Scott Loyer

Enron and Ethics

Since the creation of the corporation our world has gone under many profound changes that human civilization has never seen. Many people have many perceptions about corporations including but not limited to: corporations are evil, corporations are good, and corporations are neutral. These attitudes and beliefs towards corporations however are usually misleading because they do not get at the root of the corporation. A corporation is just a legal structure in which to conduct business in so a corporation inherently cannot have any of these human characteristics. What makes and defines a corporation is their management whose values and ethics guide a company. Like many things in this universe the values of senior management can be a double edged sword creating or destroying a company. Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. (Enron, 2012) It was one of the largest energy companies in the United States and led the way in how energy companies ran after the deregulation of the energy markets by the United States. Between the years of 1995 and 2001 Fortune magazine named Enron ³America¶s Most Innovative Company.´(Enron, 2012) Everything seemed to be going in favor of Enron up until this point with record profits, ³effective management´, great pensions for workers, and happy investors. Then in 2001 many financial analyst began questioning how was Enron¶s stock price trading over fifty times its value. (Mclean, 2001) She pointed out how analysts and investors did not know exactly how Enron was earning its income. McLean was first drawn to the company's situation after an analyst suggested she view the company's 10-K report, where she found "strange transactions", "erratic cash flow", and "huge debt." (Kurtz, 2002) This was the beginning of the end for Enron because by the end of the year December 2nd 2001 Enron filed for bankruptcy. Everyone knows the ending of this story but the question is why did it happen in

this manipulation. During this the late 1990¶s and early 2000¶s many CEO¶s were making short term record profits while hiding liabilities which in turn caused their companies stock prices to skyrocket. Before the Sarbanes Oxley act CEO¶s were not held responsible for the company¶s financial facts and figures which posed a real serious ethical issue.´ (Perel. The reason for this is because the CEO¶s bonuses were based upon the benchmarks set by the Board of Directors which included how much profit the company made that year through the CEO¶s efforts. Tyco and the company in question Enron. the actions of Enron's CEO and other executives in manipulating company earnings to increase the firm's stock price. One of the biggest concerning the time period before the Sarbanes Oxley Act of 2004 was senior management compensation.the first place? To get to the heart of the problem one must look to the management practices of Enron at that time and see the ethical issues that attributed to the downfall of Enron. compensation committee members were completely oblivious to both the potential for. and fact of. As one can see this didn¶t turn out so well because the United States experienced some of the biggest bankruptcies it has ever seen which included companies like WorldCom. In addition. 2003) Overcompensation of senior management was not the only ethical issue that led to the collapse of Enron. Senior management¶s attitudes in running the company played a large part in . A perfect example of overcompensation of CEOs in the Enron case is ³the company's payout of $750 million in cash bonuses in 2002 for a year in which net income totaled only $975 million showed a clear disregard for stockholder interests. Allegedly. In our free market society the Board of Directors who is elected by the shareholders has the ability to set bonuses for performances of the companies CEO¶s. demonstrated the fallacy behind the theory of stock options as a motivator for executive performance. and thereby vastly increase the value of their stock options.

2011) they were reaping with their close financial connections and using Enron to achieve those personal goals. (Mokhiber.´ . senior management attitudes and conflicts of interest Enron was ready ripe for the last scheme it would see. They would make sure the books did not show any significant liabilities or write ±offs and that Enron was worthy of ³investment grade credit. 2003) Senior executives had no problem turning a blind eye to the blatant conflicts of interest (Lawrence & Weber. With unintended bonus compensation.´ This obvious disregard for standards by management shows how they have an ego-centered reasoning for their decision.´ (Perel. not subliminal. (Lawrence and Weber. Enron's board of directors and CEO made a mockery of the code of conduct. which increased from approximately $30 per share in early 1998 to over $80 per share in January 2001. 2011) ³The close business and other ties Enron board members had with the company represented clear conflicts of interest. From the perspective of the directors concerned. and artificially stemming the decline of the stock during the first three quarters of 2001. Enron had a code of code of conduct in place for various ethical issues that arose but senior executives had a blatant disregard for their own company policies. In waiving key clauses to allow senior staff to pursue the specific financial deals that were to benefit them handsomely.Enron¶s fall. 2004) ³It had the effect of artificially inflating Enron's stock price. According to Perel ³the CEO or the board of directors could waive its terms and enforcement.´ Making sure Enron looked like it had consistent cash flow and a number of successful business units were key to this scheme. this conflict was overt and transparent. yet the board accepted the situation with apparent equanimity. CEO¶s Skilling and Lay designed a scheme in which they would make Enron look like they were growing at a healthy rate always in line with analyst predictions.

2004) With the inflation of the stock price major shareholders secretly pulled out their shares while telling the public everything is ok and the rest they say is history. Yes Enron¶s collapse did result in almost $11 billion loss its shareholders but once again one should not blame the corporation itself but instead the actions of its senior management. The fact that they developed this scheme to prop up its books and extract as much profit as possible was only the effect of the attitudes and values of the senior executives at Enron. . or just the attitudes of senior executives it will eventually lead ethical concerns. conflicts of interest. Having an environment in which corruption is systemic and values are thrown out will eventually lead to the collapse of any company. Enron was doomed since the early 1990¶s when these ethical concerns came into the culture of the company.(Mokhiber. Whether it is overcompensation for wrong incentives.

8-9. M. R. (2011). An ethical perspective on CEO compensation. Howard (2002-01-18).edu/login?url=http://search. Public Policy. J. 381. Business and Society: Stakeholders. Ethics. A.391. Mokhiber. Archived from the original on 2010-10-17. Journal of Business Ethics.proquest. & Weber. Retrieved from http://ezproxy. "The Enron Story That Waited To Be Told".com/docview/208861218 ?accountid=108 Perel. Fortune (CNNMoney.proquest. 25(7).rit. Bethany (2001-03-05). Lawrence. Multinational Monitor. (2004). (2003). Retrieved from http://ezproxy. McLean. The Washington Cited Kurtz. Retrieved 2010-10-17. Lay does perp ?accountid=108 . Retrieved 2012-02-12. "Is Enron Overpriced?".. Archive from the original on T. 48(4). New York: Mcgraw-Hill/Irwin.rit.

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