Enron Case Study Questions

Answers of Enron Case Study Questions Question 1: Has the Chief Executive Kenneth Lay acted immorally? Justify your views with eth ics and/or CSR theory. Answer: 1.1 The Conclusion Referring to the following analysis of Kenneth Lay and his management team’s behav iours, the following conclusion has been made: From the perspective of major stakeholders of Enron, the Chief Executive Kenneth Lay acted immorally in the management of Enron. 1.2 Definition and explanation of business ethics There are a number of definitions for business ethics in published literatures. Generally speaking, ethics of business is about the implementation of principles and guidelines represented in ethic theories (Jensen, 2002). The principles and guidelines are to guide business organizations’ behaviours to make them act moral ly. To judge if a business acts morally, principles and disciplines are used for tests (Smith, 2003). Besides, business ethics could also be applied to assess i f individuals working for a business acts morally. In published literatures, bus iness ethics are mainly researched in the form of case studies. 1.3 Requirements of ethics 1.3.1 Theories of ethics Generally, there are five theories for judging if a business or an individual wo rks ethically. Below is a brief summary of the five theories. First of all, teleological theory suggests that if the result of a certain actio n is believed to be “good”, the action taken is considered to be ethical. Thus basic ally, teleology judges if behaviours of businesses are ethical or unethical by a ssessing the results (Machold, 2008). Second of all, egoism theory defines right or acceptable behaviours as those tha t are good for a particular person. Or, in other words, the theory judges if an action is ethical or unethical by its results to the action taker’s self. Thirdly, utilitarianism theory defines right or acceptable behaviors as those th at are good for greatest number of people. In other words, the theory judges if an action is ethical or unethical by its results to the greatest number of peopl e. Fourthly, deontological defines right or acceptable behaviors as those actions w ith good intentions of preserving individual rights. Or, the theory judges if an action is ethical or unethical by the action itself rather than its consequence s (Machold, 2008). Finally, relativism suggests that ethics are judged by subjectively. Thus the ju dgement could be different for different individuals or different cultures. 1.3.2 Stages of ethics According to the organizational ethical development model, there are five stages of business ethics, which are amoral, legalistic, responsive, emerging ethical and developed ethical (Jensen, 2002). This section briefly explains the five sta ges as follows: Stage 1, “Amoral” represents actions taking for profit only. Only management and sha reholders are considered to be stakeholders. They would pursue profit at all cos t without considering other stakeholders. Stage 2, “Legalistic” represents that a bu siness would act legally. What laws required is considered as ethical. Stage 3, “R esponsive” means that a business believe that extra profit would arise if it helps local communities. Stage 4, “Emerging ethics” means that ethical behaviour are set in books while a balanced between profit and ethics is found. Stage 5, “developed ethical” is the final stage of ethic development. It requires that all behaviours of a business is driven by ethical principles. 1.4 Matching Ken Lay’s behaviour with ethical requirements 1.4.1 In conventional virtue ethics In conventional virtue ethics, Ken Lay is seemed to be quite an ethical people. He treated others with respects, offered his staff high compensation, listened c arefully, and appeared to care what others really thought. However, what I am tr ying to analysis in this paper is whether the man works ethical in his business

actions. Thus a judgement of ethical is not likely to be made based on his perso nal behaviours. The following section illustrates the ethical issue from differe nt group of stakeholders’ perspective. 1.4.2 Ethical from Stakeholders’ perspective 1.4.2.1 Investors First of all, it could not be denied that Enron made its shareholders a great fo rtune in 1990s. Especially between 1996 and 1999, Enron’s shares soared about 350% to $90 per share. Besides, during the 1990s, commercial banks and other institu tion investors received a steady stream of profit. From investor’s point of view, the action taken by Enron seems to be ethical. However, as the manipulation of financial statements and off balance sheet tradi ng come to public’s view, it became worth to reconsider the issue. Shareholders, e specially long term shareholders, are owners of businesses. They focus on not on ly the short term returns of their investment but also the long term development of the business. As owners, they are desired to know what the company’s real fina ncial situation is like. However, by manipulating the financial statements, mana gement had successfully hided significant liabilities and inflated revenues. The good performance claimed by management give investors great confidence and the confidence hence led to aggressive investment decisions. As a result of the sudd en collapse of Enron, the shares were termed junk in October 2001. All the share s hold in the shareholders’ hand became nothing more than junks. Thus generally speaking, from investors’ point of view, the company’s behaviours, or Ken Lay’s decisions are considered to be unethical. 1.4.2.2 Employees Employees are also important stakeholders of a business. Employees of Enron face d great pressured from the top management of the firm. Every year, fifty percent of staff was fired and another thirty percent were under scrutiny. Thus totally forty five percent of staff was facing the threat of dismissal. Also, the perfo rmance measurement was made to be focusing on sales only, rather than team worki ng, integrity or respect. Thus from employees’ perspective, the top management, or Key Lay, worked unethical ly. 1.4.2.3 Other stakeholders There are also many other stakeholders of the company. In this paper, the audito r of Enron, the former biggest accounting firm in the world, Andersen is conside red to be a major stakeholder. Surely it was the auditor’s responsibility to issue an opinion for Enron’s financial statements. However, the lack of integrity of a audit client could be great risk for auditing firms. As a result of Enron’s collap se, Anderson was brought down. From the auditor’s point of view, Enron, or Ken Lay, worked unethically.

Question 2: Milton Friedman and Norman Barry are both critical of CSR. Do you agree with th eir criticisms? In your answer include theories and arguments in favour of CSR. Use Enron as the context for your answer. 2.1 Conclusion As a conclusion, I do not agree with Milton Friedman and Norman Barry’s criticisms . I believe that the principles of ethics could help for business developments r ather than lessening them down. On the contrary, business ethics is critical to development of businesses since the mutual trust is the basic of free market eco nomy. 2.2 Arguments of Milton Friedman and Norman Barry As stated in the case provided, Norman Barry suggested that “What all these princi ples of ethical correction have to confront is the problem that if they were app lied rigorously to business, they would seriously attenuate (lessen) the mechani cs which drive and galvanise the system. It could be said they already have.” In o ther words, Norman Barry believes that by acting morally, business development w

ould be slowed down, profit would be decreased. Acting morally disobeys the rule that the primary goal of businesses is to generate profit and provide returns f or investors (Jensen, 2002). 2.3 Arguments of CSR theories Traditional management and corporate strategy theories suggested that a business should be responsible for its owners, the shareholders of the company. However, it is now not quite sufficient to guide management’s behaviours. As suggested by Freeman (2002), as the development of world business, management is required to take the interests of different groups of stakeholders into account when setting the business strategies. The rationale behind the claim is presented as follows : Based on normative stakeholder theory, there are two reasons why companies shoul d consider stakeholders’ claims as follows. First of all, a business’s strategic decision could affect a stakeholder’s outcomes (Smith, 2003). The strategies without taking stakeholders’ outcome into account it considered as unethical. A company should ignore stakeholders’ claim since the st akeholders normally have direct or indirect link with the company. Second of all, stakeholders could be very important to survival of a corporation . For example, banks, suppliers, customs and employees are all very important fo r development and survival of a business. Therefore, works for coordinating thos e stakeholders’ interest would finally favour the corporation itself. Based on instrumental stakeholder theory (Smith, 2003), there are certain relati onships between stakeholder’s management and the achievement of corporate objectiv es. For instance, by taking customers’ interest into account, a business is likely to get brand loyalty from their customers. Thus revenue and profit are likely t o be increased. Good stakeholder management could help a business to achieve its goals. Based on descriptive stakeholder theory, a company should be a constellation of different stakeholders’ interests. Some of those interests might be cooperative wh ile others might be competitive. 2.4 Implementation of CSR theories The CSR theories suggest that good management of stakeholders’ claims would not sl ow down a business’s development. On the contrary, it would finally help businesse s to develop. Unlike the opinions of Friedman and Barry, CSR theories indicate t hat companies should focus on the following aspects in management: Rather than setting the objective to be maximizing shareholders’ value, organizati ons should firstly change that to maximizing stakeholders’ interest. Interest of d ifferent groups should be balanced. Secondly, organizations should identify its stakeholders. Distinguishing between stakeholders should be made. For different group of stakeholders, different management strategies should be implemented (Ph illips, 1997). 2.5 Enron, as an example As suggested in the case, rather than balancing different stakeholders’ values, En ron focused on the value of shareholders and management only. The action taken by Enron is the typical behaviour suggested by Friedman and Bar ry. The focus on growth and profitability went too far and finally led to the co llapse. As mentioned above in answer of question 1, Enron treated their employee with gr eat pressure. The employees’ performance was assessed based only on sales revenue rather than team working and respect. The action is considered as bad stakeholde r management. The fact that 45 percent of staff were under pressure of dismissal would indicate that Enron did not take their staff’s value into account when sett ing up their operating strategies. Question 3 Should Enron favour some stakeholders more than others? Justify your views. 3.1 Conclusion It is clear that corporation could not maximize every stakeholder’s interest simpl y because that some of those interests might be conflicted. As mentioned in the

answers for question 2, some of the stakeholders’ claim could be cooperative while others could be competitive. Thus the conclusion is that Enron should favour so me stakeholders more than others. However, Enron should not simply ignore other stakeholders’ (other than shareholders) claim. 3.2 Prioritisation of stakeholders 3.2.1 Method 1 Identify prioritisation of stakeholders with power-interest model According CSR theories, stakeholders are divided to four groups by their power a nd interests. The first group would be those stakeholders with great power to in fluence the organization and also have great interest in the organization. The g roup is referred as key players in literatures (Smith, 2003). A typical example of key players is shareholders. As owners of the business, the shareholders coul d replace board and management team of the business. Thus they have great influe nce on the business. Besides, they have great interest in the business’s performan ce since their investment return is significantly rely on the performance of tha t company. For key players, management should set their primary objective based on their interest (Phillips, 1997). The second group of stakeholders comprised o f those who have great influential power but less interest in the business. An e xample could be governments. Government normally have great power but they are o nly interested in taxation of the company. For this group, companies should keep those stakeholders satisfied. The third group of stakeholders comprised of thos e have little power but great interest in the organization. For those stakeholde rs, companies can just keep them informed. The forth group of stakeholders compr ised of those having little power and little interest. The company could put min imum effort to the group. 3.2.2 Power, legitimacy, urgency model By using the power legitimacy and urgency model, stakeholders are divided to sev en groups as shown in the graph below. In the model, power means the stakeholders’ power to influence the organization. T here are three types of power: First of all, coercive power is the type of power that is based on physical resources, such like shareholders whose power are giv en naturally by cooperation laws. Secondly, utilitarian power means that the pow er which is based on financial or material resources (Machold, 2008). Examples c ould be major suppliers and banks. Thirdly normative power is based on resources like media. The legitimacy is “a general perception that the actions of an entity are desirabl e, proper, or appropriate within some socially constructed system of norms, valu es, beliefs and definitions. “ (Suchman, 1995) Urgency is that the time requirement claimed by stakeholders. Some might require immediate action while others might not. As shown in the graph, stakeholders owning one attribute are normally considered to be not important. Stakeholders owning three attributes are normally consider ed to be very important, referred as definite stakeholder. The moderate importan t stakeholders are those holding two attributes in the graph. 3.3 Application to Enron Enron, as a large company, should put different stakeholders into different cate gories. As for Enron, there are several major stakeholders’ group that requires sp ecial attention, which are management team, shareholders, employees, customers, business partners, local community and government. What Enron done was just put its top management team and shareholders’ interest as the priority and simply ign oring other stakeholders’ interest. The disaster happened was the evidence against the company’s behaviour. 3.4 Future development of Stakeholders’ theories CSR theories become more and more important to current economy development in th e world. The future development of the theories is seemed to be heavily relied o n whether the implementation of CSR theories would decrease profit. However, as could be noticed, level of attention of large companies towards CSR issues is in creasing. The future use of the theory is likely to be more important since more and more pressure are coming from different stakeholders.

Question 4 Do codes of conduct, and stated core values, have any practical impact or effect in a large organisation? Use Enron as the context for your answer. 4.1 Conclusion As explained in the following sections, code of conduct and stated core values c ould have practical impact and effect in large organizations if those are well d esigned and implemented. Specifically, it is essential to make sure the codes of conduct and core values are part of a company’s culture. If the codes of conduct conflict with the company’s culture, the codes are likely to stay only on papers. Little effect could be expected. 4.2 Explanation of code of conduct Codes of conduct are presentation of an organizations ethical expectation. The c odes often come in the form of norms, principles, policies, procedures and so on . As the primary expectation of an organization, ethical codes are very importan t for both business as a whole and its staff’s behaviours. The codes are normally designed by top management of organizations. The codes pass a message of tone fr om the top and the way that a company would like its staff to be. Every staff of the organization is expected to know and comply with those codes and core value s. In modern world, most large companies have their own codes of conduct and core v alues. However, those codes of conduct and core values are not expected to influ ence staff’s behaviour without proper implementations. Three factors could determi ne if the ethical codes could help to make employee work ethically. Firstly, a major factor that could make those ethical codes work effectively is whether the codes and core values are in compliance with the company’s real cultur e. The top management of the organization should obey the codes in their behavio urs, and then pass the message to employees. If the top management’s behaviours ar e not compliance with the requirements of the codes, the codes are not likely to be effective (Jensen, 2002). Secondly, the codes must be designed specifically for the organization. Ethical codes of conducts should be made for the situations that staff could face in the ir real working environment. Trainings of ethical codes are essential to make th e codes works. The communication channel should be established for reporting of misconduct of the codes. The communication channel is quite important since whis tle blowers are normally considered as betrayers in most cultures. Thirdly, relative punishment and awards regulations should be made and implement ed. If no punishment for wrong doings is in place, the effectiveness of the code s are likely to be reduced. Also, good behaviours should be awarded accordingly. 4.2 Enron’s code of conduct As stated in the case, Enron had four core values: communication, respect, integ rity and excellence. For analysis in the next section, I present the core values briefly as follows: Communication: We have an obligation to communicate. We believe that information is meant to move and that information moves people. Respect: We treat others as we would like to be treated ourselves. Integrity: We work with customers and prospects openly, honestly and sincerely. Excellence: We are satisfied with nothing less than the very best in everything we do. 4.3 Conflict between Enron’s code of conduct and the company’s real culture As stated in the core values of Enron, the first one is communication. But, what did the staff really do? In reality, no body blew the whistle since most staff receives lavish bonus and stock options. The reason could be that top management has the culture of covering things up rather than communicating those transpare ntly. For instance, the management kept hiding liabilities in their financial st atements and did not communicate those with auditors and shareholders. Hidings o f liabilities together with inflating revenues are also conflict with another co re value of the company, integrity. The staffs were likely to follow what leaders do in reality. In the culture of h iding truth, working without integrity, would codes of conduct and core values w ork effectively? The answer is definitely no.

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