Ethics in Strategic Management And Corporate Governance

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Johnson & Johnson is a global American pharmaceutical, medical devices and consumer packaged goods manufacturer founded in 1886. Its common stock is a component of the Dow Jones Industrial Average and the company is listed among the Fortune 500. Johnson & Johnson consistently ranks at the top of Harris Interactive National Corporate Reputation Survey,ranking as the world's most respected company by Barron's Magazine,and was the first corporation awarded the Benjamin Franklin Award for Public Diplomacy by the U.S. State Department for its funding of international education programs.

The corporation's headquarters is located in New Brunswick, New Jersey, United States. Its consumer division is located in Skillman, New Jersey. The corporation includes some 250 subsidiary companies with operations in over 57 countries. Its products are sold in over 175 countries. Johnson & Johnson had worldwide pharmaceutical sales of $24.6 billion for the full-year 2008.

Johnson & Johnson's brands include numerous household names of medications and first aid supplies. It's well known consumer products include the Band-Aid brand-line ofbandages, Tylenol medications, Johnson's baby products, Neutrogena skin and beauty products, Clean & Clear facial wash and Acuvue contact lenses.

Business-level strategy:

In general, the pharmaceutical segment enjoys a number of competitive advantages as identified by Michael Porter's Five Forces Model. The pharmaceutical sector is generally immune to the threat of new entrants. The cost of moving into this sector is prohibitive for most potential entrants, who are more likely to be acquired by an existing company. Rivalry among firms is, however, quite high and competition for research talent, market share, and so forth is intense. The business strategy of Johnson & Johnson emphasizes differentiation through continuous innovation. This is marked by new products, and robust product development pipelines. The pharmaceutical business segment of Johnson & Johnson enjoys a number of distinct competitive advantages and internal competencies. Among these advantages and competencies are such items as a well-established and highly productive research and development pipeline, an excellent cash position, superior marketing ability, and an ongoing commitment to high quality science. Research and development and various scientific laboratories are largely responsible for identifying potential products, testing and evaluating those products, and moving the products through the pipeline toward eventual Food and Drug Authority approval. Marketing is a major participant in ensuring that both prescription and over-the-counter (OTC) pharmaceutical products are appropriately priced, packaged, positioned, and advertised.

Some of the major new product launches in 2010 include:

OneTouch Verio (TM), a new blood glucose monitoring system that provides the next generation of accuracy and precision

ACUVUE TruEye(TM) Brand Contact Lenses, the world's first daily disposable silicone hydrogel lens

Cordis NEVO(TM) Coronary Stent, featuring unique reservoir-based technology to treat cardiovascular disease

Fibrin Pad, combining two biomaterials and two biologics to stop bleeding during surgical procedures.

Corporate level strategy:

Corporate level strategy of Johnson & Johnson is marked by special emphasis laid by the corporate management requiring each of its businesses to be number 1 or number 2 in terms of market position in each of the major markets it operates in. Examples include:

Cordis: a leader in the treatment of cardiovascular disease;

DePuy: a leader in orthopedics, spinal care, sports medicine and neurosurgical devices

Diabetes Care: a leader in products that allow people with diabetes to monitor and control their blood glucose levels;

Ethicon: a leader in sutures, tissue repair and reinforcement products, women's health, aesthetics and conditions of the ear, nose and throat;

Ethicon Endo-Surgery: a leader in surgical device solutions for minimally invasive and open surgery; and Advanced Sterilization Products, a leading developer of solutions for the reduction of healthcare-associated 2 infections;

Ortho Clinical Diagnostics: a leader in medical diagnostic products;

Vision Care: a leader in the global contact lens market.

Johnson & Johnson has largely relied on organic growth, and has been a small player in the mergers and acquisitions space. However, it does strategic acquisitions to strengthen its core portfolios and expand into adjacent markets. Acclarent, FinsburyOrthopaedics and Gloster Europe are acquisitions that provide breakthrough surgical products to move into ear, nose and throat procedures; expand its orthopedics portfolio; and increase its portfolio of infection prevention technologies.

International strategy:

The current emphasis of Johnson & Johnson's International Strategy is to expand in emerging markets. This is accompanied by globalizing of current portfolios; developing more localized, market-appropriate products; and leveraging their medical training institutes for educating medical personnel about the latest surgical techniques and treatments.

Grow the core global product portfolio - The company is focused on growing share in its core products (e.g., REMICADE®, RISPERDAL® CONSTA® and CONCERTA®) through greater market penetration, new commercial models and an expanded geographic presence

Accelerate growth in emerging markets - With 95 percent of the world's patients and much of the growth in health care occurring outside the U.S., the company continues to use its global presence, decentralized operating model and productive relationships to serve local unmet medical needs around the world.

Participate in dialogues shaping health care policy - Through its participation in global health care policy dialogues, the company is part of the effort to reduce the global burden of disease by driving greater efficiencies and increased access to affordable health care.

Governance Mechanisms and Ethical Behavior:

It is important to serve the interests of the firm's multiple stakeholder groups for an organization. These stakeholders can be divided into the following three categories.

Capital Market Stakeholders

Product Market Stakeholders

Organizational Stakeholders

Some observers believe that ethically responsible companies design and use governance mechanisms that serve all stakeholders' interests. In this part we expatiate on Johnson and Johnson's ethical practices with regards to the above agenda.

Strategy and Ethics:

Organisational strategists are responsible for determining how the company does business.  This responsibility is reflected in the organisational culture, which refers to the complex set of ideologies, symbols, and core values shared throughout the company and that influences the way it conducts business. The company's culture is the social energy that drives, or fails to drive, the company.

For example J & J has a strong mission statement in its credo which supposed to guide the company's actions. It covers four main areas of responsibility: customers, employees, communities and shareholders.

J & J's Credo


We believe our first responsibility is to the doctors, nurses and patients,

to mothers and fathers and all others who use our products and services.

In meeting their needs everything we do must be of high quality.

We must constantly strive to reduce our costs

In order to maintain reasonable prices.

Customers' orders must be serviced promptly and accurately.

Our suppliers and distributors must have an opportunity

to make a fair profit.

We are responsible to our employees,

the men and women who work with us throughout the world.

Everyone must be considered as an individual.

We must respect their dignity and recognize their merit.

They must have a sense of security in their jobs.

Compensation must be fair and adequate,

And working conditions clear, orderly and safe.

We must be mindful of ways to help our employees fulfill

their family responsibilities.

Employees must feel free to make suggestions and complaints.

There must be equal opportunity for employment, development

and advancement for those qualified.

We must provide competent management.

And their actions must be just and ethical.

We are responsible to the community in which we live and work

and to the world community as well.

We must be good citizens - support good works and charities.

And bear our fair share of taxes.

We must encourage civic improvements and better health and education,

We must maintain in good order

the property we are privileged to use,

protecting the environment and natural resources.

Our final responsibility is to our stockholders.

Business must make a sound profit,

We must experiment with new ideas,

Research must be carried on, innovative programs developed

and mistakes paid for.

New equipment must be purchased, new facilities provided

and new products launched.

Reserves must be created to provide for adverse times.

When we operate according to these principles,

the stockholders should realize a fair return.

Tylenol crisis: Placing people above over products and property:

Johnson & Johnson's true test of doing the right thing occurred in l982 during the Tylenol tampering.

At the time, Tylenol was the company's largest single money-maker.

During the incident, their market share of the analgesic market dropped from 37 percent to 7 percent within weeks and the company's share price dropped 10 percent.

However, in five months, a new tamper-proof Tylenol was back on the shelves, and it had regained 70 percent of its previous market share. Within three years its total market share was reached.

How the Credo helped them get over the crisis:

The premise of the document was that if you order your priorities, most of the time it will work out. There are conflicts, of course. It was not in the stockholders' interest to take a $50 million after-tax write off. Nobody ever complained about that.

The company was convinced that it was going to lose that brand.

The decision was made to recall the capsules altogether. As a result of that, they did find three bottles on the shelves in Chicago that were poisoned.

Credo a part of the culture at J & J:

You'll find the Credo part of the vocabulary at Johnson & Johnson, from developing 'Credo-based' leaders to 'Credo-challenge meetings' to 'Credo surveys'. Credo challenge meetings, began in l976, and continue till today at J&J. About 25 people attend each session and the session deals with the results of the Credo survey, which is done on a three year cycle. The Credo survey is a series of more than a hundred questions that give each employee (anonymously) the chance to rate how well the company is living up to the tenets of the Credo.

Johnson & Johnson's responsibility to its publics first proved to be its most efficient public relations tool. It was the key to the brand's survival.

Capital Market Stakeholders:

Corporate Governance:

The values embodied in the Credo guide the actions of the people of the Johnson & Johnson family of companies at all levels and in all parts of the world. They have done so for more than 60 years. These Credo values extend to the accounting and financial reporting responsibilities. The management is held responsible for timely, accurate, reliable and objective financial statements and related information. As such:

They maintain a well-designed system of internal accounting controls.

Encourage strong and effective corporate governance from our Board of Directors.

Continuously review our business results and strategic choices.

Focus on financial stewardship.

Accounting Controls:

These include self-assessments and internal and external audit reviews of our operating companies, which concludes with the "Management's Report on Internal Control over Financial Reporting," printed in their Annual Report.

Independent Auditor:

PricewaterhouseCoopers LLP, an independent registered public accounting firm, performs an integrated audit of our consolidated financial statements and internal control over financial reporting. Their opinions, as stated in the "Report of Independent Registered Public Accounting Firm" are based on their audits and are printed in the Annual Report.

Audit Committee of the Board of Directors:

The Audit Committee is composed solely of independent directors with the financial knowledge and experience to provide appropriate oversight. They meet regularly to review internal control matters as well as key accounting and financial reporting issues. The Audit Committee also meets regularly in private sessions with the independent auditors, the Chief Financial Officer, the General Counsel and the Vice President, Internal Audit to discuss the results of their work, including:

Observations on the adequacy of internal financial controls,

Quality of financial reporting,

Confirmation that they are properly discharging their responsibilities.

Business Results:

The Executive Committee reviews financial results and develops strategies and initiatives for long-term growth. The Committee's intent is to ensure objectivity in our business assessments, constructively challenge the approach to business opportunities and issues, and monitor the business results and related controls.

J & J follows the following measurable environmental strategy:

It has established

Its Healthy Planet 2010 Goals

Measures its Environmental Performance

Maintains Environmental Partnerships

Facility Transparency

Enron- A case Study

The unethical practices that made things go haywire

Enron had followed highly non-transparent financial statements since it did not clearly depict its operations and finances with shareholders and analysts. The business model of Enron was highly complex and in order to cover them it misrepresented its earnings and modified its balance sheet to portray a favourable depiction of its performance. Higher income and cash flows were reported and the assets were shown to have inflated values. Hence the financial statements always followed a very unaccountable and unreliable procedure of display to stakeholders, which always showed a much rosy sight of the company then it actually was.

Also, Enron and other energy suppliers earned profits by providing services such as wholesale trading and risk management in addition to building and maintaining electric power plants, natural gas pipelines, storage, and processing facilities. When taking on the risk of buying and selling products, merchants are allowed to report the selling price as revenues and the products' costs as cost of goods sold. However a "service provider" provides a service to the customer, but the risk of buying and selling is not there since service providers report trading and brokerage fees as revenue, not the full value of the transaction. Although trading firms such as Goldman Sachs and Merrill Lynch used to follow this procedure for reporting revenue, Enron instead elected to report the entire value of each of its trades as revenue. This model was much more aggressive and irrational. Enron's method of reporting inflated trading revenue was later adopted by other companies in the energy trading industry in an attempt to stay competitive with the company's large increase in revenue. Hence in a way Enron started the practice of irrational reporting and its competitors soon followed

In Enron's natural gas business, the accounting was done with respect to each time period. In this technique the company listed actual costs of supplying the gas and actual revenues received from selling it. However with passage of time it was suggested that the trading business should adopt mark-to-market accounting with the intention of reflecting true economic value. Enron became the first non-financial company to use the method to account for its complex long-term contracts. The concept of mark-to-market accounting requires that once a long-term contract is signed then income is estimated as the present value of net future cash flows. The problem with this method is that estimating future cash flow is a difficult call because it depends on the ability of the people estimating it. There are a lot of variables which are impossible to predict. Also manager who is estimating future values can manipulate the future values to show a high worth of the organization. Due to the large discrepancies of attempting to match profits and cash, investors were typically given false or misleading reports as financial earnings revealed were inflated. Hence this was again a way in which the stakeholders were blinded and exploited.

Enron used limited partnerships or companies created to fulfill a temporary or specific purpose to fund or manage risks associated with specific assets. The company elected to disclose minimal details on its use of such partnerships. These firms were created by a sponsor, but funded by independent equity investors and debt financing. In total, by 2001, Enron had used hundreds of special purpose entities to hide its debt. Hence the problem here was that investors and other stakeholders were completely unaware about the extent to which the company was leveraged. Had the actuality been known the stock prices would never had soared the way they did. Hence to depict an optimist future, management of Enron indulged in a lot of unethical practices.

Although Enron's compensation and performance management system was designed to retain and reward its most valuable employees, the methodology by which compensation was given contributed to a dysfunctional corporate culture that became obsessed with a focus only on short-term earnings to maximize bonuses. Employees constantly looked to start high-volume deals, often disregarding the quality of cash flow or profits, in order to get a higher rating for their performance review. In addition, accounting results were recorded as soon as possible to keep up with the company's stock price. This practice helped ensure deal-makers and executives received large cash bonuses and stock options. Hence hazardous deals which would have a resoundingly negative impact on the future of the organization in the long run were accepted just for short term gain. An organization with an approach like this was playing with fire which was bound to fail in the long run.

In 1993, Enron set up a joint venture in energy investments with CalPERS, the California state pension fund, called the Joint Energy Development Investments (JEDI). In 1997, Skilling, serving as Chief Operating Officer (COO) of Enron asked CalPERS to join Enron in a separate investment. CalPERS was interested in the idea, but only if they could be removed as a partner in JEDI. However, Enron did not want to show any debt from taking over CalPERS' stake in JEDI on its balance sheet. Chief Financial Officer (CFO) Fastow developed the special purpose entity Chewco Investments L.P. which raised debt guaranteed by Enron and was used to acquire CalPER's joint venture stake for $383 million. Because of Fastow's organization of Chewco, JEDI's losses were kept off of Enron's balance sheet. In fall 2001, CalPERS and Enron's arrangement was discovered, which required the discontinuation of Enron's prior accounting approach for Chewco and JEDI. This disqualification revealed that Enron's reported earnings from 1997 to mid-2001 would need to be reduced by $405 million and that the company's indebtedness would rise by $628 million. Once again credibility of Enron was questioned but this was just the tip of the iceberg.

Enron's auditor firm, Arthur Andersen, was accused of applying reckless standards in their audits because of a conflict of interest over the significant consulting fees generated by Enron. In 2000, The amount of money earned by Arthur Andersen through Enron was roughly 27% of the audit fees of public clients for Arthur Andersen's Houston office. The auditors' methods were questioned as either being completed solely to receive its annual fees or for their lack of expertise in properly reviewing Enron's revenue recognition, special entities, derivatives, and other accounting practices. Enron hired numerous Certified Public Accountants as well as accountants who had worked on developing accounting rules with the Financial Accounting Standards Board. The accountants looked for new ways to save the company money, including capitalizing on loopholes found in Generally Accepted Accounting Principles (GAAP), the accounting industry's standards. If Andersen didn't conform to Enron's wishes expectations, Enron would occasionally allow accounting firms Ernst & Young or Pricewaterhouse Coopers to complete accounting tasks to create the illusion of hiring a new firm to replace Andersen. Although Andersen was equipped with internal controls to protect against conflicted incentives of local partners, they failed to prevent conflict of interest. In one case, Andersen's Houston office, which performed the Enron audit, was able to overrule any critical reviews of Enron's accounting decisions by Andersen's Chicago partner. In addition, when news of SEC investigations of Enron were made public, Andersen attempted to cover up any negligence in its audit by shredding several tons of supporting documents and deleting nearly 30,000 e-mails and computer files.

Enron- The Fall of the "Titan"

The problem with this whole case is that people were unaware about how Enron was making such huge profits and showing such huge growth. This fact was used against them and their lack of knowledge was exploited. However when a reporter of a leading newspaper questioned Enron's practices at the grassroot level, the top management panicked and did some blunders which brought out all the secrets out in the open.

On March 5, Bethany McLean's Fortune article Is Enron Overpriced? questioned how Enron could maintain its high stock value, which was trading at 55 times its earnings. She pointed out how analysts and investors did not know exactly how Enron was earning its income. McLean was drawn to the company after an analyst suggested she view the company's annual report, where she found "strange transactions", "erratic cash flow", and "huge debt." She called COO Skilling to discuss her findings prior to publishing the article, but he brushed her off, calling her "unethical" for not properly researching the company. It was stated that Enron could not reveal earnings details as the company had over 1,200 trading books for assorted commodities and did "... not want anyone to know what's on those books. We don't want to tell anyone where we're making money."

In a conference call on April 17, 2001, the new Chief Executive Officer (CEO) Skilling verbally attacked Wall Street analyst Richard Grubman, who questioned Enron's unusual accounting practice during a recorded conference call. This became an inside joke among many Enron employees, mocking Grubman for his perceived meddling rather than Skilling's lack of tact. However, Skilling's comment was met with dismay and astonishment by press and public, as he had previously brushed off criticism of Enron coolly or humorously, and many believe that this began a downward spiral that would unravel the company's deceptive practices.

By the late 1990s Enron's stock was trading for $80-90 per share, and few seemed to concern themselves with the opacity of the company's financial disclosures. In mid-July 2001, Enron reported revenues of $50.1 billion, almost triple year-to-date, and beating analysts' estimates by 3 cents a share. Despite this, Enron's profit margin had stayed at a modest average of about 2.1%, and its share price had dropped by over 30% since the same quarter of 2000. However, concerns were mounting. Enron had recently faced several serious operational challenges, namely logistical difficulties in running a new broadband communications trading unit, and the losses from constructing the Dabhol Power project, a large power plant in India. There was also mounting criticism of the company for the role that its subsidiary Enron Energy Services had played in the power crisis of California in 2000-2001. In August 14, Skilling announced he was resigning his position as CEO after only six months. Skilling had long served as president and COO before being promoted to CEO. It was noted that in the months leading up to his exit, Skilling had sold at minimum 450,000 shares of Enron at a value of around $33 million.

By the end of August 2001, Greg Whalley was named the president and COO of Enron Wholesale Services and Mark Frevert, to positions in the chairman's office. Some observers suggested that Enron's investors were in significant need of reassurance, not only because the company's business was difficult to understand but also because it was difficult to properly describe the company in financial statements. It was really hard for analysts to determine where Enron was making money in a given quarter and where they were losing money. It was accepted that Enron's business was very complex, but at the same time it was asserted that analysts would never get all the information they wanted to satisfy their curiosity. He also explained that the complexity of the business was due largely to tax strategies and position-hedging. However the sudden departure of CEO Skilling combined with the opacity of Enron's accounting books made proper assessment difficult for Wall Street. In addition, the company admitted to repeatedly using related-party transactions, which some feared could be too-easily used to transfer losses that might otherwise appear on Enron's own balance sheet.

Enron announced that restatements to its financial statements for years 1997 to 2000 were necessary to correct accounting violations. The restatements for the period reduced earnings by $613 million, increased liabilities at the end of 2000 by $628 million and reduced equity at the end of 2000 by $1.2 billion. Enron's management team claimed the losses were mostly due to investment losses, along with charges such as about $180 million in money spent restructuring the company's troubled broadband trading unit. Some analysts were unnerved due to this announcement. David Fleischer at Goldman Sachs felt that Enron had lost credibility and have to reprove themselves. They need to convince investors these earnings are real, that the company is for real and that growth will be realized. The central short-term danger to Enron's survival seemed to be its credit rating. It was reported that Moody's and Fitch, two of the three biggest credit-rating agencies, had slated Enron for review for possible downgrade. Such a downgrade would force Enron to issue millions of shares of stock to cover loans it had guaranteed, a move that would bring down the value of existing stock further. Also, all companies began reviewing their existing contracts with Enron, especially in the long term. Analysts and observers continued their complaints regarding Enron's difficulty or impossibility of properly assessing a company whose financial statements were mysterious. Some feared that no one at Enron apart from Skilling and Fastow could completely explain years of mysterious transactions. However in some time responding to growing concerns that Enron might have insufficient cash in hand, news spread that Enron was seeking a further $1-2 billion in financing from banks. The next day Moody's lowered Enron's credit rating from Baa1 to Baa2, two levels above junk status.

Enron's stock was now trading at around $7, as investors worried that the company would not be able to find a buyer. After it received a wide spectrum of rejections, Enron management apparently found a buyer when the board of Dynegy, another energy trader based in Houston, agreed to acquire Enron. Commentators remarked on the different corporate cultures between Dynegy and Enron, and on the "straight-talking" personality of the CEO of Dynegy, Charles Watson. Some wondered if Enron's troubles had not simply been the result of innocent accounting errors. By November, Enron was asserting that the billion-plus "one-time charges" disclosed in October should in reality have been $200 million, with the rest of the amount simply corrections of dormant accounting mistakes.

However on November 28, 2001, Enron's two worst-possible outcomes came true. Dynegy Inc. unilaterally disengaged from the proposed acquisition of the company and Enron's credit rating fell to junk status. The company was rejected because it had very little cash with which to run its business, let alone satisfy enormous debts. Its stock price fell to $0.61 at the end of the day's trading. Enron was now shorthand for the perfect financial storm.

Ethics in ENRON case:

The Enron scandal is one that left a deep and ugly scar on the face of modern business. As a result of the scandal, thousands of people lost their jobs, some people lost their entire pensions, and all of the shareholders lost the money that they had invested in the corporation after it went bankrupt. I believe that Kenneth Lay, former Enron CEO, and Jeffrey Skilling behaved in an unethical manner without any form of justification, but the whistleblower, former Enron vice president Sherron Watkins, acted in a way that upheld moral principles.

There are many causes of the Enron collapse. Among them are the conflict of interest between the two roles played by Arthur Andersen, as auditor but also as consultant to Enron; the lack of attention shown by members of the Enron board of directors to the off-books financial entities with which Enron did business; and the lack of truthfulness by management about the health of the company and its business operations. In some ways, the culture of Enron was the primary cause of the collapse. The senior executives believed Enron had to be the best at everything it did and that they had to protect their reputations and their compensation as the most successful executives in the U.S. When some of their business and trading ventures began to perform poorly, they tried to cover up their own failures

Failure of the Market to Perform and Professional Dilemmas

In reality, there is nothing wrong with markets failing to fulfill their task of leveling the playing field between buyer and seller. Such market failures are in fact how many organizations make their money-through patents (temporary monopolies) and the use of expertise that is not universally available (competitive advantage). Yet there are certain forms of this type of market failure that are so egregious that they unreasonably interfere with the rights of others and endanger the credibility of all legitimate transactions.

The most common form of market failure is information asymmetries-the business decision- maker knows something that the person at the other end of the transaction does not. Most of the time this is fine but there are circumstances where the unfairness of this asymmetry exceeds simple competitive advantage and is a threat to the rights of others and to the effective operation of the free market as a whole. This appears to be the case at Enron. Insider trading is one of the indefensible exploitations of information asymmetries. In due course, we will have a legal determination regarding whether or not Enron officers or directors engaged in this practice. But legal determinations aside, Enron officers should have been far more alert to the perception that they might benefit from exploitation of information asymmetry.

Again ethical literacy is all about recognizingpotential ethical issues before they become legal problems. And incidentally, since the U.S. Supreme Court's Texas Gulf and Sulfur case in 1969 it has been unlawful for directors, as the Enron chairman was, who have inside price sensitive information to trade in that stock.

Truth and disclosure

"Falsehood ceases to be falsehood, when the truth is not expected to be spoken", wrote henry taylor, a 19th century statesman. it is recognized that a certain amount of puffing, exaggeration, and bluffing is part of the business game. but how much is too much? the "taylor rule" certainly does not apply to audited financial statements, and it probably does not cover statements made to employees who were also concerned shareholders (according to media reports, 60 percent of employee 401(k) plans consisted of enron stock). fiere these statements false? it is a fact that the financial statements had to be amended. fihile the employees were administered the soothing electronic balm of e-mail reassurance, the author of the missive and his colleagues were selling their stock. the courts will determine the facts but regardless of the legal outcome, enron senior management gets a failing grade on truth and disclosure. the purpose of ethics is to enable recognition of how a particular situation will be perceived. at a certain level, it hardly matters what the courts decide. enron is bankrupt-which is what happened to the company and its officers before a single day in court. but no company engaging in similar practices can derive encouragement for any suits that might be terminated in enron's favor. The damage to company reputation through a negative perception of corporate ethics has already been done.

The Neglect of Integrity Capacity by Managers

The neglect of managerial integrity capacity is at the moral root of Enron's legal and financial problems. What is legally permissible today, but morally questionable, may well become legally proscribed tomorrow. Thus, it is important for managers to proactively understand and attend to the multiple dimensions and moral antecedents of illegal activity (Paine 1994). Integrity capacity is the individual and collective capability for the repeated process alignment of moral awareness, deliberation, character, and conduct that demonstrates balanced judgment, enhances ongoing moral development, and promotes supportive systems for moral decision making (Petrick and Quinn 2000). It is one key intangible asset that acts as a catalyst for reputational capital and its erosion can jeopardize the survival and credibility of organizations and markets (Petrick, Scherer, Brodzinski, Quinn, and Ainina 1999). The spectacle of top Enron executives "pleading the Fifth" in Congressional hearings about managerial immoral and illegal conduct is a vivid example of the consequences of the neglect of individual and organizational integrity capacity. Furthermore, the frantic effort of Arthur Andersen, LLP, one of Enron's critical stakeholders whose integrity capacity and reputation were shattered by their unprofessional auditing services, to stem the tide of fleeing clients while negotiating with other "Big Five" accounting firms for sale of parts of its business, is another dramatic example of the costs of integrity capacity neglect (Toffler and Reingold 2003). The Enron scandal's adverse moral impact on the primary stakeholders is evident in .Enron's top managers chose stakeholder deception and short-term financial gains for themselves, which destroyed their personal and business reputations and their social standing. They all risk criminal and civil prosecution that could lead to imprisonment and/or bankruptcy. (Board members were similarly negligent by failing to provide sufficient oversight and restraint to top management excesses, thereby further harming investor and public interests (Senate Subcommittee 2002). Individual and institutional investors lost millions of dollars because they were misinformed about the firm's financial performance reality through questionable accounting practices (Lorenzetti 2002). Employees were deceived about the firm's actual financial condition and deprived of the freedom to diversify their retirement portfolios; they had to stand by helplessly while their retirement savings evaporated at the same time that top managers cashed in on their lucrative stock options (Jacobius and Anand 2001). The government was also harmed because America's political tradition of chartering only corporations that serve the public good was violated by an utter lack of economic democratic protections from the massive public stakeholder harms caused by aristocratic abuses of power that benefited select wealthy elite. The Enron scandal also harmed secondary and tertiary stakeholders. For example, Enron top managers pressured Arthur Andersen to certify maximum-risk, questionable accounting practices in part to retain their lucrative consulting business and, by acceding to this pressure, Arthur Andersen won huge contracts in the short run but ultimately lost their professional credibility and client base (Toffler and Reingold 2003). A parallel process occurred in the legal profession when Enron managerial pressure on Vinson and Elkins to legally condone investor and employee fraud prevailed. Again, Citigroup, J.P. Morgan, and Merrill Lynch made over $200 million in fees from deals that helped Enron and other energy firms boost cash flow and hide debt, and, by failing to exercise their own adequate due diligence, they multiplied the harm done to other stakeholders. The industry's reputation, furthermore, was tarnished by Enron's aggressive market leadership practices, the taxpaying public incurred additional shifting risk to eventually cover bankruptcy collateral damage, and ultimately America's stature as a model of democratic capitalist practices was replaced by fear of the global export of Enron-like corporate irresponsibility and crony capitalism (Mitchell 2002; Sirgy 2002).

Accountants, analysts and lawyers too

Enron is not the only party that is vulnerable on the issue of truth telling. Its accountants and many wall street analysts ratified and legitimized the company's scenarios and statements regarding its prospects. Fiere the accountants misled and otherwise, in u.s. supreme ¢ourt justice benjamin ¢ardozo's classic formulation (applied to an accounting firm) "skilled and careful in their calling"? The accountants and analysts are certainly making the case for enron deception but "if the truth is not expected to be spoken" which certainly is the case, then it is their job to pierce the veil. No potential client thinks otherwise. The role of accountants and analysts is to serve shareholders and potential shareholders in rectifying the information asymmetries that exist when shareholders deal directly with the company.

Perceptions of gifts, side deals, and payoffs

Here one need dwell only briefly on the recipients of Enron beneficence and the public perception. John Mendelsohn was president, university of Texas and Anderson Cancer ¢enter. Enron donated more than $600,000 to the cancer center since 1996. Fiendy Gramm is director of the Mercatus ¢enter at George mason university. Enron has given the Mercatus ¢enter $50,000. Drs. Mendelsohn and G ramm are on the audit Committee of Enron's board. This problem may not go away. William C. Powers, Jr., dean of the university of Texas is ¢hair of the special Committee to examine transactions between Enron and its partnerships. The university of Texas law school has thus far received $252,000 in Enron donations.

Process Integrity Capacity and Enron

Process integrity capacity is the alignment of individual and collective moral awareness, deliberation, character, and conduct on a sustained basis so that reputational capital results. The need to address lapses in process integrity capacity is manifest by the routine fragmentation of managerial moral attention and behavior that arouses stakeholder concern about the moral hypocrisy of management practices (e.g., Enron top managers tout their public relations images as responsible corporate citizens while defrauding investors and employees and secretly lining their own pockets with diverted funds) . While it is unlikely that Enron executives failed to perceive the relevant moral issues, it is clear that they were not sensitive to them. They appeared to be erroneously and overly confident of their initial distorted perceptions of morally acceptable business conduct, and when challenged, as Fastow was regarding the appropriateness of his financial structures, retaliated against accusers and sought information in ways that confirmed what they already believed (Messick and Bazerman 1996). Since top management and board members ignored whistleblower feedback, they became morally blind, deaf, and mute, thereby diminishing their capacity for ethical awareness and eventual strategic responsiveness-for which they are held morally accountable (Cavanagh and Moberg 1999; Swartz and Watkins 2002). Moral deliberation, the second component of process integrity, is the capacity to engage in the critical and comprehensive appraisal of causal factors and recognized moral options to arrive at a balanced and inclusive reasonable decision/resolution/policy that provides a standard for future determinations (Petrick and Quinn 1997). The decision making style of the Skilling-Fastow- Kopper circle demonstrated a tendency to suppress all but one aspect of a moral decision, i.e., its short term financial impact, and to exclude other parameters that might inhibit decisive action or constrain executive perks (Messick and Bazerman 1996). Enron managers and board members, who poorly analyzed and resolved moral conflicts of interest through self-centered policies also ignored or trivialized the harm caused to other stakeholders. For their diminished capacity for balanced moral deliberation Enron managers are held morally accountable (Fusaro and Miller 2002; Swartz and Watkins 2002).

Moral character, the third component of process integrity, is the individual and collective capacity to be ready to act ethically. The greed, dishonesty, arrogance, selfishness, cowardice, hypocrisy, disrespect, and injustice that characterized top Enron executives' intentions discloses their culpable motives and the corrupting workplace culture they created (Sennett 1998). The overemphasis on personal financial gain at the expense of others destroyed any remnant of employee trust. The visionless accumulation of rapid wealth exposed the absence of leadership wisdom and the deliberate obfuscation of financial structures to preclude a fair picture of the financial health of the firm eroded their characters; they de-humanized themselves and others with whom they interacted. The lack of the political virtue of citizenship is particularly damaging to internal and external character cultivation (Logsdon and Wood 2002).

Moral conduct, the fourth component of process integrity, is the individual and collective carrying out of justifiable actions on a sustained basis. Managers that exhibit ethical conduct develop a reputation for dependability and alignment of moral rhetoric and reality but the duplicitous exploitation of employee retirement savings exposed the cruel behavioral hypocrisy of top Enron executives (Cruver 2002).

Judgment Integrity Capacity and Enron

Managers can attempt to evade full moral accountability by compartmentalizing and fragmenting

their handling of management and ethics issues. One way to address this evasion is to enhance

judgment integrity capacity, the capability of analyzing complete moral results, rules, character,

and context in management practices (Petrick and Quinn 2000). The way Enron executives manage implicitly commits them to certain ethics theories, and just as simplistic, distorted managerial judgments produce poor results in handling behavioral complexity, so also do simplistic, distorted ethical judgments produce poor results in handling moral complexity (Paine 1994; Petrick and Quinn 2000).

For business leaders and their firms, exhibiting judgment integrity means being held accountable for achieving good outcomes (results-oriented teleological ethics), by following the right standards (rule-oriented deontological ethics), while strengthening the motivation for excellence (character-oriented virtue ethics), and building an ethically supportive environment within and outside the organization (context-oriented system development ethics).

The Ethics Code

Respect: We treat others as we would like to be treated ourselves. Ruthlessness, callousness and arrogance don't belong here." In her prescient reporting for Fortune magazine, Bethany McLean described Enron as a "Culture of arrogance," reflected in the company's lobby banner ("Enron: The world's leading company"), its officers ("Old-economy behemoths like Exxon Mobil will topple over from their own weight," said former Enron CEO Jeff Skilling) and its hubris (Skilling insisted at one point that Enron's $80-a-share stock should be valued at $126).

Integrity: We work with customers and prospects openly, honestly and sincerely. When we say we will do something, we will do it." This is true. Enron promised its execs they would make money and for a while, they did. McLean reported, "In Enron's energy services division, which managed the energy needs of large companies like Eli Lilly, executives were compensated based on a market valuation formula that relied on internal evidence. As a result, says one former executive, there was pressure to inflate the value of the contracts, even though it had no impact on the actual cash that was generated."

Communication: We believe that information is meant to move and that information moves people." Enron's communication skills were on display in an Oct. 16 press release that announced a $618 million loss but failed to say that it had written down shareholder equity by $1.2 billion.

Excellence: We are satisfied with nothing less than the very best. We will continue to raise the bar for everyone." Raise the bar, live behind bars, it's all semantics

Learning's from the Enron case

I do believe Enron will be the morality play of the new economy. It will teach executives and the

American public the most important ethics lessons of this decade. Among these lessons are:

1. You make money in the new economy in the same ways you make money in the old economy - by providing goods or services that have real value.

2. Financial cleverness is no substitute for a good corporate strategy.

3. The arrogance of corporate executives who claim they are the best and the brightest, "the most innovative," and who present themselves as superstars should be a "red flag" for investors, directors and the public.

4. Executives who are paid too much can think they are above the rules and can be tempted

to cut ethical corners to retain their wealth and perquisites.

5. Government regulations and rules need to be updated for the new economy, not relaxed

and eliminated.


Corporate managers are expected to maximize investor returns while complying with regulatorystandards, avoiding principal-agent conflicts of interest, and enhancing the reputational capital oftheir firms. The recent arrests and resignations of top U.S. managers, however, indicate anincreasing level of managerial negligence and corporate irresponsibility on Main Street and onWall Street that has eroded domestic and global trust in U.S. markets. The U.S. stock marketvolatility has added to the political pressure to bring 1930s-style regulatory reform to businesses.Corporate irresponsibility in the Enron scandal, for example, has provoked multiple lawsuits andunprecedented outrage from a range of stakeholders with demands for democratizing structuresof corporate power, improving managerial accountability, and legislating regulatory reform .The Enron scandal involves both illegal and unethical activity and the courts of law willdetermine the precise extent of civil and criminal liability that accrues to the perpetrators. Peoplecommit fraud, for instance, for a wide range of motives including perceived lack of effectivedeterrent punishment and rationalization of acceptability of illegal activity (Albrecht and Searcy2001). To control fraud by focusing on only one dimension, such as more effective deterrentpunishments, is like trying to put out a skyscraper fire with a garden hose. In addition, peopleharbor myths, such as organizations cannot proactively detect or prevent fraud, which only resultin disempowered resignation to the inevitability of corruption and more future Enron's.

References for Enron case: