Leadership at Enron Corporation
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Published: Wed, 14 Mar 2018
Leadership is a very important factor in today’s business world. Having a strong leader can help to motivate staff and lead to gains in this department such as lower labour turnover, absenteeism levels and it can also increase labour productivity which in turn can lead to a quicker turn around in producing goods or carrying out services. Consequently this can help to build a reputable brand image which in the long run will help a business become more successful due to it being seen as a better brand.
As shown by the recent loses announced by British Airways, the motivation for employees is very important. The loss of £401 million in 2009 shows that a strong leader is needed to motivate staff. Although one of the main reasons for this loss was the recession and ultimately the loss in business class passengers, which accounted for 50% of their revenue before the downturn, the demotivated staff couldn’t have helped because having staff like this led to many strikes and disputes, which created a bad image for the company and therefore made it even less likely for people to use BA to fly abroad. A solution to this would have been to have a stronger leader who could have coped with the sudden downturn and change in demand. With a strong leader confidence could have been kept within the company and therefore people would have kept working hard and ultimately they wouldn’t have suffered as much as they did. Due to the leadership issues at BA in the short-term they have suffered greatly from demotivated staff and therefore a loss in brand image, in the long-term this will lead to a slower restart of the business after the recession and in turn it will be very hard to return to their strong brand image due to people seeing the company being led poorly.
On the following pages, the author is intended to discuss on two of the persons in charge of Enron Corporation, Kenneth Lay and Jeffrey Skilling, who are accountable for the downfall of Enron Corporation. The importance of business leadership and leader qualities which should have to prevent the collapse of Enron will be another main topic on this paper.
Enron Corporation was an American energy company based in Houston, Texas. It was formed in 1985 when Houston Natural Gas merged with Internorth. By early 2001, Enron had morphed into the 7th largest U.S. Company (Gordon, 2002), and the largest U.S. buyer/seller of natural gas and electricity. Enron employed around 21,000 people and was one of the world’s leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of $111 billion in 2000. Once, Fortune named Enron “America’s Most Innovative Company” for 6 consecutive years. After several years of international and domestic expansion involving complicated deals and contracts, Enron was billions of dollars into debt. All of this debt was concealed from shareholders through partnerships with other companies, fraudulent accounting, and illegal loans.
In 1984, Kenneth Lay (1942 – 2006) became CEO of Houston Natural Gas, a big regional pipeline operator. He engineered its merger with Internorth, an Omaha pipeline company, and became CEO of the combined company, which changed its name to Enron. Ken Lay was indicted for his role in the company’s collapse, including 11 counts of securities fraud, wire fraud, and making false and misleading statements. On May 25, 2006, Lay was found guilty on all six counts of conspiracy and fraud. Sentencing was scheduled to take place on October 23, 2006. Ken Lay died of a heart attack in Colorado while vacationing on July 5, 2006.
In 1990, Jeffrey Skilling was hired by Kenneth Lay to work at Enron Corporation. He was named CEO of Enron, replacing Lay in 2001. Amidst the California energy crises, Skilling unexpectedly resigned and sold almost $60 million in Enron shares in August 2001. The company declared bankruptcy in December 2001. In 2006, Skilling was convicted of multiple federal felony charges, including insider trading, securities fraud, and making false statements to auditors. Jeffrey Skilling was fined $45 million and is currently serving a 24-year, 4-month prison sentence at the Federal Correctional Institution in Waseca, Minnesota. His case is currently under appeal.
A simple definition of leadership is that leadership is the art of motivating a group of people to act towards achieving a common goal. It is a process by which one person influences the thoughts, attitudes, and behaviors of others (D. Quinn Mills, 2005). Here the author would like to review literatures of major leadership theories and concepts particularly those that has a bearing on the discussion at hand. The literatures are presented as follows:-
Stogdill (1974) identified few traits and skills as critical to leaders. McCall and Lombardo (1983) researched both success and failure identified four primary traits by which leaders could succeed or ‘derail’.
Behavioural theories on the other hand were more focused on the study of how leaders behaved in organizational settings and went about dealing with people and the tasks. There were many proponents of behavioral theories. Findings of Ohio State University’s research found two major dimensions of leadership behavior which they termed as initiating structure and consideration (Robbins, 2001). Another research that was done by University of Michigan almost during the same period as Ohio State with similar research objectives also found two dimensions of leadership behavior which they termed as employee oriented and production oriented. The third theory is the Managerial Grid by Blake and Mouton which is a graphical representation of the dimensions of leadership behavior by drawing upon the dimensions of both the Michigan and Ohio studies which were termed as “concern for people” and “concern for production”. These two dimensions were integrated to reveal a nine – by – nine matrix comprising 81 different leadership style (Robbins, 2001). Finally the Scandinavian Studies, where researchers from Finland and Sweden began reviewing the data of Ohio state studies to find other dimensions, found that effective leaders exhibit “development – oriented“ behavior more so in a highly changing environment where leaders are required to pursue reforms and changes in the organization in line with changing requirements and support employees in the change initiative and constantly finds ways and means to develop the organization and its people (Robbins, 2001),
Fiedler’s Contingency Theory (Fred Fiedler) shows the relationship between the leader’s orientation/style and group performance under differing situational conditions. The theory is based on determining the orientation of the leader the elements of the situation, and the leader orientation that was found to be most effective as the situation changed from low to moderate to high control. The Hersey-Blanchard situational leadership model (Paul Hersey & Kenneth Blanchard) suggests that successful leaders do adjust their styles. The key issue in making these adjustments is follower maturity, as indicated by their readiness to perform in a given situation. Path-Goal Theory (Robert House) shows leader’s behavior is acceptable to subordinates insofar as they view it as a source of immediate or future satisfaction. Action Centered Leadership (John Adair), emphasizes on what a leader actually need to do. The effectiveness of the leader is dependent upon meeting three areas of need (Task Needs, Team Needs & Individual Needs) within the work group.
Transactional and Transformational Leadership
Transactional leadership represents those exchanges in which both the superior and the subordinate influence one another reciprocally so that each derives something of value (Yukl, 1981). Simply stated, transactional leaders give followers something they want in exchange for something the leaders want. Transactional leaders engage their followers in a relationship of mutual dependence in which the contributions of both sides are acknowledged and rewarded (Kellerrnan, 1984). Transformational leadership originates in the personal values and beliefs of leaders, not in an exchange of commodities between leaders and followers. Both Bass (1985) and Burns (1978) indicated that transformational leaders operate out of deeply held personal value systems that include such values as justice and integrity.
Business Ethics & Ethical Leadership
Ethical leaders embody the purpose, vision, and values of the organization and of the constituents, within an understanding of ethical ideals. They connect the goals of the organization with that of the internal employees and external stakeholders (R. Edward Freeman & Lisa Stewart). In some respects the term “ethical leaders” is redundant—we really are just developing leaders that are focused on delivering value to our customers every day. Leadership should of course be ethical as well (Steve Odland). ERC President Patricia J. Harned has observed: “Right now, we have an ethics bubble, but it’s unlikely to last unless we act to make it permanent. History tells us that when times are tough, ethics improve. When business thrives and regulatory oversight eases, ethics erode.” Ethics in business is gaining quite a bit of attention lately especially as many organizations are getting involved in messy business affairs, corporate scandals, and controversies which are somehow derived from unethical behaviours. The fact remains that these organizations have somehow thrived in their business pursuits at the expense of the public. Such behaviours are only attracting a lot more public and media attention which eventually attracts government attention – who is more likely to respond by way of increased legislations for the benefit of the society.
REVIEW OF THE LEADERSHIP BEHAVIORS
Chima (2005) describes organizational behavior as the result of the decisions of those who have obtained decision-making power, with the decisions reflecting the decision makers’ assessment of what is economically and politically beneficial for themselves and the company. Enron’s executives allowed themselves to be motivated much more by what would benefit them than what would truly benefit the company. The political model of organizational behavior describes this focus on self-interest (Chima, 2005). Money, greed, arrogance, and hubris led company executives to lose focus on working for the good of the company and to act unethically (Gini, 2004).
Ken Lay has been vilified by federal prosecutors and the media as being the key executive in a massive fraud that destroyed jobs, savings, and shareholder wealth. But in reality, Ken Lay was convicted for not being proactive in preventing the fraud or knowing about what was going on inside Enron. He was convicted for ‘honest services fraud’ that did not involve bribes or kickbacks involving the exchange of money (O.C Ferrell & Linda Ferrell). The law is used for alleged transgressions such as making false statements or depriving another of the intangible right of honest service. There were certainly pockets of corruption within Enron, and ethical rule bending was a part of the midlevel management corporate culture. Even Sherron Watkins claims that Ken Lay was some distance from the fraud and was not in any way involved in creating it (Watkins, 2003). Ken Lay was convicted for allegedly not telling the truth about what was happening at Enron. Enron juror Wendy Vaughan said, “I felt it was their duty to know what was going on.” This same theme was echoed by Enron juror Douglas Baggett. “For a man that knew every aspect of that business and seemed to know every deal, why didn‘t he know what was going on?” he asked.
Ken Lay did a good job building the company, but not in managing legal and ethical risks and the company‘s downturn in performance (O.C Ferrell & Linda Ferrell). He was the brainchild of what would have become the world’s most popular power trading house. It was his vision, innovative thinking and undoubtedly intelligence that led Enron to greater heights. He did what every leader desirably should do in going beyond conventional boundaries and taking the off beaten road. But soon it will all turn awry, driven by corporate greed Enron landed into huge trouble.
He avoided finding misconduct and dealing with the individuals involved and continued to claim publicly that all was well with the company, even after he found out that Enron was in trouble. While Ken Lay said he did not know about any misconduct, internal reports told a different story. Internal whistleblower reports had increased 300% between when Lay was CEO and when Skilling took over (Brewer, Chandler, and Ferrell, 2006). This means that there had been a significant increase in reports of misconduct. If Lay had investigated the problems when he returned as CEO and told the employees and public the truth, Enron might have survived (O.C Ferrell & Linda Ferrell).
A particularly ironic example of misinformation, deception and double standards within Enron can be found in its heavily promoted code of ethics, known as ‘RICE’ – an acronym standing for Respect, Integrity, Communication and Excellence. A 64-page booklet was produced, explaining the code in depth. Kenneth Lay issued a memo on the code in July 2000, barely 18 months before Enron declared bankruptcy, in which he concluded that ‘We want to be proud of Enron and to know it enjoys a reputation for fairness and honesty and that it is respected . . . LET’S KEEP THAT REPUTATION HIGH’ (quoted in Cruver, 2003: 333 – emphasis in the original text). As is now known, Enron’s leaders disregarded the code in their daily practice – to such an extent that, to take but one of many examples, a 166-page report was published in 1999 entitled ‘The Enron Corporation: Corporate Complicity in Human Rights Violations’. It documented, amongst much else, how Enron executives paid local law enforcement officers to suppress legitimate and peaceful opposition to its power plant near Mumbai in India (Human Rights Watch, 2002). The code of ethics was thus a dramaturgical device, whose theatrical display cultivated the illusion of noble ideals and generated a convincing spectacle of ethical practice for both the organization’s internal and external audiences (Boje et al., 2004). It also helped douse whatever suspicions people may have been nurturing about the behavior of the organization’s leaders.
Former Enron CEO Jeffrey Skilling was inspired by one of his favorite books, The Selfish Gene, (Dawkins, 1976) to establish a grading system for all employees, routinely firing those who failed to help meet the company’s performance objectives (McLean & Elkind, 2004). Instead of reinforcing the code of ethics and the list of virtuous core values, the actions of leadership established a culture with values of greed and pride. While the printed code of ethics described the company’s commitment to “conducting the business affairs of the companies in accordance with all applicable laws and in a moral and honest manner” (Enron, 2000, p. 5) and espoused the virtues of integrity and respect as core values, the behaviors and attitudes of its people often stood on the opposing pole.
Jeffrey Skilling was equally adept at promoting a charismatic self-image. In line with a company-wide dramaturgical predilection for Star Wars analogies, Cruver (2003: 10) recounts that he was known internally as Darth Vader, ‘a master of the energy universe who had the ability to control people’s minds. This goes to show that he had the ability to conceptualize his people into buying his ideas and had such a great command over his people. One could say that he was autocratic and exercised a great deal of coercive power as it is a known fact that when he was at the peak of his strength he intimidated everyone. Skilling was also sometimes known as ‘The Prince’, after Machiavelli. New recruits were instructed to read ‘The Prince’ from beginning to end, or be eaten alive (Boje et al., 2004). Dramatic nomenclatures were not uncommon.
The author opines that Jeff as he is commonly known could be likened to a Narcissistic Leader one who uses their lucky charm or rather charisma negatively in getting things out of people through cruel or sometimes negative means. Such leaders reward people excessively especially those who delivers favorable outcomes and chop off those who were unable or rather slow in delivering results as expected. This is evident in his “yank and rank” system that he is known to have practiced.,……..
He was an agent who helped Kenneth Lay in achieving his quest of the greater Enron with greater returns. Whilst Kenneth Lay displayed Transformational Leadership through his vision, innovation and intelligent business decisions to totally turnaround Enron into a trading power house, he engaged Jeff in getting things done for him. Jeff was more of a transactional leader who often focused in dealing with the people and the task at hand in achieving the business objectives as outlined by Ken. Jeff was the man working and getting things done and forged an alliance with Fastow who master minded the “mark to accounting method” again with the blessings of Kenneth Lay in deceiving the public to part with their money. Jeff was somewhat transactional based on the order of events that took place.
When strong company leadership would have been needed the most, Enron’s leader left the company. In August of 2001, Jeffery Skilling resigned as President and CEO of Enron and sold shares of his company stock totaling $66 million dollars (Zellner, W.: 2002). Another common behavior of a Narcissistic Leader who retreats and hides for cover and resorts to the blame game when all else fails. Only two months later, Enron restated earnings, stock prices dropped and the company froze shares in an attempt to help stabilize the company. Enron employees, who had been encouraged to invest heavily in the company, found themselves unable to remove and salvage their investments. “If it had been me, I would have given him more time, I guess you can’t win them all.” said Charles Prestwood, who lost $1.3 million when Enron collapsed (Shaheen Pasha, 2006). The company culture of individualism, innovation, and aggressive cleverness left Enron without compassionate, responsible leadership. Enron’s Board of Directors was slow to step in to fill the void and individual Enron employees for the first time realized all of the ramifications of a culture with leaders that eschew the boundaries of ethical behavior. More than 4,000 Enron employees lost their jobs and many their life savings when the company declared bankruptcy in December 2001. Investors lost billions (Shaheen Pasha, 2006).
Immoral & Unethical Leadership
The leadership behaviors exhibited both by Kenneth Lay and Jeffrey Skilling, are totally immoral and unethical, without a shadow of a doubt. Deeply defective leadership from Lay and Skilling played a significant role in creating the company’s culture that led to its undoing, and we may never know whether it was hubris, greed, psychological shock or just plain stupidity that led them to behave in the way they did (Eavis, 2001). Consequences of unethical or illegal actions are not usually realized until much later than when the act is committed (Sims, 2000). Enron’s house of cards collapsed as a result of interacting decision processes. The culture at Enron eroded little by little, by the trespassing of ethical boundaries, allowing more and more questionable behavior to slip through the cracks. No doubt, Kenneth Lay & Jeffrey Skilling are fully responsible and accountable for Enron’s collapse and eventual bankruptcy. It was their unethical and immoral leadership that brought such misery.
EMERGING TRENDS & DEVELOPMENT AFFECTING ORGANIZATIONS & BUSINESS LEADERS
Change is inevitable in the life of an organization. In today’s business world, most of the organizations are facing a dynamic and changing business environment. Organizations that learn and cope with change will thrive and flourish and others who fail to do so will be wiped out. Most changes arise from the wider environmental forces that are made up of political, economic, social, technological, legal, international and labour market environments. There have been many developments in organizational practice and undeniably one of the most spoken about these days is Corporate Social Responsibility or CSR as it is most commonly abbreviated. CSR is the applied part of business ethics which shows an organization’s ethical commitment through initiatives and activities an organization undertakes as part of its responsibility towards the society. As more organizations get into ethical problems affecting long term reputation, CSR and ethical practice is gaining momentum and seen as a practice that is able to shape ethical behavior and govern all organizational actions to be able to steer clear of troubles of ethical nature.. Centered on the ethical principle of do no harm CSR is simply what most organization would term as the next best practice – a must have for organizations wishing to achieve a lot more especially as people are becoming all that more knowledgeable and informed due to increasing literacy and media exposure.
Consumers are starting to expect more when it comes to companies’ attempts to “do good.” (Caroline McCarthy, 2010). CSR is about how companies manage the business processes to produce an overall positive impact on society (Mallen Baker). The question of CSR has to do with the extent to which a company is responsible for those effects, and the extent to which companies have an obligation not just to avoid social harms or risks but to contribute socially beyond making a product people value (Chris MacDonald, 2010).
British Petroleum (BP)’s oil spill in the Gulf of Mexico has many political pundits and business speculators observing how the U.S. government and the oil company will address such a massive environmental disaster. On April 20, 2010, an oil well owned by Transocean Ltd. and operated by BP exploded in the Gulf of Mexico. It is estimated that 800,000 litres (5,000 barrels) of crude continues to leak from the ocean floor into the gulf every day. Already, the accident has killed 11 workers. The explosion has had devastating effects for the environment, and tourism and local businesses have also suffered losses.
“Corporations, no matter how virtuous they claim to be, still have a hierarchy of self-interest. Practitioners of CSR may claim to attend to a “triple-bottom line“-putting economic, social and environmental objectives on equal footing. But who really believes that profits, short-term ones at that, still do not take precedence in boardroom decisions?” (Konrad Yakabuski, G&M, 27 June 2008). “The Gulf of Mexico is a very big ocean,” Hayward told The Guardian. “The amount of volume of oil and dispersant we are putting into it is tiny in relation to the total water volume.” Although Hayward showed his unwillingness to contain the issue fast, he has no choice but to take into account and responsible on this oil spill.
There have been scores of such scandals some of which goes unreported. This calls for greater leadership for a greater cause. Ethical Leadership is required from the leaders of current age. Whilst a leader constantly directs, guides and devices strategies and plans in achieving organizational goals, a leader needs to be sensitive to current developments, societal requirements and changing expectations of the customers, governments and all the stakeholders. While in pursuit of achieving organizational goals which are off course profit related, a leader has to ensure that the process through which these goals are achieved does not in any way cause harm to the environment, the society, the consumers, the government and all stakeholders concerned. He has to be on his toes, so to speak to constantly be on guard and achieve profitable aims while operating in line with acceptable standards. Pluralistic outlook is important for an organization and for that a leader should remain committed to ensure that it is responsible for the entire population ecology within which the organization inhabit. Conscious efforts must be taken to reach out to all stakeholders and fulfill moral obligations that are due to them. They must be seen as being successful for all and not just for themselves. While being focused on maximizing returns which are ultimately important as argued by Milton Friedman, to keep things going, a leader needs ensure that no harm created in the process of achieving its goals.
To prevent Enron collapse, the Enron’s leaders, Kenneth Lay and Jeffrey Skilling, are highly recommended to rule ethically. “We need to stress that personal integrity is as important as executive skill in business dealings….Setting an example from the top has a ripple effect throughout a business school or a corporation. After nearly three decades in business, 10 years as chief executive of a Big Eight accounting firm, I have learned that the standards set at the top filter throughout a company…. [Quoting Professor Thomas Dunfee of the Wharton School:] ‘ A company that fails to take steps to produce a climate conducive to positive work-related ethical attitudes may create a vacuum in which employees so predisposed may foster a frontier-style, everyone for themselves mentality.’ “(Russell E. Palmer). Instead of forging numbers, they should have been honest with their investors no matter how many of them would have lost merely from statistical information. But, by not being responsible enough in informing the public of true valid numbers, they had compromised and indeed lost everything.
Enron should improve their ethical performance in business with build in the ethical safeguards into the company. These includes develop or enhance the code of ethics, setup an ethics committee to evaluate the ethical practice among employees, as long as the leaders. “It is the mark of the cultured man that he is aware of the fact that equality is an ethical and not a biological principle.” (Ashley Montagu) Ethics training programs should be conducted to raise the awareness of the importance of ethical business behaviors. Effective ethics programs require more than having a code of ethics document – even a thorough and well-written ethics document is not enough to help an organization if it is infrequently employed. Exemplary ethics programs require that the organization consistently and routinely follow these standards in decision making and implementation of those decisions. Ethical standards are endorsed in a top-down manner by the leadership of an organization (Sims 1994). A company’s leadership should be visionary in that top executives should define and ascribe to a mission that emphasizes ethical decision making as a component of long-term organizational efficacy. It is up to the leaders to define the ethical values of the organization and codify an approach to making decisions on ethical issues, as well as to set a strong example in following these ethical guidelines. Once ethics are codified, leaders should encourage, analyze, and reward ethical decision making (Shannon A. Bowen, 2010).
Enron has made disastrous financial associations that have removed it from its main object of activity, energy, by trading completely different goods such as water, paper, steel and bandwidth for computer networks, space advertising, credit risk and derivative instruments on weather. The company’s theory was that almost anything could turn into merchandise that can be transacted. The postmodernism of the managerial approach – the deconstruction of the usual archetypes by combining real assets with the innovations of the new economy – was supported by an edifice, however ramshackle, corroded by the lack of integrity and ethics in the all four tiers: economic (profitability); social dignity, the ambiental viability, politics’ equity. Former employees of the American companies declare that for the heads of Enron, the most important thing was the immediate financial success, at any price, with any means, and they were inflicted that it is allowed to lie, cheat or to make their own rules, as long as they make money. If the Enron’s leaders had paused for a while, crossed their fingers and considered their social responsibility while making money unethically, and the consequences that they need to bear after causing more than 4,000 Enron employees lost their jobs and many their life savings when the company declared bankruptcy in December 2001. Investors lost billions (Shaheen Pasha, 2006), probably Enron can be saved. CSR advocates, whether companies, governments or the rapidly expanding CSR consultancy industry (Murray and Alasdair, 2003) argue that a company which employs an effective corporate social responsibility strategy can increase its long-term profits, even if initially it has to bear higher costs. The European Commission also suggests in its Green Paper: “There is a growing perception that sustainable business success and shareholder value cannot be achieved solely through maximizing short-term profits but instead through market-oriented yet responsible behavior.” In finality, the author is of the opinion that Enron could have survived if it implemented a genuine cultural turnaround strategy based on sound ethical practices.
The debacle at Enron highlights the leadership style that helped create a break-the-rules and win-at-all-costs culture or ethical climate that resulted in unethical and illegal consequences. The Enron leaders’ actions and behavior communicated important messages to others in the organization about the company’s ethical climate. Enron’s culture seems to have created an atmosphere ripe for the unethical and illegal behavior that occurred. At Enron, it was clear that the stock price was the only thing that mattered. Executives at Enron didn’t care how you got your numbers up—that was up to you; as long as you were successful, you would be rewarded. Short-term gains were the name of the game, and personal gains increased Enron’s employee’s motivation. In both words and deeds senior leadership communicated their priorities to employees: short-term gains and profits at all costs. Enron executives wanted their employees to focus on today’s bottom line and to be cleverer than the competition. Short-term transactional endeavors were an important part of organizational success, and employees were only as good as their last performance. Personal ambition and greed seemed to overshadow much of the Enron top executives’ corporate and individual lives. As evidenced by their 2001 stock trades Enron’s executives were committed to maximizing their individual wealth, and rules of ethical conduct were merely barriers to success. The counter norms of secrecy and deceitfulness were accepted and supported by the Enron organization; it did not pay to tell the Enron secrets. Many other organizational counter norms promoted morally and ethically questionable organization practices. The leadership and culture that brought Enron to its knees makes hopes for improvement look bleak. The company filed for bankruptcy, and former and current employees of the company will continue to go through court hearings. This will be a lengthy process, with the outcome being only a guess. Enron will survive if it implements a genuine cultural turnaround strategy based on sound ethical practices.
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