Enron Case Study

Cover Sheet For all handins Course Code: FEAD18

Course Name: Leadership & Management

Title of Work: Enron Case Study The Last Date: 2011-03-10

Name of Student/Students Family Name

Given Name

T-Number

Bhatty

Usman Tariq

840415-9256 (R238)

Guninita

Kelvin

850528-R074

Ilyas

Muhammad

831204-T455

Messele

Adey

860919-T344

Hussain

MD Mosharraf

801230-T415

Name of the Teacher:

Markus Fellesson

Name of the Administrator:

Britt-Marie Klarström

Filled out by the examiner First Return: _____ Second Return: ______ Fourth Return: _________ Passed: _________ Received Points: _________ Grade: _________ Examiner: __________________

ENRON Case Study

Abstract Enron.

Executive Summary Enron.

Contents Abstract .......................................................................................................................................... iv Executive Summary ....................................................................................................................... iv Introduction ..................................................................................................................................... 1 Conclusion ...................................................................................................................................... 2 References ....................................................................................................................................... 5 Reading Reference ...................................................................................................................... 5 Web Resources Used .................................................................................................................. 5 Appendixes ..................................................................................................................................... 0 Appendix – A

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Introduction

Skilling next lead Enron, in conjunction with the company's accounting firm Arthur Andersen, to request permission to change accounting procedures (NPR 2002 & Salter 2008). Skilling lobbied the Securities and Exchange Commission to allow Enron to use "mark-to-market" accounting, which would permit Enron to account for profits from long-term contracts in the first year of the contract. Enron history author Malcom S. Salter (2008) explains that Enron was thus the first nonfinancial company to be permitted to use the mark-to-market method. Gas prices would stabilize, further cementing Enron's appearance as a crucial firm. Difficulties Despite its reputation as a corporate juggernaut, Enron had various difficulties that preceded the scandals to come. Although the biggest natural gas company in the United States by 1992, Enron's focus on trading obscured the fact that its trading division was not making a profit (NPR 2002). To compound matters, Chief Financial Officer Andrew Fastow had created separate business entities that were not reflected in the main company's financial statements. Despite auditing

Chapter: Introduction

History of Enron The history of Enron falls into two distinct parts. The first act was the rise of a company that mastered, for a brief while, the "new economy" of the Information Age; the second act contained a spectacular fall from wealth and power, a cautionary tale full of accounting scandals and corporate malfeasance. Understanding the history of Enron gives clues to the complexity of modern trading markets and underscores the importance of ethical behavior in business. Origin Enron was formed in 1985 by Kenneth Lay (Fox, 2005). Lay merged his company, Houston Natural Gas, with Omaha, Nebraska's InterNorth to form Enron. Lay was Enron's CEO. In addition to traditional sales and transportation of natural gas, Enron, under Lay's direction, bought into futures markets. The 1980s had seen considerable deregulation of energy markets under Ronald Reagan's presidency (Fox, 2005); this allowed Enron and other futures players to buy and sell energy futures, or contracts for delivery at a future date. The company relocated its headquarters from Omaha to Houston in 1986. (NPR 2002 & Fox 2005) Innovations Kenneth Lay brought former consultant Jeffery Skilling to join Enron in 1990 (NPR 2002 & Fox 2005). Skilling would eventually become Enron's chief operating officer; his focus was on moving Enron's business from old ways of doing business--the physical building of power plants, for instance--to a largely information-based business model. Under Skilling's plan, therefore, Enron became heavily focused on contracts for delivery of energy, as well as selling pieces of those contracts as "derivatives," matching big suppliers with smaller customers. (Salter, 2008)

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In and of itself, the bankruptcy would not have been scandalous. Yet disturbing revelations began to surface. Andrew Fastow, who had been fired in October 2001, had hidden millions in debt in Enron's partnership companies (Fox 2005). In March 2002, Arthur Andersen would be indicted by the U.S. Justice Department for destroying documentation of Enron's malfeasance; the accounting firm was convicted in June of the same year (NPR 2002 & Fox 2005). Aftermath Although the initial scandal at Enron focused on accounting officers, it was soon revealed that the conspiracy to fool investors went to the very top of the organization. Kenneth Lay and Jeffrey Skilling were both indicted in 2004 on financial conspiracy charges (Fox, 2005); Enron accountant Richard Causey agreed to testify against the two Enron chiefs in exchange for Causey's own reduced sentence for his role in the matter. In 2006, Lay and Skilling were convicted of conspiracy and fraud charges. Lay passed away from heart disease in July 2006 (NPR 2002 & Fox, 2005). That October, Skilling was sentenced to 24 years, four months in prison (Fox, 2005). In 2004, Enron emerged from bankruptcy court as Enron Creditors Recovery Corp., charged with reorganizing and liquidating assets to help repay Enron's creditors (Fox, 2005).

Role of Management & Leadership in Enron HRM Policies in Enron Ethics & Cultural Perspective of Enron Fall This part will discuss the business ethics background and leadership mechanisms affecting Enron’s collapse and eventual bankruptcy. Schein’s frame of reference is used in this part to go through a systematic analysis of the organizational culture at Enron; the case study demonstrates how the company’s culture had profound effects on the ethics of its employees. Schein (1985) has focused on leadership as the critical component of the organization’s culture because leaders can create, reinforce, or change the organization’s culture. According to Schein

Chapter: Role of Management & Leadership in Enron

Enron's books, Arthur Andersen did not disclose this fact to investors at the time. The result was that an extremely successful-looking company was, in reality, going broke. Scandal Enron's situation quickly deteriorated at the end of 2001 (NPR 2002 & Fox 2005). Because of a lack of revenues, the company was forced to access a line of credit of $3 billion. Credit ratings agencies caught wind of this and downgraded the company's debt ratings; creditors, fearing they might not get paid in event of an Enron bankruptcy, increased Enron's debt payment schedules. On Dec. 2, 2001, Enron filed for bankruptcy, laying off thousands of workers in the process (NPR 2002 & Fox 2005).

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(1985) there are five primary mechanisms that a leader can use to influence an organization’s culture: attention, reaction to crises, role modeling, allocation of rewards, and criteria for selection and dismissal. We have used those five mechanisms to analyze the company’s culture and leadership that contributed to its ethical demise and filing for bankruptcy. Attention Focusing The issues that capture the attention of the leader (i.e. what is criticized, praised or asked about) will also capture the attention of the greater organization and will become the focus of the employees. One former executive of Enron has described Jeffrey Skilling as a leader driven by the almighty dollar (Zellner, 2002). Enron executives’ attention was clearly focused on profits, power, greed and influence. Consistently clear signals told employees what was important to leadership – “Profits at all costs” (Tracinski, 2002). Summarizing the actions by the top executive of Enron; we can say that whole attention of them was always focused on money and the worst part was that, the focus was not for the welfare of company or its employees but for their own self. Reaction to crises This refers to a leader’s reaction to a crisis situation; a crisis tests what the leader values and brings these values to the surface. With each impending crisis, leaders have an opportunity to communicate throughout the organization what the company’s values are.

Another crisis consists in having to admit accounting irregularities. At first, the leaders of the company tried to deny there was a problem. They next tried to cover up any evidence of a problem or any wrongdoing. They even tried to seize computers of anyone they thought was trying to expose them as well as to destroy many files thought to be guilt-inducing (Daily Press, 2002). Willet and Always (2002) noted that “the mantra at Enron seems to be that ethical wrongdoing is to be hidden at any cost; deny, play the dupe, claim ignorance (“the ostrich instruction”) lie, quit.” It appears that the truth and its consequences have never been a part of the Enron culture. Role Modeling It is the example leaders set for the acceptability of unethical behavior within an organization. Actions speak louder than words – therefore role-modeling behavior is a very powerful tool that leaders have to develop and influence corporate culture. This is the case with any cultural value. Employees observe the behavior of leaders to find out what is valued in the organization. Perhaps, this was the most significant short- coming of Enron executives. Enron’s leaders’ primary message about their values was sent through their own actions. They broke the law as they concentrated on financial measures and used of the creative partnerships.

Chapter: Ethics & Cultural Perspective of Enron Fall

Enron was facing a crisis of how to sustain a phenomenal growth rate. Leaders reacted by defending a culture that valued profitability, even when it was at the expense of everything else.

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Reward Allocation It is the behavior of people rewarded with pay increases or promotions signals to others what is necessary to succeed in an organization. Enron’s reward system established a “win- at-all-costs” focus. The company’s leadership promoted and retained only those employees that produced consistently, with little regard to ethics. Skilling singled out one of his vice presidents, Louise Kitchen, for her results-oriented approach to Enron’s online business. The company’s compensation structure contributed to an unethical work culture, too – by promoting self-interest above any other interest. The strongest per- forming units even went as far as to “ignore” company policy – granting unlimited vacation time as noted earlier as long as the work got done, ignoring Human Resources’ complaints (Bartlett and Glinska, 2001). Overall, Enron’s reward system rewarded individuals who embraced Enron’s aggressive, individualistic culture and were based on short-term profits and financial measures. Criteria for hiring and firing Schein’s (1985) last mechanism by which a leader shapes a corporate culture, describes how a leader’s decisions about whom to recruit or dismiss signals a leader’s values to all of his employees. Ken Lay placed an immediate focus on hiring the best and smartest people, those who would thrive in a competitive environment. Skilling shared Lay’s philosophy.

Recommendations & Conclusion

Two of the most important lessons to learn from the Enron culture history is that bad top management morality can be a sufficient condition for creating a self-destructive ethical climate and that a well-filled CSR and business ethics toolbox can neither stop nor compensate for such processes.

Chapter: Recommendations & Conclusion

The story of Enron sounds smart and stupid at the same time. Enron’s house of cards collapsed as a result of interacting decision processes. The culture at Enron eroded little by little, by the trespassing of ethical boundaries, allowing more and more questionable behavior to slip through the cracks. Enron’s top executives set the tone for this culture. Personal ambition and greed seemed to overshadow much of their corporate and individual lives.

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References Fox News (2005). Timeline: Enron Corp. [Online] Available http://www.foxnews.com/story/0,2933,39655,00.html. Accessed on: 2011-03-06

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NPR (2002). History of Enron. [Online] Available http://www.npr.org/news/specials/enron/history.html. Accessed on: 2011-03-06

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Salter, M., (2008). Innovation corrupted : the origins and legacy of Enronʼs collapse. Harvard Business Review, 86(10), p.viii, 525 p.

Figures Figure 1:

Kennedy Lay, NPR (2002), History of http://www.npr.org/news/specials/enron/history.html

Enron,

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Jeffery Skilling, NPR (2002), History of http://www.npr.org/news/specials/enron/history.html

Enron,

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Adrew Fastow, NPR (2002), History of http://www.npr.org/news/specials/enron/history.html Web Resources Used

Enron,

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Figure 2: Figure 3:

Chapter: References

Schein, E., (1985). Organizational Culture and Leadership. As in Sims, R.R. & Brinkmann, J., 2003. Enron ethics (or: culture matters more than codes). Journal of Business Ethics, 45(3), p.243-256. Available at: http://www.springerlink.com/index/p712j1555807774r.pdf Accessed on: 2011-03-07. Reading Reference

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Appendixes

Appendixes

Appendix – A ()

A