Term Paper on "Ethical Issues of the Enron Case"

Term Paper 5 pages (1615 words) Sources: 5 Style: APA

[EXCERPT] . . . .

Enron

When most people hear the word "Enron " they quickly think negative thoughts about company executives that took billions of dollars from their employees, while pocketing millions of their own. In years to come, the term enron will most likely be added to the dictionary and future readers will look up its true derivation. In the not too recent past, this same corporation was known for its high ethics, philanthropy and environmental responsibility.

Enron went from a corporate culture that promoted ethical behavior to one that emphasized cleverness and skill (Sims & Brinkman, 2003, p. 243). Unfortunately, this need to continually "one up" drove the company down. Enron's executives felt driven by its reputation for success to sustain the huge growth of the late 1990s, even when they knew this was impossible. A negative earnings outlook would spell disaster to the investors, indicating that the corporation was not as successful as it appeared. This would lead to a domino effect: If investors' concerns drove down the stock price due to excessive selling, credit agencies would be forced to downgrade Enron's credit rating. Trading partners would lose faith in the company, trade elsewhere, and Enron's ability to generate quality earnings and cash flows would suffer. To avoid such a scenario at all costs, the company executives developed a deceptive network of partnerships.

Partnerships can be an easy and effective way to raise money. However, the executives took partnerships to a new level by creating "special purpose vehicles" (SPVs), pseudo-partnerships that allowed the company to sell assets and "create" earnings that artificially enhanced its bottom line. This exaggerated earnings by recognizing gains on the sale of assets to SPVs. In some cases, the company booked revenues prior to a partnership generating significant revenues. Project Braveheart, a partnership developed with Blockbuster, was to provide movies to homes directly over phone lines. Just months after the partnership was formed, recorded $110.9 million in profits prematurely, these profits were never realized as the partnership failed. The SPV's also allowed the company to keep debt off its balance sheet. It parked some of its debt on the balance sheet of its SPVs and kept it hidden from analysts and investors. When all this became known, the company's credit rating crashed and lenders demanded immediate payment in the sum of hundreds of millions of dollars in debt (Sims & Brinkman, 2003, p. 243)

WHO ARE THE STAKEHOLDERS?

The stock shareholders are the main stakeholders. That does not mean, however, that the books should be illegally manipulated. Shareholders "hold" faith in the company executives that they will do their best, ethically and legally, to produce the best results. Yet shareholders also know that stocks can and do go down; there is risk involved. The other main stakeholders are the employees, who were hit twice by losing their stock and their jobs.

WHO IS RESPONSIBLE?

Unfortunately, the Enron executives saw themselves as the main stakeholders. When company's stock price began to drop, the employees were unable to sell their stock but the executives quickly sold off many of their shares.

Enron's leadership certainly dictated the company's outcome through their own actions by providing perfect conditions for unethical behavior. Michael Josephson, President of the Josephson Institute of Ethics, describes these conditions as they relate to the character of leadership:

People may produce spectacular results for a while, but it is inevitable that techniques depending so heavily on fear as a motivator generate survival strategies that include cheating, distortion, and an internal competitive ethos characterized by a look-out-for-number-one attitude.... Just as the destiny of individuals is determined by personal character, the destiny of an organization is determined by the character of its leadership. And when individuals are derailed because of a lack of character, the organization will also be harmed" (Josephson, 1999, p. 14).

Seeger and Ulmer (2003, p. 58) see this lack of ethics from a communication standpoint. They describe three kinds of communication-based responsibilities for leaders: (a) communicating appropriate values for a moral climate, (b) maintaining adequate communication to be informed of organizational operations, and - maintaining openness to signs of problems. Enron's management failed in their communication-based responsibility to both larger social values and stakeholders. Enron's demise was a consequence of a fundamental breakdown in communication-based responsibilities. With the loss of responsibility came a breakdown in accountability for actions. Also, this situation illustrates the consequences of setting a very narrow set of values and stakeholder concerns and the dangers inherent to radical innovation where few established are available.

It is also important to recognize that it was not just the Enron management team who are responsible. The web reaches beyond them to companies, like Arthur Anderson, that were also called to task, but also to scores of companies and individuals who were involved on the fringes and should have spoken up.

Sherren Watkins (2003, p. 435), who was one of the whistleblowers in this scenario and previously worked for Arthur Anderson laments that her biggest disappointment, other than with the Enron executives, is what happened to Arthur Anderson, which was also known for its "holy grail of good audits." However, in February 2001 they had an internal meeting to see about dropping Enron and decided that it was $52 million a year in fees and one day it would be $100 million a year, so stayed. She calls "Enron" the "Corporate Poster Child for Abuse of Corporate Power," because it did not stop at Andersen (2003, p. 436). There were a couple law firms involved, as well as the research analysts, such as Merrill Lynch and Salomon, that had Enron's numbers as early as 1999. These reports meant something to "Main Street America." In addition, the banks and the I-banks were helping Enron in their financial statement manipulation. Merrill Lynch paid the SCC an $80 million fine, no admission of guilt, on two transactions that made them about $10 million. Chase and City Corp were also right there.

Adds Knee (2003, p. 14) "...in between were the enablers -- the regulators, bankers, analysts, consultants, accountants, lawyers, credit agencies and journalists who could have done something to stop the madness, but did nothing until too late.

PENALTIES

Former CEO Jeffrey K. Skilling was sentenced to 24 years and four months in prison on conspiracy, securities fraud and other charges. Under a settlement with the Department of Labor, former Enron executive Skilling agreed to drop his opposition to a previous $85 million settlement, waive his right to benefits from Enron's pension plans, and be permanently barred from serving in a fiduciary capacity to any employee benefit plan in the future. CEO Ken Lay died and, as the law stands now, there can be no financial restitution. Arthur Andersen declined the Justice Department's offer to settle the matter with a deferred prosecution agreement and instead went to trial, where it was convicted for obstruction of justice. The conviction was later overturned by the Supreme Court, yet the accounting firm went from 28,000 to 200 employees. Andersen received five years probation and no jail time.

McLean and Elkind (2006, p. 6) state that these penalties offer "a measure of consolation -- or retribution -- for those employees who lost everything. And it reinforces a critical notion about our justice system: that, despite much punditry to the contrary, being rich and spending millions on a crack criminal defense team does not necessarily buy freedom." In addition, they say, verdict was good for short-sellers, early warning system certainly proved valuable. "The most important implication of the verdict, though, is the lesson it delivers for business itself."

Perhaps I am more skeptical than McLean and Elkind and side instead with Watkins who asks "who can you trust?" And Al Gini (2004, p. 16) who questions the same:

But putting numbers aside, isn't part of… READ MORE

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