Ethics in Organizations:

Learning from Enron

January 2004

Thierry C. Pauchant, Ph.D.

 Outline
 Present-day Practices in Organizational Ethics

 The Enron Scandal

1. Economic dimension
2. Political dimension
3. Social dimension
4. Environmental dimension

 Towards an Integral Development of Ethics in

Organizations
 A Strong Trend: Integration

Examples :
 Post-modernism: de-re-construction of values
 Systems theory
 Multivariate analyses
 Multidisciplinary practices
 Globalization of markets and cultures
 Stakeholder theory, CSR
 Organizational learning, OD, cooperative strategies
 Integrated models of organizational performance
Organizational Ethics:
4 «bottom lines»
 A Strong Practice: Fragmentation

 Increased importance of return on investment

and on expected value of stock

 Primacy of financial logic: 76% of organizational

performance criteria

 “ Business ethics ”: mostly politically correct

 Fragmented ethical approach : based either on

so-called “universal principles” or on deontology
 Example of Fragmentation : Enron

 The scandalous nature of the Enron scandal:

the “financial fraud” gets most of the public’s
attention!
 The three other fields of ethics are
overshadowed : equity, dignity, viability
 Whereas the activities of Enron are
problematic in the 4 fields
Enron before December 2, 2001
 7th largest company in the USA
 +100 billion $US in revenues
 1.8 M $US in benefits announced for 5 years
 +88.6% stock price increase in 2000; -9.1% S&P 500
 “New Economy’s gem”
 1996-2001: named most innovative company by Fortune
Magazine
 2000 : CEO pictured as “the energy messiah’ by The
Economist
1. Economic Scandal:
False Profitability

 Between 1 and 2 M$ in hidden

debts
 Artificial increase of stock value
 Cooptation of Arthur Andersen
 No taxes 4 years out of 5 in the
US
 Stock option deduction : 600
million $
 Dec 2000: top executives were
paid 750 million $ in bonuses
whereas the declared net profit
was 975 million $
 2. Political Scandal:
Lack of Equity

 29 top executives : 1M $ in stock options before bankruptcy

whereas employees were forbidden to sell their options
 CEO alone : sold 67m $ worth of options
 4 500 employees were laid-off. Severance package: 13 500 $
per employee
 63% of the 21,000 employees lost all their pension plan (plan
401K)
 3. Social Scandal:
Human Rights Violations (I)
 Ex: Dabhol Power Corporation, India
 One of the few “real” assets of Enron
 65% Enron; 10% G.E; 10% Betchel; 15% India, Maharashtra province
(beginning 1992)
 Biggest gas power plant in the world
 3 M$ in investment (10% foreign investments in India 1992-2002)
 Project of 2 200 megawatts
 3. Social Scandal:
Human Rights Violations (II)
 Displacement of 2 000 people and appropriation of land
without prior notification
 Arrest of 300 pacific protestors a day, average of 8-day
detention period, without trial and with violation of human
dignity
 Demonstrators, mostly women, dragged from their
homes, and beaten (lath charge, tear gassing,
helicopters), detention, humiliation, intimidation
 …Similar, Gandhi, South Africa, 1910s…
 4. Environmental Scandal:
Ecological Abuse
 No impact study; no alternative site
 Mockery of consultation process
 Use of drinking water from population (8 300 liters /
minute) replacement of 10% of water for villages
 Pollution of rivers by used waters
 Contamination of sea-water (down-load of 13 million
liters of warm water per day)
 Destruction of plantations (mango, cashew) and
fisheries
Enron in India: an Isolated Case ? (I)

 Other countries affected by Enron : Argentina,

Brazil, Mozambique, Poland… California…
 Other companies : Shell (Nigeria), BP
(Colombia), Mobil (Indonesia), Total (Burma);
Oracle, Merck, Qwest, Xerox, Vivendi, Worldcom…
 Characteristics of international finance
 LBOs
 acceleration of IPOs
 stock options (700% increase in 10 years)
 institutional investors (50%+)
 short term value of stock as only performance
criteria… “virtual assets”
 Enron in India: an Isolated Case ? (II)

 Characteristics of “New Economy” management:

 value associated to idealized top executives; CEOs =
500 times average employee salary; bonus gone from
3$ to 64$ per 1000$ of value in 10 years; aggressive
PR; image of “responsibility ” ; only 1.5% of stock
options paid to employees; etc.
 Complicity or cooptation of social actors:
 governments (Enron financed by 7M$ public
investments : USA, Germany, UK, France, Italy,
Japan…); financial analysts; accounting and consultation
firms; business schools; business press; host
governments; etc…
 Precursory Signs (Prodomes)
 1992: rumors that the Dabohl contract signed in India was
corrupted (level of investment = 50% of the province’s
education budget)
 1993: the World Bank refuses to finance the project (cost
of energy 4 times higher than locally-produced energy)
 1995-96: the Indian government attempts to withdraw
from the project; beginning of physical violence with
assistance of police
 1997: Amnesty International report
 1997-2001: abnormal stock price growth
 1999: Human Rights Watch report
 2000: “note 16” in Enron’s financial report
 1992 – 2002: Enron : 29 allegations of corruption
 2001: resignation of VPs and CEO
 2002: report of the US House of Representatives
Response of Social Actors
to Ethical Issues
 Enron : denial; legal attack for breach of contract;
lobbying; corruption; intimidation; etc.
 Financial analysts: no investigation of allegations, nor
of “note 16”
 Accounting firms and internal audit: complicity and
cooptation
 Monitoring bodies ineffectual: SEC, FERC, board…
 Media: a few articles on tensions in India; no field
investigations, no images
 Still today: the Enron scandal: a financial scandal for
most people
Lessons to Learn from this Case

 Ethics cannot be fragmented… or fragmentation

goes against ethics
 Company governance must integrate the active
participation of all stakeholders who affect the
organization's activities or who are affected by
these activities
 And in all four domains : profitability, equity,
dignity and viability
 WE also encourage this fragmentation (Shadow)
Present-day Positive Signs

 Cleansing of financial markets

 Some companies enter stocks options into their
books as expenses : Boeing, G.E., G.M., Citigroup
 Some Enron top executives cooperate with justice
 Proliferation of new approaches and tools: ex: U.N.
Global Compact; CSR; social and environmental
accounting; OECD principles, Caux Table; etc.
 36% of CEOs more aware of integral
responsibilities (but only 10% invest in CSR)
 19% of transnational companies have disinvested
from countries where Human Rights are violated
 Alien Tort Claim Act : appeal won against Unocal
Many Questions Still Remain…

 How to bring accounting firms and financial analysts to

integrate CSR norms ?
 … guarantee that these norms represent reality ?
 … ensure company governance ?
 … make companies responsible not only towards
shareholders ?
 … “de-co-opt” media and other organizations ?
 … increase the integrity of business students and
managers ?
 … diminish the phenomenon of “ethical leveling”,
denounced by Kierkegaard in …1850 !?
Conclusion:
Ethical Development in
Organizations

Organizational ethics:
 4 fields or bottom lines = “ What ”

 4 ways or practices = “ How ”

Not only grand principles and specific

controls: the financial and accounting process
of companies are already the most structured
aspect in the business world !
 Organizational Ethics, 4 Ways (I)
Solidarity Epistemology
(the just) (the true)

3 1

EO= (Indiv. X Collect.) X (Subj. X Object.)

4 2

Esthetics Ethics
(the beautiful) (the good)
Organizational Ethics, 4 Ways (II)
But ways III and IV under-used

Objective - Rational

Individual Collective
- -
Specific Global

Subjective – A-rational
Organizational Ethics, 4 Ways (III)

3 developmental strategies:
1. Diversification 2. Inter-relations 3. Integration