The Enron Scandal and the Neglect
of Management Integrity Capacity
Abstract
The nature, value, and neglect of integrity capacity by
managers and the adverse impacts that Enron executive
practices have had on a range of stakeholders are delin-
eated. An explanation is given on how moral competence
in management practice is addressed by each dimension
of the management integrity capacity construct (process,
judgment, development, and system) and how Enron
executive practices eroded each dimension. Specifically
addressed is how behavioral and moral complexity can
be utilized to balance the competing values of manage-
ment and ethics theories to reduce the likelihood of future
Enron-like managerial malpractice. Finally, three positive
action steps are recommended to improve managerial in-
tegrity capacity and remedies are proposed for victimized
Enron stakeholders.
Introduction
Corporate managers are expected to maximize inves-
tor returns while complying with regulatory standards,
avoiding principal-agent conflicts of interest, and enhanc-
ing the reputational capital of their firms (Useem 1996;
Whitman 1999). The recent arrests and resignations of top
U.S. managers, however, indicate an increasing level of
managerial negligence and corporate irresponsibility on
Main Street and on Wall Street that has eroded domestic
and global trust in U.S. markets (Elliott and Schroth 2002;
Mitchell 2002). The U.S. stock market volatility has added
to the political pressure to bring 1930s-style regulatory re-
form to businesses (Lorenzetti 2002). Corporate irrespon-
sibility in the Enron scandal, for example, has provoked
multiple lawsuits and unprecedented outrage from a range
of stakeholders with demands for democratizing structures
of corporate power, improving managerial accountability,
and legislating regulatory reform (Cruver 2002; Fusaro
and Miller 2002; Swartz and Watkins 2002).
The Enron scandal involves both illegal and unethical
activity and the courts of law will determine the precise
extent of civil and criminal liability that accrues to the
perpetrators (Verschoor 2002; Fusaro and Miller 2002).
People commit fraud, for instance, for a wide range of
Joseph A. Petrick, Wright State University
Robert F. Scherer, Cleveland State University
To control fraud by focusing on only
one dimension, such as more effective
deterrent punishments, is like trying to
put out a skyscraper fire with a garden
hose.
motives including perceived lack of effective deterrent
punishment and rationalization of acceptability of illegal
activity (Albrecht and Searcy 2001). To control fraud by
focusing on only one dimension, such as more effective
deterrent punishments, is like trying to put out a sky-
scraper fire with a garden hose. In addition, people harbor
myths, such as organizations cannot proactively detect or
prevent fraud, which only result in disempowered resig-
nation to the inevitability of corruption and more future
Enrons (Albrecht and Searcy 2001).
The focus of this article, however, is on understand-
ing the complex, interdependent moral roots that embed
the multiple motives for Enron legal malfeasance and to
provide more than a moral garden hose to address these
issues. Simplistic inspirational exhortations to do the right
thing, recommendations to impulsively follow what feels
comfortable at the time, window-dressing organizational
codes of conduct, or appeals to ad hoc abstract moral
theories are unlikely to provide practical guidance to
today’s managers in the responsible analysis and resolu-
tion of urgent moral and/or legal issues (Badaracco 1997).
What is needed is an interdependent moral and legal
framework that discloses the complex roots of inappro-
priate managerial decisions and provides comprehensive
practical remedies to reduce the likelihood of “Enronitis”
and future white-collar crimes. Such a structured frame-
work and set of remedies are presented through discus-
sion centered around the following issues: the neglect of
integrity capacity by managers, Enron executive practices
that led to stakeholder harms, and recommendations for
improving managerial integrity capacity in light of the
Enron scandal.
37
Petrick and Scherer
The Neglect of Integrity Capacity by Managers
The neglect of managerial integrity capacity is at the
moral root of Enron’s legal and financial problems. What
is legally permissible today, but morally questionable,
may well become legally proscribed tomorrow. Thus, it is
important for managers to proactively understand and at-
tend to the multiple dimensions and moral antecedents of
illegal activity (Paine 1994). Integrity capacity is the in-
dividual and collective capability for the repeated process
alignment of moral awareness, deliberation, character, and
conduct that demonstrates balanced judgment, enhances
ongoing moral development, and promotes supportive
systems for moral decision making (Petrick and Quinn
2000). It is one key intangible asset that acts as a catalyst
for reputational capital and its erosion can jeopardize
the survival and credibility of organizations and markets
(Petrick, Scherer, Brodzinski, Quinn, and Ainina 1999).
The spectacle of top Enron executives “pleading the Fifth”
in Congressional hearings about managerial immoral and
illegal conduct is a vivid example of the consequences of
the neglect of individual and organizational integrity ca-
pacity (Cruver 2002; Swartz and Watkins 2002). Further-
more, the frantic effort of Arthur Andersen, LLP, one of
Enron’s critical stakeholders whose integrity capacity and
reputation were shattered by their unprofessional auditing
services, to stem the tide of fleeing clients while negoti-
ating with other “Big Five” accounting fi rms for sale of
parts of its business, is another dramatic example of the
costs of integrity capacity neglect (Toffler and Reingold
2003).
Managers and organizations with high integrity capac-
ity are likely to exhibit a coherent unity of purpose and
action in the face of accountability pressures rather than
resort to moral evasions or other forms of irresponsible
managerial decision-making (Petrick and Quinn 2000).
Managers and organizations with low integrity capacity
(those that do not walk the talk in the process of daily
transactions, those that exercise poor or distorted judg-
ment in policy formulation, those that never morally
mature beyond manipulative acquisitiveness and domina-
tion rituals, and those that refrain from enacting support-
ive contexts for sound moral decision making) erode their
reputational capital and engender management distrust
and stakeholder wrath (Sejersted 1996).
Many managers implicitly adopt the myth that the top
management interest is always synonymous with corpo-
rate success and public welfare (Mokhiber and Weissman
1999). Since fifty-one of the world’s largest economies are
corporations, many corporate executives are often not held
accountable for betrayal of multiple stakeholder interests;
they expect aristocratic privileges without accountability
(Kelly 2001). By succumbing to greed in secretly exercis-
ing stock options and to dishonesty in falsely reporting the
performance reality of the fi rm to other stakeholders, top
Enron managers abandoned the basic standards of pro-
cess integrity capacity. The exposure of integrity capac-
38 Mid-American Journal of Business, Vol. 18, No. 1
ity neglect by managers justifies the need to focus on the
guidance offered by the construct of integrity capacity in
the Enron scandal.
Enron Executive Practices and Stakeholder
Betrayals
In December, 2001 Enron, the seventh largest U.S.
corporation, collapsed and produced the second largest
corporate bankruptcy to date in U.S. history (Cruver 2002;
Fusaro and Miller 2002). More than ten Congressional
committees are currently pursuing inquiries, over thirty
Enron-related bills have been introduced to address the
scandal-related problems, and the full extent of collateral
damage to a wide range of Enron stakeholders is yet to be
determined.
While the definitive account of the Enron scandal is yet
to be written, some key elements are clear. First, rising
stars like former Enron CEO Jeffrey K. Skilling and ex-
Enron CFO Andrew S. Fastow created and implemented
business ideas that led to major problems, which could
not be legally or ethically fixed, resulting in their downfall
(Fusaro and Miller 2002). Second, among the big ideas
was the creation of an “asset light” company by applying
Enron’s trading and risk management skills to power plants
and other facilities owned by “asset heavy” outsiders.
To maintain a high credit rating and raise capital, Enron
relocated many of its assets off the balance sheet into com-
plex off-the-book partnerships or Special Purpose Entities
(SPEs). The problem with this big idea was that some SPEs
required Enron to kick in stock if its rating and stock price
fell below a certain point. In fact, Enron was left holding a
financial liability of over $5 billion in debt. When its stock
and asset values began declining, Enron was immediately
vulnerable to financial overextension (Cruver 2002). Third,
another big idea was the expansion of Enron’s energy trad-
ing expertise into a wide array of new commodities to spur
earnings growth – everything from paper goods to metals
to telecommunication broadband capacity (Swartz and
Watkins 2002). The problem was that Enron tried to do too
much, too fast, with little or no return (Fusaro and Miller
2002). Enron invested $1.2 billion in fiber-optic capaci-
ties and trading facilities, but the telecommunications
broadband market collapsed. Furthermore, it could never
generate adequate profits from energy trading in markets,
such as metals, to cover the billion dollar mistakes (Cruver
2002). In effect, people, processes, policies and principles
that aided and implemented the rush to financial growth at
any cost all contributed to the Enron scandal.
A partial identification of Enron stakeholders and the
business practices that betrayed their interests are provided
in Part 1 of the Appendix. Part 1 consists of sixteen stake-
holder groups divided into primary stakeholders, secondary
stakeholders, and tertiary stakeholders, along with specific
Enron business practices that led to major stakeholder
moral harms.

In effect, people, processes, policies and
principles that aided and implemented
the rush to financial growth at any cost
all contributed to the Enron scandal.
The Enron scandal’s adverse moral impact on the pri-
mary stakeholders is evident in Part I. Enron’s top manag-
ers chose stakeholder deception and short-term financial
gains for themselves, which destroyed their personal
and business reputations and their social standing. They
all risk criminal and civil prosecution that could lead to
imprisonment and/or bankruptcy. (Board members were
similarly negligent by failing to provide sufficient over-
sight and restraint to top management excesses, thereby
further harming investor and public interests (Senate
Subcommittee 2002). Individual and institutional investors
lost millions of dollars because they were misinformed
about the firm’s financial performance reality through
questionable accounting practices (Lorenzetti 2002).
Employees were deceived about the firm’s actual financial
condition and deprived of the freedom to diversify their
retirement portfolios; they had to stand by helplessly while
their retirement savings evaporated at the same time that
top managers cashed in on their lucrative stock options
(Jacobius and Anand 2001). The government was also
harmed because America’s political tradition of chartering
only corporations that serve the public good was violated
by an utter lack of economic democratic protections from
the massive public stakeholder harms caused by aristocrat-
ic abuses of power that benefited a select wealthy elite.
The Enron scandal also harmed secondary and tertiary
stakeholders. For example, Enron top managers pressured
Arthur Andersen to certify maximum-risk, question-
able accounting practices in part to retain their lucrative
consulting business and, by acceding to this pressure,
Arthur Andersen won huge contracts in the short run but
ultimately lost their professional credibility and client base
(Toffler and Reingold 2003). A parallel process occurred
in the legal profession when Enron managerial pressure
on Vinson and Elkins to legally condone investor and
employee fraud prevailed. Again, Citigroup, J.P. Morgan,
and Merrill Lynch made over $200 million in fees from
deals that helped Enron and other energy firms boost cash
flow and hide debt, and, by failing to exercise their own
adequate due diligence, they multiplied the harm done to
other stakeholders. The industry’s reputation, furthermore,
was tarnished by Enron’s aggressive market leadership
practices, the taxpaying public incurred additional shift-
ing risk to eventually cover bankruptcy collateral damage,
and ultimately America’s stature as a model of democratic
capitalist practices was replaced by fear of the global
export of Enron-like corporate irresponsibility and crony
capitalism (Mitchell 2002; Sirgy 2002).
Petrick and Scherer
These multiple stakeholder damages can be viewed as
the result of serious lapses in the four dimensions of manage-
ment integrity capacity–process, judgment, development,
and system as indicated in Part II of the Appendix. Under-
standing and correcting these lapses provides a structured
way to address the moral roots of current stakeholder
remedies and reduce the likelihood of future Enrons.
Process Integrity Capacity and Enron
Process integrity capacity is the alignment of individ-
ual and collective moral awareness, deliberation, charac-
ter, and conduct on a sustained basis so that reputational
capital results (Petrick and Quinn 2000; Rest, Narvaez,
Bebeau, and Thoma 1999). The need to address lapses in
process integrity capacity is manifest by the routine frag-
mentation of managerial moral attention and behavior that
arouses stakeholder concern about the moral hypocrisy of
management practices (e.g., Enron top managers tout their
public relations images as responsible corporate citizens
while defrauding investors and employees and secretly
lining their own pockets with diverted funds) (Brunsson
1989; Messick and Bazerman 1996).
While it is unlikely that Enron executives failed to per-
ceive the relevant moral issues, it is clear that they were
not sensitive to them. They appeared to be erroneously
and overly confident of their initial distorted perceptions
of morally acceptable business conduct, and when chal-
lenged, as Fastow was regarding the appropriateness of
his financial structures, retaliated against accusers and
sought information in ways that confirmed what they
already believed (Messick and Bazerman 1996). Since top
management and board members ignored whistleblower
feedback, they became morally blind, deaf, and mute,
thereby diminishing their capacity for ethical awareness
and eventual strategic responsiveness—for which they are
held morally accountable (Cavanagh and Moberg 1999;
Swartz and Watkins 2002).
Moral deliberation, the second component of process
integrity, is the capacity to engage in the critical and
comprehensive appraisal of causal factors and recognized
moral options to arrive at a balanced and inclusive reason-
able decision/resolution/policy that provides a standard for
future determinations (Petrick and Quinn 1997). The deci-
sion making style of the Skilling-Fastow-Kopper circle
demonstrated a tendency to suppress all but one aspect of
a moral decision, i.e., its short term financial impact, and
to exclude other parameters that might inhibit decisive ac-
tion or constrain executive perks (Messick and Bazerman
1996). Enron managers and board members, who poorly
analyzed and resolved moral conflicts of interest through
self-centered policies also ignored or trivialized the harm
caused to other stakeholders. For their diminished capacity
for balanced moral deliberation Enron managers are held
morally accountable (Fusaro and Miller 2002; Swartz and
Watkins 2002).
Mid-American Journal of Business, Vol. 18, No. 1 39
Petrick and Scherer
Moral character, the third component of process integ-
rity, is the individual and collective capacity to be ready to
act ethically. The greed, dishonesty, arrogance, selfishness,
cowardice, hypocrisy, disrespect, and injustice that char-
acterized top Enron executives’ intentions discloses their
culpable motives and the corrupting workplace culture
they created (Sennett 1998). The overemphasis on per-
sonal financial gain at the expense of others destroyed any
remnant of employee trust. The visionless accumulation
of rapid wealth exposed the absence of leadership wisdom
and the deliberate obfuscation of financial structures to
preclude a fair picture of the financial health of the firm
eroded their characters; they de-humanized themselves
and others with whom they interacted. The lack of the
political virtue of citizenship is particularly damaging to
internal and external character cultivation (Logsdon and
Wood 2002).
Moral conduct, the fourth component of process integ-
rity, is the individual and collective carrying out of justifi-
able actions on a sustained basis. Managers that exhibit
ethical conduct develop a reputation for dependability and
alignment of moral rhetoric and reality but the duplicitous
exploitation of employee retirement savings exposed the
cruel behavioral hypocrisy of top Enron executives (Cru-
ver 2002).
Judgment Integrity Capacity and Enron
Managers can attempt to evade full moral accountabil-
ity by compartmentalizing and fragmenting their handling
of management and ethics issues. One way to address
this evasion is to enhance judgment integrity capacity,
the capability of analyzing complete moral results, rules,
character, and context in management practices (Petrick
and Quinn 2000). The way Enron executives manage
implicitly commits them to certain ethics theories, and
just as simplistic, distorted managerial judgments produce
poor results in handling behavioral complexity, so also
do simplistic, distorted ethical judgments produce poor
results in handling moral complexity (Paine 1994; Petrick
and Quinn 2000).
For business leaders and their firms, exhibiting judg-
ment integrity means being held accountable for achieving
good outcomes (results-oriented teleological ethics), by
following the right standards (rule-oriented deontological
ethics), while strengthening the motivation for excellence
(character-oriented virtue ethics), and building an ethically
supportive environment within and outside the organiza-
tion (context-oriented system development ethics). Al-
though all four theories of ethics (teleological, deontologi-
cal, virtues, and system development) can be isolated, the
main point is that all four theories are necessary to fully
analyze and resolve moral conflicts.
Business leaders that overemphasize or underemphasize
good results, right means, virtuous character, and morally
supportive contexts when facing morally complex prob-
40 Mid-American Journal of Business, Vol. 18, No. 1
lems incur the same adverse consequences as managers
that cannot handle behavioral complexity (i.e., offended
individuals, neglected opportunities, eroded trust, and
corrupt environments). Enron executives, greedily pursued
short-term economic returns while manipulating the rules
of their industry, ignoring the negative morale impacts of
their bad example. They exhibited poor moral judgment
when they were callously indifferent or ruthlessly hostile
to contextual constraints.
The narrow focus on financially elite results by Enron
executives, particularly Lay, Skilling, Fastow, and Kopper,
resulted in tragic consequences. Their evasion of regula-
tory rules, their corrupting abuse of power and use of po-
litical influence, their suspension of organizational moral
code and elimination of extra-organizational guidelines,
victimized many innocent stakeholders (Fusaro and
Miller 2002).
Developmental Integrity Capacity and Enron
Developmental integrity capacity according to Logsdon
and Yuthas (1997) and Rest et al. (1999) is the cognitive
improvement of individual and collective moral reasoning
capabilities. Moral reasoning moves from preconventional
self-interested regard (collective connivance) through a
stage of conforming to external conventional standards
(collective compliance), and finally, to a stage of post-
conventional commitment to universal ethical principles
(collective integrity).
Collective connivance is a molar stage of moral devel-
opment characterized by the use of direct force and indi-
rect manipulation to determine moral standards. According
to Sejersted (1996) managers who sustain this stage of
collective moral development are either issuing threats
of force (e.g., “Get it done now or else”) or developing
exclusively exploitative relationships based on mutual
manipulation (e.g., “What’s in it for me”? and “Forget the
others.”). Collective compliance is the intermediate molar
stage of moral development characterized by the use of
popular conformity to work processes and adherence to
externally imposed standards. Managers who sustain this
stage of collective moral development are either admon-
ishing employees to secure peer approval by “getting
with the program” or commanding them to comply with
organizational hierarchy and externally imposed regula-
tions. Collective commitment is the highest molar stage of
moral development characterized by the use of democratic
participation and internalized, principled regard for other
stakeholders as a basis for determining moral standards
(Petrick and Quinn 1997). Managers who sustain this
stage of collective moral development are either surveying
democratic majority trends or responding to the question,
“What principled system is worth multiple stakeholders’
ongoing participation and commitment?”
The literature on organizational ethical climate assess-
ment and development is crucial to understanding how

morally underdeveloped organizations facilitate unethi-
cal and illegal activity (Trevino, Butterfield, and McCabe
1998; Dickson, Smith, Grojean, and Ehrhart 2001). The
ethical climate of organizations at different levels has
been demonstrated to influence process and judgment
dimensions of integrity capacity (Wimbush, Shepard, and
Markham 1997; Barnett and Varcys 2000).
With respect to Enron’s developmental integrity capac-
ity, the Senate Subcommittee Report on the role of the
Board of Directors in Enron’s collapse concluded that
the firm had developed a pervasive culture of deception
(Senate Subcommittee 2002). As such it was designed
and operating at the level of connivance. CEO Lay used
direct force to fire any possible successor with whom he
disagreed and either he or other top Enron managers used
indirect force to deceive and manipulate employees and
other stakeholders for top executive advantage. Whatever
standard operating procedures were developed at the level
of conformance were honored only to the extent that they
did not infringe upon executive perks or interfere with top
executives exercising a type of feudal control over internal
subjects. When external compliance threatened to restrict
Enron corporate prerogatives, aggressive tactics to reduce
or eliminate regulatory standards were routinely em-
ployed. The extent and degree to which illegal non-com-
pliance was the cultural norm at Enron will be determined
in the courts. Enron did not reach the commitment level;
it never democratized its power structures so that employ-
ee and community input could shape strategic direction or
restrain executive perks. For all intents and purposes, the
work culture of Enron was that of a moral jungle where
abuse of power dominated principled economic democrat-
ic norms; it was a moral powder keg ready to explode.
System Integrity Capacity and Enron
System integrity capacity is the alignment of organiza-
tional infrastructure and extra-organizational environment
to provide a supportive context for sound moral decision
making (Driscoll and Hoffman 2000; Petrick and Quinn
2000). Managerial system accountability today is deter-
mined by the extent to which leaders continually im-
prove the organization’s moral infrastructure and work to
improve the external organizational environment, so that
moral performance can be realistically sustained (LeClair,
Ferrell, and Fraedrich 1998).
At the organizational level, one of the key system deci-
sions is whether to focus on a compliance-directed system
or an integrity-directed system (Petrick and Quinn 2000).
Although both systems can be complementary, world-
class managers are expected to design and adhere to moral
codes that ensure a supportive intra-organizational context
(barrel) for enhancing individual (apples) process, judg-
ment, and developmental integrity capacity. One guide-
line for building a compliance-based system is the U.S.
Federal Sentencing Guidelines for Organizations (FSGO).
Petrick and Scherer
…the moral infrastructure at Enron was too
weak to constrain a culture that supported
rampant immoral and illegal activity.
Organizations that install a compliance-based system with
whistleblower protection and uniform enforcement of
company code violations invest in this ethical risk man-
agement technique to minimize potential financial losses
in the event of illegal activity (LeClair et al. 1998). The
integrity-directed approach entails processes for internal-
izing organizational system moral improvement through
regular organizational ethics needs self-assessments, eth-
ics measures in all business functions, and benchmarked
disclosures in annual audits (Petrick and Quinn 2001).
The fact that Enron executives engaged in illegal activities
and overrode their own organizational code of ethics with
impunity indicated that the moral infrastructure at Enron
was too weak to constrain a culture that supported rampant
immoral and illegal activity.
In addition to the intra-organizational system, the extra-
organizational system needs to be shaped by managers.
Managers can comply with and proactively foster regula-
tory standards to eliminate or control corruption outside
the organization and support those domestic and inter-
national groups that do likewise. Managers can support
harsher penalties for white-collar criminals and tougher,
fraud-detection professional association accounting stan-
dards. Managers can partner with industry, public, and
nonprofit organizations to enhance stakeholder relations
in an economically democratic manner rather than only
focusing on ruthless means to extend market leadership.
Enron executives, using campaign contributions and
aggressive political lobbying to affect industry deregula-
tion, limit liability, and minimize reporting; corrupted
rather than cultivated a morally supportive external envi-
ronment (Cruver 2002). Unlike other business scandals
that involved managers who ran beneath the government
radar for unacceptable business conduct, Enron executives
worked to eliminate any government radar stations that
could warn and regulate unacceptable business conduct
(Swartz and Watkins 2002). Their brazen undermining of
system integrity indicates the need for extensive reform
and multiple stakeholder remedies that strengthen the
moral environment and enhance the prospects of stake-
holder economic democracy.
Recommendations for Improving Managerial
Integrity Capacity
If managers cannot afford to neglect integrity capacity
as an important management strategic asset, the follow-
ing three practices can serve as proposed remedies. These
remedies are recommended for improving the moral
resources of managers. First, the more aware managers
Mid-American Journal of Business, Vol. 18, No. 1 41
Petrick and Scherer
and other stakeholders are of the nature and importance
of integrity capacity as a strategic asset, the more likely it
is that they can cooperate in nurturing it and avoid the ad-
verse effects to its stakeholders of integrity capacity ne-
glect (Petrick and Quinn 2001). By gaining competence
in the conscious, balanced integration of management
and ethics approaches, managers can hold themselves and
other stakeholders accountable for principled decisions
that inclusively and systematically address moral results,
rules, character, and context. Thus, Practice I deals with
managerial and organizational learning.
Practice I: Provide education for managers to in-
crease awareness of the importance of (a) sustain-
ing process and developmental integrity capacity
as a strategic management asset and (b) of ac-
countability for developing judgment integrity by
balancing management and ethics competencies.
Second, in addition to reformed U.S. accounting and
financial reporting standards, the social and environmen-
tal accounting literature (SEAL) is now sufficiently well
developed in Great Britain, continental Europe, and Aus-
tralasia to generate auditing and reporting mechanisms
that are responsive to changing patterns of stakeholder
accountability (Lehman 1999). The Shell Report 2000,
for example, is available online. This report compre-
hensively documents the economic, social, and environ-
mental performance of the Royal Dutch/Shell Group of
Companies, and acknowledges areas for environmental
improvement in Shell holdings in Nigeria. The transpar-
ency of this process of deepening stakeholder relation-
ships around core financial, as well as non-financial,
values enhances the moral credibility and reputational
capital of the manager and the firm. It is just this broader
sense of managerial context accountability that is entailed
in system integrity capacity as a management strategic
asset. Practice II is based on accountability.
Practice II: Expand the scope of managerial account-
ability to include system integrity capacity devel-
opment, including the regular implementation of
transparent economic, social, and environmental
accounting systems.
Third, one of the chief impediments to system integ-
rity improvement is the uncritical acceptance of the belief
that the exclusive fiduciary duty of corporate manage-
ment is the legal maximization of investor profits by
means of a hierarchic power structure. On the contrary,
expanding the scope of managerial fiduciary duty to all
stakeholders, especially employees and community, by
means of an economic democratic power structure would
create a system more conducive to system integrity
capacity development (Kelly 2001; Petrick and Quinn
2001). It is this formal recognition of employee and com-
munity contributions, for example, to corporate wealth
42 Mid-American Journal of Business, Vol. 18, No. 1
and democratic participation in corporate governance
during the “Information Age” that are often precluded
and devalued in conventional accounting and financial
documents (Mokhiber and Weissman 1999; Petrick 1998;
Petrick and Scherer 2000). Practice III is based on stake-
holder economic democracy in corporate governance.
Practice III: Expand the scope of managerial fiducia-
ry duties to include institutionalized stakeholder
democratic participation in corporate gover-
nance.
Given these three practices to improve moral resources
and ethical decision making within the organization,
Part III of the Appendix provides some possible remedies
for current and future victimized Enron stakeholders.
Conclusion
The nature, value, and neglect of integrity capacity
by managers and the adverse impacts that Enron execu-
tive practices had on a range of stakeholders have been
delineated. An explanation was provided about how moral
competence in management practice is addressed by each
dimension of management integrity capacity (process,
judgment, development, and system) and how Enron
executive practices eroded each dimension. Specifically, it
was discussed how behavioral and moral complexity can
be addressed through balancing the competing values of
management and ethics theories to prevent future En-
ron-like managerial malpractice. Finally, three positive
action steps to improve managerial integrity capacity and
proposed remedies for victimized Enron stakeholders were
recommended. While it is impossible to guarantee that
Enron-like disasters will not occur in the future, the three
positive practices and the proposed remedies are one way
to reduce the likelihood of their occurrence. n
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About the Authors
Joseph A. Petrick is Professor of Management in the Raj
Soin College of Business and Administration at Wright State
University in Dayton, Ohio. His research interests include mana-
gerial and organizational ethics, corporate governance, quality
management, and international management.
Robert F. Scherer is Professor of Management and Dean in
the James J. Nance College of Business Administration at Cleve-
land State University in Cleveland, Ohio. His research interests
include international management, organizational ethics, gender
issues in the workplace, managerial communication, and occu-
pational stress and coping.
Mid-American Journal of Business, Vol. 18, No. 1 43
Petrick and Scherer
Appendix – Integrity Capacity
Part I: The Case of Enron: Moral Harm and Prevention Remedies
Primary
Stakeholders Enron Business Practices
Dishonestly concealed debt and overstated earnings
Abused power to gain wealth through advanced sale of stock
while other primary critical stakeholders later suffered due
to nondisclosure of accurate performance results
Top Management
Limited fiduciary duty to increasing wealth of investors
Created and sustained a work culture that rewarded financial
results at any cost, pushed moral limits, and became a moral
cesspool
Hid debt and falsely enhanced profits through secret, non-
transparent, off-the-book partnerships or Special Purpose
Investors Entities (SPEs)
Institutional investors passively accepted the Enron investor
relations “story”
Required that employees buy and hold Enron shares in
retirement savings accounts to sustain losses while top
executives were allowed to sell shares for profit
Employees
Ignored fellow employee whistleblowing and turned a
blind eye to malfeasance while the value of their retirement
portfolios rose
Used campaign contributions and lobbying influence to
enable government deregulation, limited liability, and minimal
reporting requirements that abetted stakeholder victimization
Government
Unfair enablement of powerful private interests over the
public interest
Charged higher prices due to near monopoly control of energy-
Customers
traded resources which led to loss of customer loyalty
Knew about and could have prevented risky financial practices
but did nothing
Abdicated substantive corporate oversight responsibilities
and provided ineffective audit control and ethics system
coordination
Board of Directors Lack of majority of independent directors who exercised
capable oversight of auditing processes
Did not democratize structures of power but primarily rubber-
stamped executive hierarchy decisions
Participated in interlocking Board of Directors’ activities and
remained relatively silent about executive accountability
Secondary
Stakeholders Enron Business Practices
Pressuring Arthur Andersen, LLP to use questionable account-
External Auditing
ing practices exacerbating auditor conflicts of interest, condon-
Services by Certified ing of off-balance sheet financing, and facilitating managerial
Public Accounts fraud
44 Mid-American Journal of Business, Vol. 18, No. 1
Major Stakeholder Moral Harms
Character erosion due to vices of dishonesty, greed,
arrogance, selfishness, cowardice, hypocrisy, and
indifference
Loss of business and social standing
Risk fines, bankruptcy and imprisonment
Even well-intentioned employees were inhibited from
doing the right thing
Huge financial losses for institutional and individual
investors
Loss of individual investor trust in the stock market
Loss of foreign capital credibility in U.S. markets due to
crony capitalism
Violation of moral right to accurate and timely stock
information
Devalued economic democratic participation in corporate
governance; employee whistleblower ignored
Violation of freedom to diversify retirement funds
Lifetime pensions lost
Injustice occurred due to disproportional harm inflicted
on loyal employees
Disrespect for the contribution of labor to firm success
Risks increase in violence to redress grievances or secure
remedies from lower socioeconomic groups
Eroded public trust in government protection from busi-
ness abuse of power
Eroded credibility of regulatory standards and their
enforcement
Price gouging that unfairly deprived West Coast and
other customers of market alternatives
Eroded respect for corporate board governance with pos-
sible exposure to criminal and civil litigation
Devalued the important role of corporate oversight and
economic democratic participation in corporate gover-
nance
Acquiesced to managerial malfeasance that injured all
stakeholders
Major Stakeholder Moral Harms
Caving into pressures out of fear of losing consulting
business
Collapse of professional character trait of independence
and concern for the public good
Becoming an accomplice in the obstruction of justice by
document shredding
(Part I continued on following page)
 Petrick and Scherer

Appendix – Integrity Capacity

Part I: The Case of Enron: Moral Harm and Prevention Remedies (continued)

Primary
Stakeholders Enron Business Practices Major Stakeholder Moral Harms

Persisting in conflicts of interest in auditing and consulting

services that harm public trust
Risk limitations on auditors' consulting work
Loss of current and future clients

External Auditing Pressuring Arthur Andersen, LLP to use questionable account- Loss of professional service reputation and credibility
ing practices exacerbating auditor conflicts of interest, condon-
Services by Certified Risk of demise of the firm, bankruptcy and/or hostile
ing of off-balance sheet financing, and facilitating managerial
Public Accounts fraud takeover
Being disrespectfully manipulated into becoming an ac-
complice to a violation of market and public trust
Provoke creation of government board to oversee cor-
porate audits and discipline auditors in the accounting
profession

Collapse of professional character trait of independence

and concern for the public good
Caving into pressures out of fear of losing business
Loss of professional service reputation through violation
External Legal Pressuring Vinson and Elkins to use questionable legal of client contractual moral right to accurate and timely
Services by Members practices exacerbating the legal condoning of investor professional legal services
of the Bar and employee fraud and loss of firm reputational capital
Delegitimizes stakeholder, especially employee, role in
corporate governance
Being disrespectfully manipulated into becoming an ac-
complice to a violation of market and public trust

Loss of business reputation for inadequate due diligence

Pressured financial suppliers like Citigroup, J.P. Morgan
Chase, and Merrill Lynch to boost cash flow and hide debt to
Creditors/Suppliers deceive others about Enron's creditworthiness
Deceived credit rating agencies about reality of firm financial
performance
Increased risk of future civil litigation
Unjust, disproportionate harm to trusting creditors and
suppliers
Caving into pressures out of fear of lost business
Eroded credibility of credit rating agencies and U.S. finan-
cial markets due to perception of crony capitalism

Abrupt loss of jobs and retirement savings lead to broken

families and enduring social ills
Tormented former corporate vice chairman commits sui-
Community Community relations policy led to destruction of social capital cide to add to family and social losses
and Society through bankruptcy, layoffs, and abuse of top management
Externalizes the costs of emotional, social, and health
power
damages onto society
Erosion of community trust and expansion of community
cynical resentment

Tertiary
Stakeholders Enron Business Practices Major Stakeholder Moral Harms

Aggressive promotion of private business interests that ignore Risk of tax increases and/or existing public resources allo-
Taxpaying Public the public interest and concerns about appropriate government cated to picking up the pieces of industry sector negligence
regulation to protect the public and shifted risk for taxpayers and malfeasance
to cover bankruptcy collateral damage

Media relations policy of systematic deception regarding the Erosion of media credibility in early detection and dis-
Media financial condition, accounting practices, and executive abuse semination of business corruption
of power

(Part I continued on following page)

Mid-American Journal of Business, Vol. 18, No. 1 45

Petrick and Scherer

Appendix – Integrity Capacity

Part I: The Case of Enron: Moral Harm and Prevention Remedies (continued)

Tertiary
Stakeholders Enron Business Practices Major Stakeholder Moral Harms
Media relations policy of systematic deception regarding the Erosion of media credibility in early detection and
Media financial condition, accounting practices, and executive abuse dissemination of business corruption
of power

Forced law-abiding competition out of the industry

Engaged in questionable industry tactics based on unconstrained
entrepreneurial zeal to achieve and sustain industry market
Industry Groups
leadership
Withholding critical censure and trying to prevent gov-
ernment remedies by aggressive, self-serving practices
Tainted the reputation of the entire industry

Eroded professional and public respect for U.S. business

and professional practices
Inadequate professional leadership in developing
uniform accounting, finance, and legal standards and
Professional Ignored or trivialized compliance with managerial, accounting, practices
Associations financial, and legal professional standards
Increased insurance costs to cover business and profes-
sional liabilities
Inadequate professional leadership in designing new
economic democracy structures of organizational power
and governance

Reckless focus on short-term executive self-interest ignored Bankruptcy caused loss of philanthropic donations
NGOs interests of non-profit organizations for improvements in mana-
gerial accountability and the need for special contributions to Widespread victimization of innocent parties
the general welfare of humans and nature

Eroded global trust in deregulated markets and U.S.

Engendered fear that crony capitalism and Enron-type corporate
Global Citizens irresponsibility will be America’s newest and most powerful
export imposed on them under the rhetoric of free trade and
globalization
managers to contribute to a better world where growth
and equity should prevail
Loss of funds by volatile stock markets

Part II: Dimensions and Components of Integrity Capacity

Dimensions of Integrity Capacity Components of Each Dimension of Integrity Capacity

Process Integrity Capacity Process Components:

• Awareness
• Deliberation
• Character
• Conduct

Judgment Integrity Capacity Judgment Components:

• Teleological ethics (results)
• Deontological ethics (rule)
• Virtue ethics (character)
• System development ethics (context)

Developmental Integrity Capacity Developmental Components:

• Connivance
• Compliance
• Commitment

System Integrity Capacity System Components:

• Intra-organizational compliance-directed system
• Intra-organizational integrity-directed system
• Extra-organizational system improvement

46 Mid-American Journal of Business, Vol. 18, No. 1

 Petrick and Scherer

Appendix – Integrity Capacity

Part III: Victimized Enron Stakeholders and Proposed Remedies

Victimized Enron
Stakeholders Proposed Remedies

• Resignation from Enron

• Fine and imprison executives who lie to SEC and egregiously harm investors
• Make easier criminal prosecution of executives who destroy evidence or defraud investors and lengthen
maximum jail terms
• Ban personal loans to top executives of public companies
• Expansion of fiduciary duty to stakeholders, especially employees and community
• Public acknowledgement of moral guilt and redistribution of executive retention bonuses to Enron ex-employees
Top Management • Integrity capacity selection screening and ongoing education
• Have Ethics Officer report directly to top management
• Require CEOs and CFOs to certify accuracy of financial reports
• Prohibit executives from selling company stock during blackout periods
• Require all insiders to report all company stock trades within two days
• Require top managers to forfeit profits and bonuses when earnings are restated due to securities fraud
• Prevent officials facing fraud judgments from using bankruptcy to escape liability
• Raise the maximum penalty for securities fraud to 25 years
• Increase CEO and CFO penalties for false statements to SEC or failing to certify financial reports to a $5 million fine and
20-year prison term
• Raise maximum penalties for mail and/or wire fraud to 20 years and to 10 years for defrauding pension funds

• Improved accounting and financial reporting standards to increase transparency and accountability
• Require shareholder approval of option plans
Investors • Restrictions on SPEs and other off-the-book partnerships
• Integrity capacity ongoing training
• Lengthen statue of limitations on securities fraud to five years or two years from discovery
• Direct civil penalties from SEC enforcement authorities to accounts that benefit investors victimized by securities fraud

• Increase employee control over pension retirement funds allowing for increased and timely diversification
• Increase the security of company-sponsored retirement savings plans and increase tax advantages for employee ownership
of firms
• Increase democratization processes at work that require employees to have timely access to accurate financial information
that affects pension decisions
• Improve education programs to inform employees about investment principles and practices
• Increase democratization processes at work that require employees to have a vote in Board deliberations and in all major
Employees strategic decisions
• Integrity capacity selection screening and ongoing training
• Increase formal recognition and inclusion of the asset value of employee human capital in all accounting and financial
reporting documents
• Broaden ability of whistleblowers to sue and prove retaliation against employers
• Increase any severance payments
• Challenge the executive retention bonuses and obtain employee redistribution of funds under laws governing fraudulent
conveyance, i.e., the transfer of assets by a company without valid consideration being paid

• Boost SEC and DOJ budgets significantly

• Meaningful campaign finance reform
• Expand budget and enforcement of U.S. Federal Sentencing guidelines for organizational misconduct
• Enact stakeholders statutes rather than stockholder statutes to give boards the leeway to legally value employees and the
community in strategic oversight decisions
• Closer oversight of corporate political lobbying and accounting practices
Government • Expansion of corporate charter revocation powers for egregious corporate harm done to the public good
• Full disclosure of business-government closed-door agreements regarding public resources
• Expand SEC rule-making power on financial analyst conflict of interest
• Further restrictions on business-government revolving door influence positions
• Integrity capacity selection screening and ongoing training
• Bar law-breaking companies, those who face more than one criminal conviction or civil judgment in three years, from
government contracts
• Fully enact and enforce the Sarbanes-Oxley Act

• Increased protection from energy price gouging

Customers
• Integrity capacity training (Part III continued on following page)

Mid-American Journal of Business, Vol. 18, No. 1 47

Petrick and Scherer

Appendix – Integrity Capacity

Part III: Victimized Enron Stakeholders and Proposed Remedies (continued)

Victimized Enron
Stakeholders Proposed Remedies

• Increased independence and responsible oversight over executive decisions

• Ensure that top executive fiduciary duty extends beyond investors to stakeholder enhancement
• Increase diversity of board membership
• Ensure that top management’s commitment to ethical behavior is backed up with a comprehensive values-directed
ethical system
Board of Directors • Require that any U.S. organization have an operating compliance system in place that meets U.S. Federal Sentencing guide-
lines
• Ensure that a company’s code of conduct never be waived in policy and strategy decision making
• Exposure to criminal and civil litigation by incompetent board members who neglect both investor and public interests
• Integrity capacity selection screening and ongoing training
• Legally limit the practice of interlocking Boards of Directors

• Complete reform of conflict of interest standards, especially relating to auditing and consulting services
• Require preservation of key financial audit documents and e-mail for five years and create a 10-year felony for
destroying such documents
• Require accounting firms to rotate lead or reviewing partners from client assignments every five years
External Auditing • Prohibit auditors from offering certain types of consulting services
Services by • Create a new 20-year crime for destroying, altering, or fabricating records in federal investigations on any scheme to de-
Certified fraud investors
Public Accountants • Improve document shredding policy to preclude obstruction-of-justice charges
• Overhaul of accounting industry peer review procedures that appear to be ineffective
• Exposure to criminal and civil litigation
• Exposure to professional standards censure
• Integrity capacity selection screening and ongoing training
• Support the creation of a national and international Corporate Accountability Commission, which assigns auditors and pays
them from fees assessed on companies and expands reporting requirements beyond stockholders needs to encompass data
needed by other stakeholders

• Complete reform of conflict of interest standards, especially relating to attorney-client relations

External • Exposure to professional standards censure
Legal Services by • Legal expansion of executive fiduciary duty to include employee and community stakeholders
Members of the Bar • Exposure to criminal and civil litigation
• Integrity capacity selection screening and ongoing training

• Reform of practices and standards for determining creditworthiness

• Reform of financial analyst conflict of interest
Creditors/Suppliers • Exposure to professional standards censure
• Exposure to criminal and civil litigation
• Integrity capacity selection screening and ongoing training
• Prohibit investment firms from retaliation against analysts who criticize clients of the firm

• Enhance and render explicit standards for corporate citizenship

• Require social and environmental audit
Community • Practical guidance on how a corporation can become a “neighbor of choice” in a community
and Society • Identify stakeholder communities of interest and use benchmarks to document responsiveness improvements
• Integrity capacity ongoing training

• Tighten standards for corporate bankruptcy so that managerial irresponsibility will entail stiffer financial costs
• Pressure political representatives to serve the public interest rather than cater to corporate special interests
Taxpaying Public • Demand meaningful campaign finance reform
• Demand increased appropriate government regulation of industry and professional service practices
• Specify restrictions on corporate welfare
• Integrity capacity ongoing training

• Engage in more independent investigative reporting for the public rather than serving as another form of corporate public
relations
Media • Strengthen business investigative resources
• Integrity capacity selection screening and ongoing training (Part III continued on following page)

48 Mid-American Journal of Business, Vol. 18, No. 1

 Petrick and Scherer

Appendix – Integrity Capacity

Part III: Victimized Enron Stakeholders and Proposed Remedies (continued)

Victimized Enron
Stakeholders Proposed Remedies

• Clarify and enforce existing industry standards and create new standards for acceptable business conduct
• Exert informal peer pressure on maverick corporations to abide by legal and industry standards to avoid undue
Industry Groups government regulation
• Recommend that industry organizational members have an operating compliance system in place that meets U.S.
Federal Sentencing guidelines
• Integrity capacity ongoing training

• Clarify and enforce existing professional standards and create new standards for acceptable professional conduct
• Exert professional censure on irresponsible professionals and corporations
Professional • Recommend that organizations have an operating integrity system in place that meets and exceeds the U.S. Federal Sentenc-
Associations
ing guidelines so that professionalism can flourish
• Integrity capacity ongoing training

• Form public, private, and nonprofit partnerships to facilitate growth in integrity capacity domestically and globally
• Form alliances with like-minded NGOs to strengthen the voice of reform regarding current costs of corporate management
NGOs irresponsibility, which are being externalized onto an unsuspecting public
• Integrity capacity ongoing training

• Use information technology resources to identify and disseminate facts regarding corporate irresponsibility
• Use international institutions to voice expectations and develop standards regarding responsible global corporate
Global Citizens
conduct
• Integrity capacity ongoing training

Mid-American Journal of Business, Vol. 18, No. 1 49