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The Enron Scandal and the Neglect

of Management Integrity Capacity
Joseph A. Petrick, Wright State University
Robert F. Scherer, Cleveland State University

The nature, value, and neglect of integrity capacity by
managers and the adverse impacts that Enron executive To control fraud by focusing on only
one dimension, such as more effective
practices have had on a range of stakeholders are delin-
deterrent punishments, is like trying to
eated. An explanation is given on how moral competence put out a skyscraper fire with a garden
in management practice is addressed by each dimension hose.
of the management integrity capacity construct (process,
judgment, development, and system) and how Enron
executive practices eroded each dimension. Specifically
addressed is how behavioral and moral complexity can
be utilized to balance the competing values of manage- motives including perceived lack of effective deterrent
ment and ethics theories to reduce the likelihood of future punishment and rationalization of acceptability of illegal
Enron-like managerial malpractice. Finally, three positive activity (Albrecht and Searcy 2001). To control fraud by
action steps are recommended to improve managerial in- focusing on only one dimension, such as more effective
tegrity capacity and remedies are proposed for victimized deterrent punishments, is like trying to put out a sky-
Enron stakeholders. scraper fire with a garden hose. In addition, people harbor
myths, such as organizations cannot proactively detect or
prevent fraud, which only result in disempowered resig-
Introduction nation to the inevitability of corruption and more future
Corporate managers are expected to maximize inves- Enrons (Albrecht and Searcy 2001).
tor returns while complying with regulatory standards, The focus of this article, however, is on understand-
avoiding principal-agent conflicts of interest, and enhanc- ing the complex, interdependent moral roots that embed
ing the reputational capital of their firms (Useem 1996; the multiple motives for Enron legal malfeasance and to
Whitman 1999). The recent arrests and resignations of top provide more than a moral garden hose to address these
U.S. managers, however, indicate an increasing level of issues. Simplistic inspirational exhortations to do the right
managerial negligence and corporate irresponsibility on thing, recommendations to impulsively follow what feels
Main Street and on Wall Street that has eroded domestic comfortable at the time, window-dressing organizational
and global trust in U.S. markets (Elliott and Schroth 2002; codes of conduct, or appeals to ad hoc abstract moral
Mitchell 2002). The U.S. stock market volatility has added theories are unlikely to provide practical guidance to
to the political pressure to bring 1930s-style regulatory re- today’s managers in the responsible analysis and resolu-
form to businesses (Lorenzetti 2002). Corporate irrespon- tion of urgent moral and/or legal issues (Badaracco 1997).
sibility in the Enron scandal, for example, has provoked What is needed is an interdependent moral and legal
multiple lawsuits and unprecedented outrage from a range framework that discloses the complex roots of inappro-
of stakeholders with demands for democratizing structures priate managerial decisions and provides comprehensive
of corporate power, improving managerial accountability, practical remedies to reduce the likelihood of “Enronitis”
and legislating regulatory reform (Cruver 2002; Fusaro and future white-collar crimes. Such a structured frame-
and Miller 2002; Swartz and Watkins 2002). work and set of remedies are presented through discus-
The Enron scandal involves both illegal and unethical sion centered around the following issues: the neglect of
activity and the courts of law will determine the precise integrity capacity by managers, Enron executive practices
extent of civil and criminal liability that accrues to the that led to stakeholder harms, and recommendations for
perpetrators (Verschoor 2002; Fusaro and Miller 2002). improving managerial integrity capacity in light of the
People commit fraud, for instance, for a wide range of Enron scandal.


required Enron to kick in stock if its rating and stock price ity are likely to exhibit a coherent unity of purpose and fell below a certain point. those that exercise poor or distorted judg. people. Watkins 2002). to stem the tide of fleeing clients while negoti. Skilling and ex- illegal conduct is a vivid example of the consequences of Enron CFO Andrew S. and the full extent of collateral for reputational capital and its erosion can jeopardize damage to a wide range of Enron stakeholders is yet to be the survival and credibility of organizations and markets determined. Swartz and Watkins 2002). In effect. many corporate executives are often not held any cost all contributed to the Enron scandal. (Petrick. not be legally or ethically fixed.2 billion in fiber-optic capaci- reputational capital and engender management distrust ties and trading facilities. top stakeholders. Further. In fact. Quinn. is another dramatic example of the relocated many of its assets off the balance sheet into com- costs of integrity capacity neglect (Toffler and Reingold plex off-the-book partnerships or Special Purpose Entities 2003). collapsed and produced the second largest alignment of moral awareness. policies and principles 1999). those that never morally to telecommunication broadband capacity (Swartz and mature beyond manipulative acquisitiveness and domina. conduct that demonstrates balanced judgment. The problem with this big idea was that some SPEs Managers and organizations with high integrity capac. Enron was left holding a action in the face of accountability pressures rather than financial liability of over $5 billion in debt. What the Enron scandal. with little or no return (Fusaro and Miller ive contexts for sound moral decision making) erode their 2002). in Part 1 of the Appendix. along with specific Enron managers abandoned the basic standards of pro. 2001 Enron. ating with other “Big Five” accounting fi rms for sale of To maintain a high credit rating and raise capital. and tertiary stakeholders. broadband market collapsed. may well become legally proscribed tomorrow. the seventh largest U. deliberation. Vol. resulting in their downfall more. Enron business practices that led to major stakeholder cess integrity capacity. and other facilities owned by “asset heavy” outsiders. but the telecommunications and stakeholder wrath (Sejersted 1996). moral harms. While the definitive account of the Enron scandal is yet The spectacle of top Enron executives “pleading the Fifth” to be written. 18. it could never Many managers implicitly adopt the myth that the top generate adequate profits from energy trading in markets. First. dividual and collective capability for the repeated process corporation. business ideas that led to major problems. to cover the billion dollar mistakes (Cruver rate success and public welfare (Mokhiber and Weissman 2002). and promotes supportive committees are currently pursuing inquiries. Since fifty-one of the world’s largest economies are that aided and implemented the rush to financial growth at corporations. The problem was that Enron tried to do too tion rituals. Furthermore. In December. LLP. one of (Fusaro and Miller 2002). accountable for betrayal of multiple stakeholder interests. Thus. rising in Congressional hearings about managerial immoral and stars like former Enron CEO Jeffrey K. Brodzinski.S. It is one key intangible asset that acts as a catalyst scandal-related problems. Fastow created and implemented the neglect of individual and organizational integrity ca. By succumbing to greed in secretly exercis. is legally permissible today.S.Petrick and Scherer The Neglect of Integrity Capacity by Managers ity neglect by managers justifies the need to focus on the The neglect of managerial integrity capacity is at the guidance offered by the construct of integrity capacity in moral root of Enron’s legal and financial problems. Enron Executive Practices and Stakeholder tend to the multiple dimensions and moral antecedents of Betrayals illegal activity (Paine 1994). such as metals. processes. Second. The exposure of integrity capac. 1 . the frantic effort of Arthur Andersen. too fast. 38 Mid-American Journal of Business. which could pacity (Cruver 2002. Enron parts of its business. over thirty systems for moral decision making (Petrick and Quinn Enron-related bills have been introduced to address the 2000). enhances Fusaro and Miller 2002). and corporate bankruptcy to date in U. No. A partial identification of Enron stakeholders and the they expect aristocratic privileges without accountability business practices that betrayed their interests are provided (Kelly 2001). and those that refrain from enacting support. but morally questionable. (SPEs). Enron invested $1. Part 1 consists of sixteen stake- ing stock options and to dishonesty in falsely reporting the holder groups divided into primary stakeholders. Third. Managers and organizations with low integrity capacity another big idea was the expansion of Enron’s energy trad- (those that do not walk the talk in the process of daily ing expertise into a wide array of new commodities to spur transactions. Enron was immediately managerial decision-making (Petrick and Quinn 2000). among the big ideas Enron’s critical stakeholders whose integrity capacity and was the creation of an “asset light” company by applying reputation were shattered by their unprofessional auditing Enron’s trading and risk management skills to power plants services. it is important for managers to proactively understand and at. history (Cruver 2002. much. some key elements are clear. Scherer. management interest is always synonymous with corpo. More than ten Congressional ongoing moral development. When its stock resort to moral evasions or other forms of irresponsible and asset values began declining. Integrity capacity is the in. and Ainina 1999). vulnerable to financial overextension (Cruver 2002). character. earnings growth – everything from paper goods to metals ment in policy formulation. secondary performance reality of the fi rm to other stakeholders.

future determinations (Petrick and Quinn 1997). imprisonment and/or bankruptcy. (Board members were Bebeau. Enron top managers pressured thereby diminishing their capacity for ethical awareness Arthur Andersen to certify maximum-risk. is the capacity to engage in the critical and (Toffler and Reingold 2003). i. process integrity capacity is manifest by the routine frag- sight and restraint to top management excesses. who poorly practices. J. Rest. Citigroup. the taxpaying public incurred additional shift. already believed (Messick and Bazerman 1996). they became morally blind. standing and correcting these lapses provides a structured way to address the moral roots of current stakeholder remedies and reduce the likelihood of future Enrons. Under- all contributed to the Enron scandal. stakeholders. and eventual strategic responsiveness—for which they are able accounting practices in part to retain their lucrative held morally accountable (Cavanagh and Moberg 1999. it is clear that they were their retirement savings evaporated at the same time that not sensitive to them. furthermore. The government was also of morally acceptable business conduct.e.P. For example. Watkins 2002). processes. For their diminished capacity capitalist practices was replaced by fear of the global for balanced moral deliberation Enron managers are held export of Enron-like corporate irresponsibility and crony morally accountable (Fusaro and Miller 2002. question. Enron managers and board members. tion or constrain executive perks (Messick and Bazerman was tarnished by Enron’s aggressive market leadership 1996). lining their own pockets with diverted funds) (Brunsson Employees were deceived about the firm’s actual financial 1989. Enron top managers tout their lost millions of dollars because they were misinformed public relations images as responsible corporate citizens about the firm’s financial performance reality through while defrauding investors and employees and secretly questionable accounting practices (Lorenzetti 2002). development. Individual and institutional investors management practices (e. The Enron scandal’s adverse moral impact on the pri- mary stakeholders is evident in Part I. which destroyed their personal ual and collective moral awareness. Process Integrity Capacity and Enron ers chose stakeholder deception and short-term financial Process integrity capacity is the alignment of individ- gains for themselves. they had to stand by helplessly while ceive the relevant moral issues. and. analyzed and resolved moral conflicts of interest through ing risk to eventually cover bankruptcy collateral damage.g. policies and the result of serious lapses in the four dimensions of manage- principles that aided and implemented ment integrity capacity–process. They ter. retaliated against accusers and by an utter lack of economic democratic protections from sought information in ways that confirmed what they the massive public stakeholder harms caused by aristocrat. deaf. the second component of process ultimately lost their professional credibility and client base integrity.. and conduct on a sustained basis so that reputational all risk criminal and civil prosecution that could lead to capital results (Petrick and Quinn 2000. they multiplied the harm done to to exclude other parameters that might inhibit decisive ac- other stakeholders. No. Messick and Bazerman 1996). consulting business and. its short term financial impact. thereby mentation of managerial moral attention and behavior that further harming investor and public interests (Senate arouses stakeholder concern about the moral hypocrisy of Subcommittee 2002). The deci- and Merrill Lynch made over $200 million in fees from sion making style of the Skilling-Fastow-Kopper circle deals that helped Enron and other energy firms boost cash demonstrated a tendency to suppress all but one aspect of flow and hide debt. Swartz and Watkins 2002). A parallel process occurred comprehensive appraisal of causal factors and recognized in the legal profession when Enron managerial pressure moral options to arrive at a balanced and inclusive reason- on Vinson and Elkins to legally condone investor and able decision/resolution/policy that provides a standard for employee fraud prevailed. 18. Morgan. deliberation. condition and deprived of the freedom to diversify their While it is unlikely that Enron executives failed to per- retirement portfolios. and adequate due diligence. The need to address lapses in similarly negligent by failing to provide sufficient over. Mid-American Journal of Business. people. 1 39 . judgment. management and board members ignored whistleblower The Enron scandal also harmed secondary and tertiary feedback. by failing to exercise their own a moral decision. Narvaez. self-centered policies also ignored or trivialized the harm and ultimately America’s stature as a model of democratic caused to other stakeholders. and mute. charac- and business reputations and their social standing. Arthur Andersen won huge contracts in the short run but Moral deliberation. They appeared to be erroneously top managers cashed in on their lucrative stock options and overly confident of their initial distorted perceptions (Jacobius and Anand 2001). Petrick and Scherer These multiple stakeholder damages can be viewed as In effect. Vol. as Fastow was regarding the appropriateness of only corporations that serve the public good was violated his financial structures. the rush to financial growth at any cost and system as indicated in Part II of the Appendix. and Thoma 1999). Since top ic abuses of power that benefited a select wealthy elite. by acceding to this pressure. Sirgy 2002). Again.. and when chal- harmed because America’s political tradition of chartering lenged. Enron’s top manag. The industry’s reputation. Swartz and capitalism (Mitchell 2002.

ignoring the negative morale impacts of they created (Sennett 1998). Managers who sustain this For business leaders and their firms. neglected opportunities. and cowardice. One way to address opment characterized by the use of direct force and indi- this evasion is to enhance judgment integrity capacity. by with the program” or commanding them to comply with following the right standards (rule-oriented deontological organizational hierarchy and externally imposed regula- ethics). Managers who sustain this cal. capabilities. and system development) can be isolated. deontologi. Collective compliance is the intermediate molar do simplistic. their bad example. selfishness... virtuous character. Al. while strengthening the motivation for excellence tions. (collective integrity). (Petrick and Quinn 1997). rect manipulation to determine moral standards.Petrick and Scherer Moral character. preclude a fair picture of the financial health of the firm resulted in tragic consequences. stakeholders as a basis for determining moral standards though all four theories of ethics (teleological. is the individual and collective capacity to be ready to that cannot handle behavioral complexity (i.”). Collective commitment is the highest molar stage of (character-oriented virtue ethics). distorted ethical judgments produce poor stage of moral development characterized by the use of results in handling moral complexity (Paine 1994.. distorted managerial judgments produce manipulation (e. virtues. (1999) is the cognitive exploitation of employee retirement savings exposed the improvement of individual and collective moral reasoning cruel behavioral hypocrisy of top Enron executives (Cru. is the individual and collective carrying out of justifi- able actions on a sustained basis. greedily pursued acterized top Enron executives’ intentions discloses their short-term economic returns while manipulating the rules culpable motives and the corrupting workplace culture of their industry. the stage of collective moral development are either surveying main point is that all four theories are necessary to fully democratic majority trends or responding to the question.g. The visionless accumulation to contextual constraints. “What’s in it for me”? and “Forget the poor results in handling behavioral complexity. arrogance. eroded trust. The way Enron executives manage of force (e. self-interested regard (collective connivance) through a stage of conforming to external conventional standards (collective compliance). particularly Lay. right means. Managers that exhibit Developmental Integrity Capacity and Enron ethical conduct develop a reputation for dependability and Developmental integrity capacity according to Logsdon alignment of moral rhetoric and reality but the duplicitous and Yuthas (1997) and Rest et al. offended act ethically. externally imposed standards. and Kopper. They exhibited poor moral judgment sonal financial gain at the expense of others destroyed any when they were callously indifferent or ruthlessly hostile remnant of employee trust. “What principled system is worth multiple stakeholders’ Business leaders that overemphasize or underemphasize ongoing participation and commitment?” good results. Miller 2002). Skilling. so also others. No. rules. The overemphasis on per. lems incur the same adverse consequences as managers rity.g. participation and internalized. The lack of the litical influence. principled regard for other tion (context-oriented system development ethics). the fourth component of process integ- rity. 18. 1 . exhibiting judg. Enron executives. the third component of process integ. and building an ethically moral development characterized by the use of democratic supportive environment within and outside the organiza. Moral conduct. their corrupting abuse of power and use of po- and others with whom they interacted. individuals. and injustice that char. to a stage of post- Judgment Integrity Capacity and Enron conventional commitment to universal ethical principles Managers can attempt to evade full moral accountabil.e. analyze and resolve moral conflicts. dishonesty. According the capability of analyzing complete moral results. disrespect. Vol. stage of collective moral development are either admon- ment integrity means being held accountable for achieving ishing employees to secure peer approval by “getting good outcomes (results-oriented teleological ethics). of rapid wealth exposed the absence of leadership wisdom The narrow focus on financially elite results by Enron and the deliberate obfuscation of financial structures to executives. and context in management practices (Petrick collective moral development are either issuing threats and Quinn 2000). their suspension of organizational moral political virtue of citizenship is particularly damaging to code and elimination of extra-organizational guidelines. to Sejersted (1996) managers who sustain this stage of character. they de-humanized themselves tory rules. hypocrisy. “Get it done now or else”) or developing implicitly commits them to certain ethics theories. and finally. and exclusively exploitative relationships based on mutual just as simplistic. The greed. internal and external character cultivation (Logsdon and victimized many innocent stakeholders (Fusaro and Wood 2002). Fastow. corrupt environments). Their evasion of regula- eroded their characters. Moral reasoning moves from preconventional ver 2002). Petrick popular conformity to work processes and adherence to and Quinn 2000). ment and development is crucial to understanding how 40 Mid-American Journal of Business. and morally The literature on organizational ethical climate assess- supportive contexts when facing morally complex prob. ity by compartmentalizing and fragmenting their handling Collective connivance is a molar stage of moral devel- of management and ethics issues.

subjects. judg. Managerial system accountability today is deter. eth- disagreed and either he or other top Enron managers used ics measures in all business functions. and multiple stakeholder remedies that strengthen the Ferrell. been demonstrated to influence process and judgment dimensions of integrity capacity (Wimbush. and Ehrhart 2001). Dickson. one of the key system deci. As such it was designed integrity-directed approach entails processes for internal- and operating at the level of connivance. using campaign contributions and aggressive political lobbying to affect industry deregula- System Integrity Capacity and Enron tion. other stakeholders for top executive advantage. national groups that do likewise. 1998). ing three practices can serve as proposed remedies. Organizations that install a compliance-based system with With respect to Enron’s developmental integrity capac. Enron executives. Although both systems can be complementary. Managers can partner with industry. When external compliance threatened to restrict In addition to the intra-organizational system. Butterfield. and minimize reporting. the follow- ment. Managers can comply with and proactively foster regula- ployed. the Senate Subcommittee Report on the role of the company code violations invest in this ethical risk man- Board of Directors in Enron’s collapse concluded that agement technique to minimize potential financial losses the firm had developed a pervasive culture of deception in the event of illegal activity (LeClair et al. public. and work culture of Enron was that of a moral jungle where nonprofit organizations to enhance stakeholder relations abuse of power dominated principled economic democrat. Petrick and Quinn radar for unacceptable business conduct. rather than cultivated a morally supportive external envi- tional infrastructure and extra-organizational environment ronment (Cruver 2002). Recommendations for Improving Managerial class managers are expected to design and adhere to moral Integrity Capacity codes that ensure a supportive intra-organizational context If managers cannot afford to neglect integrity capacity (barrel) for enhancing individual (apples) process. Petrick and Scherer morally underdeveloped organizations facilitate unethi- cal and illegal activity (Trevino. and Fraedrich 1998). sions is whether to focus on a compliance-directed system or an integrity-directed system (Petrick and Quinn 2000). remedies are recommended for improving the moral Federal Sentencing Guidelines for Organizations (FSGO). These line for building a compliance-based system is the U. moral environment and enhance the prospects of stake- At the organizational level. and Markham 1997. limit liability. Whatever The fact that Enron executives engaged in illegal activities standard operating procedures were developed at the level and overrode their own organizational code of ethics with of conformance were honored only to the extent that they impunity indicated that the moral infrastructure at Enron did not infringe upon executive perks or interfere with top was too weak to constrain a culture that supported rampant executives exercising a type of feudal control over internal immoral and illegal activity. aggressive tactics to reduce organizational system needs to be shaped by managers. No. holder economic democracy. the extra- Enron corporate prerogatives. so that system integrity indicates the need for extensive reform moral performance can be realistically sustained (LeClair.S. whistleblower protection and uniform enforcement of ity. world. could warn and regulate unacceptable business conduct prove the organization’s moral infrastructure and work to (Swartz and Watkins 2002). CEO Lay used izing organizational system moral improvement through direct force to fire any possible successor with whom he regular organizational ethics needs self-assessments. For all intents and purposes. 1 41 . Their brazen undermining of improve the external organizational environment. and developmental integrity capacity. First. the dards. and benchmarked indirect force to deceive and manipulate employees and disclosures in annual audits (Petrick and Quinn 2001). 18. ee and community input could shape strategic direction or fraud-detection professional association accounting stan- restrain executive perks. The (Senate Subcommittee 2002). resources of managers. Unlike other business scandals to provide a supportive context for sound moral decision that involved managers who ran beneath the government making (Driscoll and Hoffman 2000. Vol. focusing on ruthless means to extend market leadership. it was a moral powder keg ready to explode. the more aware managers Mid-American Journal of Business. corrupted System integrity capacity is the alignment of organiza. The extent and degree to which illegal non-com. as an important management strategic asset. in an economically democratic manner rather than only ic norms. Enron did not reach the commitment level. Shepard. The weak to constrain a culture that supported ethical climate of organizations at different levels has rampant immoral and illegal activity. Grojean. and McCabe …the moral infrastructure at Enron was too 1998. Smith. Enron executives 2000). worked to eliminate any government radar stations that mined by the extent to which leaders continually im. or eliminate regulatory standards were routinely em. Barnett and Varcys 2000). harsher penalties for white-collar criminals and tougher. tory standards to eliminate or control corruption outside pliance was the cultural norm at Enron will be determined the organization and support those domestic and inter- in the courts. One guide. Managers can support it never democratized its power structures so that employ.

means of a hierarchic power structure. Third. Specifically. 1989. 2002. T. It is just this broader Enron-like disasters will not occur in the future. Brunsson. social. balanced integration of management holder economic democracy in corporate governance. The organization of hypocrisy: Talk. The transpar. create a system more conducive to system integrity Research in ethical issues in organizations. glect (Petrick and Quinn 2001). Finally. Thus. character. New York: Carroll and Graff. executive practices eroded each dimension. Pava and P. Boston: Harvard Busi- ness School Press. and system) and how Enron for example. Practice I: Provide education for managers to in.S.S. accounting and The nature. was discussed how behavioral and moral complexity can mental performance of the Royal Dutch/Shell Group of be addressed through balancing the competing values of Companies.Petrick and Scherer and other stakeholders are of the nature and importance and democratic participation in corporate governance of integrity capacity as a strategic asset. and C. and environmental Badaracco. deci- expanding the scope of managerial fiduciary duty to all sions. The virtue of courage means of an economic democratic power structure would within the organization. Searcy. 1 . An explanation was provided about how moral tralasia to generate auditing and reporting mechanisms competence in management practice is addressed by each that are responsive to changing patterns of stakeholder dimension of management integrity capacity (process. While it is impossible to guarantee that capital of the manager and the firm. delineated. and actions in organizations. in addition to reformed U. and context. It is this formal recognition of employee and com. n asset. Journal of Business Ethics ment is the legal maximization of investor profits by 27(4):351-362). Conclusion Second. nance. ry duties to include institutionalized stakeholder rules. action steps to improve managerial integrity capacity and ships around core financial. proposed remedies for victimized Enron stakeholders were values enhances the moral credibility and reputational recommended. References Albrecht. Primeaux. the social and environmen. 1999. New York: John Wiley. The moderating effect of indi- rity improvement is the uncritical acceptance of the belief viduals’ perceptions of ethical work climate on ethical judg- that the exclusive fiduciary duty of corporate manage. 2001). three positive ency of this process of deepening stakeholder relation. On the contrary. countability for developing judgment integrity by balancing management and ethics competencies. Petrick and Quinn JAI Press. ron-like managerial malpractice. This report compre. as well as non-financial. Translated by Nancy Adler. No. managers can hold themselves and other stakeholders accountable for principled decisions Practice III: Expand the scope of managerial fiducia- that inclusively and systematically address moral results. Top 10 reasons why fraud is opment. Practice I deals with democratic participation in corporate gover- managerial and organizational learning.. to corporate wealth an Enron insider. Barnett. especially employees and community. W. is available online. documents (Mokhiber and Weissman 1999. Strategic Finance 82(11):58-61. and D. J. Stamford. Practice II is based on accountability. In M. 42 Mid-American Journal of Business. and Aus. G. Vol. and ethical decision making within the organization. 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S. 1 . No. Huge financial losses for institutional and individual transparent. Vol. employee whistleblower ignored executives were allowed to sell shares for profit Employees Violation of freedom to diversify retirement funds Ignored fellow employee whistleblowing and turned a Lifetime pensions lost blind eye to malfeasance while the value of their retirement Injustice occurred due to disproportional harm inflicted portfolios rose on loyal employees Disrespect for the contribution of labor to firm success Risks increase in violence to redress grievances or secure Used campaign contributions and lobbying influence to remedies from lower socioeconomic groups enable government deregulation. Price gouging that unfairly deprived West Coast and Customers traded resources which led to loss of customer loyalty other customers of market alternatives Knew about and could have prevented risky financial practices but did nothing Abdicated substantive corporate oversight responsibilities Eroded respect for corporate board governance with pos- and provided ineffective audit control and ethics system sible exposure to criminal and civil litigation coordination Board of Directors Lack of majority of independent directors who exercised Devalued the important role of corporate oversight and capable oversight of auditing processes economic democratic participation in corporate gover- nance Did not democratize structures of power but primarily rubber- stamped executive hierarchy decisions Acquiesced to managerial malfeasance that injured all Participated in interlocking Board of Directors’ activities and stakeholders remained relatively silent about executive accountability Secondary Stakeholders Enron Business Practices Major Stakeholder Moral Harms Caving into pressures out of fear of losing consulting business Pressuring Arthur Andersen. and became a moral Even well-intentioned employees were inhibited from cesspool doing the right thing Hid debt and falsely enhanced profits through secret. and facilitating managerial and concern for the public good Public Accounts fraud Becoming an accomplice in the obstruction of justice by document shredding (Part I continued on following page) 44 Mid-American Journal of Business. off-the-book partnerships or Special Purpose investors Investors Entities (SPEs) Loss of individual investor trust in the stock market Institutional investors passively accepted the Enron investor Loss of foreign capital credibility in U.Petrick and Scherer Appendix – Integrity Capacity Part I: The Case of Enron: Moral Harm and Prevention Remedies Primary Stakeholders Enron Business Practices Major Stakeholder Moral Harms Dishonestly concealed debt and overstated earnings Character erosion due to vices of dishonesty. LLP to use questionable account- External Auditing Collapse of professional character trait of independence ing practices exacerbating auditor conflicts of interest. hypocrisy. and while other primary critical stakeholders later suffered due indifference to nondisclosure of accurate performance results Top Management Loss of business and social standing Limited fiduciary duty to increasing wealth of investors Risk fines. limited liability. and minimal reporting requirements that abetted stakeholder victimization Eroded public trust in government protection from busi- Government ness abuse of power Unfair enablement of powerful private interests over the public interest Eroded credibility of regulatory standards and their enforcement Charged higher prices due to near monopoly control of energy. condon- Services by Certified ing of off-balance sheet financing. bankruptcy and imprisonment Created and sustained a work culture that rewarded financial results at any cost. selfishness. 18. Abused power to gain wealth through advanced sale of stock arrogance. cowardice. pushed moral limits. greed. markets due to relations “story” crony capitalism Violation of moral right to accurate and timely stock information Required that employees buy and hold Enron shares in Devalued economic democratic participation in corporate retirement savings accounts to sustain losses while top governance. non.

bankruptcy and/or hostile ing of off-balance sheet financing. finan- cial markets due to perception of crony capitalism Abrupt loss of jobs and retirement savings lead to broken families and enduring social ills Tormented former corporate vice chairman commits sui- Community Community relations policy led to destruction of social capital cide to add to family and social losses and Society through bankruptcy. role in corporate governance Being disrespectfully manipulated into becoming an ac- complice to a violation of market and public trust Loss of business reputation for inadequate due diligence Pressured financial suppliers like Citigroup. Morgan Increased risk of future civil litigation Chase. especially employee. layoffs. and facilitating managerial Public Accounts fraud takeover Being disrespectfully manipulated into becoming an ac- complice to a violation of market and public trust Provoke creation of government board to oversee cor- porate audits and discipline auditors in the accounting profession Collapse of professional character trait of independence and concern for the public good Caving into pressures out of fear of losing business Loss of professional service reputation through violation External Legal Pressuring Vinson and Elkins to use questionable legal of client contractual moral right to accurate and timely Services by Members practices exacerbating the legal condoning of investor professional legal services of the Bar and employee fraud and loss of firm reputational capital Delegitimizes stakeholder. and abuse of top management Externalizes the costs of emotional. condon- Services by Certified Risk of demise of the firm. social. J.S. LLP to use questionable account. Loss of professional service reputation and credibility ing practices exacerbating auditor conflicts of interest. accounting practices. and executive abuse semination of business corruption of power (Part I continued on following page) Mid-American Journal of Business. and health power damages onto society Erosion of community trust and expansion of community cynical resentment Tertiary Stakeholders Enron Business Practices Major Stakeholder Moral Harms Aggressive promotion of private business interests that ignore Risk of tax increases and/or existing public resources allo- Taxpaying Public the public interest and concerns about appropriate government cated to picking up the pieces of industry sector negligence regulation to protect the public and shifted risk for taxpayers and malfeasance to cover bankruptcy collateral damage Media relations policy of systematic deception regarding the Erosion of media credibility in early detection and dis- Media financial condition. disproportionate harm to trusting creditors and suppliers Deceived credit rating agencies about reality of firm financial Caving into pressures out of fear of lost business performance Eroded credibility of credit rating agencies and U. Petrick and Scherer Appendix – Integrity Capacity Part I: The Case of Enron: Moral Harm and Prevention Remedies (continued) Primary Stakeholders Enron Business Practices Major Stakeholder Moral Harms Persisting in conflicts of interest in auditing and consulting services that harm public trust Risk limitations on auditors' consulting work Loss of current and future clients External Auditing Pressuring Arthur Andersen. and Merrill Lynch to boost cash flow and hide debt to Creditors/Suppliers deceive others about Enron's creditworthiness Unjust. 1 45 . 18. No. Vol.P.

Engendered fear that crony capitalism and Enron-type corporate managers to contribute to a better world where growth Global Citizens irresponsibility will be America’s newest and most powerful and equity should prevail export imposed on them under the rhetoric of free trade and globalization Loss of funds by volatile stock markets Part II: Dimensions and Components of Integrity Capacity Dimensions of Integrity Capacity Components of Each Dimension of Integrity Capacity Process Integrity Capacity Process Components: • Awareness • Deliberation • Character • Conduct Judgment Integrity Capacity Judgment Components: • Teleological ethics (results) • Deontological ethics (rule) • Virtue ethics (character) • System development ethics (context) Developmental Integrity Capacity Developmental Components: • Connivance • Compliance • Commitment System Integrity Capacity System Components: • Intra-organizational compliance-directed system • Intra-organizational integrity-directed system • Extra-organizational system improvement 46 Mid-American Journal of Business. and legal professional standards Increased insurance costs to cover business and profes- sional liabilities Inadequate professional leadership in designing new economic democracy structures of organizational power and governance Reckless focus on short-term executive self-interest ignored Bankruptcy caused loss of philanthropic donations NGOs interests of non-profit organizations for improvements in mana- gerial accountability and the need for special contributions to Widespread victimization of innocent parties the general welfare of humans and nature Eroded global trust in deregulated markets and U. No. finance.S. and executive abuse dissemination of business corruption of power Forced law-abiding competition out of the industry Engaged in questionable industry tactics based on unconstrained entrepreneurial zeal to achieve and sustain industry market Withholding critical censure and trying to prevent gov- Industry Groups ernment remedies by aggressive. accounting practices. Vol. 18. business and professional practices Inadequate professional leadership in developing uniform accounting. and legal standards and Professional Ignored or trivialized compliance with managerial. accounting.Petrick and Scherer Appendix – Integrity Capacity Part I: The Case of Enron: Moral Harm and Prevention Remedies (continued) Tertiary Stakeholders Enron Business Practices Major Stakeholder Moral Harms Media relations policy of systematic deception regarding the Erosion of media credibility in early detection and Media financial condition. practices Associations financial.S. self-serving practices leadership Tainted the reputation of the entire industry Eroded professional and public respect for U. 1 .

No. 18. especially employees and community • Public acknowledgement of moral guilt and redistribution of executive retention bonuses to Enron ex-employees Top Management • Integrity capacity selection screening and ongoing education • Have Ethics Officer report directly to top management • Require CEOs and CFOs to certify accuracy of financial reports • Prohibit executives from selling company stock during blackout periods • Require all insiders to report all company stock trades within two days • Require top managers to forfeit profits and bonuses when earnings are restated due to securities fraud • Prevent officials facing fraud judgments from using bankruptcy to escape liability • Raise the maximum penalty for securities fraud to 25 years • Increase CEO and CFO penalties for false statements to SEC or failing to certify financial reports to a $5 million fine and 20-year prison term • Raise maximum penalties for mail and/or wire fraud to 20 years and to 10 years for defrauding pension funds • Improved accounting and financial reporting standards to increase transparency and accountability • Require shareholder approval of option plans Investors • Restrictions on SPEs and other off-the-book partnerships • Integrity capacity ongoing training • Lengthen statue of limitations on securities fraud to five years or two years from discovery • Direct civil penalties from SEC enforcement authorities to accounts that benefit investors victimized by securities fraud • Increase employee control over pension retirement funds allowing for increased and timely diversification • Increase the security of company-sponsored retirement savings plans and increase tax advantages for employee ownership of firms • Increase democratization processes at work that require employees to have timely access to accurate financial information that affects pension decisions • Improve education programs to inform employees about investment principles and practices • Increase democratization processes at work that require employees to have a vote in Board deliberations and in all major Employees strategic decisions • Integrity capacity selection screening and ongoing training • Increase formal recognition and inclusion of the asset value of employee human capital in all accounting and financial reporting documents • Broaden ability of whistleblowers to sue and prove retaliation against employers • Increase any severance payments • Challenge the executive retention bonuses and obtain employee redistribution of funds under laws governing fraudulent conveyance. i. those who face more than one criminal conviction or civil judgment in three years. Vol. Petrick and Scherer Appendix – Integrity Capacity Part III: Victimized Enron Stakeholders and Proposed Remedies Victimized Enron Stakeholders Proposed Remedies • Resignation from Enron • Fine and imprison executives who lie to SEC and egregiously harm investors • Make easier criminal prosecution of executives who destroy evidence or defraud investors and lengthen maximum jail terms • Ban personal loans to top executives of public companies • Expansion of fiduciary duty to stakeholders. 1 47 . the transfer of assets by a company without valid consideration being paid • Boost SEC and DOJ budgets significantly • Meaningful campaign finance reform • Expand budget and enforcement of U. Federal Sentencing guidelines for organizational misconduct • Enact stakeholders statutes rather than stockholder statutes to give boards the leeway to legally value employees and the community in strategic oversight decisions • Closer oversight of corporate political lobbying and accounting practices Government • Expansion of corporate charter revocation powers for egregious corporate harm done to the public good • Full disclosure of business-government closed-door agreements regarding public resources • Expand SEC rule-making power on financial analyst conflict of interest • Further restrictions on business-government revolving door influence positions • Integrity capacity selection screening and ongoing training • Bar law-breaking companies. from government contracts • Fully enact and enforce the Sarbanes-Oxley Act • Increased protection from energy price gouging Customers • Integrity capacity training (Part III continued on following page) Mid-American Journal of Business..S.e.

Vol. altering.S. 1 . or fabricating records in federal investigations on any scheme to de- Certified fraud investors Public Accountants • Improve document shredding policy to preclude obstruction-of-justice charges • Overhaul of accounting industry peer review procedures that appear to be ineffective • Exposure to criminal and civil litigation • Exposure to professional standards censure • Integrity capacity selection screening and ongoing training • Support the creation of a national and international Corporate Accountability Commission. especially relating to attorney-client relations External • Exposure to professional standards censure Legal Services by • Legal expansion of executive fiduciary duty to include employee and community stakeholders Members of the Bar • Exposure to criminal and civil litigation • Integrity capacity selection screening and ongoing training • Reform of practices and standards for determining creditworthiness • Reform of financial analyst conflict of interest Creditors/Suppliers • Exposure to professional standards censure • Exposure to criminal and civil litigation • Integrity capacity selection screening and ongoing training • Prohibit investment firms from retaliation against analysts who criticize clients of the firm • Enhance and render explicit standards for corporate citizenship • Require social and environmental audit Community • Practical guidance on how a corporation can become a “neighbor of choice” in a community and Society • Identify stakeholder communities of interest and use benchmarks to document responsiveness improvements • Integrity capacity ongoing training • Tighten standards for corporate bankruptcy so that managerial irresponsibility will entail stiffer financial costs • Pressure political representatives to serve the public interest rather than cater to corporate special interests Taxpaying Public • Demand meaningful campaign finance reform • Demand increased appropriate government regulation of industry and professional service practices • Specify restrictions on corporate welfare • Integrity capacity ongoing training • Engage in more independent investigative reporting for the public rather than serving as another form of corporate public relations Media • Strengthen business investigative resources • Integrity capacity selection screening and ongoing training (Part III continued on following page) 48 Mid-American Journal of Business. No. 18. which assigns auditors and pays them from fees assessed on companies and expands reporting requirements beyond stockholders needs to encompass data needed by other stakeholders • Complete reform of conflict of interest standards. especially relating to auditing and consulting services • Require preservation of key financial audit documents and e-mail for five years and create a 10-year felony for destroying such documents • Require accounting firms to rotate lead or reviewing partners from client assignments every five years External Auditing • Prohibit auditors from offering certain types of consulting services Services by • Create a new 20-year crime for destroying. Federal Sentencing guide- lines • Ensure that a company’s code of conduct never be waived in policy and strategy decision making • Exposure to criminal and civil litigation by incompetent board members who neglect both investor and public interests • Integrity capacity selection screening and ongoing training • Legally limit the practice of interlocking Boards of Directors • Complete reform of conflict of interest standards.S. organization have an operating compliance system in place that meets U.Petrick and Scherer Appendix – Integrity Capacity Part III: Victimized Enron Stakeholders and Proposed Remedies (continued) Victimized Enron Stakeholders Proposed Remedies • Increased independence and responsible oversight over executive decisions • Ensure that top executive fiduciary duty extends beyond investors to stakeholder enhancement • Increase diversity of board membership • Ensure that top management’s commitment to ethical behavior is backed up with a comprehensive values-directed ethical system Board of Directors • Require that any U.

S. Vol. and nonprofit partnerships to facilitate growth in integrity capacity domestically and globally • Form alliances with like-minded NGOs to strengthen the voice of reform regarding current costs of corporate management NGOs irresponsibility. Federal Sentenc- Associations ing guidelines so that professionalism can flourish • Integrity capacity ongoing training • Form public. 1 49 .S. private. Federal Sentencing guidelines • Integrity capacity ongoing training • Clarify and enforce existing professional standards and create new standards for acceptable professional conduct • Exert professional censure on irresponsible professionals and corporations Professional • Recommend that organizations have an operating integrity system in place that meets and exceeds the U. No. Petrick and Scherer Appendix – Integrity Capacity Part III: Victimized Enron Stakeholders and Proposed Remedies (continued) Victimized Enron Stakeholders Proposed Remedies • Clarify and enforce existing industry standards and create new standards for acceptable business conduct • Exert informal peer pressure on maverick corporations to abide by legal and industry standards to avoid undue Industry Groups government regulation • Recommend that industry organizational members have an operating compliance system in place that meets U. 18. which are being externalized onto an unsuspecting public • Integrity capacity ongoing training • Use information technology resources to identify and disseminate facts regarding corporate irresponsibility • Use international institutions to voice expectations and develop standards regarding responsible global corporate Global Citizens conduct • Integrity capacity ongoing training Mid-American Journal of Business.