3/17/2019 CORPORATE

GOVERNANCE
CASE STUDY AND ANALYSIS ON
ENRON SCANDAL

Nousheen Hayat
ID NO# 14590
INTRODUCTION
Enron has been regarded as the most innovative company of United States of America in 80s and
90s. It has been the largest buyer/seller of Natural Gas and Electricity and served as a Gas bank
where producers sold their natural gas and Enron dealt with extending the utilities consumers.

ENRON HISTORY AND BUSINESS

Enron was founded in 1985 when InterNorth acquired Houston Natural Gas and Mr. Kanlay was
hired as CEO of Enron. It was originally initially involved in transmission of natural gas and
electricity but it also started trading in more than 30 products. Some of them were;
Petrochemicals, Oil, Plastics, Steel, LNG and Electricity etc.

ENRON’S SUCCESSFUL START

By the end of 1990, Enron had become nation’s largest natural gas company with revenue of
$13.2 Billion. It won fortune magazine award for 5 consecutive years. Enron stock price steadily
increased to $90 Billion. By acquiring another 41 other companies, its revenue touched $100
Billion. Hence it turned as world’s largest energy trader.

PROBLEMS THAT LED ENRON TO A STEEP DOWNFALL

With passage of time, and such rapid growth, the prosperity brought a number of problems.
Some hailed human lustrous approaches while other were systemic failures and destructive
impulses and aftershocks. Mentioned below are a few of them;
1. Accounting rules and regulation were extremely violated and bypassed for personal
interests of higher ones.
2. The downfall of stock prices were left unattended and notices for such declines were
criminally neglected.
3. As an impulse of criminal negligence in corporate governance, the company was delisted
from New York Stock Exchange.
4. Enron considered generating nontransparent financial statements for stakeholders and
to the outside world. Such statements were based on unclear depiction of its operations.
5. An independent third party firm, Arthor Andersons, was hired for financial Audit which
eventually continued to proceed as per company’s foul play i.e. they caught accused of
applying reckless standards in audits.
6. The company’s higher hierarchy started to hide debts and concealed its true
performances.
7. A dysfunctional corporate culture was set up that benefitted the higher hierarchy and
enormous bonuses were collected by the leaders.
SOLUTIONS TO THE PROBLEMS
1. Accountancy must be assured with transparent practices and strict reforms are required
for any giant company in order to proceed the better way.
2. Company must comply generating financial statements with correct facts and figures.
3. Audit must be conducted independently by acquiring services of third party firms and all
the reports must speak truth for themselves.
4. Company must ensure practices with best standards operating procedures. The
procedures must pursue company’s interest and ensure intersections and bypassing
impossible.
5. Rule based approach must be complied in all circumstances. In case of noncompliance,
strict punishments must be rendered to the guilty personnel whoever one could be i.e.
the governor or subordinates.
6. Fiduciary duty must be followed in good faith and the utmost interest of the company.
7. Whistle blowing culture must be appreciated greatly so that no one can abide by rules.
Moreover, the company must promote integrity and straight forward dealing.
 CASE STUDY
Enron

This Enron case study presents our own analysis of the spectacular rise and fall of Enron. It is the
first in a new series assessing organisations against ACG’s Golden Rules of corporate governance
and applying our proprietary rating tool.
As we say in our business ethics examples homepage introducing this series, the first and most
critical rule is an ethical approach, and this should permeate an organisation from top to bottom.
We shall therefore always start with an assessment of the ethical approach of the organisation.
The way this creates the culture determines the performance in relation to the other four Rules.

The Enron case study: history, ethics and governance failures

Introduction: why Enron?
Why pick Enron? The answer is that Enron is a well-documented story and we can apply our
approach with the great benefit of hindsight to show how the end result could have been
predicted. It is also a good example to illustrate how ethics drives culture which in turn pushes the
ethical boundaries and is a key influence on all the four other key elements of good corporate
governance.
Hence, in advance of using our own membership for the survey input we can apply the very
detailed findings from the post-crash dissection of Enron. Readers who are interested can go
to Wikipedia and burrow into the history of Enron and its major players. They can also study the
various accounts that have been written and which are referred to in Wikipedia. We particularly
commend “The Smartest Guys in the Room”, the story of Enron’s rise and fall, by Bethany McLean
and Peter Elkind, and we gratefully acknowledge the valuable insights we have drawn from this
fascinating book in producing our Enron case study.
Below is a brief résumé of Enron’s spectacular rise in fifteen years to a market valuation of nearly
$100bn and its precipitous collapse. We have prepared a detailed history (around 20,000 words)
with our own annotations, which will soon be available as an ebook for those who would like to
draw their own conclusions. We have also applied our proprietary survey tool to Enron and
imagined how the various stakeholder groups might have responded to a business ethics survey
at a critical time in Enron’s history, mid 2000, eighteen months before it suddenly collapsed. The
results of this survey are summarised below.
History of Enron

Enron was created in 1986 by Ken Lay to capitalise on the opportunity he saw arising out of the
deregulation of the natural gas industry in the USA. What started as a pipelines company was
transformed by the vision of a McKinsey consultant, Jeff Skilling, who had the idea of applying
models used in the financial services industry to the deregulated gas industry.
He persuaded Enron to set up a Gas Bank through which buyers and sellers of natural gas could
transact with each other using an intermediary (Enron) whose contractual arrangements would
provide both parties with reliability and predictability regarding pricing and delivery. Enron duly
recruited him to run this business and he rapidly built up a major gas trading operation through
the early nineties.
During this time Enron was extending its pipeline operations into a wider power supply business,
initially in the USA and then on an international scale, completing a large plant at Teesside in the
UK and contracting to build a huge plant near Mumbai in India. In due course it had deals all round
the globe, from South America to China. The hard driving expansion of Enron’s power business
worldwide created a global reputation for Enron.
This, of course, meant that Enron was not generating adequate cashflow, while spending
extravagantly on expansion, and eventually it blew up suddenly and dramatically. Colleagues of
this author who met Lay and had dealings with Enron confirm that there was scepticism in the
market about Enron’s profitability and its cash position. Suspicions grew that Enron’s earnings had
been manipulated and in late summer 2001 it emerged that its Chief Finance Officer had privately
made himself rich at Enron’s expense through the off-balance sheet vehicles. About this time the
dotcom boom ended suddenly and for Enron, this coincided with the international power business
going radically wrong, the broadband business having to be shut down, the water business
collapsing and the electricity services business getting into serious trouble in California. Enron’s
share price started to slide and Skilling, appointed Chief Executive Officer in January 2001, resigned
in August.
Enron’s share price then rapidly declined, triggering repayment clauses in the financing vehicles
which Enron couldn’t handle. Its credit rating went to junk status, which caused the share price to
collapse and triggered further crystallising of debt obligations. Banks refused further finance,
suppliers refused to supply and customers stopped buying.
At the beginning of December 2001, Enron filed for the biggest bankruptcy the USA had yet seen.

Impact on Corporate Governance

Our five Rules of Good Corporate Governance start with the need for an ethical culture. Having
established that Enron’s culture became progressively more deficient in this regard, let’s consider
briefly the impact of this failure in business ethics on the other Rules.
Clear goal shared by all key stakeholders

Lay and, particularly Skilling, engendered in all the staff of Enron the goal of driving up the share
price to the virtual exclusion of all else. The goal of achieving a long term satisfaction from a stable
customer base took a distant second place to signing up deals. In California, the customers were
deliberately exploited by the traders to the maximum extent their ingenuity could achieve. Even
internally, the Chief Finance Officer’s funding scheme was designed to make him rich at his
employer’s expense.
Strategic management
As a McKinsey consultant specialising in strategy, Skilling had a very clear vision, at least initially,
of what he wanted Enron to achieve. However, he wasn’t interested in management per se and
allowed operational management to wither. But his vision of a huge trading enterprise wasn’t
carried down to the next level of developing and implementing practical business plans, as
evidenced by his crazy launch into broadband, a field in which he had no personal knowledge or
experience and in which Enron had almost no capability or likelihood of raising the funds required
to implement the project.
Conclusion and rating by our Survey tool
The flaws in Enron should have been spotted from early on, and indeed were periodically
commented on by various observers from the early nineties onward. If independent ethical and
corporate governance surveys had been conducted by independent parties they would have
highlighted the growing problems. To illustrate, consider the hypothetical survey summarised in
the following chart.
The scores out of ten (high is good) result from a set of questions which aim at deriving an
independent, unbiased view from the interviewees, based on observations of corporate
behaviour. What we have called the “sniff test” represents the personal view of the interviewee
and would take into account their gut feel about the corporation and its management and owners.
The highlighted scores would point the observer to clear problem areas.