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A Look at the Ethics and Organizational Culture of ENRON

Published June 10, 2013 by Mayrbear's Lair

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Due to a number of highly publicized scandals including AIG, Countrywide Financial, Fannie Mae, and Enron, the ability to identify and manage complex business ethics issues has become an important priority. According to Shaw (2008) Enron was the organization that stood out among others because they were showing enormous rates of profit. As a result they quickly became favored by Wall Street and subsequently grew to become the seventh largest company in the US, was highly respected, and was quickly placed on a financial pedestal. Enron was looked at as innovative, forceful and most important, highly profitable. However, the truth was that while CEO Kenneth Lay was recommending stock to his employees, he and other executives were secretly cashing in their own shares and jumping ship. According to Shaw, Enron’s market value was $28 billion just two months prior to their filing bankruptcy. This is the reason shareholders and investors were completely caught by surprise. Unfortunately, the corruption of Enron execs affected more than $1 billion in the retirement accounts of their employees (Shaw, 2008). The leaders created a culture based on personal gain and profit, with a complex and complicated accounting system. In addition, employees were meshing into the corrupted culture because they too were receiving high levels of rewards. The organization established an atmosphere based on financial prowess and illusion. Workers and shareholders were unable and too comfortable with their fortunes to make ethical choices and stand up against the majority who ruled. This is one way corruption thrives. In fact, there are some organizational leaders that initiate new members into their elite boys clubs by taking them out to brothels encouraging them to engage in elicit behavior. This is a well known tactic corrupt leaders used to blackmail employees, should they later have inclinations to become whistler blowers.

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A poor reputation can damage an organization’s image and destroy the public’s trust. Ferrel and Fraedrich (2012) contend that employer decisions affect more than just those of their employees. In fact, their decisions most likely have impact on shareholders, customers, suppliers, and society as well (Ferrell & Fraedrich, 2012). Making good ethical decisions should be consistent throughout an organization on every level. Evidence revealed that Enron executives, through their operations, informally communicated and designed a culture whose objective was to achieve personal gain and organizational success at whatever cost, regardless of regulations and policies. Additionally, the climate consisted of executives who resorted to public use of vulgarity that created an atmosphere to encourage more of the same behavior from staff members. One reason for this is that some employees look up to their superiors and strive to become like them. Others just want to fit in and partake of the spoils. As a result, they tend to model and absorb similar methods as a justifiable means to an end. Because of Enron’s high level of success, a complicated accounting system to create misdirection in their underhanded practices, and a legal team to support those goals, Enron execs believed their organization was too big to fail.

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To prevent this from happening, Enron execs should have created a culture that was ethical and responsible from the onset. Instead, they established an organization of people that operated in a corrupted fashion and disguised their unethical behavior under the guise of a very ethical public persona. In addition, Enron’s CEO should have enlisted an auditing firm that had a track record for ethical practices. Shaw’s (2008) research disclosed that Enron’s auditing firm (spearheaded by Arthur Andersen), failed to make Enron’s public records reflect their purported financial reality. Instead, they were focused on their auditing and consulting fees and neglected their fiduciary responsibilities. Also, Enron’s CEO should have made sure all documents were turned in to authorities. Instead, one of the partners at the auditing firm was caught shredding incriminating records. Furthermore, Enron’s downfall exposed conflicting interests in Wall Street Analysts who were highly compensated for supporting their investment banking deals. Enron’s CEO should have enlisted Wall Street connections that were engaged in ethical practices. Finally, large banks like Citibank who did business with Enron, also participated in corrupt business operations in their manufacturing fraudulent financial statements (Shaw, 2008). Enron’s leaders should have identified banks that  operated ethically. In short, Enron was a well-oiled machine of corruption, reminiscent of organizations run by the Don Corleone family from Mario Puzo’s famous books. Enron had many influential people and corporations “in their pocket” that were also corrupt. This was the strategy they employed to engage in their unethical practices. Officials and staff members looked the other way because of the massive amounts of profits they were receiving. In conclusion, the Enron story is a classic example of how absolute power tends to breed absolute corruption.

References:

Ferrell, O., & Fraedrich, J. (2012). Business ethics: Ethical decision making (9th ed.). Mason, OH: South-Western College Publishing.

Shaw, W. (2008). Business ethics. Belmont, CA: Thomas Higher Education.

Managing in Social Change

Published January 14, 2013 by Mayrbear's Lair

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We reside in a wondrous and complicated world and a great number of individuals consider it impossible to make sense of.  It is simpler for people to give up, unplug and concede their uniqueness to the tramlines of programmed convention (Icke, 2012).  In fact, it is a considerably different place from the world we came to recognize as children, or even of ten years ago for that matter.  There are many reasons for these changes, one of which includes the significant events that occur which continue to help shape our evolution.

It is important to differentiate between the causes and consequences of an event to better comprehend the impact it may have.  In the social sciences, causes are implications, not things that are self-evident from a given set of observations (Harper & Leicht, 2011).  This can make analysis and documentation of significant events a difficult task, whether arbitrarily treated as a cause or consequence.  In addition, a biographer may view and describe a noteworthy event from a different perspective than that of a social scientist.  For example, a social scientist would be interested in how a momentous event would impact the culture’s values, problems, fears, as well as hopes and dreams that people share; whereas a biographer tends to focus on investigating the story without the conjecture of outcomes.  A historian on the other hand, may implement a bit of both as they may wish to reveal the process, progress, evolution and development of an event.

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One such recent significant event that had great impact on the country was the mortgage and loan crisis.  The US economy entered a mortgage crisis in 2007 that caused panic and financial turmoil worldwide.  It was a result of too much borrowing and severely flawed financial modeling, largely based on greed and fraudulent practices as well as the assumption that home prices would only continue to increase.  One noteworthy consequence of the mortgage crisis is that a shocked public discovered how leveraged the world is.  Bankers, lawmakers, consumers and business people all continue to work diligently to reduce the paramount effects of that crisis.

A reverence for homeownership has been a central theme of the American experience, which was the mindset behind making home loans more available to everyone.  In their book Reckless Endangerment Morgenson and Rosner (2011) purport:

The Federal Housing Enterprises Financial Safety and Soundness Act actually encouraged unsafe and unsound activities at both Fannie Mae and Freddie Mac by assigning them a new affordable housing mission.  Under the law, the companies had to use their mortgage purchases to help provide housing to those across the nation who had previously been unable to afford a home (p. 25).

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The mortgage crisis affected many cities and communities severely.  Many local mortgage and loan organizations suffered bankruptcy leaving many individuals unemployed and destitute.  Additionally thousands of families became homeless, losing their places of residence to foreclosure. Can an event like this ever happen again?  Morgenson and Rosner (2011) seem to think so. In fact, they contend, “Most certainly, because Congress decided against fixing the problem of too big to fail institutions when it had its chance” (p. 304).  Only time will tell.

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References

Harper, C., & Leicht, K. (2011). Exploring social change American and the world (6th ed.). Saddle River, NJ: Prentice Hall.

Icke, D. (2012). Remember who you are: Remember where you are and where you come from. Isle of Wight, UK: David Icke Books.

Morgenson, G., & Rosner, J. (2011). Reckless endangerment (1st ed.). New York, NY: Times Books.