American energy, commodities, and services company
based in Houston, Texas.
Employed approximately 20,000 staff.
Claimed revenues of nearly $101 billion during 2000.
Enron filed for bankruptcy protection in late 2001
Attained its greatest value of $90 and to less than $1
per share at the end of 2001.
More commonly known as rank and yank system.
A rating system used by companies to evaluate their
employees. The system requires the managers to evaluate
each individual, and rank them into one of three categories.
This system is widely-used, but remains controversial due
to the competition it creates, and also the reality that not all
employees will fit neatly into one of the categories and
might end up in a category that does not reflect their true
Creates negative competitive spirit
between the employees.
They start working for the benefit of
themselves and not the company.
A certain percentage of employees
loose their jobs every year.
It makes employees more
It is a transparent system for
In the case of Enron, the forced ranking distribution
scheme created negativity amongst employees as they
became more and more greedy.
Traders no longer worked in the interest of the
company but worked for personal benefits.
The basic method to prevent this kind of employee
behavior, at micro and macro level will be simply to not
implement this scheme.
Even if this scheme is implemented, company should
see that whether this scheme is positively motivating
the employees to perform better.
A few companies that successfully use this scheme are
Microsoft and GE.
There were huge issues with the way that the
organization did their auditing and accounting work.
There was no transparency in their work.
Also they did not prepare true and fair balance sheets
and cash flow statements.
Enron sponsored a retirement plan – a “401(k)” – for its employees to which
they can contribute a portion of their pay on a tax-deferred basis.
As of December 31, 2000, 62% of the assets held in the corporation’s 401(k)
retirement plan consisted of Enron stock.
Many individual Enron employees held even larger percentages of Enron stock
in their 401(k) accounts.
Shares of Enron, which in January 2001 traded for more than $80/share, were
worth less than 70 cents in January 2002.
Consequently, the company’s bankruptcy has substantially reduced the value
of its employees’ retirement accounts.
The losses suffered by participants of the 401(k) plan have prompted questions
about the laws and regulations that govern these plans.
The board of directors had a major role to play in the
They promoted unfair practices to fill their pockets,
instead of stopping them.
This promoted corruption in the organization.
Securities analysts employed by investment banks provide
research and make “buy,” “sell,” or “hold”
recommendations for the use of their sales staffs and their
Analyst support was crucial to Enron because it required
constant infusions of funding from the financial markets.
On November 29, 2001, after Enron’s stock had fallen 99%
from its high, and after rating agencies had downgraded its
debt to “junk bond” status, only 2 of 11 major firm analysts
rated its stock a “sell.”
Banking companies, notably Citigroup and J.P. Morgan
Chase, were involved in both the investment banking
and the commercial banking businesses with Enron.
These companies suffered a lot due to Enron’s fall.
They wanted to earn as much as possible.
They totally disregarded the fact that there was no
transparency in the business.
These issues could have been easily prevented at
both, micro and macro levels.
At a micro level, the companies can have people who
are committed to the company and want to work with
transparency and sincerity.
At a macro level, the governing boards should promote
fair practices in the organization. They should design
policies that will make the organization more
transparent and less prone to scrutiny.
A measure of the fair value of accounts that can change
over time, such as assets and liabilities. Mark to market
aims to provide a realistic appraisal of an institution's or
company's current financial situation.
The accounting act of recording the price or value of a
security, portfolio or account to reflect its current market
value rather than its book value.
When the net asset value (NAV) of a mutual fund is valued
based on the most current market valuation.
Enron used this scheme to appreciate their share
They showed profits that were only an assumption and
never existed in reality.
This way they were able to window dress their share
They exploited the scheme.
Preventing the wrong use of such schemes is really
important so as to present a realistic picture of the
At a Micro level, the board of directors should have
forced the CFO, Andrew Fastow, to resign.
At a Macro level, the government should have made
new policies so as to prevent companies from misusing
the mark to market accounting technique.
Examine ethical climate and put safeguards in place.
Don't just print, post and pray.
Build a robust ethics infrastructure that is self-
Publicly commit to being an ethical organization.
Separate auditing from consulting functions.
Talk with employees at all levels often.
Build ethical conduct into corporate systems.
Establish an Ethics Committee to constantly keep the
organization focused on the seven main provisions of the
Federal Sentencing Guidelines of 1991 in mind.
Live your corporate values.
Keep the lines of communications open.