power cycle: how enron unplugged ethics and blacked out business

© Matthew A. Gilbert, MBA of 5

Power Cycle: How Enron Unplugged

Ethics and Blacked out Business

Matthew A. Gilbert, MBA

MatthewAGilbert.com

[email protected]

(661) 513-3370

Abstract

With unsettling ease, the architects of Enron’s demise wove an intricate web of deception

and destruction. Ironically, despite Enron’s stature as an impersonal corporation, its downfall was

the result of personal character flaw that unearthed a seriously flawed ethical environment. This

paper explores the origins of Enron’s collapse, analyzes the roots of unethical behavior and

suggests some solutions by which companies can avoid a similar ethical fate.

I. Enron’s Unethical Underpinnings

Paralyzed by a culture that placed profit over people, Enron’s inverted ethical

underpinnings destroyed the organization from the inside-out. Despite being diverse in demeanor,

the primary players of the Enron debacle were strikingly similar in their desire for wealth. From

huge cash bonuses, to multi-million dollar compensation packages, to the daytime delivery of sports

cars to top performers, Enron was all about conspicuous consumption.

Elkind and McLean (2003) define the Enron saga as, “a story about people…of human

weakness, of hubris and greed and rampant self-delusion; of ambition run amok…of smart people

who believed their next gamble would cover their last disaster – and who couldn’t admit they were

wrong,” (p. vii, xxiv). Realistically, even if somebody had actually recognized a problem – and the

culture was so deluded it is feasible that nobody might have – that person would have been ignored.

In an eerily prescient quote, Elkind and McLean (2003) report that when former Enron

President Jeffrey Skilling was asked what action he would take if a company of which he was CEO

made or sold a product thought to be harmful:

‘I’d keep making and selling the product,’ replied Skilling. ‘My job as a

businessman is to be a profit center and to maximize return to the

shareholders. It’s the government’s job to step in if a product is dangerous.’

(p. 31)

Although Enron authored a celebrated code of ethics, it was never integrated into the

organization – as exemplified by Skilling’s quote above. When financial opportunities arose, the

code of ethics was forcefully pushed aside. Millman (2002) asserts, “Enron had a code of ethics

without a culture of ethics,” (p. 18).

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II. A Corrupt Culture of Competition

Ethical errors at Enron began at the top and permeated through middle management to the

lowest layers of the company. Simply put: unethical behavior was institutionalized at Enron. The

company’s code of ethics meant nothing because the culture was entirely sycophantic. Watkins

(2003) explains, “Enron has a pristine code of ethics, code of conduct, and corporate governance

procedures, but they weren’t following the spirit of their own procedures,” (p. 16).

Further exacerbating the situation, Enron encouraged crushing gladiatorial competition.

Enron recruited the most competitive, combative and contemptuous candidates with singular

exploitable talents. At Enron, “pushing the limits was considered a survival skill…[Jeffrey]

Skilling…encouraged employees to be independent, innovative and aggressive,” (Brinkman and

Sims, 2003, p. 244).

While a competitive atmosphere can promote productivity, pitting people against one

another for simple survival does not yield cohesion. Annual “rank and yank” evaluations – a

cornerstone of Enron’s culture in which the bottom 20 percent of employees were summarily

terminated – did little to encourage honor (Fowler, 2002, p, 5). Employees can’t be simultaneously

out for themselves and have the company’s interest at heart. Elkind and McLean (2003) offer this

assessment of Enron’s inflammatory human resources practices:

No company can prosper…if every employee is a free agent, motivated solely

by greed…people who get along with others tend to do well in corporate

life…you can’t build a company on brilliance alone. (p. 56)

As illustrated by Collins (2001), high performing companies place a greater emphasis on

character than specific qualifications – the opposite of Enron. Recognizing that you can’t pay people

to be committed, companies Collins favored people who would be as willing to give of themselves to

help develop a company as equally as they needed the organization for income and benefits.

Despite the nefarious endeavors in which Enron engaged (e.g. take-or-pay contracts, mark-

to-market accounting, and special purpose vehicles) it’s collapse was actually fuelled by the

environment that encouraged the unethical behavior. Had Enron been a fundamentally ethical

company, the actions that individuals took would have eventually been uncovered and stopped.

III. Nature or Nurture? Causes for Ethical Chaos

The fiasco Enron forces discussion of a timeless question: are people good or flawed? The

answer boils down to determining what drives individuals. It is the contention of this author that,

when people are motivated and happy, they operate more ethically. However, human nature lends

itself to self-destructive behavior when the chips are down. But what is motivation?

As illustrated by McGregor (Crainer, 2000), “Theory X assumes workers are inherently lazy,

need to be supervised and motivated, and regard work as a necessary evil to make money…Theory

Y…is based on the principle that people want and need work,” (p. 139-140). Organizations that

embrace Theory Y must challenge their workers and provide them with opportunities for continued

growth. In the case of Theory X, there is no perceived reward beyond remuneration for continued

employment.

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Traditional thinking might validate the Theory X concept, but studies seem to indicate the

inverse. Accel-Team.com (2004) cites a study in which 44,000 employees preferred “security” as

the most desired as a condition of their employment. This was followed by advancement, type of

work, and being proud of the company for which they work. Pay, benefits and working conditions

were all ranked lower – thus validating the concept of Theory Y.

Unfortunately, many individuals feel disconnected and unmotivated. From the boardroom

to the lunchroom, those who manage and those who are managed acknowledge something lacking.

As a result, they revert to a more basic system of needs when their higher ideals are overlooked –

the area in which Theory X is more relevant. Why? As offered by Bennis in Denton and Mitroff

(1999):

What’s missing at work…is meaning…wholeness, integration…We’re all on a

spiritual quest for meaning and…the underlying cause of organizational

dysfunctions…is the lack of a spiritual foundation in the workplace. (p. xi)

People who feel better about their professional responsibilities perform better. Humorously

illustrating this, an advertising campaign for the California Milk Advisory Board promotes cheese

made with milk from California cattle. As reported in AdWeek (2002), the tagline “Great Cheese

Comes from Happy Cows. Happy Cows Come from California,” (p. 1) captures the idea that content

employees perform better, thereby increasing the bottom line.

Despite its highly comical tone – and the equally as comical contentions of a politically

active group that California cows are not actually happy – the concept remains valid: happy

employees + satisfied customers = higher revenues. It’s not rocket science; it’s not agricultural

science. It’s human nature.

IV. An Education in Ethics?

Can ethics be taught? Most likely, no. Ethics are a by-product of values and morals acquired

throughout your life and are shaped by your experiences. Unlike a specific skill – learning a foreign

language for example – ethics are not a commodity that can be consumed. You can’t cram for a test

on ethics. And, even predominantly ethical people can be compromised in a challenging situation.

Corporations don’t have a corner on unethical behavior. Just as people have the potential to achieve

greatness, so too can we destroy that which we have created.

Enron could have been saved, if only someone was willing to save it. There were many

points along the company’s path to destruction at which someone could have done something – or

even said something. Nobody wanted to hear the truth. Investors, analysts and others feeding off

the company’s financial food chain kept quiet as long as the cash rolled in. Risking revenue on the

truth was not an option. Since nobody – until Sherron Watkins, whose anonymous memo alerted

investigators that something was amiss – was even willing to acknowledge the existence of

questionable actions, the unethical activity could not be stopped.

The people most financially affected by the underhanded actions of Enron were individual

investors and rank and file employees – many of whom lost significant money when Enron

collapsed. Of course, many of those investors were also gambling on the exorbitant returns the

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company had claimed to generate for years. To some degree, everyone involved at every level

shared in what could best be considered “comparative negligence.”

IV. Conclusion: Determine Your Destiny

Ultimately, change must come from within. You can never fundamentally fix a person or

company from the outside in. The desire for change must originate from inside. In the case of a

company like Enron, the admission of fault must start at the top and emanate throughout all levels

of the organization. Just as you can’t make an addict sober without their participation, a company

can’t improve without any involvement on the part of the individuals that comprise it.

Of course, identifying improvement depends on the parameters by which your actions are

judged. With the possible exception of murder and crimes against children, there is tremendous

cultural relativity with regard to the moral foundations on which ethics are erected. So, prior to

embarking on an adventure of ethical improvement, you must first clarify the cultural

considerations. This is not meant to condone actions that some might find questionable – whether

they are part of the culture or foreign to it – but to communicate that passing judgment without the

benefit of full understanding is unfair and naïve.

However, actions you take as an individual are your own – proclaiming they were done at

the behest of another has no merit. At the end of the day you are responsible for yourself and your

actions. Every action has a reaction, and you can’t expect to build up as much negative karma as did

Enron without incurring additional adverse effects.

In the end, you determine your own destiny.

References

Accel-Team.com. (2003). Employee Motivation in the Workplace. Retrieved November 5, 2004 from

http://www.accel-team.com/motivation/index.html.

AdWeek. (2002, September 23). California Milk Advisory Board | “Sprinkler.” Downloaded May 7,

2003 from http://www.adweek.com/aw/creative/best_spots_02/020923_03.jsp

Brinkman, J and Sims, R. (2003). Enron Ethics (Or: Culture Matters More than Codes). Journal of

Business Ethics; Jul 2004; 45, 3, 243-256.

Collins, Jim. (2001). Good to Great: Why Some Companies Make the Leap and Others Don’t. New

York: Harper Business.

Crainer, Stuart (Ed.) (2000). The Ultimate Business Library: 75 Books That Made Management.

Dover, NH: Capstone US.

Denton, E. and Mitroff, I. (1999). A Spiritual Audit of Corporate America. San Francisco, CA: Jossey-

Bass, Inc.

Elkind, P and McLean, B. (2003). The Smartest Guys in the Room: The Amazing Rise and Scandalous

Fall of Enron. New York: Portfolio.

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Fowler, T. (2002, October 20). The pride and fall of Enron. Downloaded January 19, 2005 from

http://www.chron.com/cs/CDA/story.hts/special/enron/1624822

LeVenness, F. and Primeaux, P. (2004). Vicarious Ethics: Politics, Business, and Sustainable

Development. Journal of Business Ethics; May 2004; 51, 2. 1850198.

Millman, G. (2002). New Scandals, Old Lessons: Financial Ethics After Enron. Financial Executive;

July/August 2002, p. 16-19.

Robbins, S. (2003). Essentials of Organizational Behavior, 7th Edition. Upper Saddle River, NJ:

Prentice Hall.

Watkins, S. (2003). Ethical Conflicts at Enron: Moral Responsibility in Corporate Capitalism.

California Management Review; 45 (4), 6 – 19.

Publication Credit

Gilbert, M. (2005). Power cycle: How Enron unplugged ethics and blacked-out business. In Adams,

M. and Alkhafaji, A. (Eds.), Business Research Yearbook, Vol. XII (pp. 245-249). Saline, MI:

McNaughton & Gunn.