Power Cycle: How Enron Unplugged Ethics and Blacked out Business

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With unsettling ease, the architects of Enron’s demise wove an intricate web of deception and destruction. Ironically, despite Enron’s stature as an impersonal corporation, its downfall was the result of personal character flaw that unearthed a seriously flawed ethical environment. This paper explores the origins of Enron’s collapse, analyzes the roots of unethical behavior and suggests some solutions by which companies can avoid a similar ethical fate.

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Power Cycle: How Enron Unplugged Ethics and Blacked out Business

  1. 1. © Matthew A. Gilbert, MBA Page 1 of 5 Power Cycle: How Enron Unplugged Ethics and Blacked out Business Matthew A. Gilbert, MBA MatthewAGilbert.com mttglbrt@gmail.com (661) 513-3370 Abstract With unsettling ease, the architects of Enron’s demise wove an intricate web of deception and destruction. Ironically, despite Enron’s stature as an impersonal corporation, its downfall was the result of personal character flaw that unearthed a seriously flawed ethical environment. This paper explores the origins of Enron’s collapse, analyzes the roots of unethical behavior and suggests some solutions by which companies can avoid a similar ethical fate. I. Enron’s Unethical Underpinnings Paralyzed by a culture that placed profit over people, Enron’s inverted ethical underpinnings destroyed the organization from the inside-out. Despite being diverse in demeanor, the primary players of the Enron debacle were strikingly similar in their desire for wealth. From huge cash bonuses, to multi-million dollar compensation packages, to the daytime delivery of sports cars to top performers, Enron was all about conspicuous consumption. Elkind and McLean (2003) define the Enron saga as, “a story about people…of human weakness, of hubris and greed and rampant self-delusion; of ambition run amok…of smart people who believed their next gamble would cover their last disaster – and who couldn’t admit they were wrong,” (p. vii, xxiv). Realistically, even if somebody had actually recognized a problem – and the culture was so deluded it is feasible that nobody might have – that person would have been ignored. In an eerily prescient quote, Elkind and McLean (2003) report that when former Enron President Jeffrey Skilling was asked what action he would take if a company of which he was CEO made or sold a product thought to be harmful: ‘I’d keep making and selling the product,’ replied Skilling. ‘My job as a businessman is to be a profit center and to maximize return to the shareholders. It’s the government’s job to step in if a product is dangerous.’ (p. 31) Although Enron authored a celebrated code of ethics, it was never integrated into the organization – as exemplified by Skilling’s quote above. When financial opportunities arose, the code of ethics was forcefully pushed aside. Millman (2002) asserts, “Enron had a code of ethics without a culture of ethics,” (p. 18).
  2. 2. Power Cycle… © Matthew A. Gilbert, MBA Page 2 of 5 II. A Corrupt Culture of Competition Ethical errors at Enron began at the top and permeated through middle management to the lowest layers of the company. Simply put: unethical behavior was institutionalized at Enron. The company’s code of ethics meant nothing because the culture was entirely sycophantic. Watkins (2003) explains, “Enron has a pristine code of ethics, code of conduct, and corporate governance procedures, but they weren’t following the spirit of their own procedures,” (p. 16). Further exacerbating the situation, Enron encouraged crushing gladiatorial competition. Enron recruited the most competitive, combative and contemptuous candidates with singular exploitable talents. At Enron, “pushing the limits was considered a survival skill…[Jeffrey] Skilling…encouraged employees to be independent, innovative and aggressive,” (Brinkman and Sims, 2003, p. 244). While a competitive atmosphere can promote productivity, pitting people against one another for simple survival does not yield cohesion. Annual “rank and yank” evaluations – a cornerstone of Enron’s culture in which the bottom 20 percent of employees were summarily terminated – did little to encourage honor (Fowler, 2002, p, 5). Employees can’t be simultaneously out for themselves and have the company’s interest at heart. Elkind and McLean (2003) offer this assessment of Enron’s inflammatory human resources practices: No company can prosper…if every employee is a free agent, motivated solely by greed…people who get along with others tend to do well in corporate life…you can’t build a company on brilliance alone. (p. 56) As illustrated by Collins (2001), high performing companies place a greater emphasis on character than specific qualifications – the opposite of Enron. Recognizing that you can’t pay people to be committed, companies Collins favored people who would be as willing to give of themselves to help develop a company as equally as they needed the organization for income and benefits. Despite the nefarious endeavors in which Enron engaged (e.g. take-or-pay contracts, mark- to-market accounting, and special purpose vehicles) it’s collapse was actually fuelled by the environment that encouraged the unethical behavior. Had Enron been a fundamentally ethical company, the actions that individuals took would have eventually been uncovered and stopped. III. Nature or Nurture? Causes for Ethical Chaos The fiasco Enron forces discussion of a timeless question: are people good or flawed? The answer boils down to determining what drives individuals. It is the contention of this author that, when people are motivated and happy, they operate more ethically. However, human nature lends itself to self-destructive behavior when the chips are down. But what is motivation? As illustrated by McGregor (Crainer, 2000), “Theory X assumes workers are inherently lazy, need to be supervised and motivated, and regard work as a necessary evil to make money…Theory Y…is based on the principle that people want and need work,” (p. 139-140). Organizations that embrace Theory Y must challenge their workers and provide them with opportunities for continued growth. In the case of Theory X, there is no perceived reward beyond remuneration for continued employment.
  3. 3. Power Cycle… © Matthew A. Gilbert, MBA Page 3 of 5 Traditional thinking might validate the Theory X concept, but studies seem to indicate the inverse. Accel-Team.com (2004) cites a study in which 44,000 employees preferred “security” as the most desired as a condition of their employment. This was followed by advancement, type of work, and being proud of the company for which they work. Pay, benefits and working conditions were all ranked lower – thus validating the concept of Theory Y. Unfortunately, many individuals feel disconnected and unmotivated. From the boardroom to the lunchroom, those who manage and those who are managed acknowledge something lacking. As a result, they revert to a more basic system of needs when their higher ideals are overlooked – the area in which Theory X is more relevant. Why? As offered by Bennis in Denton and Mitroff (1999): What’s missing at work…is meaning…wholeness, integration…We’re all on a spiritual quest for meaning and…the underlying cause of organizational dysfunctions…is the lack of a spiritual foundation in the workplace. (p. xi) People who feel better about their professional responsibilities perform better. Humorously illustrating this, an advertising campaign for the California Milk Advisory Board promotes cheese made with milk from California cattle. As reported in AdWeek (2002), the tagline “Great Cheese Comes from Happy Cows. Happy Cows Come from California,” (p. 1) captures the idea that content employees perform better, thereby increasing the bottom line. Despite its highly comical tone – and the equally as comical contentions of a politically active group that California cows are not actually happy – the concept remains valid: happy employees + satisfied customers = higher revenues. It’s not rocket science; it’s not agricultural science. It’s human nature. IV. An Education in Ethics? Can ethics be taught? Most likely, no. Ethics are a by-product of values and morals acquired throughout your life and are shaped by your experiences. Unlike a specific skill – learning a foreign language for example – ethics are not a commodity that can be consumed. You can’t cram for a test on ethics. And, even predominantly ethical people can be compromised in a challenging situation. Corporations don’t have a corner on unethical behavior. Just as people have the potential to achieve greatness, so too can we destroy that which we have created. Enron could have been saved, if only someone was willing to save it. There were many points along the company’s path to destruction at which someone could have done something – or even said something. Nobody wanted to hear the truth. Investors, analysts and others feeding off the company’s financial food chain kept quiet as long as the cash rolled in. Risking revenue on the truth was not an option. Since nobody – until Sherron Watkins, whose anonymous memo alerted investigators that something was amiss – was even willing to acknowledge the existence of questionable actions, the unethical activity could not be stopped. The people most financially affected by the underhanded actions of Enron were individual investors and rank and file employees – many of whom lost significant money when Enron collapsed. Of course, many of those investors were also gambling on the exorbitant returns the
  4. 4. Power Cycle… © Matthew A. Gilbert, MBA Page 4 of 5 company had claimed to generate for years. To some degree, everyone involved at every level shared in what could best be considered “comparative negligence.” IV. Conclusion: Determine Your Destiny Ultimately, change must come from within. You can never fundamentally fix a person or company from the outside in. The desire for change must originate from inside. In the case of a company like Enron, the admission of fault must start at the top and emanate throughout all levels of the organization. Just as you can’t make an addict sober without their participation, a company can’t improve without any involvement on the part of the individuals that comprise it. Of course, identifying improvement depends on the parameters by which your actions are judged. With the possible exception of murder and crimes against children, there is tremendous cultural relativity with regard to the moral foundations on which ethics are erected. So, prior to embarking on an adventure of ethical improvement, you must first clarify the cultural considerations. This is not meant to condone actions that some might find questionable – whether they are part of the culture or foreign to it – but to communicate that passing judgment without the benefit of full understanding is unfair and naïve. However, actions you take as an individual are your own – proclaiming they were done at the behest of another has no merit. At the end of the day you are responsible for yourself and your actions. Every action has a reaction, and you can’t expect to build up as much negative karma as did Enron without incurring additional adverse effects. In the end, you determine your own destiny. References Accel-Team.com. (2003). Employee Motivation in the Workplace. Retrieved November 5, 2004 from http://www.accel-team.com/motivation/index.html. AdWeek. (2002, September 23). California Milk Advisory Board | “Sprinkler.” Downloaded May 7, 2003 from http://www.adweek.com/aw/creative/best_spots_02/020923_03.jsp Brinkman, J and Sims, R. (2003). Enron Ethics (Or: Culture Matters More than Codes). Journal of Business Ethics; Jul 2004; 45, 3, 243-256. Collins, Jim. (2001). Good to Great: Why Some Companies Make the Leap and Others Don’t. New York: Harper Business. Crainer, Stuart (Ed.) (2000). The Ultimate Business Library: 75 Books That Made Management. Dover, NH: Capstone US. Denton, E. and Mitroff, I. (1999). A Spiritual Audit of Corporate America. San Francisco, CA: Jossey- Bass, Inc. Elkind, P and McLean, B. (2003). The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Portfolio.
  5. 5. Power Cycle… © Matthew A. Gilbert, MBA Page 5 of 5 Fowler, T. (2002, October 20). The pride and fall of Enron. Downloaded January 19, 2005 from http://www.chron.com/cs/CDA/story.hts/special/enron/1624822 LeVenness, F. and Primeaux, P. (2004). Vicarious Ethics: Politics, Business, and Sustainable Development. Journal of Business Ethics; May 2004; 51, 2. 1850198. Millman, G. (2002). New Scandals, Old Lessons: Financial Ethics After Enron. Financial Executive; July/August 2002, p. 16-19. Robbins, S. (2003). Essentials of Organizational Behavior, 7th Edition. Upper Saddle River, NJ: Prentice Hall. Watkins, S. (2003). Ethical Conflicts at Enron: Moral Responsibility in Corporate Capitalism. California Management Review; 45 (4), 6 – 19. Publication Credit Gilbert, M. (2005). Power cycle: How Enron unplugged ethics and blacked-out business. In Adams, M. and Alkhafaji, A. (Eds.), Business Research Yearbook, Vol. XII (pp. 245-249). Saline, MI: McNaughton & Gunn.

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