management

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The organizational culture and leadership styles of Enron

To begin, one should look at the background of Enron and how it became “the largest energy trading company in the world” (Needle, 2004) in less than two decades. Founded in 1985 in a merger between Houston Natural Gas and InterNorth, Enron expanded from pipelines to electricity and online trading. Enron was based in Houston, Texas and it built pipelines, power stations and gas plants in the USA and around the world; Kenneth Lay was the Chairman and CEO. According to the documentary film “Enron: The Smartest Guys in the Room”, the arrival of Jeffrey Skilling as CEO was a turning point in Enron's business activities. Skilling was a visionary initiator and he saw the future of Enron as a middleman in nationwide and global energy trading. The tide of energy deregulation in the 1990s made it possible for Enron's senior executives to convince investors, financial regulators, and the United States' Government that its sale of financial instruments also known as derivatives was economically sound.

ORGANIZATIONAL CULTURE

Organisational culture was one of the important aspects which played a crucial role in the downfall of Enron. Using “Schein's layered conceptualisation of culture” (Rollinson, 2008) one can begin by analysing the core of the culture also known as basic assumptions. In this layer, main desire of an organization is to create wealth for its shareholders, employees, and investors. As revealed in the documentary film, the management and trading floors were obsessed with value of the Enron stock from which wealth would be generated; people inside Enron literally did whatever they could to ensure that the stock kept rising to attract further investments.

The next layer in Schein's model is values and beliefs. Here basis of reward and effort are in instantly recognised as an important aspect of Enron. As mentioned before, Enron paid large bonuses to employees and partners who performed their job exceptionally well. To receive these rewards some divisions of Enron falsified information regarding their financial performance. In this layer we also find trust and honesty which Enron did receive from its customers and employees until its downfall. In fact the shock and disbelief of its employees and customers evidently supports the notion that Enron was a respected business in the investor community and in the government.

The final layer, artefacts and creations, are those most visible to the general public. As the 7th largest company in the USA there was relatively a lot of publicity regarding Enron as the leader in innovation having received the Fortune honour of “America's Most Innovative Company” six years in a row. It became a norm on the trading floors to work overtime in hope of receiving bonuses. In the documentary, a local priest revealed how some employees came to see him for counselling as they felt that Enron was “taking over” their lives. Symbols of hierarchy were also explicit; Kenneth Lay, Skilling and most senior managers occupied large offices in the top floors while traders operated on the lower floors. Myths and stories is a very interesting aspect since senior management circulated stories regarding devilish trips inducing the idea of a macho culture where it is admirable to take risks. This furthered the notion that it was acceptable for people at all levels in the Enron hierarchy to take risks to expand the company. Last but not least, taboos were considered the few but strongly outspoken criticisms it received by few investors and journalists; these were ignored completely. This blunt ignorance played a major role in its downfall because it could still be in business today if it had responded to early criticism.

LEADER

There are a lot of definitions for the term “Leader”. One of the definition which suits the leader in this case study being “A person who holds a dominant or superior position within its field, and is able to exercise a high degree of control or influence over others”.

Jeff skilling, the CEO of Enron has been depicted as the leader in this case. He was aggressive, intelligent and possessed exemplary leadership qualities which was incremental in creating a culture of aggression and incentivised competition in the organisation. He wanted to alter the way in which Energy was being traded. He succeeded in initiating a market for natural gas wherein it started being traded as stocks. He converted energy into a financial instrument and this led to Enron becoming the largest energy trader in North America.

In the movie, Bethany has said that Jeff Skilling was an inspirational leader who inspired his work force and empowered them. He was a genius who controlled the working environment with his intelligence, asking employees to believe that they are the best group of employees and understand that they are associated with the best organization in the world.

LEADERSHIP TRAITS

Traits are distinguishing qualities or characteristics of a person, while character is the sum total of these traits. The more of these you display as a leader, the more your followers will believe and trust in you. The five leadership traits/leadership qualities are honest, forward-looking, competent, inspiring and intelligent.

Jeff skilling was very much forward-looking in nature as he always wanted to make maximum out of the business and wanted Enron to be one of the largest organization in the world. He was inspirational to many people including the share holders, employees, media and even stock brokers/analyst. These people blindly followed him because of his charismatic leadership style. He was one the intelligent minds in Enron. Under his leadership the organisation transformed from a small energy market player to the biggest energy trading company in North America with a rapidly expanding global operations network. The company was being driven by the aggressive and individualistic attitude which was strongly ingrained in the system by Jeff Skilling and the policies of the management team for attaining short term profit. These were successful in achieving the results in hindsight but were seriously damaging the ethical balance in the system. His charisma had many dark side tendencies which overlooked the ethical side of the business leading the company to go down in a few years time frame.

LEADERSHIP STYLE

An influential definition of leadership states as follows: “The process whereby one individual influences other group members towards the attainment of defined group, or organizational goals.” (Barron & Greenberg, 1990).

The case of Enron singles out two individuals in particular with leadership qualities namely Kenneth Lay and Jeffrey Skilling. Group members may be considered to be the employees of Enron but in the documentary mentioned above, many say that the traders performing the day-to-day business activities are those most influenced by the CEO. From the quote one can also see that the traders' desire to be known as the ones making the most money for the company and the desire for Lay and Skilling to be rich and influential are two goals which go well hand in hand. However it may be this mutual desire which blinded both partners and drove them to greed and illegality. It is now one turns to the role of leadership in the downfall of Enron.

Although both Lay and Skilling essentially are managers appointed by those with the most shares in Enron, it is evident that during their tenure they possessed leadership qualities which affected their subordinates.

Using first the descriptive approach to leadership (Rollinson 2008), one can observe that many people inside and outside the Enron admire Lay for his rise from a modest preacher family to a “Washington-insider” and CEO of a billion dollar company. In America, individualism is regarded as the predominant workplace culture and as CEO of Enron Lay's influence was therefore significant. In essence Lay embodies the capitalist dream in the US in particular. Having received the leadership mantel Lay bluntly lied to his subordinates and investors regarding the financial state of Enron as it faced financial difficulties. This prolonged the period of debts and may be the reason to the speed of the eventual collapse.

Jeffrey Skilling as well as being the appointed CEO possessed leadership qualities of a different kind. The functional approach to leadership (Rollinson 2008) shows that Skilling arguably acquired his leadership status as accredited with the visionary movement of Enron into the online trading medium. Ironically, it is likely that this new complex trading paved way for the accounting fraud to come and caused the downfall.

An aspect perhaps less investigated but which also affects leadership is the idea of reciprocal causality (Rollinson 2008). The followers, in this case the employees; in return for their dedication to the leaders also demand something in return. It is acknowledged that many traders received large bonuses for creating wealth for the company. At best this gave employees incentive to work hard with dedication and work overtime and at worst it engaged some, in particular traders, in illegality as shown in the documentary with the “California blackouts”.

5.1 Transactional and transformational leadership

In transactional leadership, the leader holds the power and has the control over his employees or followers. He provides incentives for followers to do what he wants. Hence, if an employee does what is desired, a reward will follow and he or she does not, a punishment or with holding of the reward will occur.

In transformational leadership, positive changes can be observed in the followers. Transformational leaders are very energetic, enthusiastic and passionate by nature. They are generally concerned about the processes and are always involved in it to make it even better. These kinds of leader interact with their employees, take their suggestions into consideration and help them to succeed in their work.

“The best leadership is both transformational and transactional. Transformational leadership augments the effectiveness of transactional leadership; it does not replace transactional leadership, (Walsman, Bass, & Yammarino, 1990).” Transaction is an effective and necessary tool for leaders at all levels. Transformational leaders generally resort to the transactional style when they do not find a suitable solution for any of the problem faced. “When the transformational leader sees him/her in a win-lose negotiation he tries to convert it into a win-win problem solving situation. If this is not possible, then he or she can display the transactional skills necessary as an effective negotiator, (Walsman, Bass, & Yammarino, 1990).” Transactional and transformational leadership are different from each other but still they are not mutually exclusive processes and different leaders may use both of these based on different situations. This may be termed as situational leadership where the leader responds differently under different circumstances showing the behaviour of both transactional and transformational leadership.

Jeff Skilling demonstrated both these styles in his leadership. He was transactional in the sense that involved an exchange taking place between leader and follower. He wanted employees to believe on his words and made sure that each and every employee work according to his instructions and timelines, making sure that maximum output is achieved in the minimum time. For this, he kept on motivating employees by rewarding them for the work done. He was also simultaneously transformational where in the followers were motivated to transcend their own self interests for the good of the group, organization, or society. According to Jeff Skilling, certain elements like hiring the most talented people and providing them a challenging environment for them to perform to their best, flattening the traditional corporate hierarchy to encourage personal accountability, efficiency, and motivation, being first in new markets and adopting the best systems and technology are critical for maintaining an environment where innovation can thrive.

5.2 CHARISMATIC LEADERSHIP AND CULT

In charismatic leadership, the leader has the ability to communicate and behave in such a basic and emotional way that the followers are inspired and motivated in a great way. Being "charismatic" may be difficult, but not impossible; because many people have the capability to communicate on a very powerful emotional level and they even include some personality traits. Charismatic leadership is not an essential to be an effective leader and more ever relying on charisma to lead can also be problematic. Jeff Skilling was one of the charismatic leaders, who lacked other leadership characteristics and skills (e.g. integrity), who led his followers into situations that turned out horribly.

At Enron, Skilling aimed at developing a charisma aura around him. He did every possible thing to promote himself and his views which was consistent with the business. The employees at Enron, media and even the market analyst believed his words blindly without cross verifying or questioning any his argument or declaration made by him. Skilling and Lay were successful in controlling the minds of people. They were internally known as Darth Vader.

Charisma is a powerful attribute in many cult leaders which is used in a negative way for self-serving and being destructive to others. Charisma is useful during the cult formation. Only an influential and strong-willed leader can convince others to follow him and belief his words. People misinterpret the quality of this cult leader and the leader foster them belief in his special qualities.

At Enron, the leaders had the tendency of living in unusual wealth; this is a disparity that is used in reinforcing the intuition that the individuals possess extraordinary charisma, insight and abilities. The CEO led an ultra opulent life. A good example is Kenneth Lay, an executive leader of Enron; he had to pay a sum of $7 million for an apartment, which together with his wife transformed into a Venetian fortress with deep velvets, dark woods and a period sanctuary (Watkins & Swartz, 2003).

POWER AND INFLUENCE

Leaders generally use two kinds of powers- Position power which is due to the position they hold in an organisation and Personal power. We can safely say that Skilling had both at his disposal. In terms of position, he would offer rewards to people who did a good job, hence demonstrating Reward power and also people would comply to his orders as they thought he was at a level of authority t make that request and they had to obey. This showed the use of legitimate power. Also due to the knowledge he had and what was demonstrated in the movie followers even looked up to him, this showed the use of expert power. He also used referent power which was the personal power he could use to influence people. People wanted to gain his approval as they admired him and were awed by his charismatic personality and were willing to do anything to stay in his good books or be commended by him.

Skilling influenced people by rational persuasion and inspirational appeals by being logical in his arguments but also at the same time appealing to their values and getting their commitment as this was needed to prevent the whistle blowing of all the activities that were happening within Enron. All employees were part of the Enron game, which could only be done by showing them a better future for the organisation.

FOLLOWERS

Followers were in awe of Skilling. They drew a blind eye to everything wrong happening within Enron. The charismatic personality was having its effect on the people, and even though under normal situations they probably would have acted different, under Skilling’s leadership, they were committed and loyal. They wanted his approval, and they believed in the vision he showed them. They were unaware of the fact that they were being played. Skilling’s job was to get higher profits for all the stakeholders and that was exactly what he was trying to achieve. As mentioned in the movie, “Enron captured the hearts and minds of stock analysts”. Employees were very much surrounded by the healthy environment of the company and the stock price of Enron was an obsession among them. They believed that Jeff Skilling was the person responsible for this and thus followed his instructions to enjoy the benefits of the company’s performance. They worked extra hours to fulfil the demand raised by Jeff Skilling as they were been promised bonuses and rewards for the completion of task on time.

LEADERSHIP DEVELOPMENT

Enhancement of leadership quality and skills of a leader within an organization is termed as leadership development. These skill enhancements results from experience and time spent within the organization.

Jeff Skilling was one of the finest minds and that was the reason why Kenneth Lay recruited him and introduced him to Enron. He spent time understanding the essentials of Enron and followed the directions of Lay to get a grip on the organizational process. Soon he understood that the aura of Enron was based on the belief of the stakeholders who followed Enron strategy blindly. He, as a leader, made sure that the followers follow his words and work according to his strategy. For this he followed the transactional approach to make sure that every employee is giving his best effort to get the work done on time, so that he is eligible for rewards. At the same time he also added some transformational methods to make the employees feel that they are equally involved in organizations development. As per the movie, he even changed up his get up to look more vibrant. He also followed situational leadership methods to tackle different situation and keep everyone on the same track that whatever he is doing is for the betterment of the organization and its stakeholders. His leadership aura spread and everyone started feeling that whatever Skilling does is a stepping stone towards the success of Enron and everyone is going to be benefitted from his strategic move. He even became the CEO of company within a few years time frame. He developed, from an employee, to a successful leader who was considered as icon in US industries. This self-confidence of his increased over the period the time and he kept exploiting the resources to fulfil his dreams and soon the dark side of his charismatic leadership was exposed.

CONCLUSION

The reasons for the downfall of Enron were analysed from the leadership and ethical perspectives. The movie Enron – “The Smartest Guys in the room” was a great source of information which helped in conducting an analysis about the cultural and leadership patterns in the organization. It was observed that Enron had an obligation to all its stakeholder but those were not met at the end. Enron executives made unethical and illegal decisions based on their personal benefit but those went totally wrong.

The leader’s job was to provide the vision for the group but it was done in an unethical manner. The view provided to the employees, media, stock analysts and external world was doctored unethically and improper practises were projected as the best business practises by the ubiquitous skills of Jeff Skilling and Kenneth Lay. The dark side of charismatic leadership was observed in the movie, where Jeff Skilling had a dream and ability to get the company to support that dream but he used his charismatic aura to influence people in wrong direction. He provided a self-manipulated framework by which the employees in the organization can achieve their dreams in the form of rewards and bonuses. But the company’s culture did not allow the employees to challenge and question the ideas of Jeff Skilling. Rather they were given the target and timeliness and asked to achieve it by planning accordingly, in order to be eligible for rewards and bonuses. Enron did not allow dissent, people who suggested alternatives were castigated for not being “team players”. The leaders produced an environment of fear, stagnation and antipathy in the organization and this led to the downfall of the Enron.


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