The collapse of Enron, a multi billion dollar corporation that employed thousands of people in the United States heightened the awareness of Corporate Social Responsibility and ethics.
Corporate Social Responsibility (CSR) relates to responsible behavior increasingly taking place within the relationships between business and society. In general, CSR refers to the
various responsibilities which business organizations may have toward their stake holders; in short, toward all members in society including the future members of society [1] ( Leadership, Change and Responsibility.2008).CSR can also be used as an umbrella term to describe much of what is happening in terms of ethics related activities in firms around the globe.
The collapse of Enron triggered a broad discussion on the role of business in society with regard to obligations, legitimacy and responsibility. Responding to CSR, corporations have started to present themselves in much detail as "good corporate citizens" explaining why and how they care about a sustainable future and what they do for their employees. CSR focus on both primary and secondary stakeholders meaning that the stakeholders would be affected by decisions which the company undertook.
The top leadership of Enron did not exercise both the Act and Rule of Utilitarianism which looks to single actions and bases the moral judgment on the amount of pleasure or pain the action will cause in society.
The report discusses the following based on Enron movie:
Whistleblower in relation to Enron scandal
How ethics were breached in Enron
Impact of the scandal
Lessons learnt and conclusion
WHISTLEBLOWER IN RELATION TO ENRON SCANDAL.
Sherron Waltkins actions, in our opinion, were perfectly orchestrated in a very ethical manner. She noticed something wrong suspicious about the accounting, so she took a closer look and didn't just ignore the problem, when she realized the depth of the situation, she reported it to the people that could do something about it in the organization even reaching the top management, Kenneth Lay. When the company refused to act on the situation, she went to the media, which forced the problem to be fixed by causing shareholders to dump their investments in Enron. In her memo written to Kenneth Lay, she expressed that with Enron would not be with anything after the scandal, and she went ahead despite these fears about her future employment.
People lost their jobs and pensions when the news came out, but that was not the fault of the whistleblower, it was the faulty of those who forced her to take the story outside of the company. It was Jeffrey Skilling fault in the first place that was the unethical accounting was being done, but the company could easily have fixed the problem internally without going bankrupt. If the Kenneth Lay had actually done something about the problem, share value might have gone down after the corrected financials came out, but the company would probably have survived. Companies with a worse situation reverse their fortunes by replacing management and making their process more efficient.
Whistleblower in Enron scandal demonstrates the need for significant reforms in accounting and corporate governance in the United States such as Sarbanes-Oxley act of 2002, as well as for a close look at the ethical quality of the culture of business corporations in United States, and .
In conclusion we found that the actions of Kenneth Lay and Jeffer Skilling were clearly unethical and not justified. The whistleblower actions, on the other hand, were very ethical and represented the selfless things that human beings are capable of doing. It was very unfortunate that the Enron situation occurred at all, but it is fortunate that it was exposed in a somewhat timely manner and people responsible are being brought to justice.
The Enron scandal in relation to whistleblower has much for us to learn , especially as much relates to ethical issues leaders in today's organizations, most of us find that ethical decision making at work is not only "the right thing to do" but a solid business practice for long term sustainability. It can be challenging, though, when the pace of an organization quickens and important decisions that have between right and wrong gets blurred and resulting ethical snowball causes otherwise ethical individuals to make bad decisions.
How ethics were breached in Enron?
Ethic is study of morality. Ethics is considered to be an important concept in doing business and having a good ethic means that a company has a good image. Enron is considered as one of the most celebrated ethic case in the century. We could see many issues that went wrong with in Enron from all personal and managerial perspective which we considered to be unethical. The mark to market accounting adopted by the new company CEO Jeffery Skilling, which meant once a long term contract was signed, they anticipated futures gains, the process anticipated Enron could record gains from what over time might turns out losses, which was not wise to do and that gave a false impressions to the investors as a profitable company.
Kenneth Lay and Jeffery Skilling who were the top management were the top list of liars and deceivers including Louis Borget (the former CEO of the Enron) who diverted the company's money to his personal offshore account. Even the Enron's accounting firm Arthur Anderson ratified and legitimized the company's scenarios and statements regards its prospects. The biggest lack of ethics of all is that Kenneth Ley and Skilling didn't have the integrity to be able to take responsibility for their actions.
Andrew Fastow the chief financial officer on the other hand is one of the most important players in the game of deception. He was able to design a complex web of off balance sheet, with the dual purpose of raising money for the company, and also hiding its massive losses in their quarterly balance sheets. Their financial statements were not transparent. This effectively allowed Enron to appear debt free to investors and analyst, while in reality it owned more than 30 billion dollars at the height of its debt and was actually losing money.
We could also see Kenneth Lay as the early advocate of deregulation, eager to liberate the business men from the government regulations. Enron was also the largest contributor to the Bush campaign. The Enron's traders took the full advantage of the states newly deregulated market and they created the artificial energy shortage, scene which depicts this is the conversation between the traders, where they try to manipulate California's electricity delivery system. Enron knowingly created the California crisis. There was never a shortage of power in California, we could hear the Enron traders laughing about "Grandma Millie" a hypothetical victim of the rolling blackouts and boasting about the millions they made for Enron. Creating false crises and instigating unnecessary blackouts was indeed their lack of responsibility. In this scene we even see the guys laughing and making fun of California families will not be able to pay for electricity. The crises were made possible because of the deregulation organized by the Enron's lobbyist.
The Rank and Yank process initiated by Jeffery skilling created a brutal working environment in the company, every year the employees were rated and ranked from one to five, one was the best and 5 the worst ranking and He made it mandate that 10 to 15 percent of the employees had to be rated as 5s, and those who were rated 5 were meant to be fired from their jobs which indeed disrupted in having the good working environment.
Another important character in the movie was Sherron Watkins who is considered as the whistle blower, Whistle blower actually is somebody who sees the weaknesses or problems in a company and alerts the public about it. It is said in the movies that she had send a memo to the Enron Chairman Kenneth Lay stating about the mistakes and problems in the financial statements and even went personally to talk about the matter but was not paid attention instead they tried to fired her. Her memo did not reach the public until 5 months after it was written. If the top executives had listened and then started to work for the better, the company would have done better.
IMPACT OF THE ENRON SCANDAL
Impact on the Enron Employees and Their Pensions
For Enron's employees, their downfall came both as a result of the collapse of the company for which they worked as well as their own misinformation, assumptions and greed. Enron's stock values nearly doubled in one year, albeit through illegal and unethical activities. This falsely valued stock was bought in huge amounts by Enron's very own employees, who either on purpose or through deception, did not ask any questions about how the stock was growing so quickly in value or what would happen when the price fell (What Really Happened.com, 2002). Moreover, many employees had their entire pensions vested in Enron stock, which any financial analyst will tell you is a recipe for disaster in itself.
Of course, the major event that changed everything for Enron's employees was the collapse of the company in a hail of legal problems, alleged crimes, and finger pointing. When Enron crashed, employees were affected in several ways. Most obvious is the loss of employment for about twenty thousand (20,000) highly skilled and well paid employees, who were forced to try to find work elsewhere virtually overnight. To add insult to injury, many of these employees also had their life savings totally invested in Enron stock which was now worthless. Unemployed and bankrupt, many Enron employees saw their whole life come undone when it came to light exactly what Ken Lay and Jeff Skilling had in fact done.
The impact on the United States
Enron affected the United States in several important ways, in addition to the individual employees themselves. If anything positive can be said about the Enron scandal, it is that the scandal itself heightened awareness of the importance of integrity in Accounting and business in general, and led to the creation of new safeguards to make sure that something like this would not happen again, or at least not to the full extent of the Enron damage.
Ethically speaking, the scandal led to what is perhaps one of the most significant pieces of legislation associated with the oversight of corporate ethics- The Sarbanes/Oxley Act which sets guidelines and requirements for Accounting, financial disclosure, the ethical behavior of corporations, and the like (McCrie, 2001). With this legislation in place, the promise exists for the elimination, if not total eradication of corporate fraud as was so blatantly practiced by the Enron team.
Another major impact of the scandal was the emergence of the California power crises. Two days of rolling blackouts in June 2000 marked the beginning of California's energy crisis which was directly caused by manipulative energy trading, according to a dozen former traders for Enron and its rivals.
The blackouts left more than 100,000 businesses and residential customers in the dark for parts of two days, trapped people in elevators and shut down some offices of high-tech companies such as Cisco Systems and Apple Computer, as well as chipmaking plants, costing millions of dollars in lost revenue.
The Impact on Stock Market
The Stock Market was also highly influenced by the Enron scandal; while it was too late for the Enron investors, the crash of Enron's stock sent out a loud message to all stock investors that it was extremely important to take a closer look at the stocks that one already owned, as well as any that they were considering purchasing from that point forward. On the enforcement side of the Stock Market, the Securities and Exchange Commission tightened its grip on publicly traded stock as well as the companies that issue them, effectively raising the bar for the conduct of stock trades from that point forward (Thomas, 2002). Net effect, it can be said that in yet another irony, Enron did in fact lead to the protection of more stock investors than it originally hurt, although those who were hurt can never be made totally whole once again after the terrible experiences of Enron. The scandal, as already discussed resulted in massive loss of shareholders investment.
Impact on the Outside World
The scandal did not only affect the U.S and its economy but also had major impact on the outside world where ever Enron found itself. Below are some of the effects.
In the Dominican Republic, eight people were killed when police were brought in to quell riots after blackouts lasting up to 20 hours followed a power price hike that Enron and other private firms initiated. The local population was further enraged by allegations that a local affiliate of Arthur Andersen had undervalued the newly privatized utility by almost $1 billion, reaping enormous profits for Enron.
In India, police hired by the power consortium of which Enron was a part beat non-violent protesters who challenged the $30 billion agreement-the largest deal in Indian history-struck between local politicians and Enron.
The president of Guatemala tried to dissolve the Congress and declare martial law after rioting ensued, following a price hike that the government deemed necessary after selling the power sector to Enron.
In Panama, the man who negotiated the asking price for Enron's stake in power production was the brother-in-law of the head of the country's state-owned power company. Rioting followed suspicions of corruption and Enron's price hikes and power outages there, too.
In Colombia, two politicians resigned amid accusations that one was trying to push a cut-rate deal for Enron on the state-owned power company.
Impact on Customer and Suppliers
Lastly, the scandal had massive impact on Enron's supplier and customers. Customer who depended on Enron for electricity in California for example, suffered severely due to price hikes in electricity. Many businesses had to close down since power was cut for two days. Again, many people even lost their lives through accidents as a result of the power cut since traffic lights were not working and others also died through suffocation in elevators. Supplier on the other hand had, probably after losing so much, had to find a new customer which is time consuming and costly.
Lesson Learnt from Enron and conclusion
Enron case reminds us how important ethics and CSR are in business. It does not matter anymore who is responsible for the case, but the more important thing is how we prevent this case from happening again in the future.
In general, there are many parties can learn from Enron case. They are the organization itself including the top management and all of its employees, government as authorized body to control and regulate corporation, auditors, and investors.
We learn some key points from the case as follows:
Leadership.
Leadership is important for a company because a leader can influence many people in the organization and directs them wherever he/she wants to go, especially if he/she is the charismatic leader. However, (charismatic) leader without ethics and integrity is dangerous. They will ruin the company or organization in the future although he/she may bring success at beginning. Leaders must have integrity, and not compromise the integrity and corporate values with something else even for the benefit of organization in the short or long term.
More strict rules and regulation.
Government and/or authorized body should have more strict rules and regulation, close monitoring to the company especially for public companies. Legislator or policy maker should think as criminal and anticipate crime because there are many unethical smart people who can take benefit from others while they may not be aware they are becoming victims of cheating. The theft is often one step ahead than the police. However, CSR and moral obligation go beyond law and regulation. Law and regulation compliance is just the minimum threshold, and companies are expected to do more. They should consider the moral obligation in all actions even if they already have met all the rules and regulations.
Take into account all stakeholders' interests.
All decisions of the company will affect many stakeholders hence they should consider the impacts of their decisions to stakeholders. In many situations, the company cannot maximize their profit because it means cost for other stakeholders. The perspective of utilitarianism can be applied where any decision or action of the company should bring the greatest amount of good result for the people affected. In other words, this means moral imagination, to think ahead what the implications are of their actions on stakeholders in the future.
Work climate or organization culture.
Every employee of the company from lower level to top management should be responsible if something goes wrong in the company, not just try to please his or her boss especially if it is related to unethical decision. This can be realized if only the company has a strong positive culture where integrity, trust, transparency and openness are put as priority. From the perspective of organization, the corporate culture including corporate values should not just nice on the paper like in Enron. They should embed the values into all employees mind and behavior, look for the suitable people to be employed from the beginning, and orient and strengthen the values continuously.
Return on investment
Investors either individual or institution investor should be very careful with their investment, not only look into the high return or profit. They should be alert when an investment promises super normal return, and check carefully how the profit comes. Investors should also be responsible if they suspect that companies cheat.
