmans symbolic politics and political
Punctuated Equilibrium
One of the policy theories that may be utilized to help analyze the overall
development of the SOX legislation is a social and political theory known as punctuated
equilibrium. Frank Baumgartner and Bryan Jones first presented punctuated equilibrium in
1993. Baumgartner and Jones theorized that U.S. policy development was characterized by
long periods of stability punctuated by large, but rare, changes due to societal or
governmental shifts best described by a leptokurtic curve. In this model, policy changes
occur incrementally due to the bounded rationality of individual decision makers and the lack
of institutional change most typically found in subgovernments. Policy change, however,
becomes punctuated or spiked when governments change in their political control or when
large shifts in public opinion occur (Tyner, Krach, and Foth, p. 1). Examples in American
history of punctuations in policy development include the New Deal, the Great Society, and
the Reagan Revolution (p. 2).
At the theoretical core of punctuated equilibrium are the dual components of stability and
punctuation. Policy stability exists for long periods of time when little or no attention is
given to an issue. In the stability model of policy formation, political issues become
disaggregated into policy subsystems or iron triangles composed of Congress, interest groups,
and bureaucratic agencies (p. 2). Iron triangles help to stabilize the interests of various
constituent groups and hegemonize power into the hands of the elite. Punctuation, on the
other hand, takes place in the development of policy when acute attention is directed at a
particular issue. Policy punctuation occurs when shifts to macropolitical considerations are
made and serial attentiveness are given to specific problems or sets of issues. Overall, serial
attentiveness is the result of a variety of factors including the impact of the media, changes in
the definition of the issue, or internal or external forces that help to focus attention on the
The SOX legislation is an excellent example of the kind of punctuation that can occur within
Baumgartner and Jones social and political model for policy change. In the case of the SOX
Act, the iron triangle of legislators, special interest groups, and the Securities Exchange
Commission (SEC) quickly responded with legislation to the instability created by external
forces in the media and shifts in public opinion over the rash of corporate scandals that had
taken place at companies like Enron, Tyco, and WorldCom. In this way, the SOX legislation
was a response from lawmakers to reestablish investor confidence in the United States
securities markets. A quote from President Bush further establishes the relevance of
punctuated equilibrium as a theory describing policy change with, This act includes the most

far-reaching reforms of American business practice since the time of Franklin D. Roosevelt
(Sarbanes-Oxley Act, 2008).
In the case of the Enron scandal, serial attentiveness via the media was directed at the issue of
corporate malfeasance in such a way as to create a macropolitical shift in the public opinion
of corporate America. Investors simply did not trust the markets after having lost billions of
dollars in market share value due to the collapse of Enron and others. People watched on
television, as thousands of people lost their jobs as well as their pensions at Enron while
corporate leaders walked away with millions of dollars. Additionally, the political image
created by the media of CEO Kenneth Lay having supported President Bushs presidential
campaign also helped to focus attention on the issue of Enrons corporate malfeasance and
Lays close ties to the White House. This media pressure, in effect, became one of the
primary casual agents for Congress quick legislative response to Enrons collapse and helps
to explain how external factors swayed public opinion in such a manner as to elicit and justify
major legislative reform in the area of corporate governance.
Edelmans Symbolic Politics and the Political Spectacle
Another policy theory that helps to explain the legislative response to the fall of Enron is the
political theory proposed by Murray Edelman. Working within the framework provided by
his seminal works entitled The Symbolic Uses of Politics (1964) and Constructing the
Political Spectacle (1988) Edelman successfully crafted a unique theoretical position on how
policy develops. At the heart of Edelmans theory is the concept that politics is a spectacle,
reported by the media and witnessed by parts of the public. With respect to this political
spectacle, Edelman (1964) argues that, It attracts attention because, as an ambiguous text, it
becomes infused with meanings that reassure or threaten. The construction of diverse
meanings for described political events shapes support for causes and legitimizes value
allocations (p. 195).
In Edelmans policy theory, political reality is a construction of the media. There are no facts,
only constructs of what the media chooses to portray. Additionally, people do not react
rationally to media-related depictions of political events, leaders, and problems. Rather,
people respond emotionally to events and perceived problems on the basis of their feelings
which constitute individual perspectives of phenomenon. These individual perspectives are
rooted in social situations that create condition-specific signifiers that evoke mutually
constructed meanings and interpretations of subject-object relationships. Edelman further
argues that critical differences in: race, class, gender, language, ethics, morals, history, and
culture are embedded in each social situation. These differences are, in turn, polarized by
power elites who then fortify existing political inequalities and perpetuate hegemonic
ideologies (pp. 1-11). The cumulative effect on policy formation is what Edelman (1988)
describes as, a spectacle which varies with the social situations of the spectator and serves
as a meaning machine: a generator of points of view and therefore of perceptions, anxieties,
aspirations, and strategies (p. 10).
Additionally, Edelman theorizes that taxonomy exists within the political spectacle for the
construction and uses of social problems. Of the 15 constructions and uses of social
problems outlined by Edelman, two most closely parallel the development of Congress
policy response to the Enron, Tyco, and WorldCom scandals. First, Edelman argues for the
construction of problems to justify solutions. In this way, solutions, typically come first,
chronologically and psychologically. Those who favor a particular course of governmental

action are likely to cast about for a widely feared problem to which to attach it in order to
maximize its support (Constructing the Political Spectacle, 1988, p. 22).
With respect to the corporate scandals that occurred in the wake of Enrons collapse, media
attention focused heavily on the personal stories that emerged, ranging from investors who
lost money to Enron employees who lost their jobs and pensions. From an Edelmanian
perspective, the media circus surrounding the fall of Enron provided an opportunity for
legislators like Sarbanes and Oxley to push through their proposed legislation and do so with
the broad support of public opinion. Congress was able to establish support via appealing to
the publics ideological and moral concerns regarding the scandals. Interestingly enough,
Edelman also theorizes that, Actions justified as solutions to a problem of wide concern
often bring consequences that are controversial (p. 23). This may be true in the case of the
SOX Act as evidenced by the high levels of criticism the legislation has received in recent
years due to unusually high costs for corporate compliance with the law.
A second way that Edelman theorizes about the construction and uses of social problems is
by way of the perpetuation of problems through policies to ameliorate them. In reference to
policy driven responses to social problems, Edelman states, Proposals to solve chronic social
dilemmas by changing the attitudes and the behavior of individuals are expressions of the
same power structure that created the problems itself (Constructing the Political Spectacle,
1988, p. 27). Although Edelmans perspective on this aspect of policy formation is highly
pessimistic, one wonders to what extent the SOX Act was merely an ill-fated attempt by the
iron triangle of Congress, interest groups, and the SEC to fix the symbolic image of
corporate America by dictating to public corporations how they should behave in terms of
governance, internal auditing, and public reporting. It could be, from an Edelmanian
viewpoint, another attempt by the constituent groups forming subgovernments to further
hegemonize their control over the structural aspects of business practice thereby increasing
the privatization of publicly held companies. In the wake of the rising compliance costs
associated with SOX, many companies have been forced to go private.
In one article, Jeff Thomson, vice president of research and applications development for the
Institute of Management Accountants in Montvale, said that Sarbanes-Oxley is absolutely
needed and well-intentioned, but that the implementation has been a disaster (Corporate
Americas Criticism of Sarbanes-Oxley, 2006). Evidently, the lack of practical guidance in
accounting standards has been an issue inhibiting the proper implementation of the
legislation. According to Thomson, this is resulting in, tremendous economic costs to
corporations, destroying shareholder value and impacting U.S. global competitiveness
(Corporate Americas Criticism of Sarbanes-Oxley, 2006). Taken from this perspective,
Edelmans political spectacle has helped to create a policy that has not only failed to provide
the appropriate policy solution but has intensified the acuity of the problem. In fact, many
companies have simply found loopholes in the legislation and have chosen, for example, to
simply raise share prices to help offset the costs incurred by complying with the SOX Act.
Peter Morici, of the Robert H. Smith School of Business at the University of Maryland,
College Park, called Sarbanes-Oxley a typical legislative response from Congress
following any kind of scandal. He went on to say that, Frankly, a CEO can walk away a
billionaire if he can jack up the share price and that's a very bad way to do business. The
symptom has been addressed but not the disease (Hopkins, 2006). This would seem to
support Edelmans theory regarding the construction and uses of social problems as the
perpetuation of problems through policies to ameliorate them.

In conclusion, one can see that a variety of perspectives can be applied to the Enron scandal.
Policy perspectives such as punctuated equilibrium and Edelmans symbolic politics and
constructing of the political spectacle help to frame the issue politically and symbolically.
Viewpoints such as mixed deontology and universal ethical egoism help to understand how
the culture of narcissism at Enron developed from an ethical framework. Trait and
transformational theories help us to make sense of what went wrong at Enron from a
leadership perspective. Historical, economic, and political conditions aid in making sense of
the situational factors contributing to the rise and fall of Enron. In the end, there is no one
answer why Enron became the largest bankruptcy in the United States history. Perhaps, that
is part of the reason why people continue to find the story so fascinating.

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