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ETHICAL

DISINTEGRATION
OF ENRON
PHI 401: Business Ethics
FINAL PROJECT

Prepared for:

Barrister Sarah Hassan (SaH)


Course Instructor
Department of History & Philosophy
North South University
Prepared by (section-14)

Afrina Ahsan Sharni - 1611751030


Anika Chowdhury - 1621803030
Bisma Afzal - 1611682030
Mahir Iqbal - 1610035030
Noman Mojib – 1530133030
Samila Touhid – 1610338030
Shamma Rushafy Abantee - 133 1138 630

Date of Submission: 22nd December, 2018


ETHICAL DISINTEGRATION OF ENRON

ABSTRACT

The administration and top executives at Enron were caught involved in unethical activities
such as abusing their power by manipulating data, getting involved in inconsistent treatment
with internal and external voters, proving unable to provide proper oversight over
responsibilities and putting their own interests before that of their stakeholders. As a result,
educators of leadership qualities must exercise:

 Share some of the blame for what happened at Enron,


 Integrate ethics into the rest of the curriculum,
 Highlight the responsibilities of both leaders and followers,
 Address both individual and contextual variables that encourage corruption,
 Recognize the importance of trust and credibility in the leader-follower relationship,
 Hold followers as well as leaders accountable for ethical misdeeds.

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ETHICAL DISINTEGRATION OF ENRON

INTRODUCTION

Enron's chapter 11 documenting in November 2001 denoted the start of an exceptional rush
of corporate embarrassments. Authorities at Tyco, WorldCom, ImClone, Global Crossing,
Adelphia, AOL Time Warner, Quest, and Charter. Correspondences joined Enron officials as
focuses of SEC tests, congressional hearings, investor claims, and criminal prosecutions.
Enron's inconveniences, which had been the all-important focal point, were before long
pushed to the foundation by consequent disclosures of corporate bad behavior.

Later examples of corporate debasement ought not lessen the significance of Enron as a
contextual analysis in good disappointment. Enron crumbled in vast part on account of the
exploitative practices of its administrators. Looking at the moral inadequacies of Enron's
pioneers, and in addition the variables that added to their mischievous activities, can give
critical bits of knowledge into how to address the theme of morals in a business situation.

The organization's crumple was at last activated by fizzled interests in abroad endeavors and
the unwinding of a progression of questionable constrained associations called Special
Purpose Entities (SPEs). These SPEs , supported by Enron stock and wrongfully kept running
by organization insiders, were intended to keep obligation off the association's asset reports
and helped prop up its offer cost. In any case, when the association's stock value started to
slide, the organization was not able back its assurances. Notwithstanding charges identified
with obscure associations Enron stands blamed for:

 borrowing from auxiliaries with no expectation to reimburse the advances (Wilke,


2002, August 5).
 avoiding government assesses despite the fact that a portion of its auxiliaries, similar
to Portland General Electric, gathered expense installments from clients (Manning
and Hill, 2002).
 contributing to the California vitality emergency by controlling power costs (Fusaro
and Miller, 2002; Manning, 2002).
 paying off outside authorities to anchor contracts in India, Ghana and different nations
(Wilke, 2002, August 7).

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 promptly guaranteeing benefits for long haul extends that would in the end lose cash
(Hill,Chaffin, and Fidler, 2002).
 exchanging account adjusts preceding quarterly reports to help obvious income
(Cruver, 2002).
 controlling government vitality strategy (Duffy, 2002; Duffy and Dickerson, 2002).
 plotting with investigators to extend a bogus picture of the association's monetary
wellbeing (Fox, 2003).

A significant part of the fault for what occurred at Enron (nicknamed the "Screwy E" for its
tilted Capital E logo) can be laid at the feet of organization author Kenneth Lay, his successor
Jeffrey Skilling, CFO Andrew Fastow, and Fastow's best collaborator Michael Kopper. Each
neglected to address critical moral difficulties or situations of administration (Johnson, 2001).

Abuse of Power

Lay and Skilling both exercised their power brutally. So many occupants were taken away
from the position when they had problem with Lay or seemed as a threat to his power. Hence
the vice-chairman position was called the “ejector seat”. In addition to the above, Skilling
removed corporate competitors and tyrannized his subordinate officers. Enron also faced a
problem concerning relinquishment of power. Occasionally, managers failed to understand
their employees – what the employees were working on or how the business was functioning.
Moreover, the board members did not have an effective oversight and seldom questioned the
management decisions. According to Cruver, the writer of the book Anatomy of greed: The
unshredded truth from an Enron, “Many were selected by CEO Kenneth Lay and did
business with the firm or represented non-profits that received large contributions from
Enron.”

Excess Privilege

The top management at Enron had some excessive privilege. Lay is a son of a Baptist
preacher and lived a humble life later changed into money-grabber and started to showing
off, trying to make a really big impression. As stated by Cruver, once Lay told his friend,” I
don’t want to be rich, I want to be world-class rich.” One time he even joked about giving his
wife a $2 million to decorate their new home and his wife, Linda exceeded that budget. As
per the writings of Eisenberg, the writer of the book Ignorant & Poor – “The couple
borrowed $75 million from the firm that they repaid in stock. Linda Lay fanned the flames of

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resentment among employees when she broke into tears on the Today Show to claim that the
family was broke. This was despite the fact that the Lays owned over 20 properties worth
over $30 million.” Through Enron’s period of success, workers also received some of the
perks that came with the job. Workers availed benefits such as lavish Christmas parties,
aerobic classes, free taxi rides, refreshments, and the services of a concierge (Enron excess,
2002; How Enron let down its employees, 2002)

Fraud

Executives of Enron influenced information unscrupulously in order to preserve their


interests and to mislead the public. However, the degree of the deceit is yet to be discovered.
The executives and board members together claimed that they had no knowledge of the
organization’s off-the-books partnerships developed and managed by Fastow and Kopper
(Eisenberg, 2002). Lay and Skilling both were given fair warnings that the organizations
bookkeeping approaches were under suspicion. Investigation was carried out to figure out the
reasons for Enrons collapse. It was carried out by the Senate Permanent Subcommittee on
Investigations and they came to a conclusion that the board members were actually aware of
the unlawful activities which were taking place at Eron. Moreover, as stated by Cruver,
“Board members specifically waived the conflict of interest clause in the company’s code of
ethics that would have prevented the formation of the most troublesome special
partnerships.” The employees were promptly moving forward in accordance with the
organizations top executives. They stated fictitious profits, concealed expenses, misguided
energy regulators etc.

Inconsistent Treatment of Internal and External Stakeholders

The relationship of Enron with its employees and external stakeholders were completely
inconsistent. Employees were coerced to invest much of their savings in Enron shares
through the retirement plan. Moreover, they were not allowed to sell their shares when Enron
shares were in free fall. On the other hand top officials were able to sell their stocks as they
desired. According to Barreveld, writer of the book The Enron Collapse: Creative
Accounting, Wrong Economics or Criminal Acts?, “Five-hundred officials received
“retention bonuses” totaling $55 million at the same time laid off workers received only a
fraction of the severance pay they had been promised.”

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Friends of Enron were treated as royals. To illustrate, Enron made political donations in order
to receive favourable treatment from government agencies. Executives made considerable
donations to members of the House and Senate of both Democratic and Republican members
and the highest contributor for the Bush campaign was Kenneth Lay. Consequently, the
company got the opportunity to nominate favourable candidates for the Security Exchange
Commission (SEC) and the Federal Energy Regulatory Commission (FERC). Federal
officials along with the foreign government got involved to stimulate Enron projects, and
representatives of Enron played a vital role in positioning federal energy policy that
facilitated the removal of regulations of additional energy markets. However, if anyone was
considered to be against Enrons interests could anticipate reprisal. At one time, to force
Merrill Lynch to fire an analyst who sold out Enrons’ stock, Lay pulled out an underwriting
deal. As mentioned by Cruver, Skilling called one analyst an “asshole” when he questioned
the company’s performance during a conference call.

Loyalties Misplaced

Enron authorities put their faithfulness to themselves over those of every other person with a
stake in the organization's destiny — investors, colleagues, rate payers, nearby networks,
outside governments, etc. They likewise double-crossed the trust of the individuals who
worked for them. Workers obviously had faith in the organization and in Lay's hopeful
declarations. In August 2001, for instance, he announced "I have never rested easy thinking
about the prospects for the organization" (Cruver, 2003, p. 91). In late September, only weeks
previously the organization crumbled, he urged workers to "talk up the stock" in light of the
fact that "the organization is on a very basic level sound" (Fox, 2003, p. 252). These
admonishments came even as he was dumping his very own offers. The feeling of selling out
experienced by Enron workers just added to the torment of losing their positions and
retirement funds.

Irresponsible Behaviour

Officials and Executives at Enron failed awfully to take the necessary actions and conducted
unethical activities by misusing power and not having proper oversight of their organization.
Despite the warnings from the CEO of the company, employees at Enron received
opportunities to window-frame the company accounts due to lacking of oversight from the
management leading to board members being unable to understand company numbers and

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projects. No one stepped forward to accept the blame after the company collapsed resulting to
Lay and Fastow claiming Fifth Amendment privileges. This was done to call this incident as
an example of self-incrimination in front of the congressional committees claiming that he
had no knowledge of the illegal activities being conducted within Enron. It was visible that
the main motives that fueled such unethical activities inside the company’s management were
due to greed.

By window-dressing the accounts, employees of Enron created artificially created optimistic


reports showing optimistic earnings and hid losses. This tactic was used to keep the stock
prices of Enron artificially high which was used as a justification for generous salaries and
earnings and allowed the insiders to earn profits from their own stock options. Managers
throughout the organization at times received bonuses larger than their salaries by showing
artificially met targets. All these benefits compelled the employees of the organization to
overlook the shortcomings that the business could face regarding ethics.

Hubris was a major flaw at the Crooked E, that reflected a fact in the company banner that
stated: “FROM THE WORLD’S LEADING ENERGY COMPANY — TO THE WORLD’S
LEADING COMPANY” (Cruver, 2002, p. 3). Lacking of the social and communication
skills of Ken Lay, gives a good example of the haughty spirit of many Enron officials. During
the California energy crisis he joked that the only difference between the Titanic and the state
of California was that “when the Titanic went down, the lights were on” (Fusaro & Miller,
2002. p. 122).Even the so-called “heroes” of the Enron terribly failed to demonstrate reasons
to delay or to prevent Enron’s demise. Complains were received from the company’s
treasurer about the financial forgery and window-dressing but retired without going public
with these issues.

Vice-president of corporate development Sherry Watkins showed concerns regarding the


firm’s questionable financial practices in a letter and in a meeting with Lay (A Hero, 2002).
Later Sherry Watkins discussed the same issues with an audit partner at Anderson. Individual
greed and pride was magnified by the corporate culture of the company encouraging
creativity and risk taking leading to the company’s demise. Employees invented new
commodity products earning Enron as a top ranking six straight years on Fortune magazine’s
list of most innovative companies (Fusaro & Miller, 2002). The cost of freedom was the
pressure to produce that created a climate of terror. Lack of controls, combined with an
intense, competitive, results-driven culture made ignoring the company’s code of ethics much

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easier which was prohibited and conflicted interest such as to seek results at any cost.
Anderson’s auditors signed off on its questionable financial transactions fearing of loss of
lucrative auditing and consulting contracts with Enron.

Publicly traded firms in the United States are judged by their quarterly earnings reports which
greatly victimized Enron. Obsession with short-term results and expectations encouraged
Enron executives to commit such unethical activities. Every stock index soared and billions
got wasted on Internet start-ups that never had a chance to be profitable.

RECCOMENDATIONS FOR ETHICAL LEADERSHIP

Enron's lessons go beyond the accounting and market reforms introduced following the
scandal. Leadership educators can gain important insights into how to deal with the subject of
ethics in the classroom from the moral deficiencies of the top executives of Enron. The
pedagogical effects of Eron includes:

Educators Must Share Some of the Blame

Academics can easily separate themselves from Enron's sins. The college and university
classroom appears to be a world away from the ex - energy giant's flying gun mentality. Few
professors can begin to understand the privilege and influence of the company’s C level
executives. Those who study and teach ethics believe that they would display the virtues of
Lay, Skill and Fastow.

The disassociation of Enron may be comforting, but this maneuver conveniently overlooks
the fact that educators must at least bear some responsibility for the moral failure of the
company (Kavanaugh 2002). Enron managers have undoubtedly participated in leadership
and ethics courses as college graduates. Enron managers have undoubtedly participated in
leadership and ethics courses as college graduates. Many of them were Harvard products and
other top MBA programmes. Followers armed with bachelor's degrees and master's degrees
served as willing soldiers in the army of experts in public relations who helped the company
maintain its profits, lobby government officials and attack its critics. What the top leaders,
lower managers and front- line employees of Enron learned in university classrooms was not
sufficient to prevent ethical tragedies.

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Make an effort for Ethical Integration

Enron is a great case of an organization whose moral declarations were "decoupled" from
whatever remains of its tasks (Weaver, Trevino, and Cochran 1999). The key estimations of
the organization were regard, respectability, interchanges, and magnificence. Enron
additionally had a broad code of morals.

Lamentably, these qualities and arrangements had little effect on how Lay, Skilling, and their
subordinates worked together. When of its crumple in 2001, the organization had been
controlling its books and misdirecting speculators for quite a while.

Highlight Leadership and Followership Duties and Responsibilities

Many students study leadership in the hope of achieving the kind of heroic stature that was
reflected in press reports about renowned business people and other prominent leaders until
recently. Power, perks, financial security and acknowledgement all seem to be executive.
Teachers take this motivation into account when they act as cheerleaders for prominent
business leaders such as Jack Welch or Kenneth Lay. They ignore the fact that the same
qualities and strategies that are so often praised in business and other management literature
can lead to disaster. Enron 's just one case in point. Many things the company's leaders did
according to management literature. Lay and his colleagues had a clear vision and values,
pursued excellence and great creativity and innovation. Unfortunately, their vision was
unrealistic, their stated values returned to unstated ones( e.g. make the deal at all costs and
generate constant profits and growth), And their drive for innovation led them to a host of
unprofitable markets that did not even have their management team completely understand.
Followers also lost sight of their personal values as well as their commitment to society.

Highlighting leadership duties and responsibilities is one way to address selfish motivation
and to demythologize leadership. Altruism, Communitarianism, and Servant Leadership are
three ethical perspectives that drive home this point. Each of these approaches emphasizes the
duties that leaders have both to followers and to the larger community and can serve as a
framework for discussions of leadership and followership ethics.

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 Altruism is a universal value that is particularly important for leaders who exercise
influence on behalf of others by virtue of their roles. Altruistic leaders pursue
organizational goals instead of personal achievement and are more likely to dismiss
power. Leaders seeking to benefit themselves concentrate on personal achievements
and control followers through coercion and reward.
 Communitarianism emphasizes the need for personal responsibility and corporate
responsibility. In the larger community, citizens and institutions have obligations.
When taking decisions, leaders and supporters must consider the needs of the local
community and society as a whole beyond the immediate interests of themselves and
their organizations.
 Servant leadership is a model that puts the needs of followers first (Greenleaf, 1977;
Spears, 1998). Servant leaders ask themselves continually what would be best for
their constituents and measure their success by their followers ' progress. They seek
to treat others fairly, driven by a concern for people, and to recognize that they hold
their positions in stewardship for others.

Address both Individual and Contextual Variables

Leadership teachers must help students to analyze and respond to contextual forces that
promote ethical misdeeds. These questions should be taken into account:

• What organizational controls should innovation be carried out?

• How can employees be rewarded in a manner that encourages ethical conduct?

• What are the dysfunctional effects of the assessment system of rank and yank?

• What are reasonable Executive Compensation limitations?

• What is the role of a corporate board in the supervision of an organization's operations?

• What should the membership of a board be?

• What should the membership of a board be?

• How should companies ' performance be judged?

• How can society develop a long- term financial outcome perspective?

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Recognize the Importance of Credibility

From the time of Aristotle, researchers and scholars have inspected the factors that make a
source credible and believable to a group of people, an interest that is built on the strong,
solid correlation between believability, reliability trustworthiness and influence. (Hackman
and Johnson, 2001, chap. 6).The Enron catastrophe and ensuing outrages, consequent
scandals show that credibility, especially reliability and trustworthiness are more important
than ever. Stock values dropped about 40% from market highs in July1998 due to a great
extent to investors' loss of trust and confidence in the honesty of publicly held organizations.
Employees have been becoming more and more incredulous as well. The result of a survey
2002 done by the Ethics Resource Center shows that 43% of respondents believed that their
superiors fail to demonstrate honesty, integrity and felt compelled and pressurized to trade off
their own ethical standards at work (Wee, 2002). Present day technology, advancements and
innovation, which empowers the quick, overall scattering of data and dissemination of
information makes credibility increasingly critical at this point than in the times of Aristotle
and Plato. Leadership faculty members should need teach students to consider how credibility
is created and retained, as well as how trust is demolished and at what cost to people and
organizations.

Followers are Also Responsible and Accountable

Lay, Skilling, Fastow and other high level officials merit most of the blame for what went
wrong at Enron. They were the ones who created and established company’s culture,
permitted dubious partnerships, confronted and assaulted critics, and, in the end, abandoned
employees while enriching themselves. However, followers, ranking from second tier
officials down to receptionists and mailroom clerks, are responsible and share some of the
blame. Many readily became tied up with the become rich quick mindset of the Crooked E.
Amid the corporation's 15 years of fast growth and development, few ceased to scrutinize the
organization's strategies. They were “bought off” by the generous incentives, benefits and the
delight of being part of one of the most sophisticated and pioneering companies in the world.
The constant threat of termination unquestionably persuaded others to keep their doubts to
themselves and to help and support their superiors. As indicated by Chaleff (1995), courage -

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the willingness to admit a higher level of risk - is the most important virtue for organizational
followers. Such courage was woefully missing at Enron. Some had the courage to challenge
authority. Few had the nerve to leave when encountered with ethical violations. Seemingly no
member of the organization had the courage to bring forth the misconduct of Lay and his
subordinates to the attention of the public before the crisis erupted (Cruver, 2002).
Disappointingly, cowardice isn't constrained to Enron. Almost 66% of the individuals who
witness moral infringement, ethical violations in their organizations decline to report them,
believing that revealing issues would not do any great (Chief Executive, 2002). The final
lesson of Enron, then, is that both instructors and students have the responsibility to oppose,
confront moral and ethical failures whenever and wherever it appears, irrespective of whether
they function in a leadership or in a followership role.

CONCLUSION

In summary, the top officials at Enron misused their ability and took unfair advantages. They
operated while being a part of conflicting treatment of inside and outside voters. The leaders
failed to apply actual oversight or shoulder responsibility of moral ethics, as they put their
very own advantages over the general public. From Enron’s situation, many suggestions can
be taken to teach leadership morality as well as blame what happened.

Leadership educators should focus on responsibility of both the heads to the followers along
with labeling both individual and contextual changes that holds up dishonesty. It is important
to identify the faith and trustworthiness among the leader and their followers. Lastly, for any
kind of misdeed or crime that is being committed, both the leader and their followers must be
held accountable.

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