Examining A Business Failure

Any lessons to be learnt by the rest of the world from the stout, market-oriented systems of the American corporate models were suddenly made redundant by a series of corporate misfortunes at WorldCom, Tyco International, Enron, and Adelphia Communications among others. The crumple of Enron was a major bankruptcy case study in the history of the United States. It resulted in the loss of life savings of its employees that amounted into billions of dollars worth of stocks. The federal indictments against the company’s executives were for complex but unethical financial schemes to swindle the company, along with its stakeholders, using off-the books transactions that made Enron to appear more profitable that the reality on the ground (Maak and Pless, 2006). Various organizational behavior theories can be used to explain the failure of Enron.

Enron was started in 1985 as a company dealing in natural gas by Kenneth Lay. The newly created company was a leader in the newly deregulated natural gas industry. The gas bank permitted manufacturers and outlets to hedge and trade gas supplies. With the leadership of Jeffrey Skilling, initially the Chief Financial Officer and later the CEO, the company invested in the energy sector worldwide. Enron progressively developed to become a leading trading entity in the energy industry. The company later ventured into coal, metal, plastic, paper, and electricity generation. With the advent of Enron Online, it entered the telecommunication industry through bandwidth provision.

Despite Enron’s reputation for performing better than its earnings expectations, its diversified market performance begun to suffer due to unseen catastrophes that included a public disgrace in India. CFO Andrew Fastow established numerous special purpose entities in order to maintain the appearance of continued growth despite the company’s shortcomings. Enormous amounts of losses running into billions of dollars were cloaked in financial arrangement that the company maintained with its partners. Faced by falling share prices, the company found itself unable to keep its losses secret which resulted in the fall of Enron, a long time energy giant (Maak and Pless, 2006).

The upheaval caused by its demise was incomparable to the consequences that would have resulted had the opposite happened. Had Enron been left to continue making huge profits through unethical means, by exploiting business opportunities that would leave adverse economic effects in their countries of operations, its shareholders interests would have been served but its monopolistic power would have left prices sky rocketing. Monopoly would have destabilized the critical energy sector along with most of the other crucial services that rely on energy. It would have created volatility in the industry and destabilized the efforts of maintaining normality and result in far reaching negative impact in people’s lives (Crane and Matten, 2007). What happened at Enron validates the agency theory which shows how managers with self-interest can siphon resources out of an organization, leaving misinformed shareholders with nothing from their had earned investments.

Economic theories that put emphasis on maintaining checks and balances on organizational management in order to solve problems facing an organization have been made even more relevant by Enron, where an uncontrolled management system efficiently escaped the scrutiny of the company’s auditors, the company board, financial regulators, and even the market itself. The demise of Enron can also be explained using the managerialist theory. Based on this theory, Enron was inexorably a result of a period in which all powerful chief financial officers, CEOs and executives endowed themselves stock-options whose astronomic value would have astounded even the medieval princes, were given virtually unlimited freedom provided they showed improved earnings. This was a time when money making was the most important thing and not the means of making it. Both professional and ethical commitment failed in this organization. Despite the presence of a professional code of ethics in Enron it was never put into practice.

According to the doctrines of stewardship theory, the ability and willingness of managers in balancing various company pursuits in the quest for organizational strategy would seem to have been challenged by the Enron scandal. The executives of Enron were irresponsible in that they failed to uphold their fiduciary and stewardship duties. This is a clear indication of how some of the modern day CEOs and other executives have ceased treating the decision making process as a moral exercise and management as a profession (Ciulla, 2004).

As shown above, failure of Enron has demonstrate that systematic failure of chairman, board of directors and CEO, as well as the basic failure in ethical and moral essentials of decision making of the organization accompanied with systematic manipulation of markets, deception of investors and exploitation of customers among others played a central role in the collapse of Enron. Hence, organizational culture, leadership, management and organizational structure had a share in the demise of Enron. The issue of business ethics is fundamentally inseparable from the operations of any organization regardless of its size or international reach and cannot be disregarded in favor of profits or unrealistic impressions of high performance.

References

Ciulla, J. B. (2004). Ethics, the heart of leadership. Westport, CT: Greenwood Publishing Group.

Crane, A. & Matten, D. (2007). Business Ethics: managing corporate citizenship and

Sustainability in the age of globalization. New York, NY: Oxford University Press.

Maak, T. & Pless, N. (2006). Responsible leadership. New York, NY: Routledge.