Enron Ethical Values
Proposal for Ethical changes at Enron
By
Patrick Laurent
April 2007
Abstract
The Enron corporation has a set of values and ethical behaviors which needs to be addressed quickly by the management. Systemic challenges are strongly leading to unethical behaviors from their managers, traders, financial officers and CEO. I propose 3 strategies and their leadership methods to change the behaviors, methods and moral conducts of Enron’s employees.
The ethical challenge
Twenty thousand employees work for Enron corporation. These people and this company have built a set of rules, values and a culture which does not meet the approved business standards in this country. Enron’s previous C.E.O. encouraged greed and manipulation as normal behaviors and encouraged employees to fight to be the fittest. The management’s ego makes them think that they are part of an elite and capable of doing anything, as long as it brings in money. Managers are rewarded with high salaries, stock options and bonuses that are totally inappropriate when compared to the company’s real profit. S. D. Tweedie (2006, p.36) points out that “ Encouraged by Skilling, a highly paid army of financially literate MBAs sought innovative ways to ‘translate any deal into a mathematical formula’ that could then be traded or sold on, often to SPEs set up for that purpose”.
The Systemic Challenges
Enron corporation did not wait for adaptive change to happen. Ken Lay actively lobbied and pushed for regulation changes and deregulation. Deregulation allowed Skilling to emphasize the business on the trading of commodities such as gas and electricity. Enron received an exemption from being overviewed by regulatory agencies. Enron also secured long term supplies of natural gaz. In 1991 the SEC granted Enron the right to use “Mark to Market” accounting. This would allow Enron’s accountant to write potential future profits of signed contracts without taking into consideration the risk of a reduction in value. “Enron could determine its own profits based on a forecast price which it alone provided: a recipe ripe for manipulation” S. D. Tweedie (2006, p.39).
For the outside world the profit of the Enron corporation was whatever Enron would tell them they were. There was no way to say if the hypothetical future value would be the right one announced and therefore there was no correlation between actual profits and forecasted profits. This explains in part why the share price kept rising all the time. Top management kept in close contact with the SEC, bankers and analysts while communicating with the investors’ press, the media and the institutions. By doing so they were able to maintain an image of a healthy, profitable leader company.
The systemic business world of Enron is therefore a complicated and secret puzzle in which all pieces fit very well. However these pieces are a recipe for unethical behaviors and are so well connected that it becomes very difficult to remove or alter them without causing important adaptive issues. S. DeGenring (2007) points out that “The challenges faced by senior leaders are often systemic problems that traverse functional, geographic, and cultural barriers: e.g., redesigning core business strategies, merging or dissolving businesses, and managing across space, time and culture. The solutions are murky at best, and may not be easily seen from the executive suite.”
The adaptive challenge
The adaptive challenge facing Enron is complicated and risky. Employees and managers will sustain hardships as the structure and the values discussed above will have to be changed. The systemic structure at Enron will have to be adapted to strict ethical rules and some approved practices will have to be strongly controlled and restrained. Management must learn from its past mistakes and use it as a jumping platform for a brighter future. Changes in the mark to market accounting, trading practices, rewards and incentives and financial offshore accounts will be reviewed and adapted. Leadership will have to have the capacity to adapt and not just remain bitter and refuse to give in to the unknown. C.E. Johnson (2005, p.77) suggests that “effective leaders tell a different story than their ineffective counterparts. They identify hardships as stepping-stones, not as insurmountable obstacles”.
Strategy for ethical change
In order to lay a moral and ethical base to any adaptive change at Enron, top management and leadership has to recognize the errors of the past; analyze the critical present situation and crisis; and plan and implement a strategy for short, medium and long term changes. Employees will turn toward authority to look for answers and new ways. In my proposal, I will describe these three strategies and leadership styles which should be appropriate to achieve the desired effect and goals. The result of this strategy will be short and medium term fall of the stock price, layoffs, mistrust from the financial market and the SEC. Long term results will be a regain of trust and respect, increase of stock value and a successful and profitable business model. C.E. Johnson (2005, p.163) confirms that “transformational leadership rests on a clear ethical foundation. The goal of transforming leader is to raise the level of morality in a group or organization. Pursuit of this goal will increase the ethical capacity of followers, create a moral climate, foster independent action and serve the larger good”.
Short Term Strategy
Leadership should concentrate its thinking on the crisis and present issues in the company, with the employees, with Financial Markets and the SEC. Leading by example and servant leadership is in this situation very important as it will help establish quick and direct information channels and give strategic issues that need to be addressed first. Moral and ethics should be restored first by applying the moral conduct rules strictly and firing those who do not. The CEO and top managers should immediately renounce unacceptable money incentives and receive reasonable incomes. Crisis management groups should be formed to deal first with three main issues: 1. Change in accounting and reporting practices and elimination of off-balance sheet activities; 2. Continuous and truthful information to the press and media; 3. Review and change of trading practices for the Enron group. This leadeship and strategy would allow employees and management to quickly receive a new set of values. CEO Open meetings with the employees will take place on a regular basis and each crisis group will carefully monitor anxiety and keep it on an acceptable level. C.E. Johnson (2005, p.255) confirms that “In stage one, the CEO or designated facilitator kicks off the process in face-to-face conversations or public meetings. Members record their personal values, ones that they would want to be shared in the workplace. These values are then collected, prioritized and segmented into department or topic groups”.
Medium Term Strategy
After a few months of actively implementing the above, values and structures should already be in place. It is time for targeted actions in the various departments to correct the remaining issues and aim at the third phase which is regaining trust and profitability. This strategy should not last very long and quickly evolve into more long term ethics, morals, values and visions. Significant changes in accounting, finances, Human Resources, management and trading start to give results both of the remaining faithful and active employees, but also on our outside partners. Leadership must now step out of the field of action more and more and let key managers handle the management issues and generate innovative ideas. This will allow leadership to be more objective and get back on the balcony to have a clear overall view of the organization and the change taking place. R. L. Hughes (2007, p.482) explains that “developing subordinates is one of the most important responsibilities any leader has, and delegating significant tasks to them is one of the best ways to support their growth”.
Long term strategy
Once authority and leadership is established at all levels in the company, the CEO must put in place a method of evaluation with three parts: 1. Evaluation of the management and its ethical behavior by the followers. 2. Open discussions on moral and ethical issues in the company. 3. Analyses and statistical control of performances, actions and strategies. These evaluations would help to track performances and progress in regaining trust from employees, partners and financial institutions. Charismatic, servant, transformational leadership can then take place and organize moral and ethical evaluations at each level. Open information and delegation of management can encourage followers and leaders to do the right things without ego nor greed. Long term strategy must be based on respect, trust, innovation, ethics and satisfaction of the followers. R. L. Hughes (2007, p.405) proposes a quote which I feel describes leadership well. “Leadership is the art of getting someone else to do something you want done because he wants to do it” Dwight D. Eisenhower.
A Brand New Start
Enron has had a lot of systemic issues in the past and a CEO who’s motivation was based on greed. Leadership failed to recognize signs of unethical behaviors and moral misconduct. The siloed thinking of management, that the only important thing is to make money, is not possible in the long run. Enron is starting on a new crusade which will bring back ethical values, respect and trust in its new CEO and his leadership.
References:
Susan DeGenring (2007) Adaptive Leadeship: Risky Business? Interaction Associates
R. L. Hughes, R.C. Ginnett, G.J. Curphy (2007) Leadership , Enhancing the Lessons of
experience (5th ed.) Tata McGraw-Hill.
C.E. Johnson (2005) Meeting the Ethical Challenges of Leadership. Second edition, Sage
Publications Inc. , California
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