Running head: Harvard Business Review Case Study - CORPORATE SCANDALS HBR Case- Corporate Scandals Okusolubo Gbenga Samuel Student ID: 551695 Central Penn College 1 Running head: Harvard Business Review Case Study - CORPORATE SCANDALS Abstract The case "Jeffrey Skilling, Bernie Madoff & the Other Smartest Guys in the Room" presents two micro cases that describe some critical situations associated with the bankruptcies of Enron and Bernard L. Madoff Investment Securities in 2001 and 2008, respectively. The first micro case focuses on factors affecting the behavior of Arthur Andersen's managers and employees in the Enron scandal, while the second micro case describes variables leading the SEC to fail in identifying the illegal conduct of Bernie Madoff. 2 Running head: Harvard Business Review Case Study - CORPORATE SCANDALS 3 Introduction Motivation and promoting the company is the basic aim of Enron. The main aim of the organization is to be of the world largest and well known energy company in the world. Enron look like to be able to completing their mission and build a huge amount of assets. The company had strong control over the organizational management, leadership style, and production which gave them a big opportunity for uprising in late 1990’s. The company maintained its name and looks like they can do nothing wrong. Overview of the Company Enron Corporation (former New York Stock Exchange ticker symbol ENE) was an American energy, commodities, and Services Company based in Houston, Texas. It was founded in 1985 as the result of a merger between Houston Natural Gas and InterNorth, both relatively small regional companies in U.S. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the world's major electricity, natural gas, communications and pulp and paper companies, with claimed revenues of nearly $111 billion during 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years. Almost immediately after the relocation to Houston, Enron began selling major assets such as its chemicals division, Northern PetroChemicals, accepted silent partners in Enron CoGeneration, Northern Border Pipeline and Transwestern Pipeline, and became a less diversified company.[citation needed] Early financial analysts said Enron was accumulating great debt and the sale of major operations would not solve the problem. Enron was created in 1986 from a merger of Houston National Gas and InterNorth (a natural gas pipeline company) with Ken Lay as its chair and CEO (Stein & Pinto, 2011). In 1988, the Running head: Harvard Business Review Case Study - CORPORATE SCANDALS 4 deregulation of electrical power markets took effect, and Enron transformed from a traditional natural gas energy company focused on energy delivery through gas pipelines to an energy broker company that brought buyers and sellers together (Sims & Brinkmann, 2003). Enron transformed into a high-tech global enterprise that diversified into trading energy, water, weather derivatives, broadband and electricity. Leadership Style in Enron Case- Charismatic Leadership Enron was led by charismatic leaders Ken Lay as well as Jeff Skilling who was said to have “radiated so much charisma that he induced blind obedience in his followers” (Khurana, 2002). Charisma is a sought-after quality among corporate leaders (Khurana, 2002) and one that has been correlated with leadership effectiveness (Hoffman, Woehr, Maldagen-Youngjohn, & Lyons, 2011), but when overdeveloped, charisma is a quality that can lead to the dark side of leadership. As charismatic leaders, Lay and Skilling had a clear and compelling vision for the organization and were skilled in communicating their compelling vision of Enron and its culture to all stakeholders—employees, shareholders, the media and the public—that the company was “the most innovative culture in America” (Murphy & Ensher, 2008). Charismatic leaders are also characterized as having heightened sense to the environmental context of the organization and the ability to scan for environment for trends that might require them to change their vision (Murphy & Ensher, 2008). Ken Lay, for example, was acutely aware of the regulatory context of the business and believed that energy markets should be deregulated and lobbied tirelessly for change on Capitol Hill. The power of deregulation gave rise to new business opportunities for Enron. However, Lay also had sensitivity to the nature of politics and the need to maintain relationships with politicians and became the largest contributor Running head: Harvard Business Review Case Study - CORPORATE SCANDALS 5 to the George W. Bush campaign. Lay, Skilling and other top leaders such as Andy Fastow, also demonstrated risk-taking and deviation from the status quo, a characteristic found in charismatic leaders (Murphy & Ensher, 2008). Fastow was the creator of hundreds of special purpose entities—risky investments named after Star War’s characters that were designed to transfer Enron’s debt outside of the company and get it off the books (Saporito, 2002; Schwartz & Watkins, 2004). Charismatic leaders can bring much strength to their organizations, but this same characteristic has also been defined as a “key ingredients of cultic dynamics” in Enron leadership (Tourish, & Vatcha, 2005). Charismatic leaders may have a self-schema that reflects a propensity toward authoritarian control (Murphy & Ensher, 2008), a defining characteristic Enron’s top leadership. The Culture of Enron Enron’s leadership used its charisma to craft a strong organizational culture which was both an extraordinary corporate and managerial success, and at the same time, a weakness that eventually led to the company’s downfall. A cultural paradigm is a schematic which captures the underlying assumptions on which a corporate culture is based. Figure 3 describes Enron’s paradigm and serves as a basis for explaining the cultural artifacts that have emerged as the result of these underlying values and assumptions (Schein, 1990). Enron’s leadership developed a set of very clear cultural values that were explicitly and repeatedly communicated to employees and guided their actions. Enron valued innovation, creativity, change and adaptability, and competitive dominance of the marketplace—and the company richly rewarded employees who achieved these objectives. The deregulation of the energy market was a “critical incident” that Running head: Harvard Business Review Case Study - CORPORATE SCANDALS 6 shaped Enron’s culture because the company was no longer bound by the regulations that directed traditional gas pipeline companies; Enron was now able to exercise creativity in diversifying into an energy trading company (Schein, 1990; Sims & Brinkmann, 2003). This creative vision enabled Enron to embrace change and adapt to the marketplace in transforming from a traditional energy company to one that diversified into brokering energy, broadband services, electricity and weather derivatives (Gibney, 2005). SWOT Facts: Strengths Marketing and value delivery: Enron did not become overnight an energy giant serving multitude of customers. Its success comes as a result of marketing and value delivery. Marketing helps Enron to identify and meet customer’s needs. In a hypercompetitive economy with increasingly rational buyers faced with abundant choices, a company can win only by fine-tuning the value delivery process and choosing, providing and communicating superior vales. Another strength displayed Enron is that it gave awareness to it entire customers which also cause its name as brand. Enron was ranked as seventh among 500 companies, Enron display reliability as the biggest natural gas pipeline system company that operates in the United State. Along with the with the energy level supply, the company also has advantage by keeping the price reasonable and the service which they provide. Weaknesses Failed board of Directors: Running head: Harvard Business Review Case Study - CORPORATE SCANDALS 7 The question raised by the general public when the Enron saga started was where the board of Directors was and how come they did not see mess coming. Probably, they are more interested in the task and satisfied with the profit. Nevertheless, board of directors bears the big responsibilities for not doing correctly their oversight. The board of directors failed to carry out proper monitoring by acting through the committee, evaluate and influence, initiate and determine the idea and best decision that suites the organization. Conflict of Interest: Even though at the time of Enron’s collapse the Sarbanes-Oxley Act was enacted yet, the Internal Revenue Service require corporation to adhered to the Conflict of Interest Policy to avoid wrong doing that can get it off the path. For any organization to be healthy and productive, it needs to be strong in four core areas namely; (a) financial capital in terms of investments and profits, (b) technological capital in terms of cutting-edge software and hardware, (c) human capital in terms of knowledge, expertise and creativity, (d) social-spiritual capital in terms of ethics, relationship, morals, meaning and purpose Unethical Practices: Hearing and reports indicate that Enron kept accounting documents hidden and well manipulated with complicity of its auditing company. Enron unethical practices in particular has become infamous for the questionable actions of its top executives in the form (1) off-balance sheet partnerships used to hide the company’s deteriorating finances, (2) revenue from long-term contracts being spread over multiple years, (3) financial reports being falsified to inflate executive bonuses, and (4) manipulation of electricity market –leading to California energy crisis. If one will pinpoint the major cause of Enron downfall, it will be its unethical practices. Running head: Harvard Business Review Case Study - CORPORATE SCANDALS 8 Enron Opportunities The main opportunity which Enron has is its name and brand One of the good point of Enron has that it’s know is well known in the market as energy provider. Enron can take many advantages for expanding their products as they are the main supplier of gas pipeline and many other materials goods related to it. In 1970’s deregulation of energy occurs in the market which allow Enron to rise and start business in the market. Conclusion The HBR analysis performed on this case study helped to identify, among many, the strengths, weaknesses, opportunities, and ethical culture of Enron. The analysis provide external and internal factor the company had to deal with , the important question is to determine what led to the collapse of an apparently wealthy company like Enron. Despite Enron’s thorough ethics policy, a massive financial scandal took place that could have been prevented by encouraging whistle-blowing throughout the organization. The auditing system that the company had in place failed to serve its purpose in the detection of fraudulent activity which shows a need for more comprehensive accountability. An organization is not an individual but a collection of individuals working towards a common goal. Because of this, companies need transparency as well as the means at all levels to be able to report unethical activity on behalf of any held position regardless of hierarchical status. A company’s ethics program should not be assessed based solely on how it looks on paper, but rather how it is Running head: Harvard Business Review Case Study - CORPORATE SCANDALS integrated into the culture of the organization and the amount of transparency and ethical autonomy that is granted at all positional levels of the company. 9 Running head: Harvard Business Review Case Study - CORPORATE SCANDALS 10 References Agor, W.H. Intuition in organizations: Leading and managing productively. Newbury Park, CA: Sage Publications, 1990a Johnson C.E. (2015). Organizational Ethics: A Practical Approach, 3rd edition, Sage, 2015. Northouse P.G. (2016). Leadership Theory and Practice, 7th edition, SAGE Publications, Thousand Oaks, CA. Sims, R. R., & Brinkmann, J. (2003). Enron Ethics (Or: Culture Matters More than Codes). Journal Of Business Ethics, 45(3), 243-256. Hays, J. B., & Ariail, D. L. (2013). Enron Should Not Have Been a Surprise and the Next Major Fraud Should Not Be Either. Journal Of Accounting & Finance (2158-3625), 13(3). Wilson, A. C., & Key, K. G. (2013). Enron Audit Failures: A Compromise of Ethics?. Feature Edition, 2013(3), 50-68. Yuhao, L. (2010). The Case Analysis of the Scandal of Enron. International Journal Of Business & Management, 5(10), 37-41. Gilbert, J. (2012). Ethics for managers: Philosophical foundations and business realities. New York, NY: Routledge.
