Running head: Harvard Business Review Case Study - CORPORATE SCANDALS 1

HBR Case- Corporate Scandals

Okusolubo Gbenga Samuel

Student ID: 551695

Central Penn College

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Abstract

The case "Jeffrey Skilling, Bernie Madoff & the Other Smartest Guys in the Room"

presents two micro cases that describe some critical situations associated with the bankruptcies

of Enron and Bernard L. Madoff Investment Securities in 2001 and 2008, respectively. The first

micro case focuses on factors affecting the behavior of Arthur Andersen's managers and

employees in the Enron scandal, while the second micro case describes variables leading the

SEC to fail in identifying the illegal conduct of Bernie Madoff.

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Introduction

Motivation and promoting the company is the basic aim of Enron. The main aim of the

organization is to be of the world largest and well known energy company in the world. Enron

look like to be able to completing their mission and build a huge amount of assets. The company

had strong control over the organizational management, leadership style, and production which

gave them a big opportunity for uprising in late 1990’s. The company maintained its name and

looks like they can do nothing wrong.

Overview of the Company

Enron Corporation (former New York Stock Exchange ticker symbol ENE) was an

American energy, commodities, and Services Company based in Houston, Texas. It was founded

in 1985 as the result of a merger between Houston Natural Gas and InterNorth, both relatively

small regional companies in U.S. Before its bankruptcy on December 2, 2001, Enron employed

approximately 20,000 staff and was one of the world's major electricity, natural gas,

communications and pulp and paper companies, with claimed revenues of nearly $111 billion

during 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive

years. Almost immediately after the relocation to Houston, Enron began selling major assets

such as its chemicals division, Northern PetroChemicals, accepted silent partners in Enron

CoGeneration, Northern Border Pipeline and Transwestern Pipeline, and became a less

diversified company.[citation needed] Early financial analysts said Enron was accumulating

great debt and the sale of major operations would not solve the problem.

Enron was created in 1986 from a merger of Houston National Gas and InterNorth (a natural gas

pipeline company) with Ken Lay as its chair and CEO (Stein & Pinto, 2011). In 1988, the
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deregulation of electrical power markets took effect, and Enron transformed from a traditional

natural gas energy company focused on energy delivery through gas pipelines to an energy

broker company that brought buyers and sellers together (Sims & Brinkmann, 2003). Enron

transformed into a high-tech global enterprise that diversified into trading energy, water, weather

derivatives, broadband and electricity.

Leadership Style in Enron Case- Charismatic Leadership

Enron was led by charismatic leaders Ken Lay as well as Jeff Skilling who was said to

have “radiated so much charisma that he induced blind obedience in his followers” (Khurana,

2002). Charisma is a sought-after quality among corporate leaders (Khurana, 2002) and one that

has been correlated with leadership effectiveness (Hoffman, Woehr, Maldagen-Youngjohn, &

Lyons, 2011), but when overdeveloped, charisma is a quality that can lead to the dark side of

leadership. As charismatic leaders, Lay and Skilling had a clear and compelling vision for the

organization and were skilled in communicating their compelling vision of Enron and its culture

to all stakeholders—employees, shareholders, the media and the public—that the company was

“the most innovative culture in America” (Murphy & Ensher, 2008).

Charismatic leaders are also characterized as having heightened sense to the

environmental context of the organization and the ability to scan for environment for trends that

might require them to change their vision (Murphy & Ensher, 2008). Ken Lay, for example, was

acutely aware of the regulatory context of the business and believed that energy markets should

be deregulated and lobbied tirelessly for change on Capitol Hill. The power of deregulation gave

rise to new business opportunities for Enron. However, Lay also had sensitivity to the nature of

politics and the need to maintain relationships with politicians and became the largest contributor
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to the George W. Bush campaign. Lay, Skilling and other top leaders such as Andy Fastow, also

demonstrated risk-taking and deviation from the status quo, a characteristic found in charismatic

leaders (Murphy & Ensher, 2008). Fastow was the creator of hundreds of special purpose entities

—risky investments named after Star War’s characters that were designed to transfer Enron’s

debt outside of the company and get it off the books (Saporito, 2002; Schwartz & Watkins,

2004). Charismatic leaders can bring much strength to their organizations, but this same

characteristic has also been defined as a “key ingredients of cultic dynamics” in Enron leadership

(Tourish, & Vatcha, 2005). Charismatic leaders may have a self-schema that reflects a propensity

toward authoritarian control (Murphy & Ensher, 2008), a defining characteristic Enron’s top

leadership.

The Culture of Enron

Enron’s leadership used its charisma to craft a strong organizational culture which was

both an extraordinary corporate and managerial success, and at the same time, a weakness that

eventually led to the company’s downfall. A cultural paradigm is a schematic which captures the

underlying assumptions on which a corporate culture is based. Figure 3 describes Enron’s

paradigm and serves as a basis for explaining the cultural artifacts that have emerged as the result

of these underlying values and assumptions (Schein, 1990). Enron’s leadership developed a set

of very clear cultural values that were explicitly and repeatedly communicated to employees and

guided their actions. Enron valued innovation, creativity, change and adaptability, and

competitive dominance of the marketplace—and the company richly rewarded employees who

achieved these objectives. The deregulation of the energy market was a “critical incident” that
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shaped Enron’s culture because the company was no longer bound by the regulations that

directed traditional gas pipeline companies; Enron was now able to exercise creativity in

diversifying into an energy trading company (Schein, 1990; Sims & Brinkmann, 2003). This

creative vision enabled Enron to embrace change and adapt to the marketplace in transforming

from a traditional energy company to one that diversified into brokering energy, broadband

services, electricity and weather derivatives (Gibney, 2005).

SWOT Facts: Strengths

Marketing and value delivery:

Enron did not become overnight an energy giant serving multitude of customers. Its

success comes as a result of marketing and value delivery. Marketing helps Enron to identify and

meet customer’s needs. In a hypercompetitive economy with increasingly rational buyers faced

with abundant choices, a company can win only by fine-tuning the value delivery process and

choosing, providing and communicating superior vales.

Another strength displayed Enron is that it gave awareness to it entire customers which

also cause its name as brand. Enron was ranked as seventh among 500 companies, Enron display

reliability as the biggest natural gas pipeline system company that operates in the United State.

Along with the with the energy level supply, the company also has advantage by keeping the

price reasonable and the service which they provide.

Weaknesses

Failed board of Directors:

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The question raised by the general public when the Enron saga started was where the

board of Directors was and how come they did not see mess coming. Probably, they are more

interested in the task and satisfied with the profit. Nevertheless, board of directors bears the big

responsibilities for not doing correctly their oversight. The board of directors failed to carry out

proper monitoring by acting through the committee, evaluate and influence, initiate and

determine the idea and best decision that suites the organization.

Conflict of Interest:

Even though at the time of Enron’s collapse the Sarbanes-Oxley Act was enacted yet, the

Internal Revenue Service require corporation to adhered to the Conflict of Interest Policy to

avoid wrong doing that can get it off the path. For any organization to be healthy and productive,

it needs to be strong in four core areas namely; (a) financial capital in terms of investments and

profits, (b) technological capital in terms of cutting-edge software and hardware, (c) human

capital in terms of knowledge, expertise and creativity, (d) social-spiritual capital in terms of

ethics, relationship, morals, meaning and purpose

Unethical Practices:

Hearing and reports indicate that Enron kept accounting documents hidden and well

manipulated with complicity of its auditing company. Enron unethical practices in particular has

become infamous for the questionable actions of its top executives in the form (1) off-balance

sheet partnerships used to hide the company’s deteriorating finances, (2) revenue from long-term

contracts being spread over multiple years, (3) financial reports being falsified to inflate

executive bonuses, and (4) manipulation of electricity market –leading to California energy

crisis. If one will pinpoint the major cause of Enron downfall, it will be its unethical practices.
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Enron Opportunities

 The main opportunity which Enron has is its name and brand

 One of the good point of Enron has that it’s know is well known in the market as energy

provider.

 Enron can take many advantages for expanding their products as they are the main

supplier of gas pipeline and many other materials goods related to it.

 In 1970’s deregulation of energy occurs in the market which allow Enron to rise and start

business in the market.

Conclusion

The HBR analysis performed on this case study helped to identify, among many, the

strengths, weaknesses, opportunities, and ethical culture of Enron. The analysis provide external

and internal factor the company had to deal with , the important question is to determine what led

to the collapse of an apparently wealthy company like Enron.

Despite Enron’s thorough ethics policy, a massive financial scandal took place that could

have been prevented by encouraging whistle-blowing throughout the organization. The auditing

system that the company had in place failed to serve its purpose in the detection of fraudulent

activity which shows a need for more comprehensive accountability. An organization is not an

individual but a collection of individuals working towards a common goal. Because of this,

companies need transparency as well as the means at all levels to be able to report unethical

activity on behalf of any held position regardless of hierarchical status. A company’s ethics

program should not be assessed based solely on how it looks on paper, but rather how it is
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integrated into the culture of the organization and the amount of transparency and ethical

autonomy that is granted at all positional levels of the company.

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