Answers of Enron Case Study Questions Question 1: Has the Chief Executive Kenneth Lay acted immorally?

Justify your views with eth ics and/or CSR theory. Answer: 1.1 The Conclusion Referring to the following analysis of Kenneth Lay and his management team’s behav iours, the following conclusion has been made: From the perspective of major stakeholders of Enron, the Chief Executive Kenneth Lay acted immorally in the management of Enron. 1.2 Definition and explanation of business ethics There are a number of definitions for business ethics in published literatures. Generally speaking, ethics of business is about the implementation of principles and guidelines represented in ethic theories (Jensen, 2002). The principles and guidelines are to guide business organizations’ behaviours to make them act moral ly. To judge if a business acts morally, principles and disciplines are used for tests (Smith, 2003). Besides, business ethics could also be applied to assess i f individuals working for a business acts morally. In published literatures, bus iness ethics are mainly researched in the form of case studies. 1.3 Requirements of ethics 1.3.1 Theories of ethics Generally, there are five theories for judging if a business or an individual wo rks ethically. Below is a brief summary of the five theories. First of all, teleological theory suggests that if the result of a certain actio n is believed to be “good”, the action taken is considered to be ethical. Thus basic ally, teleology judges if behaviours of businesses are ethical or unethical by a ssessing the results (Machold, 2008). Second of all, egoism theory defines right or acceptable behaviours as those tha t are good for a particular person. Or, in other words, the theory judges if an action is ethical or unethical by its results to the action taker’s self. Thirdly, utilitarianism theory defines right or acceptable behaviors as those th at are good for greatest number of people. In other words, the theory judges if an action is ethical or unethical by its results to the greatest number of peopl e. Fourthly, deontological defines right or acceptable behaviors as those actions w ith good intentions of preserving individual rights. Or, the theory judges if an action is ethical or unethical by the action itself rather than its consequence s (Machold, 2008). Finally, relativism suggests that ethics are judged by subjectively. Thus the ju dgement could be different for different individuals or different cultures. 1.3.2 Stages of ethics According to the organizational ethical development model, there are five stages of business ethics, which are amoral, legalistic, responsive, emerging ethical and developed ethical (Jensen, 2002). This section briefly explains the five sta ges as follows: Stage 1, “Amoral” represents actions taking for profit only. Only management and sha reholders are considered to be stakeholders. They would pursue profit at all cos t without considering other stakeholders. Stage 2, “Legalistic” represents that a bu siness would act legally. What laws required is considered as ethical. Stage 3, “R esponsive” means that a business believe that extra profit would arise if it helps local communities. Stage 4, “Emerging ethics” means that ethical behaviour are set in books while a balanced between profit and ethics is found. Stage 5, “developed ethical” is the final stage of ethic development. It requires that all behaviours of a business is driven by ethical principles. 1.4 Matching Ken Lay’s behaviour with ethical requirements 1.4.1 In conventional virtue ethics In conventional virtue ethics, Ken Lay is seemed to be quite an ethical people. He treated others with respects, offered his staff high compensation, listened c arefully, and appeared to care what others really thought. However, what I am tr ying to analysis in this paper is whether the man works ethical in his business

Employees of Enron face d great pressured from the top management of the firm. On the contrary. 2. mana gement had successfully hided significant liabilities and inflated revenues. they are desired to know what the company’s real fina ncial situation is like. Shareholders.4. I believe that the principles of ethics could help for business developments r ather than lessening them down. Question 2: Milton Friedman and Norman Barry are both critical of CSR. From investor’s point of view. it could not be denied that Enron made its shareholders a great fo rtune in 1990s. Enron. 1. They focus on not on ly the short term returns of their investment but also the long term development of the business. Especially between 1996 and 1999. integrity or respect. The following section illustrates the ethical issue from differe nt group of stakeholders’ perspective. fifty percent of staff was fired and another thirty percent were under scrutiny. 1. the perfo rmance measurement was made to be focusing on sales only. The good performance claimed by management give investors great confidence and the confidence hence led to aggressive investment decisions. the action taken by Enron seems to be ethical.actions. It could be said they already have. the lack of integrity of a audit client could be great risk for auditing firms.2. Anderson was brought down. or Ken Lay. Surely it was the auditor’s responsibility to issue an opinion for Enron’s financial statements. by manipulating the financial statements. I do not agree with Milton Friedman and Norman Barry’s criticisms . from investors’ point of view. Andersen is conside red to be a major stakeholder. e specially long term shareholders. However.1 Investors First of all. business ethics is critical to development of businesses since the mutual trust is the basic of free market eco nomy. are owners of businesses.4. As a result of Enron’s collap se. during the 1990s. Norman Barry believes that by acting morally. From the auditor’s point of view. Also. However.2 Employees Employees are also important stakeholders of a business. rather than team worki ng. as the manipulation of financial statements and off balance sheet tradi ng come to public’s view. However. business development w . the audito r of Enron. Thus generally speaking. As a result of the sudd en collapse of Enron. Thus totally forty five percent of staff was facing the threat of dismissal. As owners. worked unethical ly. Every year.2. the top management. worked unethically. or Ken Lay’s decisions are considered to be unethical. the company’s behaviours. In this paper. they would seriously attenuate (lessen) the mechani cs which drive and galvanise the system. or Key Lay. commercial banks and other institu tion investors received a steady stream of profit. Thus from employees’ perspective. Enron’s shares soared about 350% to $90 per share.2 Ethical from Stakeholders’ perspective 1. Use Enron as the context for your answer. All the share s hold in the shareholders’ hand became nothing more than junks. 2.4. the shares were termed junk in October 2001.2 Arguments of Milton Friedman and Norman Barry As stated in the case provided. it became worth to reconsider the issue. 1.2. Norman Barry suggested that “What all these princi ples of ethical correction have to confront is the problem that if they were app lied rigorously to business.4.” In o ther words. the former biggest accounting firm in the world. Do you agree with th eir criticisms? In your answer include theories and arguments in favour of CSR.1 Conclusion As a conclusion. Besides.3 Other stakeholders There are also many other stakeholders of the company. Thus a judgement of ethical is not likely to be made based on his perso nal behaviours.

a company should be a constellation of different stakeholders’ interests. a business’s strategic decision could affect a stakeholder’s outcomes (Smith. The focus on growth and profitability went too far and finally led to the co llapse. Interest of d ifferent groups should be balanced. rather than balancing different stakeholders’ values. banks. Thus revenue and profit are likely t o be increased. it is now not quite sufficient to guide management’s behaviours. as an example As suggested in the case.5 Enron. 1997).3 Arguments of CSR theories Traditional management and corporate strategy theories suggested that a business should be responsible for its owners. Acting morally disobeys the rule that the primary goal of businesses is to generate profit and provide returns f or investors (Jensen.4 Implementation of CSR theories The CSR theories suggest that good management of stakeholders’ claims would not sl ow down a business’s development. Secondly. 2002). 3. 2. suppliers. On the contrary. profit would be decreased. As mentioned in the . The fact that 45 percent of staff were under pressure of dismissal would indicate that Enron did not take their staff’s value into account when sett ing up their operating strategies. The action is considered as bad stakeholde r management. by taking customers’ interest into account. For example. Based on descriptive stakeholder theory. First of all. As mentioned above in answer of question 1. it would finally help businesse s to develop. For different group of stakeholders. As suggested by Freeman (2002). Unlike the opinions of Friedman and Barry. The employees’ performance was assessed based only on sales revenue rather than team working and respect. Good stakeholder management could help a business to achieve its goals. as the development of world business. Therefore. management is required to take the interests of different groups of stakeholders into account when setting the business strategies. En ron focused on the value of shareholders and management only. 2003). works for coordinating thos e stakeholders’ interest would finally favour the corporation itself. customs and employees are all very important fo r development and survival of a business. Second of all.1 Conclusion It is clear that corporation could not maximize every stakeholder’s interest simpl y because that some of those interests might be conflicted. the shareholders of the company. Enron treated their employee with gr eat pressure. 2. organizations should identify its stakeholders. CSR theories indicate t hat companies should focus on the following aspects in management: Rather than setting the objective to be maximizing shareholders’ value. Question 3 Should Enron favour some stakeholders more than others? Justify your views. However. The action taken by Enron is the typical behaviour suggested by Friedman and Bar ry. there are two reasons why companies shoul d consider stakeholders’ claims as follows. For instance. organizati ons should firstly change that to maximizing stakeholders’ interest. a business is likely to get brand loyalty from their customers. stakeholders could be very important to survival of a corporation . The strategies without taking stakeholders’ outcome into account it considered as unethical. 2. different management strategies should be implemented (Ph illips. Some of those interests might be cooperative wh ile others might be competitive.ould be slowed down. The rationale behind the claim is presented as follows : Based on normative stakeholder theory. 2003). A company should ignore stakeholders’ claim since the st akeholders normally have direct or indirect link with the company. there are certain relati onships between stakeholder’s management and the achievement of corporate objectiv es. Distinguishing between stakeholders should be made. Based on instrumental stakeholder theory (Smith.

What Enron done was just put its top management team and shareholders’ interest as the priority and simply ign oring other stakeholders’ interest. An e xample could be governments. stakeholders owning one attribute are normally considered to be not important. The third group of stakeholders comprised of thos e have little power but great interest in the organization. For key players. 2003). 3. as a large company. companies should keep those stakeholders satisfied. In the model. power means the stakeholders’ power to influence the organization. Thus they have great influe nce on the business. they have great interest in the business’s performan ce since their investment return is significantly rely on the performance of tha t company. shareholders. However. Thus the conclusion is that Enron should favour so me stakeholders more than others. urgency model By using the power legitimacy and urgency model.3 Application to Enron Enron. For those stakeholde rs. management should set their primary objective based on their interest (Phillips. T here are three types of power: First of all.1 Method 1 Identify prioritisation of stakeholders with power-interest model According CSR theories. Besides. The legitimacy is “a general perception that the actions of an entity are desirabl e. coercive power is the type of power that is based on physical resources. stakeholders are divided to four groups by their power a nd interests.2. The disaster happened was the evidence against the company’s behaviour. the shareholders coul d replace board and management team of the business. Thirdly normative power is based on resources like media. A typical example of key players is shareholders. 3. 1995) Urgency is that the time requirement claimed by stakeholders. local community and government. “ (Suchman. or appropriate within some socially constructed system of norms. stakeholders are divided to sev en groups as shown in the graph below. Stakeholders owning three attributes are normally consider ed to be very important. Enron should not simply ignore other stakeholders’ (other than shareholders) claim.answers for question 2. employees. level of attention of large companies towards CSR issues is in creasing. customers. referred as definite stakeholder. . 3. legitimacy. The second group of stakeholders comprised o f those who have great influential power but less interest in the business. 2008). As shown in the graph. should put different stakeholders into different cate gories. as could be noticed.2 Power. proper. business partners. The forth group of stakeholders compr ised of those having little power and little interest. there are several major stakeholders’ group that requires sp ecial attention.4 Future development of Stakeholders’ theories CSR theories become more and more important to current economy development in th e world. 1997). The company could put min imum effort to the group. As for Enron. companies can just keep them informed. beliefs and definitions. valu es. However. The first group would be those stakeholders with great power to in fluence the organization and also have great interest in the organization. Secondly. The future development of the theories is seemed to be heavily relied o n whether the implementation of CSR theories would decrease profit.2 Prioritisation of stakeholders 3. The future use of the theory is likely to be more important since more and more pressure are coming from different stakeholders. The moderate importan t stakeholders are those holding two attributes in the graph. 3. The g roup is referred as key players in literatures (Smith. Government normally have great power but they are o nly interested in taxation of the company. which are management team. Some might require immediate action while others might not. For this group. some of the stakeholders’ claim could be cooperative while others could be competitive. As owners of the business. Examples c ould be major suppliers and banks.2. such like shareholders whose power are giv en naturally by cooperation laws. utilitarian power means that the pow er which is based on financial or material resources (Machold.

. ethical codes are very importan t for both business as a whole and its staff’s behaviours. have any practical impact or effect in a large organisation? Use Enron as the context for your answer. would codes of conduct and core values w ork effectively? The answer is definitely no. integrity. We believe that information is meant to move and that information moves people. However. For instance. If the top management’s behaviours ar e not compliance with the requirements of the codes. a major factor that could make those ethical codes work effectively is whether the codes and core values are in compliance with the company’s real cultur e. 4. honestly and sincerely. The codes pass a message of tone fr om the top and the way that a company would like its staff to be. it is essential to make sure the codes of conduct and core values are part of a company’s culture.1 Conclusion As explained in the following sections. If the codes of conduct conflict with the company’s culture. The communication channel should be established for reporting of misconduct of the codes. 4. 4. working without integrity. If no punishment for wrong doings is in place. But. relative punishment and awards regulations should be made and implement ed. what did the staff really do? In reality. The staffs were likely to follow what leaders do in reality. The reason could be that top management has the culture of covering things up rather than communicating those transpare ntly. integ rity and excellence. Integrity: We work with customers and prospects openly. Firstly. As the primary expectation of an organization. Also. the effectiveness of the code s are likely to be reduced. procedures and so on . the codes are likely to stay only on papers. The communication channel is quite important since whis tle blowers are normally considered as betrayers in most cultures. good behaviours should be awarded accordingly. Enron had four core values: communication. those codes of conduct and core values are not expected to influ ence staff’s behaviour without proper implementations. The top management of the organization should obey the codes in their behavio urs. Ethical codes of conducts should be made for the situations that staff could face in the ir real working environment. Specifically. policies. Hidings o f liabilities together with inflating revenues are also conflict with another co re value of the company. Secondly. no body blew the whistle since most staff receives lavish bonus and stock options. Little effect could be expected. and stated core values. code of conduct and stated core values c ould have practical impact and effect in large organizations if those are well d esigned and implemented. the management kept hiding liabilities in their financial st atements and did not communicate those with auditors and shareholders.Question 4 Do codes of conduct. I present the core values briefly as follows: Communication: We have an obligation to communicate. Every staff of the organization is expected to know and comply with those codes and core value s. Excellence: We are satisfied with nothing less than the very best in everything we do. In modern world.2 Enron’s code of conduct As stated in the case.2 Explanation of code of conduct Codes of conduct are presentation of an organizations ethical expectation. the codes must be designed specifically for the organization. Three factors could determi ne if the ethical codes could help to make employee work ethically. most large companies have their own codes of conduct and core v alues. respect. Trainings of ethical codes are essential to make th e codes works. and then pass the message to employees. the codes are not likely to be effective (Jensen. principles. the first one is communication. 2002).3 Conflict between Enron’s code of conduct and the company’s real culture As stated in the core values of Enron. Respect: We treat others as we would like to be treated ourselves. In the culture of h iding truth. For analysis in the next section. The codes are normally designed by top management of organizations. 4. Thirdly. The c odes often come in the form of norms.

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