Case Study - The Enron Story1 - Jeff Skilling - Assessment Answer

December 04, 2018
Author : Ashley Simons

Solution Code: 1HFD

Question: Case Study

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Case Study Assignment

Case Scenario

US company Enron was formed in 1986 from the merger of natural gas pipeline companies Houston Natural Gas and Internorth, and in the following 15 years diversified to provide products and services related to natural gas, electricity and communications. Early in 2001the company employed around 22,000 staff. Ken Lay was Chairman of the Board and Jeff Skilling was CEO

. Enron failed when the market lost confidence in it following major profit and asset writedowns in the third quarter of 2001. This caused loans to become due as stock market collateral collapsed making new borrowings impossible. Enron suffered the usual fate of a failed business; it simply ran out of cash. However, the lost confidence was not the cause of the collapse but merely its latest symptom. Enron failed because in the words of one commentator it was the proverbial `Emperor's New Clothes'. The assets and expected earnings which underpinned its meteoric rise into the Fortune top ten were largely illusory, while the tangled web of related companies and financial deals hid a huge burden of debt. Its aggressive accounting practice and market power ensured that the secret was safe, at least in the short term.

In 1997 the company reported operating results of $515m and profits of $105m as a result of non-recurring charges of $410m that `allow us to clear the decks for future growth' [Enron press release 20 January 1998]. From this point to summer 2001 the published financial results were spectacular, with the company meeting or exceeding rising earnings targets in 20 successive quarters. Operating results were $698m in 1998, $957m in 1999 and $1.266bn in 2000, the last full year reported.

With the help of their accountants and lawyers, top executives created subsidiaries that looked like partnerships and made it possible to sell assets and create false earnings. Offshore entities were used to avoid taxes, inflate assets and profits and hide losses. Conflict of interest rules were relaxed to allow executives to benefit personally from questionable ventures that in most cases were a drain on company funds.

One example of unethical practices was the transfer of energy out of California to create blackouts thus raising the price of electricity. Then the energy was transferred back to California and sold at higher prices, generating billions of dollars in extra profits.

Key Individuals

Jeff Skilling, Enron’s Chief Executive is quoted as saying that his priority as Chief Executive Officer (CEO) was `to keep the stock price up'. In an interview on 28 March 2001 with FRONTLINE about the California power crisis Jeff Skilling said, `We are the good guys. We are on the side of the angels'. His interviewer asked him, `A general comment that I've heard about Enron, and to a certain extent about you [is] that you're very, very smart, very, aggressive. You'll lay out your argument, ``The rules in California are terrible'', but then once you see what the rules are, you guys push those rules to the edge in an effort to make a buck'. Skilling replied, `That's probably fair, yes. Once you set the rules to a marketplace, we adhere to the rules. If that's what you're saying, that's what we do.' Interviewer, `But you know what I mean you play the game hard. You take it right down to the . . .'. Skilling, `We adhere to the rules. If they set up the rules, we adhere to them. It's like the tax code. No one expects you to pay more taxes than you owe. And so you're expected to interpret the rules and conduct your business in that fashion . . .'.

Jeff Skilling resigned in August 2001 for ‘personal reasons’ and was allowed to sell significant amounts of his own stock at a premium price. When Ken Lay took over as CEO he repeatedly emphasised the need to reinforce the message about the value of the company's shares. He made appearances to investors and the public telling them that Enron was heading in the right direction, at the same time as top executives were rapidly selling their own shares. By August 15 the stock price was down to $15 but many trusted Ken Lay and continued to hold their stock and buy more of it. Four months later Enron filed for bankruptcy

The Board of Directors

The Board of Directors is responsible to the shareholders for the company's business. They should be the guardians of the ethical code and sufficiently in touch with the business to be effective. Enron's board appear to have fallen short in many respects. They were not fully briefed on the extent of the partnerships, allegedly taking only fifteen minutes to review some of the more dubious transactions underlying the surge in earnings. Subsequently of the 17 Directors, 7 were sued for insider trading and 6 had a trading or sponsorship relationship with Enron thus raising questions of conflicts of interest.

Executives and senior management

It is generally considered that the key determinant of the ethical culture of an organisation is the example set by senior management. Enron is no exception. In principle Enron claimed to subscribe to a morally worthy set of values insofar as Respect, Integrity, Communication and Excellence are at the core of its Mission Statement. Respect is defined as `We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness and arrogance don't belong here.'

The Culture

The company culture of individualism, innovation and unrestrained pursuit of profits eroded the ethical behaviour of many Enron employees. The risk-taking culture of Enron and bonus incentives encouraged staff to manipulate profits estimates. Unethical practices were encouraged and were rife throughout much of the organisation. An employee's appraisal scheme, the Performance Review Committee (known locally as `rank and yank') resulted in promotions and bonuses for the top employees and dismissal for the bottom ones. Each year 15-20% of the employees with the lowest performance were fired and replaced by new employees. One commentator says, `the main factor that discouraged questioning of Enron's business practices was a ruthless and reckless culture that lavished rewards on those who played the game, while persecuting those who raised objections'.

The Performance Review Committee controlled employees and forced them into line. Appraisal was supposed to be based upon how well employees had delivered the core values; in reality appraisal was based upon how much paper profit the employee had generated. By all accounts Enron was an exciting place to work and it undermines those who argue that the macho `greed is good' culture did not survive the late 1980s and early 1990s

The end

It was the biggest and most complex bankruptcy case in US history and had a devastating effect on thousands of employees and investors. It also led to the dissolution of accountancy firm Arthur Andersen, one of the largest in the world, after employees were found to have destroyed documents relating to the auditing of Enron finances. Anderson was serving as the independent auditor whilst at the same time charging Enron millions of dollars in consultancy fees.

Assignment Task

You are now required to use knowledge learned from MGT306 to analyse this real world case in accordance with following instructions:

  1. How can what happened at Enron be explained by some of the theories of leadership that you have looked at?
  2. In what ways does leadership influence culture?
  3. What can be done to reduce the type of unethical behaviour demonstrated in this case? What are your recommendations?

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Solution:

Enron has seen many ups and downs during the course of business and these situations can be explained using a few leadership theories. The reason behind attributing this to leadership theory is that what has happened in Enron is due to the leaders and their unethical tactics to handle the business. I has also been mentioned in the most significant task of leaders in Enron is to keep the stock prices up at any cost. The leaders used to give incentives to the employees who help them in unethical activities and they also promoted risk taking. This clearly signals towards behavioural theory of leadership and Hersey Blanchard’s Situational leadership (SLT) (Tyssen et al., 2013).

The behavioural theory of leadership suggests that specific behaviours are something that differentiates leaders from non-leaders. This also denotes that the patters of actions that are used by different individuals are something that determines leadership potential. Here the actions of leaders are unethical and they need to follow those practices so as to make the company survive. This theory is an attempt to describe and explain leadership in terms of what leaders do. It has nothing to do with the traits of the leader. Leadership is only shown by the cats of the person and not by his traits. The same happened with both the CEO, they may have significant traits but they are known only by the behaviour they have depicted. It also helps in isolating effective leaders from ineffective ones. This is clearly seen in the case of Enron as well. The case of Enron and its failure can also be associated with Ohio State Studies (Alice, 2014). There are two major factors in this study that are initiating structure and consideration. The initiating structure defines the extent to which a leader is likely to define and structure his role and the roles of subordinate with an objective of goal attainment. In this case the leaders have defined the structure in such a way that keeping the stick prices up is the primary goal and the roles of subordinates are also defined in similar manner. The company also had a policy that those subordinates who are not able to stick to their roles significantly will be sacked from the company and those who do that will be promoted.

The university of Michigan studies suggest that there are two types of employees that are employee oriented and production oriented. In this case the leaders are production oriented. The case clearly suggest that those employees who are not able to perform well are sacked so employees’’ feeling do not have any importance. It’s just that the output shall not get affected. The Hersey and Blanchard’s Situational leadership suggests that the followers’ readiness is very important and it is denoted by the willingness and ability of employees to accomplish a specific task (Austin, 2013). In the case of Enron the followers were also readily following the instructions of the leaders and because of that all this happened. This case can also be related to great man theory of leadership. The case suggested that people have trust on the policies and capabilities of Ken Lay and due to that they continued to hold up their stocks that later resulted in the failure and the company went  bankrupt. The Great man theory of leadership suggests that people blindly trust the capabilities of their leaders and follow them without knowing the truth. The same happened with the people in Enron. In this manner the great man theory, the Situational leadership theory, Ohio State model and University of Michigan studies are closely related to what has happened in the case.

Leadership has a huge impact on the culture of an organisation. It is also mentioned in the case that a leader sets example for followers and followers do the things that leaders set in front of them. In present context the leadership and the acts of leaders are totally transparent and followers are able to see the examples that are set by their leaders. It is believed that the organisational culture is created by four major aspects that are the behaviour and actions of leaders, what leaders pay attention to, what gets punished and what gets rewarded and the attention and allocation of the resources(Stella, 2010). In this case the actions and behaviour of leaders are such that the followers are also getting signs to undertake unethical practices and this has a fatal impact over the culture of the company. It also suggested that like every other company the culture of Enron also has strict principles and their mission and vision statements are also ethical. But these are only written rules and leaders are not following this and due to that followers are also not following this and this is affecting the culture of the company. The second aspect of leaders affecting culture is that what leaders pay attention to. If leaders pay attention to such activities that are positive for the culture of the organisations then the culture of the organisation will be positive and if the leaders will pay attention to negativities and unethical acts then the followers will also do the same and again it is going to affect the culture of the company. The third aspect is what gets punished and what gets rewarded. As in this case it is mentioned that the employees who work exactly according to the leaders get rewarded and the ones who do not follow leaders are punished. So the employees follow leaders blindly without acknowledging that the act is ethical or unethical (Robin, 2013). In this case leaders are promoting risk taking culture and those who are doing this are getting promoted and those who are not able to do this are getting sacked. This is because the entire culture of the organisation gets affected. In this manner a leader has a huge impact over the culture of a company. It depends upon the leader whether to make a positive culture or a negative one. Whatever the leader will do, will be followed by the employees. In this way leaders have a huge impact over the culture of an organisation.

The type of unethical behaviour that is demonstrated in the case can be reduced using various measures. The most significant aspect to reduce this is to first make the leadership practices ethical. It is required that the leaders of the organisation shall be bound by the ethical practices and this will further enhance the ethical culture in the organization. In previous part it has been discussed that leaders have huge impact over the culture of the company and if the leaders will show unethical behaviour then everyone else will also do the same. Thus, the first aspect is to control and make leadership practices ethical. The second aspect that will help is to strictly follow the vision and mission of the company. The vision and mission are not just for the sake of writing them but they shall be followed strictly. If the company will follow its vision, mission and values strictly then reducing unethical practices will be a very easy task for the company(Chambers, 2009). Another thing to do to reduce unethical practices is to make sure that the management shall strictly follow the governmental norm, rules and regulations. If management will set criteria to run business practices then unethical practices will reduce down automatically. It all depends upon how liberal the management is towards the practices of the company. From start to end the only thing about which the management is concerned is nothing but profit and existence of the company. To achieve this, the company has tried every possible act be it ethical or unethical. To prevent this it is important to consider values and ethics equally while running a business organisation. Due to its unethical practices the company destroyed itself as well as the other companies. Besides that the stakeholders shall also pay a major role in reducing the unethical practices. If any of the stakeholders observes that something unethical is going then he or she shall immediately take an action to prevent that. On the basis of this discussion following recommendations can be laid down to prevent the unethical practices in the company :

  • The company shall understand the value of sustainability and run business practices that are beneficial for the society as well as for the business. It is not important just to look at the profitability of business and ignore other aspects.
  • All the stakeholders shall be aware of the differences between ethical and unethical and they shall raise their voice if they observe anything unethical.

The guidelines of business shall be followed by the company and leaders shall also take care of it.

 

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