Enron: Leadership without Ethics and Practical Execution

Table of Content

Enron, a former global giant in the energy industry, had assets worth $65 billion but went bankrupt in just 24 days. Originally, the company’s primary focus was on extracting natural gas and producing energy-related products. However, due to its overly aggressive and profit-driven approach, Enron started to establish numerous “innovative” investment departments and financial products. Ultimately, these activities became the underlying cause of the company’s collapse.

Suddenly, there was a tragic downfall in the previous glory and pride, causing private and institutional investors to lose more than 90% of their investment. Many other business partners and stakeholders were also drawn into deceitful dealings that seemed endless. After a lengthy federal investigation, the public finally discovered the hidden factors behind this massive business scandal involving Enron, one of the world’s largest companies. Despite appearing to meet or surpass various governance standards, such as having a diverse board of directors and independent compensation and audit committees, Enron was eventually exposed for its wrongdoings.

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However, the management of Enron was able to take advantage of superficial prosperity and gain personal benefits due to the company’s complex reporting and accounting methods that prevented outsiders from detecting their actions. While it is understandable to criticize the unethical leadership of Enron’s board, simply making structural changes will not be enough to alter the ethical behavior and dynamics of the boardroom. According to De Kluyver (Page 73), building a culture of ethics, implementing effective supervision, and promoting participation are all essential components that can foster ethical leadership, ensure practical execution, and contribute to the company’s sustainable development. Prior to discovering their true intentions, employees and stakeholders took pride in having talented individuals such as CEO Jeffery Skilling and CFO Andrew Fastow, as it was unusual for a traditional energy company to introduce so many innovative financial products, services, and business models.

Following a legal investigation, the Senate discovered that Skilling utilized accounting loopholes known as Mark-to-market accounting, alongside special purpose entities and inadequate financial reporting, to conceal billions of debt. This allowed Enron to sustain significant business growth for over a decade. Enron’s CFO, Fastow, also played a role by creating complex off-balance-sheet vehicles and misleading members of the board and audit committee with intricate financing structures that few could comprehend. The Senate report confirms that the audit committee was aware of these activities. Both Skilling and Fastow orchestrated unethical business practices that had detrimental effects on all internal and external stakeholders, including employees, investors, partners, the local community, and even the country at large. However, I believe that if Enron had fostered a positive work environment and implemented effective oversight mechanisms, it would have been more challenging for such greed and deceit to flourish.

According to my perspective, two main reasons contribute to the gradual ruin of Enron over a ten-year period. The first reason is centralization, which led to confusion among stakeholders due to the complex internal company structure. However, underneath this complexity, Enron’s true motive was to conceal insider trading, obstruct external investigations, and deceive shareholders in order to protect management’s existing benefits. Key executives such as Kenneth Lay, Jeffery Skilling, and Andrew Fastow had control over most business relationships with partners and decision-making power.

During the Enron scandal, the individuals in power not only had complete control over all the crucial resources within the company, but they also possessed unexpected authority to collaborate with the auditing firm (Arthur Anderson) and investment organizations. As stated by Gibney in “Enron: The Smartest Guys in the Room,” it was deemed trendy during that time to engage in unethical practices with Enron in order to gain popularity on Wall Street. This prevalent mindset serves as clear proof of collusion between the management and supposedly impartial third parties. Another significant factor behind this collusion was the motive of personal gain.

According to Hamilton (S, Case Study, Page 14), Enron aimed to transform every transaction into a quantifiable equation that could be exchanged or marketed. This mindset exemplified the company’s pursuit of profit. Enron introduced a variety of innovative financial products and services, unrelated to its core activities in wholesale trading, futures trading, and investment banking, which served as the building blocks for their avaricious empire.

The working style and thoughts of the management greatly influenced employees at Enron, including traders and managers who were only focused on achieving high returns without considering the overall well-being of the country and community. This resulted in the increased price of electricity in California for futures trading, as Enron subjectively closed down power plants without ethical consideration for the impact on local residents’ daily lives. Traders discovered that by shutting down power plants, they could create an artificial shortage that would drive prices even higher (Gibney, A. Enron: The Smartest Guys in the Room). It is clear that if these negative characteristics affected most employees and managers across all important departments at Enron, the company’s bankruptcy was a logical outcome. The lack of effective internal and external governance was undeniably responsible for the extensive negative social and industrial consequences of Enron’s collapse. To prevent such a situation, a firm must establish appropriate connections of information, incentives, and governance between managers and investors.

The process of carrying out this task is intended to involve a network of intermediaries, including assurance professionals such as external auditors, and internal governance agents like corporate boards (Krishna Palepu, Paul M. Haley. The Fall of Enron). It is evident that the crucial connections within the entire ecosystem of Enron, involving all stakeholders, were completely dysfunctional. Within the organization, the management consolidated all major powers and convinced other board members or managers to participate in the chain of benefits.

The third-party auditing firm was primarily influenced and conspired with by Enron’s management externally due to its strong partnership with the company’s largest client and consistent revenue flow. Consequently, the auditing firm did not prioritize establishing its own credibility and seeking justice to assess Enron’s true financial situation. Instead, it became a collaborator in helping Enron exploit other stakeholders for profit. It is evident that Enron’s deceptive practices only favored a few beneficiaries, while the majority of stakeholders suffered significant losses resulting from the company’s bankruptcy.

During the long process of facing ruin, Enron and its stakeholders encountered numerous conflicts periodically. Enron, an energy firm that primarily manufactured natural gas and electricity, underwent significant internal upheaval when Skilling proposed a change in the type of service and internal structures. However, the CEO’s thoughts and ideas held significant influence at that time, leading to the immediate establishment of trading, risk management, and investment banking divisions.

Enron employed various tactics to conceal its substantial long-term debt in order to maintain a high rating and impressive financial performance. These methods included the establishment of special purpose entities worldwide to remove underperforming assets and unhealthy debt from the main company, presenting non-transparent financial statements to shareholders and analysts, developing an exceedingly complex business model that was incomprehensible to anyone, and misleading shareholders with counterfeit formal information. Despite these deceptive practices, Enron was once considered a role model for the energy industry due to its apparent revenue and performance.

Enron chose to classify the complete value of its trader as value trading revenue in its accounting approach, a practice that was widely accepted and followed by other energy companies. The unethical actions of Enron severely disrupted the industrial and business order. Investors, employees, and shareholders only received limited compensation through lawsuits. The question of who would compensate for their trust in Enron remains unanswered. The scandal of Enron prompts reflection on its causes and provides public companies with an opportunity to examine their own financial conditions and address internal management issues.

The passage of the Sarbanes-Oxley Act on July 30, 2002 was partly influenced by the Enron scandal. The Act closely reflects the corporate governance flaws identified in Enron’s operations. It establishes the Public Company Accounting Oversight Board (PCAOB) to ensure that fraud is prevented and accurate financial performance is protected from manipulation. Auditors from auditing firms should maintain their credibility and independence while examining and inspecting a company’s financial statements.

Furthermore, the Act highlights the importance of managing conflicts of interest to avoid insider trading and other illicit financial activities that disrupted business operations and investment principles. Additionally, it stresses the necessity of ensuring absolute independence for key stakeholders of a public company. The Enron Board of Directors’ independence was undermined due to financial connections between the company and specific Board members. (US Senate: Senate Report: The Role of The Board of Directors in Enron’s Collapse).

From the sustainable development perspective, Enron faced a problem where the Board did not ensure the independence of the company’s auditor, Andersen, who was also providing internal audit and consulting services. The culture, morale, and mechanism are crucial for ethical leadership. In addition, internal and external regulations can effectively implement ethical leadership and make it practical (De Kluyer, 2009, p. 73).

The Senate Report titled “The Role of The Board of Directors in Enron’s Collapse” (Senate, Permanent Subcommittee on Investigations, 2002) from the 107th Congress, 2nd session, is referenced on page 6. In addition, the documentary film “Enron: The Smartest Guys in the Room” by Gibney (2005) and the case study “The Enron Collapse” by Hamilton (2003) are cited on page 14 of the book “Ethical issues in business: A philosophical approach” edited by Thomas Donaldson and Patricia Werhane. The references also include the work by Palepu and Haley (2003) titled “The Fall of Enron” published by Harvard Business School and the National Bureau of Economic Research (NBER).

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Enron: Leadership without Ethics and Practical Execution. (2017, Jan 05). Retrieved from


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