For many people, a company
called Enron Corp. still ranks as one of history's classic examples of ethics
run amok. During the 1990s and early 2000s, Enron was in the business of
wholesaling natural gas and electricity. Enron made its money as the
intermediary (wholesaler) between suppliers and customers. Without getting
into all the details, the nature of Enron's business—and the fact that Enron
didn't actually own the assets—meant that its profit statements and balance
sheets listing the firm's assets and liabilities were unusually difficult to
understand.
It turned out that the lack of
accounting transparency enabled the company's managers to make Enron's
financial performance look much better than it actually was. Outside experts
began questioning Enron's financial statements in 2001. In fairly short order,
Enron collapsed, and courts convicted several of its top executives of things
like manipulating Enron's reported assets and profitability. Many investors
(including former Enron employees) lost all or most of their investments in Enron.
In Enron's case this breakdown is perhaps more perplexing than usual. As one
writer said,
Enron had all the elements
usually found in comprehensive ethics and compliance programs: a code of
ethics, a reporting system, as well as a training video on vision and values
led by [the company's top executives].'35
Experts subsequently put forth
many explanations for how a company that was apparently so ethical outwardly
could actually have been making so many bad ethical decisions without other
managers (and the board of directors) noticing. The explanations ranged from a
"deliberate concealment of information by officers," to more
psychological explanations (such as employees not wanting to contradict their
bosses) and the "surprising role of irrationality in
decision-making."'
But perhaps the most persuasive
explanation of how an apparently ethical company could go so wrong concerns
organizational culture. The reasoning here is that it's not the rules but what
employees feel they should do that determines ethical behavior. For example
(speaking in general, not specifically about Enron), the executive director of
the Ethics Officer Association put it this way:
[W]e're a legalistic society,
and we've created a lot of laws. We assume that if you just knew what those
laws meant that you would behave properly. Well, guess what? You can't write
enough laws to tell us what to do at all times every day of the week in every
part of the world. We've got to develop the critical thinking and critical
reasoning skills of our people because most of the ethical issues that we deal
with are in the ethical gray areas.
Questions
- Based on what you read in this chapter, summarize in one page or less how you would explain Enron's ethical meltdown.
- It is said that when one securities analyst tried to confront Enron's CEO about the firm's unusual accounting statements, the CEO publicly used vulgar language to describe the analyst, and that Enron employees subsequently thought doing so was humorous. If true, what does that say about Enron's ethical culture?
- This case and chapter had something to say about how organizational culture influences ethical behavior. What role do you think culture played at Enron? Give five specific examples of things Enron's CEO could have done to create a healthy ethical culture.