For many people, Enron Corp still ranks as one of history's classic examples of ethics run amok. Even 10 years after the fact, courts (including the U.S. Supreme Court) were debating the fates of one of Enron's top executives. Outing the 1990s and early 2000s, Enron was in the business of wholesaling natural gas and electricity.
Rather than actually owning the gas or electric, 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 accounting procedures were unusual. For example, the profit statements and balance sheets listing the firm's assets and liabilities were unusually difficult to understand.
As most people know by now, 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's house of cards collapsed, and several of its top executives were convicted 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.
Its probably always easier to understand ethical breakdowns like this in retrospect, rather than to predict they are going to happen. However, in Enron's case the 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 executivesl.118
Experts subsequently put forth many explanations for how a company that was apparently so ethical on its face 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."119
But perhaps the most persuasive explanation of how an apparently ethical company could go so wrong concerns organizational culture. Basically, 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:
We are 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. Virtually every regulatory body in the last year has come out with language that has said in addition to law compliance, businesses are also going to be accountable to ethics standards and a corporate culture that embraces them120
How can one tell or measure when a company has an "ethical culture? Key attributes of a healthy ethical culture include:
• Employees feel a sense of responsibility and accountability for their actions and for the actions of others.121
• Employees freely raise issues and concerns without fear of retaliation.
• Managers model the behaviors they demand of others.
• Managers communicate the importance of integrity when making difficult decisions.
Question
Based on what you read in this chapter, summarize in one page or less how you would explain Enron's ethical meltdown.