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Enron: What Caused The Ethical Collapse?: Work and The Examined Life As Saying, "I Was Fully Exposed To Not Only
Enron: What Caused The Ethical Collapse?: Work and The Examined Life As Saying, "I Was Fully Exposed To Not Only
Introduction
Kenneth Lay, former chairman and chief executive ofcer (CEO) of
Enron Corp., is quoted in Michae !ova"#s $oo" Business as a Calling:
Work and the Examined Life as sayin%, &' (as fuy exposed to not ony
e%a $ehavior $ut mora and ethica $ehavior and (hat that means
from the standpoint of eadin% or%ani)ations and peope.* 'n an
introductory statement to the revised Enron Code of Ethics issued in
+uy ,---, Lay (rote. &/s ofcers and empoyees of Enron Corp., its
su$sidiaries, and its afiated companies, (e are responsi$e for
conductin% the $usiness a0airs of the companies in accordance (ith a
appica$e a(s and in a mora and honest manner.* Lay (ent on to
indicate that the 123pa%e Enron Code of Ethics re4ected poicies
approved $y the company#s $oard of directors and that the company,
(hich en5oyed a reputation for $ein% fair and honest, (as hi%hy
respected. Enron#s ethics code aso speci6ed that &/n empoyee sha
not conduct himsef or hersef in a manner (hich directy or indirecty
(oud $e detrimenta to the $est interests of the Company or in a
manner (hich (oud $rin% to the empoyee 6nancia %ain separatey
derived as a direct consequence of his or her empoyment (ith the
Company.*
Enron#s ethics code (as $ased on respect, inte%rity,
communication, and exceence. 7hese vaues (ere descri$ed as
foo(s.
8espect. 9e treat others as (e (oud i"e to $e treated
ourseves. 9e do not toerate a$usive or disrespectfu treatment.
8uthessness, caousness and arro%ance don#t $eon% here.
'nte%rity. 9e (or" (ith customers and prospects openy, honesty
and sincerey. 9hen (e say (e (i do somethin%, (e (i do it:
(hen (e say (e cannot or (i not do somethin%, then (e (on#t
do it.
Communication. 9e have an o$i%ation to communicate. ;ere (e
ta"e the time to ta" (ith one another . . . and to isten. 9e
$eieve that information is meant to move and that information
moves peope.
Exceence. 9e are satis6ed (ith nothin% ess than the very $est
in everythin% (e do. 9e (i continue to raise the $ar for
everyone. 7he %reat fun here (i $e for a of us to discover 5ust
ho( %ood (e can reay $e.
<iven this code of conduct and Ken Lay#s professed commitment
to $usiness ethics, ho( coud Enron have coapsed so dramaticay,
%oin% from reported revenues of =>-> $iion in ,--- and
approximatey =>2- $iion durin% the 6rst three quarters of ,--> to
decarin% $an"ruptcy in ?ecem$er ,-->@ 7he ans(er to this question
seems to $e rooted in a com$ination of the faiure of top eadership, a
corporate cuture that supported unethica $ehavior, and the
compicity of the investment $an"in% community.
Enrons Top Leadership
'n the aftermath of Enron#s $an"ruptcy 6in%, numerous Enron
executives (ere char%ed (ith crimina acts, incudin% fraud, money
aunderin%, and insider tradin%. Aor exampe, Ben <isan, Enron#s
former treasurer, (as char%ed (ith t(o3do)en counts of money
aunderin%, fraud, and conspiracy. <isan ped %uity to one count of
conspiracy to commit fraud and received a prison term, three years of
post3prison supervision, and 6nancia penaties of more than => miion.
?urin% the pea ne%otiations, <isan descri$ed Enron as a &house of
cards.*
/ndre( Aasto(, +e0 C"iin%, and Ken Lay are amon% the most
nota$e top3eve executives impicated in the coapse of Enron#s
&house of cards.* /ndre( Aasto(, former Enron chief 6nancia ofcer
(CAO), faced DE counts of money aunderin%, fraud, and conspiracy in
connection (ith the improper partnerships he ran, (hich incuded a
Bra)iian po(er pant pro5ect and a !i%erian po(er pant pro5ect that
(as aided $y Merri Lynch, an investment $an"in% 6rm. Aasto( ped
%uity to one char%e of conspiracy to commit (ire fraud and one char%e
of conspiracy to commit (ire and securities fraud. ;e a%reed to a
prison term of >- years and the forfeiture of =,D.E miion. +e0 C"iin%
(as indicted on FG counts of (ire fraud, securities fraud, conspiracy,
ma"in% fase statements on 6nancia reports, and insider tradin%. Ken
Lay (as indicted on >> crimina counts of fraud and ma"in% miseadin%
statements. Both C"iin% and Lay ped not %uity and are a(aitin% tria.
7he activities of C"iin%, Aasto(, and Lay raise questions a$out
ho( cosey they adhered to the vaues of respect, inte%rity,
communication, and exceence articuated in the Enron Code of Ethics.
Before the coapse, (hen Bethany McLean, an investi%ative reporter
for Aortune ma%a)ine, (as preparin% an artice on ho( Enron made its
money, she caed Enron#s then3CEO, +e0 C"iin%, to see" cari6cation
of its &neary incomprehensi$e 6nancia statements.* C"iin% $ecame
a%itated (ith McLean#s inquiry, tod her that the ine of questionin%
(as unethica, and hun% up on McLean. Chorty thereafter /ndre(
Aasto( and t(o other "ey executives traveed to !e( Hor" City to meet
(ith McLean, ostensi$y to ans(er her questions &competey and
accuratey.*
Aasto( en%a%ed in severa activities that chaen%e the
foundationa vaues of the company#s ethics code. Aasto( tried to
concea ho( extensivey Enron (as invoved in tradin% for the simpe
reason that tradin% companies have inherenty voatie earnin%s that
aren#t re(arded in the stoc" mar"et (ith hi%h vauationsIand a hi%h
mar"et vauation (as essentia to "eepin% Enron from coapsin%.
/nother Aasto( venture (as settin% up and operatin% partnerships
caed reated party transactions to do $usiness (ith Enron. 'n the
process of ao(in% Aasto( to set and run these very ucrative private
partnerships, Enron#s $oard and top mana%ement %ave Aasto( an
exemption from the company#s ethics code.
Contrary to the federa prosecutor#s indictment of Lay, (hich
descri$es him as one of the "ey eaders and or%ani)ers of the crimina
activity and massive fraud that ead to Enron#s $an"ruptcy, Lay
maintains his innocence and ac" of "no(ed%e of (hat (as happenin%.
;e $ames virtuay a of the crimina activities on Aasto(. ;o(ever,
Cherron 9at"ins, the "ey Enron (histe$o(er, maintains that she can
provide exampes of Lay#s questiona$e decisions and actions. /s
Bethany McLean and feo( investi%ative reporter Jeter E"ind o$serve.
&Lay $ears enormous responsi$iity for the su$stance of (hat (ent
(ron% at Enron. 7he pro$ems ran (ide and deep, as did the deception
required in coverin% them up. 7he company#s cuture (as his to
shape.* Ktimatey, the actions of Enron#s eadership did not match the
company#s expressed vision and vaues.
Enrons Corporate Culture
Enron has $een descri$ed as havin% a cuture of arro%ance that ed
peope to $eieve that they coud hande increasin%y %reater ris"
(ithout encounterin% any dan%er. /ccordin% to Cherron 9at"ins,
&Enron#s unspo"en messa%e (as, LMa"e the num$ers, ma"e the
num$ers, ma"e the num$ersIif you stea, if you cheat, 5ust don#t %et
cau%ht. 'f you do, $e% for a second chance, and you# %et one.#*
Enron#s corporate cuture did itte to promote the vaues of respect
and inte%rity. 7hese vaues (ere undermined throu%h the company#s
emphasis on decentrai)ation, its empoyee performance appraisas,
and its compensation pro%ram.
Each Enron division and $usiness unit (as "ept separate from
the others, and as a resut very fe( peope in the or%ani)ation had a
&$i% picture* perspective of the company#s operations. /ccompanyin%
this emphasis on decentrai)ation (ere insufcient operationa and
6nancia contros as (e as &a distracted, hands3o0 chairman, a
compiant $oard of directors, and an impotent sta0 of accountants,
auditors, and a(yers.*
+e0 C"iin% impemented a very ri%orous and threatenin%
performance evauation process for a Enron empoyees. Kno(n as
&ran" and yan",* the annua process utii)ed peer evauations, and
each of the company#s divisions (as ar$itrariy forced to 6re the o(est
ran"in% one36fth of its empoyees. Empoyees frequenty ran"ed their
peers o(er in order to enhance their o(n positions in the company.
Enron#s compensation pan &seemed oriented to(ard enrichin%
executives rather than %eneratin% pro6ts for sharehoders* and
encoura%ed peope to $rea" rues and in4ate the vaue of contracts
even thou%h no actua cash (as %enerated. Enron#s $onus pro%ram
encoura%ed the use of non3standard accountin% practices and the
in4ated vauation of deas on the company#s $oo"s. 'ndeed, dea
in4ation $ecame (idespread (ithin the company as partnerships (ere
created soey to hide osses and avoid the consequences of o(nin% up
to pro$ems.
Complicity of the Investment Banking
Community
/ccordin% to investi%ative reporters McLean and E"ind, &One of the
most sordid aspects of the Enron scanda is the compicity of so many
hi%hy re%arded 9a Ctreet 6rms* in ena$in% Enron#s fraud as (e as
$ein% partners to it. 'ncuded amon% these 6rms (ere +.J. Mor%an,
Citi%roup, and Merri Lynch. 7his compicity occurred throu%h the use
of prepays, (hich (ere $asicay oans that Enron $oo"ed as operatin%
cash 4o(. Enron secured ne( prepays to pay o0 existin% ones and to
support rapidy expandin% investments in ne( $usinesses.
One of the reated party transactions created $y /ndre( Aasto(,
"no(n as L+M,, used a tactic (here$y it (oud ta"e &an asset o0
Enron#s handsIusuay a poor performin% asset, usuay at the end of a
quarterIand then se it $ac" to the company at a pro6t once the
quarter (as over and the Learnin%s# had $een $oo"ed.* Cuch
transactions (ere $asicay smo"e and mirrors, re4ectin% a reationship
$et(een L+M, and the $an"s (herein &Enron coud practicay puc"
earnin%s out of thin air.*
Epilogue
7he Enron Code of Ethics and its foundationa vaues of respect,
inte%rity, communication, and exceence o$viousy did itte to hep
create an ethica environment at the company. 7he fu extent and
expanation of Enron#s ethica coapse is yet to $e determined as e%a
proceedin%s continue. Aourteen other Enron empoyeesImany hi%h
eveIhave ped %uity to various char%es: >, of these are a(aitin%
sentencin%, (hie the other t(o, one of (hom is /ndre( Aasto(#s
spouse, have received prison sentences of at east one year. +uries
have convicted 6ve individuas of fraud, as (e as /rthur /ndersen,
the accountin% 6rm hired $y Enron that shared responsi$iity for the
company#s frauduent accountin% statements. 7hree of the convicted
individuas (ere Merri Lynch empoyees invoved in the !i%erian
$ar%e dea (ith Aasto(. Ken Lay and +e0 C"iin%, aon% (ith 8ichard
Causey, Enron#s former chief accountin% ofcer, are a(aitin% tria. Lay
faces >> crimina counts, C"iin% faces FG crimina counts, and Causey
faces F> crimina counts. Aive executives from Enron#s $road$and
division are aso a(aitin% tria. 7hree $an" executives from Britain (ho
had $een invoved in a compicated series of deas in a Aasto(
partnership are 6%htin% extradition. 'n addition, there are >>2
unindicted co3conspirators in the federa %overnment#s case a%ainst
Lay and C"iin%.
uestions for !iscussion
>. 9hat ed to the coapse of Enron under Lay and C"iin%@
,. ;o( did the top eadership at Enron undermine the foundationa vaues of
the Enron Code of Ethics@
F. <iven Kenneth Lay#s and +e0 C"iin%#s operatin% $eiefs and the Enron
Code of Ethics, (hat expectations re%ardin% ethica decisions and actions
shoud Enron#s empoyees reasona$y have had@
2. ;o( did Enron#s corporate cuture promote unethica decisions and
actions@
G. ;o( did the investment $an"in% community contri$ute to the ethica
coapse of Enron@
Cources
7his case (as deveoped from materia contained in the foo(in% sources.
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,--2.
Enron. ;ouston Chronice Cpecia 8eport. (?ec. >>, ,--2). ;ouston Chronice, http.MM
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