Unhealthy Organizational Culture of Enron - Case Study Example

Leadership Case Study: Enron Student’s Name Institutional Affiliation Course Name Date of Submission Table of Contents Table of Contents 2 Introduction 3 Brief Overview of the Rise and fall of Enron 4 Analysis of Problems Found In the Case 4 Unhealthy Organizational Culture 4 Corporate Governance Failure 10 Lack of Strong Internal Control Mechanisms 12 Discussion 13 Alternative Solutions 13 Conclusion 16 Recommendations 16 Implementation 17 References 18 Leadership Case Study: Enron Introduction It is about 15 years since the fall of Enron Corporation, a former American energy giant but the business community and scholars still continue to wonder as to what might have caused such a big and performing company to collapse and file for bankruptcy (Gini, 2004). Different arguments have emerged that attempts to explain how the former American energy giant was reduced from riches to rags. Some scholars and business analysts argue that Enron’s record-breaking bankruptcy and its subsequent collapse was caused by unethical behaviors on the part of the leadership of the company as the leadership of the company was driven by greed (Gini, 2004).  Others, however, believe that the collapsed of Enron was the result of bad accounting practices, such as the mark-to market accounting practices that were calculated to hide the huge financial debts that the company had accumulated. In some instances, business analysts point at a series of things that include the company’s mismanagement of risk, adoption of bad organizational culture, coupled with overextension of capital resources as the major causes of Enron’s downfall (Pojman, 2006). Despite these arguments, the story about the rise and the surprising fall of Enron remains a puzzle and continue to generate interests as people try to get to the root cause of the failure of this former energy giant. This paper begins by providing a brief overview of the rise and fall of Enron as presented in the case study. It will proceed to identify what went wrong at the company based on ethical and leadership theories. The paper will then propose solutions to the problems identified in the case and make recommendations on the best solution to adopt and how the solution should be implemented. Brief Overview of the Rise and fall of Enron Enron Corporation was an American energy company founded in 1986 when Houston Natural Gas and Internorth both of which were natural gas companies merged. Although the company struggled in the initial years by posting a loss of $14 million, the company was quickly turned around to profit making ways (Gini, 2004). In the 15 years that followed, Enron developed to become one of the largest companies in America having diversified its product portfolio to include natural gas, communication and electricity. The good performance made Enron become the benchmark for most companies then. It was also one of the largest employers in America having employed about 22,000 people. Despite the many years of success, things were later to turn to the worse in 2001 when Enron was forced to file for a bankruptcy (Gini, 2004). The filing for a bankruptcy was triggered by the market loss in confidence following the move by the company to write down its assets and profits in the third quarter of 2001. According to the case, the write offs of assets and profits caused the loans that the company had sourced to finance its operations to become due for payment since the stock market collateral had collapsed that made it virtually impossible for Enron to continue borrowing more money to finance its operations. In this respect, Enron failed because of liquidity problems. Analysis of Problems Found In the Case Unhealthy Organizational Culture Organizational culture has a huge effect on the organizational performance and success. Culture refers to a set of shared values, norms and traditions by a group of individuals. Javidan et al. (2006) define organizational culture as the set of values that employees are expected to conform to. In other words, organizational culture refers to the way things are done in an organization. In Enron case, unhealthy organizational culture happens to be one of the major reasons for the failure of company. The case indicates that Enron operated on the culture of individualism, innovation and uncontrolled pursuit of profits. The adoption of this kind of culture brought problems because it destroyed the ethical conduct of many employees of the company (Gini, 2004). According to the case, the leadership of the company promoted risk-taking culture coupled with awarding of bonus incentives and this was a dangerous thing because it encouraged the employees of the company to manipulate the profits for their benefits. In other words, this culture promoted greed in the company in which employees pursued ways of making huge profits even through dubious methods (Gini, 2004). Besides, the culture of the company was a big problem because it promoted unethical business practices that eventually contributed to the downfall of this former American energy giant. However, the main question that puzzles many pertains to how and why this culture developed at Enron. Although there are many leadership theories that can explain how the bad culture that ruined Enron developed, trait and transformational theories are the most appropriate for explaining this phenomenon. To begin trait theories happens to be one of the leadership approaches that the 20th century scholars used in determining the qualities that make one a good or bad leader and was initially known as the ‘great man theory’ Although trait theory was widely used to identify qualities that make one a leader in the early 20th century, some scholars among them being R.M. Stogdill (1974) started to question the universality of this leadership theory. This follows Stogdill’s observation that the leadership style that a leader adopted varied depending on the situation that a leader and the staff encountered. According to Stogdill (1974) leadership model, a leader varies his/her leadership style according to the prevailing situation. The principal idea in Stogdill leadership theory is that leadership is an active process and not passive since leadership has all to do with leaders and followers working together as a team in most situations. As time progressed, Stogdill (1974) discovered that there exist five leadership traits that developed from socially constructed situations that leaders and group members encounter. The traits include self-confidence, intelligence, integrity, determination and sociability. According to this leadership model, the five leadership traits operate together to bring about effective leadership (Avolio, Luthans and Walumba, 2004). This implies that effective leadership requires that the five traits be demonstrated by a leader. In fact, Stogdill (1948) noted that whenever all the five leadership traits were present and properly worked, this resulted in the achievement of a balance between a leader and the situational factors that are required to develop a healthy organizational culture and exert positive influence on followers. However, in the event that one of more of these leadership traits were absent in a leader, then this resulted in problems especially in the development of the situational-based social interactions between a leader and followers, thus impacting negatively on the development of a healthy organizational culture (Zaccaro, 2007). Looking at the Enron failure case, with regards to the leadership that emerged at the company, it becomes clear that integrity, which is a key trait required for effective leadership was lacking and this was one of the reasons that caused the failure of Enron as lack of integrity on the part of the leadership impacted negatively on the culture of the company. Leeds (2003) noted that integrity is a very critical leadership trait that any leader should posses because it involves a number of things. First, integrity is an important leadership trait because it promotes honesty and trustworthiness. Integrity has to with adherence to strong principles and taking responsibility for individual actions. Integrity, therefore, is an important leadership trait since such leaders inspire confidence in followers since followers can trust that they would do as they say (Zaccaro, 2007). Besides, leaders with integrity are loyal, non-deceptive and dependable. In brief, integrity is an important leadership trait since it makes a leader trustworthy and believable. The case indicates clearly that the executive leaders of the company did not exhibit integrity as a trait within Enron’s culture. From the case, it becomes clear that Jeffrey Skilling was that kind of a leader who was very confident, determined and intelligent leader. In fact, Skilling’s style of leadership was not only inspiring but also amazing as he was able to provide a vision for the company, as well as inspire the employees to work towards the achievement of the vision (Zaccaro, 2007). His leadership style encouraged the development of risk-taking, creativity and innovative culture as it can be seen that the company was focused on profit maximization and share value. Integrity, however, was lacking in many of the executives whose main aim was to maximize profits at all cost. The leaders aggressive pursuit for profit maximization resulted in a situation in which the leadership trait of integrity became absent in the Enron culture (Gini, 2004). Lack of integrity in the leadership of Enron was a fundamental flaw within the structure of the organization and its organizational culture. This is because, whereas Andrew Fastow started encountering incidences that required honest and transparent disclosure of financial information, Skilling provided motivation to only a few employees to provide the truth about the real financial position of Enron. Thos people that lacked integrity to provide honest information about Enron’s financial losses were punished through dismissal or demotion by those in power in a process called the “rank and yank” (Gini, 2004).  However, the overall absence of integrity on the part of Enron’s leadership promoted the development of “me-first” and dog-eat-dog” attitude in the top leadership of Enron. As time progressed, these attitudes integrated to become cultural values and norms that resulted in the development of a bad pattern, such as greed and self-interest pattern of behavior that caused the downfall of the company (Pojman, 2006).  The problem of unhealthy culture that developed at Enron causing the failure of the firm can also be analyzed with transformational theory of leadership. Transformational leadership is a leadership style that is geared towards changing individuals (Leeds, 2003). This leadership theory is concerned with values, emotions, standards, ethics and long-term goals. The approach includes analyzing the motives of the employees, fulfilling their needs and treating them well. Transformational leadership incorporates visionary and charismatic leadership. The term transformational leadership was first coined by Downton in 1973 by was first used to explain leadership in James MacGregor Burns’ book, Leadership (1982). Burn’s identified two types of leadership, namely transformational and transactional leadership. Burn argues that most leadership adopts transactional model in the sense that they involve exchanges between leaders and employees/followers. On the other hand, transformational leadership is that approach to leadership which involves a leader engaging with subordinates in a manner that results in the development of relationships that increases morality of leaders and inspiring followers to work hard towards the achievement of organizational goals. Transformational leadership has received support and criticism in almost equal measure. Supporters of transformational leadership argue that transformational leadership is the best approach for influencing followers to pursue a common goal (Leeds, 2003). On the other hand, critics of the theory argue that the theory is antidemocratic and that it is elitist. This can be interpreted to mean that transformational leadership encourages individualism in which a leader places self interest above those of the followers, which results in less participative decision making and authoritarianism. Additionally, transformational leadership is criticized on the grounds that this approach to leadership suffers from ‘heroic leadership’ bias. In assessing how the culture of Enron developed, transformational leadership provides a good perspective. It is clear in the case study that both Kenneth Lay and Jeffrey Skilling were transformational leaders at the company. The two leaders led a company that was struggling to become one of the largest energy companies not just in America but in the entire world, an achievement that few believed could be achieved by a natural gas firm. The two leaders both cultivated the culture of creativity, risk-taking and innovation. In fact, in the late 1990s, Enron was being hailed by Fortune magazine as being “Americas Most Innovative Company” (Gini, 2004). However, the question that one has to ask pertains to whose benefit was the two leaders’ transformational leaders, Lay and Skilling acting. The short term stay of the two leaders turned out to be disastrous despite their transformational leadership styles as they placed Enron into serious financial difficulties that ended in bankruptcy, putting thousands of jobs at risk, as well as putting shareholders into losses. It becomes apparent from the case that only a few people will argue that the hierarchy of leadership at Enron obeyed the ethical and moral standards, other than the quick money making behavior that has characterized transformational leadership. At Enron, the moral-less transformational leadership exhibited by Lay and Skilling can be seen to have been both an asset and a shortcoming because it was through charismatic personalities that Lay and Skilling drove Enron to riches and to rags. It is noted that lack of morality in transformational leadership at Enron led into the development of a culture of narcissism, a culture that developed into the entire organization, causing the downfall of the former energy giant (Pojman, 2006).  Corporate Governance Failure Corporate governance failure is the other problem that is presented in Enron case. From the case, it becomes apparent that the collapse of Enron was largely the result of corporate governance failure in which the internal controls mechanisms were characterized by conflicts of interest that enriched the certain executives of the company at the expense of stakeholders (Gini, 2004). This is in contravention of the stakeholder theory that states that the executives and the board are supposed to act in the interest of the stakeholders instead of self. Stakeholder theory looks at the relationship between and organization and its stakeholders. Every organization has its stakeholders that its serves (Tricker and Tricker, 2015). A stakeholder in this case refers to any person, group of persons or corporate with an interest in a company’s activities or that are affected by the operations of a business. Example of stakeholders is employees, managers, customers, suppliers, the government, sponsors, media, investors and the community (fig.1). According to Friedman, the executives and the board have the responsibility to ensure that the interest of investors/shareholders is fulfilled by ensuring profit maximization (Carson, 1993). The same applies to the principal-agent relationship that states that the managers/executive/boards should act in the best interest of the principle (shareholders). Fig. 1 Source: Hamid (2012). However, it is common for a conflict of interest to arise between the agent and the principal, which in this case are the executive and shareholders of a firm. Tricker and Tricker (2015) note that all companies experience agency problem in which the managers/executives sometimes end up pursuing self interest goals instead of that of the shareholders of a firm. The same applies to the Enron case in which agency problem was highly prevalent. This is because the executives of the company failed to adhere to their corporate functions of serving the interest of the shareholders of the company (Abdullah, and Valentine, 2009). Instead, the executives of the company decided to pursue their own interest as described in the case. For instance, the case shows that, with the help of the accountants and lawyers, the executives of Enron created subsidiaries that resembled partnerships which made it possible for the top executives to sell assets and generate falls incomes. One such example of a conflict of interest could be seen when the top executives of Enron created special purpose entities (SPE) known as Chewco that had been initially established to buy an outside investor’s interest in partnership known as Joint Energy Development Investment Limited Partner (JEDI). Gutman (2002) indicates that, in an attempt to avoid creating a partnership with Enron, Enron’s Chief Financial Officer Andrew Fastow assigned his employee called Michael Kopper the responsibility of managing Chewco. Besides keeping JEDI off the balance sheet, the resultant deal resulted triggered an agency problem between Kopper’s duty as an Enron agent and the principal of Chewco. Additionally, the case indicated a corporate governance failure on the part of the executives since instead of advancing the interest of shareholders, the executives reportedly created an offshore entity, which they used to not only avoid taxes, but was also used to inflate the values of assets and profits, while concealing the losses in order to portray a good financial position of Enron, when the company was indeed facing serious liquidity problems (Gini, 2004). Furthermore, the executives of Enron acted in contravention with the ethics and agency principal in the sense that they relaxed the rules on conflict of interest so as to allow the executives to benefit personally from the questionable investments that were designed to siphon Enron funds (Abdullah, and Valentine, 2009). Lack of Strong Internal Control Mechanisms The case highlights a situation that shows that Enron collapsed largely due to lack of strong internal control mechanisms to safeguard the company assets. Internal controls refers to the mechanisms that are instituted by a company to ensure the achievement of corporate objectives by safeguarding corporate assets, as well as ensuring transparency and reliability of financial reporting and compliance with the laws of governing businesses. Examples of internal controls include separation of duties, keeping accurate records for physical safeguards, authorization of transactions and preventing errors and frauds (Luthans et al., 2007). As for Enron, as highlighted in the case, there was a serious problem with the internal control system that allowed the executives of Enron to engage in unethical acts that eventually resulted in the downfall of the former energy giant. For instance, the case indicates that Enron had no internal check in place to control capital spending on projects a situation that gave the executives of the company the opportunity to spend billions of dollars irresponsibly without taking risk and return into consideration (Gini, 2004). Besides, lack of effective internal control mechanisms in place allowed conflict of interest to thrive in the company, thereby resulting in the failure of Enron. Discussion Alternative Solutions The findings above indicate that Enron’s failure was caused by multiple factors all of which are related to leadership. Firstly, it was found that cultivation of unhealthy organizational culture was to blame for the downfall of the company as it destroyed the ethical values of the employees, thereby resulting in pursuance of goals in ways that are unethical. Second, Enron’s collapse was caused by corporate governance failures in which the executives pursued personal benefits instead of working for the benefits of shareholders (Gini, 2004). Additionally, lack of strong internal control systems is to blame for the failure of Enron. Fortunately, there are various strategies that Enron could adopt to address the problems highlighted above. First, to address the problem of unhealthy culture, Enron should promote the development of ethical behaviors in the company. It is clear from the case study that the unhealthy culture of narcissism and selfishness resulted from the fact that the company had not promoted ethical conducts among its employees and management. Therefore, this problem could be addressed by creating an effective ethical code of conducts that defines the behaviors that are expected of employees and the management (Luthans et al., 2007). Creating an ethical code of conduct is advantageous since it will make the employees and the management understands the behaviors that are expected of them for the benefit of the company. The second solution to the unhealthy culture is doing away with the leadership by performing an overhaul and replacing it with selfless leaders who can work with integrity. As indicated in the findings, lack of integrity which is an important leadership trait was a reason for the downfalls of Enron. Therefore, to turnaround the fortunes of Enron, it would be important that Lay and Skilling, as well as the entire board are replaced so as to get new leaders who could lead with integrity for the benefit of the company. In fact, as narrated earlier, integrity, determination, sociability, self-confidence and intelligence are very important leadership traits needed for organizational success (Gutman, 2002). Besides, hiring leaders with for Enron turnaround because integrity it promotes honesty and trustworthiness. Having leaders with Integrity to lead Enron would also be beneficial as such leaders inspire confidence in followers since followers can trust that they would do as they say and the fact that such leaders are loyal, non-deceptive and dependable (Zaccaro, 2001). The only challenge is that getting leaders with integrity will be a challenging undertaking. The second major problem highlighted in the case had to do with corporate governance failures. The corporate governance failures allowed the executives to pursue personal interest instead of the interest of shareholders. The first measure to take to address corporate governance problem highlighted in the analysis is by managing conflict of interest (Zaccaro, 2007). This would require implementing a robust conflict of interest policy. The policy promote integrity at Enron as this is the best way of ensuring that executives avoid engaging in personal interests that conflicts with those of the organization. Additionally, a code of conduct should have been created that require employees and the executives to refrain from conflicts of interest as much as possible and manage those which they can avoid (Abdullah, and Valentine, 2009). Moreover, the code of conduct should be created that requires all employees of Enron and executives to report any issue that they feel can result in a conflict of interest. Lastly, lack of strong and internal control mechanisms was largely to blame for the problems that Enron faced in the early 2000s that resulted in its eventual collapse. However, there is a number of this that Enron could have done to address this problem. Firstly, this problem could be addressed by instituting a strong internal control system (ICS) (Hamid, 2012). In this regard, Enron’s management should have created a strong and independent internal audit team to ensure that all the operations and the company’s books of accounts are kept of check to ensure that any error or fraudulent activity is detected on time. Lack of a strong ICS gave the top executives of Enron opportunity to not only mismanage the company’s resources and assets, but also engage in personal interests. Secondly, the problem could be addressed by ensuring that there is separation of duties. Separation of duties will be beneficial as it will promote accountability on the part of every employee, managers and the executives (Hamid, 2012). Additionally, the problem could be addressed by ensuring that all records are kept as this would help in safeguarding the company assets from fraudulent actions. However, it is important to state that instituting a strong and independent ICS might fact the challenge of cost as it would be a costly move. Besides, some internal auditors could still collude with the executives and employees, thereby making it easy for the executives, the board and the employees to continue engaging in unethical acts of defrauding the company. Conclusion Enron’s collapse is one of the worst cases involving corporate scandal that America has witnessed. Enron was once the largest energy company in the United States. However, the company was reduced from riches to rags in 2001 because of a number of factors. The case study indicates that Enron collapsed because of various factors that include unhealthy organizational culture, corporate governance failure and lack of strong internal control system. However, as described in the report, the Enron’s problem could have been addressed if the company had instituted certain measures in place. The solutions include creating a healthy and ethical culture, addressing conflict of interest and promoting good corporate governance, as well as instituting strong internal control mechanisms. Recommendations Although there are a number of measures that could be adopted to solve the problems at Enron, the best solution to the problem would be promoting sound corporate governance. The case indicates that corporate governance failure was the main cause of the problems that resulted in Enron being forced into filing bankruptcy. According to the agency theory, an agent (executives) is expected to act on the best interest of the principal (shareholders) (Hamid, 2012). Unfortunately, in this case, the executives and directors of the company decided to pursue personal interests instead of that of promoting the interest of the company, which was unethical. As such, the best solution to Enron is to promote good corporate governance by requiring the executives, directors and the employees being that they are all agents to act in the best interest of the shareholders. This is supported by Friedman’s ethical theory that states that the duty of the executives of a company is to maximize shareholder value through profit maximization (Carson, 1993). Implementation The good corporate governance practice will be implemented by doing a number of things. The first step will be to create a corporate culture and vision that promotes ethical behaviors as this will provide direction the acceptable behaviors expected to be exhibited by the board and executives. The second step will involve building a skilled and ethical-based board. The third step will involve appointing a competent chairperson to head the board. In this respect, the chairperson to be chosen will have to be someone with good leadership abilities and the ability to build sound relationship with the chief executive officers. The next step will involve building and maintaining a good governance structure that sets forth the responsibility of the board and the management. Lastly, the board and the directors of Enron will be evaluated periodically to establish how they are performing and pursue opportunities for improvement. The implementation cost is estimated at approximately £1000. References Abdullah, H., & Valentine, B. (2009). 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(2007). Trait-based perspectives of leadership. American Psychologist, 62(1), 6-16. DOI: 10.1037/0003-066X.62.1.6 Read More