Enron Ethics — The Culture of Enron

This arti­cle describes and dis­cusses the Enron Cor­po­ra­tion deba­cle. The arti­cle presents the busi­ness ethics back­ground and lead­er­ship mech­a­nisms affect­ing Enron’s col­lapse and even­tual bank­ruptcy. Through a sys­tem­atic analy­sis of the orga­ni­za­tional cul­ture at Enron (fol­low­ing Schein’s frame of refer– ence) the paper demon­strates how the company’s cul­ture had pro­found effects on the ethics of its employ­ees.
Now, when most peo­ple hear the word “Enron” they think of cor­rup­tion on a colos­sal scale – a com­pany where a hand­ful of highly paid execu– tives were able to pocket mil­lions of dol­lars while care­lessly erod­ing the life-savings of thou­sands of unwit­ting employ­ees. Not long ago, the same com­pany had been her­alded as a paragon of cor– porate respon­si­bil­ity and ethics – suc­cess­ful, dri­ven, focused, phil­an­thropic and envi­ron­men– tally respon­si­ble. Enron appeared to rep­re­sent the best a 21st cen­tury orga­ni­za­tion had to offer, eco­nom­i­cally and eth­i­cally. The ques­tions become, how did Enron lose both its econom– ical and eth­i­cal sta­tus? Is it because of its very size and effects? Is it the direct harm to pri­mary and sec­ondary stake­hold­ers? Or, is it the world­wide media cov­er­age that the Enron demise has drawn? These ques­tions make the Enron case inter­est­ing to us as busi­ness ethi­cists.
At first sight, Enron looks like a mega-size illus­tra­tion of the bad apple and/or the bad bar­rel dis­ease and, hence, looks like good mar­ket­ing for the busi­ness ethics busi­ness (which almost has a vested inter­est in such scan­dals and other bad exam­ples). The prob­lem is, how­ever, that Enron looked like an excel­lent cor­po­rate cit­i­zen, with all the cor­po­rate social respon­si­bil­ity (CSR) and busi­ness ethics tools and sta­tus sym­bols in place.
Enron Ethics (an ironic expres­sion which is used now and then, see e.g. the head­ings of Tracin­ski, 2002 or Beren­beim in Exec­u­tive action no. 15, Feb. 2002) reads like the new catch­word for the ulti­mate con­tra­dic­tion between words and deeds, between a deceiv­ing glossy facade and a rot­ten struc­ture behind, like a def­i­nite good-bye to naive busi­ness ethics. Enron ethics means (still iron­i­cally) that busi­ness ethics is a ques­tion of orga­ni­za­tional “deep” cul­ture rather than of cul­tural arti­facts like ethics codes, ethics offi­cers and the like. With this as a back­drop, the paper will describe and dis­cuss how exec­u­tives at Enron in prac­tice cre­ated an orga­ni­za­tional cul­ture that put the bot­tom line ahead of eth­i­cal behav­ior and doing what’s right. More specif­i­cally, the paper first pro­vides a brief back­ground on Enron and its rise and fall. Next, the paper sys­tem­at­i­cally uses Schein’s (1985) five pri­mary mech­a­nisms avail­able to lead­ers to cre­ate and rein­force aspects of cul­ture (i.e., atten­tion focus­ing, reac­tion to crises, role mod­el­ing, rewards allo­ca­tion and cri­te­ria for hir­ing and fir­ing) to ana­lyze the company’s cul­ture and lead­er­ship that con– trib­uted to it’s eth­i­cal demise and fil­ing for bank– ruptcy. It is our con­tention, that with such a point of depar­ture one will be bet­ter pre­pared for a nec­es­sary dis­cus­sion in our field of how to pre­vent an “instru­men­tal­iza­tion” of ethics and CSR for mere facade pur­poses (this theme deserves and requires a paper on its own, at least).

The cul­ture his­tory of Enron

The Enron case is not least a good illus­tra­tion of con­tin­u­ously updated case pre­sen­ta­tion and case dis­cus­sion in the Inter­net age (which could

deserve a paper on its own, too). Busi­ness school researchers, teach­ers and stu­dents alike can eas­ily keep them­selves busy for days just with sort­ing, struc­tur­ing, check­ing and sum­ma­riz­ing all the ingre­di­ents and pieces of the Enron story found on the Inter­net. One pos­si­ble way of orga­niz­ing and lim­it­ing such a task is depart­ing from or even stay­ing with the web­sites of tra­di­tional mass media such as CNN (see e.g. cnn.com/SPECIALS/2002/enron/), the Wall Street Jour­nal, Finan­cial Times, or of the main stake– hold­ers such as the vic­tims’ enrongate.com or the remain­ders’ enron.com. Most tempt­ing for busi­ness ethi­cists is of course a closer look at the web­sites of the busi­ness ethics busi­ness (see e.g. http://www.msnbc.com/modules/enron/, businessethics.ca/enron/, caseplace.org, enron– guide.com, all with lots of fur­ther links) and as the up-dated and ear­li­est of all the aca­d­e­mic arti­cles and papers we can expect in the future Tonge et al., 2003; Pet­rick and Quinn, 2002; Cohan, 2002). In spite of (or because of) such an abun­dance of avail­able information1 we choose to tell the story once more, as a cul­ture his­tory in our own prose, as a back­ground for the fol­low­ing illus­tra­tion of how Schein’s orga­niza– tion cul­ture approach can lead to a bet­ter under– stand­ing of the Enron case.

Back­ground

A com­pany with hum­ble begin­nings, Enron began as a merger of two Hous­ton pipeline com­pa­nies in 1985. Although Enron faced a num­ber of finan­cially dif­fi­cult years, the com­pany man­aged to sur­vive. In 1988, the dereg­u­la­tion of the elec­tri­cal power mar­kets took effect, and the com­pany rede­fined its busi­ness from “energy deliv­ery” to “energy bro­ker” and Enron quickly changed from a sur­viv­ing com­pany to a thriv­ing one. Dereg­u­la­tion allowed Enron to become a “match­maker” in the power indus­try, bring­ing buy­ers and sell­ers together. Enron prof­ited from the exchanges, gen­er­at­ing rev­enue from the dif– fer­ences between the buy­ing and sell­ing prices. Dereg­u­la­tion allowed Enron to be cre­ative – for the first time, a com­pany that had been required to “oper­ate within the lines” could inno­vate and

test lim­its. Over time, Enron’s con­tracts became increas­ingly diverse and sig­nif­i­cantly more com­plex. As Enron’s prod­ucts and ser­vices evolved, so did the company’s culture.

In this newly dereg­u­lated and inno­v­a­tive forum, Enron embraced a cul­ture that rewarded “clev­er­ness”. Dereg­u­la­tion opened the indus­try up to exper­i­men­ta­tion and the cul­ture at Enron was one that expected employ­ees to explore this new play­ing field to the utmost. Push­ing the lim­its was con­sid­ered a sur­vival skill.

Enron’s for­mer Pres­i­dent and Chief Exec­u­tive Offi­cer (CEO) Jef­fry Skilling actively cul­ti­vated a cul­ture that would push lim­its – “Do it right, do it now and do it bet­ter” was his motto. He encour­aged employ­ees to be inde­pen­dent, inno– vative and aggres­sive. The Har­vard Busi­ness Review Case Study: Enron’s Trans­for­ma­tion (Bartlett and Glin­ska, 2001) con­tains employee quo­ta­tions such as “… you were expected to per­form to a stan­dard that was con­tin­u­ally being raised …”, “the only thing that mat­tered was adding value”, or “… it was all about an atmos– phere of delib­er­ately break­ing the rules …” (Bartlett and Glin­ska, 2001). A cul­ture that admires inno­va­tion and unchecked ambi­tion and pub­licly pun­ishes poor per­for mance can pro­duce tremen­dous returns in the short run. How­ever, in the long run, achiev­ing addi­tional value by con­stantly “upping the ante” becomes harder and harder. Employ­ees are forced to stretch the rules fur­ther and fur­ther until the lim­its of eth­i­cal con­duct are eas­ily over­looked in the pur­suit of the next big suc­cess (Joseph­son, 1999; cf. also sim­i­lar­i­ties found in the cul­ture at Salomon Broth­ers in the early 1990s, see Sims, 2000; Sims and Brinkmann, 2002).

A lot of smoke and mirrors

Enron’s spec­tac­u­lar suc­cess, and the pos­i­tive scrutiny the com­pany was receiv­ing from the busi­ness press and the finan­cial ana­lysts, only added fuel to the company’s com­pet­i­tive cul­ture. The busi­ness com­mu­nity rewarded Enron for its clev­er­ness (and even its eth­i­cal­ness) and Enron’s exec­u­tives felt dri­ven by this rep­u­ta­tion to sus­tain the explo­sive growth of the late 1990s, even

when they log­i­cally knew that it was not pos­si­ble. A neg­a­tive earn­ings out­look would have been a red flag to investors, indi­cat­ing Enron was not as suc­cess­ful as it appeared. If investors’ con­cerns drove down the stock price due to exces­sive sell­ing, credit agen­cies would be forced to down– grade Enron’s credit rat­ing. Trad­ing part­ners would lose faith in the com­pany, trade else­where, and Enron’s abil­ity to gen­er­ate qual­ity earn­ings and cash flows would suf­fer. In order to avoid such a sce­nario at all costs, Enron entered into a deceiv­ing web of part­ner­ships and employed increas­ingly ques­tion­able account­ing meth­ods to main­tain its investment-grade sta­tus. Enron exec­u­tives prob­a­bly felt that they were doing the right thing for their organization.

Part­ner­ships

Part­ner­ships can be an easy and effi­cient way to raise money. How­ever, in an effort to con­tinue to push the value enve­lope Enron took part­ner– ships to a new level by cre­at­ing “spe­cial pur­pose vehi­cles” (SPVs), pseudo-partnerships that allowed the com­pany to sell assets and “cre­ate” earn­ings that arti­fi­cially enhanced its bot­tom line. Enron exag­ger­ated earn­ings by rec­og­niz­ing gains on the sale of assets to SPVs. In some cases, the com­pany booked rev­enues prior to a part– ner­ship gen­er­at­ing sig­nif­i­cant rev­enues. Project Brave­heart, a part­ner­ship Enron devel­oped with Block­buster was intended to pro­vide movies to homes directly over phone lines. Just months after the part­ner­ship was formed, Enron recorded $110.9 mil­lion in prof­its pre­ma­turely, these prof­its were never real­ized as the part­ner­ship failed after only a 1,000-home pilot.

In a suc­cess cul­ture like Enron’s such behav­ior rep­re­sented a way of least resis­tance. Enron employ­ees with a self-image of being the best and the bright­est and being extremely clever do not make busi­ness deals that fail. There­fore book­ing earn­ings before they are real­ized were rather “early” than wrong. The cul­ture at Enron was quickly erod­ing the eth­i­cal bound­aries of its employees.

Keep­ing debt off the bal­ance sheet

The SPVs not only allowed Enron to boost earn­ings, but the SPV’s also allowed the com­pany to keep debt off its bal­ance sheet. A highly lever– aged bal­ance sheet would jeop­ar­dize its credit rat­ing as its debt-equity ratio would rise and increase its cost of cap­i­tal. To avoid this, Enron parked some of its debt on the bal­ance sheet of its SPVs and kept it hid­den from ana­lysts and investors. When the extent of its debt bur­den came to light, Enron’s credit rat­ing fell and lenders demanded imme­di­ate pay­ment in the sum of hun­dreds of mil­lions of dol­lars in debt.

This can be read as another exam­ple of eth­i­cal ero­sion. Enron’s deci­sion mak­ers saw the shuf– fling of debt rather as a tim­ing issue and not as an eth­i­cal one. Clever peo­ple would even­tu­ally make every­thing right, because the deals would all be suc­cess­ful in the long run. Mov­ing debt was as easy as pre-dating a check, and would harm no one, and there­fore was not an eth­i­cal issue.

Part­ner­ships at “arm’s length”

Each ques­tion­able part­ner­ship deci­sion car­ried addi­tional clev­er­ness bur­dens. In order to keep infor­ma­tion from the pub­lic, Enron had to guar– antee that the Secu­ri­ties Exchange Com­mis­sion (SEC) did not con­sider its part­ner­ships as Enron sub­sidiaries. If the part­ner­ships had been classi– fied as such, in-depth dis­clo­sure and stricter account­ing meth­ods would have been required. In order to pre­vent poten­tial SEC skep­ti­cism, Enron enlisted help from its out­side accoun­tants and its attor­neys (Arthur Ander­sen, and Vin­son & Elkins). The accoun­tants and attor­neys all ref­er­enced the Finan­cial Account­ing Stan­dards Board (FASB) rule that holds that part­ner­ships are not con­sid­ered sub­sidiaries as long as 3% of their equity comes from out­side investors and they are man­aged inde­pen­dently of their spon­sors. This is com­monly known as being at “arm’s length”. Enron crafted rela­tion­ships that looked (legally) like part­ner­ships, although they were (in prac­tice) sub­sidiaries. A closer look at the part­ner­ships would have revealed that the

out­side invest­ments came from com­pa­nies (like SE Thun­der­bird LLC) that were owned by Enron.

Con­flicts of interest

Although the part­ner­ships were clas­si­fied as part– ner­ships accord­ing to the FASB rules, Enron offi– cials obvi­ously had close ties with them. This raised the ques­tion about con­flicts of inter­est. Andrew Fas­tow, Enron’s for­mer Chief Finan­cial Offi­cer (CFO), ran or was par­tial owner of two of the most impor­tant part­ner­ships: LJM Cay­man LP and LJM2 Co-Investment LP. Michael Kop­per, a for­mer man­ag­ing direc­tor at Enron, man­aged a third part­ner­ship, Chewco Invest­ments LP.

The cul­ture of clev­er­ness at Enron started as a pur­suit of excel­lence that devolved into the appear­ance of excel­lence as exec­u­tives worked to develop clever ways of pre­serv­ing Enron’s infal– lible facade of suc­cess. Although Enron main– tained that top offi­cials in the com­pany reviewed the deal­ings with poten­tial con­flicts of inter­est, Enron later claimed that Fas­tow earned over $30 mil­lion from Enron with his com­pa­nies. At some point in the bend­ing of eth­i­cal guide­lines for the good of the com­pany, Enron’s exec­u­tives also began to bend the rules for per­sonal gain. Once a culture’s eth­i­cal bound­aries are breached thresh­olds of more extreme eth­i­cal com­pro­mises become lower.

The self-reinforcing decline of Enron

In the long run, Enron’s exec­u­tives could not “rob Peter to pay Paul”. Even if the Enron cul­ture per­mit­ted acts of insignif­i­cant rule bend­ing, it was the sum of incre­men­tal eth­i­cal trans­gres­sions that pro­duced the busi­ness cata– stro­phe. Although Enron’s exec­u­tives had believed that every­thing would work suc­cess­fully in the long run, the ques­tion­able part­ner­ships left the com­pany extremely vul­ner­a­ble when finan– cial trou­bles came to light. As part­ner­ships began to fail with increas­ing reg­u­lar­ity, Enron was liable for mil­lions of dol­lars it had not anticipated

los­ing. Promises began to come due and Enron did not have the abil­ity to fol­low through on its finan­cial obligations.2

The finan­cial implosion

The part­ner­ships that once boosted earn­ings and allowed Enron to pros­per became the mis­placed card that caused the Enron house to col­lapse. The sta­bil­ity of Enron’s house of cards had been eroded by the very cul­ture that had allowed it to be built. Enron was forced to renounce over $390 mil­lion in earn­ings from deal­ings with Chewco Invest­ments and JEDI, another part­ner– ship. The com­pany was also forced to restate earn­ings back to 1997, and the restated earn­ings totaled only $586 mil­lion, a mere 20% of the ini– tially reported fig­ures. The very results Enron had sought to pre­vent – falling stock prices, lack of con­sumer and finan­cial mar­ket con­fi­dence – came about as a direct result of deci­sions that had been dri­ven by Enron’s culture.

The Enron case of eth­i­cal fail­ure con­sists of more than a series of ques­tion­able busi­ness deal­ings. 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. 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. The com­pany cul­ture of indi– vid­u­al­ism, 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.

What did the Enron exec­u­tives do to mold a cor­po­rate cul­ture that resulted in uneth­i­cal behav­ior and the col­lapse of the com­pany? The remain­der of this paper drafts some answers to this question.

Lead­er­ship mech­a­nisms and orga­ni­za­tional cul­ture at Enron

If cor­po­rate lead­ers encour­age rule-breaking and fos­ter an intim­i­dat­ing, aggres­sive envi­ron­ment, it is not sur­pris­ing that the eth­i­cal bound­aries at Enron eroded away to noth­ing. Schein (1985) has focused on lead­er­ship as the crit­i­cal com­po­nent of the organization’s cul­ture because lead­ers can cre­ate, rein­force, or change the organization’s cul­ture. This applies not the least to an organi– zation’s eth­i­cal cli­mate (Sims, 2000; Trevino et al., 2000; Sims and Brinkmann, 2002). Accord­ing to Schein (1985) there are five pri­mary mech­a­nisms that a leader can use to influ­ence an organization’s cul­ture: atten­tion, reac­tion to crises, role mod­el­ing, allo­ca­tion of rewards, and cri­te­ria for selec­tion and dis­missal. Schein’s assump­tion is that these five cri­te­ria rein– force and encour­age behav­ioral and cul­tural norms within an orga­ni­za­tion. Our paper can be read as an illus­tra­tion of Schein’s assump­tions. The Enron exec­u­tives used the five mech­a­nisms to rein­force a cul­ture that was morally flex­i­ble open­ing the door to ethics degen­er­a­tion, lying, cheat­ing, and stealing.

Atten­tion

The first of the mech­a­nisms men­tioned by Schein (1985) is atten­tion. The issues that cap­ture the atten­tion of the leader (i.e. what is crit­i­cized, praised or asked about) will also cap­ture the atten­tion of the greater orga­ni­za­tion and will become the focus of the employ­ees. If the lead­ers of the orga­ni­za­tion focus on the bot­tom line, employ­ees believe that finan­cial suc­cess is the lead­ing value to con­sider. D. M. Wolfe, author of “Exec­u­tive Integrity” even sug­gests that a focus on profit, “pro­motes an unre­al­is­tic belief that every­thing boils down to a mon­e­tary game” (1988). In such a con­text, rules or moral­ity are merely obsta­cles, imped­i­ments along the way to bottom-line finan­cial suc­cess (Sims, 2000).

One for­mer exec­u­tive of Enron has described Jef­frey Skilling as a leader dri­ven by the almighty dol­lar. “… Skilling would say all that mat­ters is

money. You buy loy­alty with money” (Zell­ner, 2002). Enron exec­u­tives’ atten­tion was clearly focused on prof­its, power, greed and influ­ence. They wanted their employ­ees to focus on today’s bot­tom line. Skilling com­mu­ni­cated his pri­ori– ties to his employ­ees overtly, both in word and deed. Con­sis­tently clear sig­nals told employ­ees what was impor­tant to lead­er­ship – “Prof­its at all costs” (Tracin­ski, 2002). Or with another quote from a for­mer Enron employee: “… there were no rules for peo­ple, even in our per­sonal lives. Every­thing was about the com­pany and every– thing was sup­posed to be on the edge – sex, money, all of it …” (Broughton, 2002). In her tes­ti­mony before the House Sub­com­mit­tee, Sher­ron Watkins described Enron as a “… very arro­gant place, with a feel­ing of invin­ci­bil­ity”. Still another Enron employee noted about the company’s envi­ron­ment that “… it was all about cre­at­ing an atmos­phere of delib­er­ately break­ing the rules. For exam­ple, our offi­cial vaca­tion pol­icy was that you could take as much as you wanted when­ever you wanted as long as you deliv­ered your results. It drove the human resource depart­ment crazy” (Bartlett and Glin­ska, 2001).

Another exam­ple of today’s bot­tom line gain men­tal­ity is Andrew Fastow’s, for­mer Enron CFO, net­work of ques­tion­able part­ner­ships. These part­ner­ships pro­vided profit for Fas­tow per­son­ally, as well as for some of his more favored employ­ees, who were aware of his actions. Fas­tow demanded that Enron per­mit him to invest in and to per­son­ally profit from the part– ner­ships (some of his earn­ings were passed to asso­ciates who aided him). Such actions sent a clear mes­sage that management’s atten­tion was focused on the bot­tom line for the com­pany as well as per­sonal gain, regard­less of the means to get there. When it came to Fastow’s spe­cial inter­est deal­ings the Board of Direc­tors sus– pended the company’s Code of Ethics at least twice. This made Fas­tow a wealthy man at the expense of Enron (Lan­ders, 2002).

As Stern (1992) has sug­gested, if the organi– zation’s lead­ers seem to care only about the short-term bot­tom line, employ­ees quickly get the mes­sage too. How else could employ­ees read the Enron cul­ture than being focused on

short-term when their CEO (Ken Lay) both blessed the relax­ation of conflict-of-interest rules designed to pro­tect Enron from the very self– deal­ings that brought the com­pany down and par­tic­i­pated in board meet­ings allow­ing the cre­ation of the off-balance sheet part­ner­ships that were part of those trans­ac­tions. By late sum­mer 2001 he was reas­sur­ing investors and employ­ees that all was well (when he already had been informed that the com­pany had prob­lems with some invest­ment vehi­cles that could cost it hun­dreds of mil­lions of dol­lars, see Gru­ley and Smith, 2002).

Reac­tion to crises

The sec­ond lead­er­ship method men­tioned by Schein (1985) refers to a leader’s reac­tion to a cri­sis sit­u­a­tion. Schein asserts, that a cri­sis tests what the leader val­ues and brings these val­ues to the sur­face. With each impend­ing cri­sis, lead­ers have an oppor­tu­nity to com­mu­ni­cate through­out the orga­ni­za­tion what the company’s val­ues are. Enron was fac­ing a cri­sis of how to sus­tain a phe­nom­e­nal growth rate. Lead­ers reacted by defend­ing a cul­ture that val­ued prof– itabil­ity, even when it was at the expense of every­thing else. The off-balance sheet part­ner– ships were tremen­dously risky. How­ever, since nor­mal growth of the stock price would have fallen short of expec­ta­tions any­way, the only thing to do was to try to meet the unre­al­is­tic tar­get prof­itabil­ity expec­ta­tions. In such a case, an acci­dent was wait­ing to happen.

Once the Enron sit­u­a­tion came to light, the reac­tion from the Enron exec­u­tives was telling. The exec­u­tives were busy shift­ing the blame and point­ing fin­gers. Jef­fery Skilling even went as far as telling an incred­u­lous Con­gress that despite his Har­vard Busi­ness School degree and busi­ness expe­ri­ence he nei­ther knew of, nor would under­stand the intri­ca­cies of the Enron account­ing deals. (On the other hand, Skilling also was quoted on CNN say­ing “… if he knew then what he knows now – he STILL would not do any­thing dif­fer­ently.”) Even before the issues came to light it appears that Skilling was will­ing to aban­don the com­pany to save his own skin as

evi­denced by his mys­te­ri­ous res­ig­na­tion in August 2001 and giv­ing only the “per­sonal rea­sons” expla­na­tion for his sud­den depar­ture (and he still sold sig­nif­i­cant amounts of com­pany stock at a pre­mium). Both Ken­neth Lay and Sher­ron Watkins also sold stock before prices began to dra­mat­i­cally plum­met (Ken­neth Lay claim­ing that he had some per­sonal debts to pay off, Sher­ron Watkins refer­ring to the Sep­tem­ber 11th ter­ror­ist attacks. Watkins also sold stock at the same time when she was mak­ing alle­ga­tions of decep­tive account­ing practices).

Enron began sys­tem­at­i­cally fir­ing those it could lay blame on before it declared bank­ruptcy (Brown and Sender, 2002). A self-serving exon– era­tion com­mit­tee was employed to explain (or excuse?) the cur­rent sit­u­a­tion (Eichen­wald, 2002). After Skilling resigned from his post, Ken­neth Lay returned as CEO, promis­ing that there were no “account­ing issues, trad­ing issues, or reserve issues” at Enron (McClean, 2001). Con­gres­sional tes­ti­mony, news accounts and fed­eral inves­ti­ga­tions have told us oth­er­wise. Through­out Octo­ber 2001, Lay insisted that Enron had access to cash and that the com­pany was “per­form­ing very well,” while he failed to dis­close that Enron had writ­ten down share– hold­ers’ equity by $1.2 bil­lion, or that Moody’s was con­sid­er­ing down­grad­ing Enron’s debt (“Explain­ing the Enron Bank­ruptcy”, 2002). Com­pany insid­ers also referred to Loretta Lynch as “an idiot” (the Yale-educated lit­i­ga­tor who was among the first to ques­tion Enron’s prac– tices), Bethany McLean, the For­tune Mag­a­zine jour­nal­ist who first broke the story, was called “a looker who doesn’t know any­thing” (Dowd, 2002).

Another cri­sis con­sists in hav­ing to admit account­ing irreg­u­lar­i­ties. At first, the lead­ers of the com­pany tried to deny there was a prob­lem. They next tried to cover up any evi­dence of a prob­lem or any wrong­do­ing. They even tried to seize com­put­ers of any­one they thought was try­ing to expose them as well as to destroy many files thought to be guilt-inducing (Daily Press, 2002). It tran­si­tioned into a blame game as many exec­u­tives tried blam­ing each other, say­ing they didn’t know what was going on, or it was some­one else’s respon­si­bil­ity to know about the

prob­lems and do some­thing about it. Both Ken­neth Lay and his wife pro­claimed his inno– cence. Lay claimed to have been unaware of the sweet­heart deals, which were entirely the brain– child of Skilling and Fas­tow. Watkins also blamed them for the deba­cle, while shift­ing any blame from herself.

I take the Fifth” (U.S. Con­gres­sional Hear­ing, 2002 – this was the response Ken­neth Lay gave to the Sen­ate Com­merce Com­mit­tee when asked to explain Enron’s fail­ure. Although all but one of Enron’s offi­cers (curi­ously Skilling) invoked the 5th Amend­ment right to not self– incrim­i­nate, the story has played out much like that of the Salomon Broth­ers and John Gut­fre­und fiasco in the early 1990s. Doc­u­ment shred­ding and lies, both overt and those of omis­sion, have become the pre­ferred strat­egy for Enron’s man– age­ment (Brown and Sender, 2002). These bold acts from Enron lead­er­ship show a poor reac­tion to crisis.

From anony­mous whistle­blow­ing to bank– ruptcy to doc­u­ment shred­ding, to sui­cide (Cliff Bax­ter) to hid­ing behind the 5th Amend­ment, the lead­ers at Enron have run the gamut of extremes in their reac­tion to the company’s cri­sis. Wil­let and Always (2002) noted that “the mantra at Enron seems to be that eth­i­cal wrong­do­ing is to be hid­den at any cost; deny, play the dupe, claim igno­rance (“the ostrich instruc­tion”) lie, quit.” It appears that the truth and its conse– quences have never been a part of the Enron culture.

Role mod­el­ing (how lead­ers behave)

Schein’s third mech­a­nism is the exam­ple lead­ers set for the accept­abil­ity of uneth­i­cal behav­ior within an orga­ni­za­tion. Actions speak louder than words – there­fore role-modeling behav­ior is a very pow­er­ful tool that lead­ers have to develop and influ­ence cor­po­rate cul­ture. Through role mod­el­ing, teach­ing, and coach­ing, lead­ers rein– force the val­ues that sup­port the orga­ni­za­tional cul­ture. Employ­ees often emu­late lead­ers’ behav­ior and look to the lead­ers for cues to appro­pri­ate behav­ior. Many com­pa­nies are encour­ag­ing employ­ees to be more entrepre–

neur­ial – that is, to take more ini­tia­tive and be more inno­v­a­tive in their jobs. The Sci­en­tific Foun­da­tion reports a study that showed that man­agers who want to change the organization’s cul­ture to a more entre­pre­neur­ial one must “walk the talk”. In other words, they must demon­strate the entre­pre­neur­ial behav­iors them­selves (Pearce et al., 1997). This is the case with any cul­tural value. Employ­ees observe the behav­ior of lead­ers to find out what is val­ued in the orga­ni­za­tion. Per­haps, this was the most sig­nif­i­cant short– com­ing of Enron executives.

Accord­ing to the val­ues state­ment in Enron’s Code of Ethics and its annual report, the com­pany main­tains strong com­mit­ments to com– muni­ca­tion, respect, integrity, and excel­lence. How­ever, there is lit­tle evi­dence that sup­ports man­age­ment mod­el­ing of these val­ues. For instance, while the first pil­lar of the val­ues state– ment addresses an oblig­a­tion to com­mu­ni­cate, Sher­ron Watkins claims (quoted from the Hear­ing transcripts):

I con­tin­ued to ask ques­tions and seek answers, pri­mar­ily from for­mer cowork­ers in the Global Finance Group or in the busi­ness units that had hedged assets with Rap­tor. I never heard reas­sur­ing expla­na­tions. I was not com­fort­able con­fronting either Mr. Skilling or Mr. Fas­tow with my con­cerns. To do so, I believe, would have been a job-terminating move (U.S. Con­gres­sional Hear­ings, 2002).

Enron’s lead­ers’ pri­mary mes­sage about their val­ues was sent through their own actions. They broke the law as they con­cen­trated on finan­cial mea­sures and used of the cre­ative part­ner­ships described ear­lier in this paper. For exam­ple, Ken­neth Lay announced to ana­lysts on Octo­ber 16, 2001 that Enron had elim­i­nated $1.2 bil­lion in share­holder equity by ter­mi­nat­ing a part­ner– ship cre­ated by for­mer CFO Andrew Fas­tow. This arrange­ment allowed Enron to buy and sell assets with­out car­ry­ing the debt on its books, i.e. keep­ing Enron’s credit clean and the stock price high. Such actions clearly show a self-serving atti­tude of Enron lead­er­ship. The exec­u­tives not only con­doned such uneth­i­cal behav­ior, they ini– tiated it and were rewarded for it. The part­ner– ships were used to deceive investors about the

enor­mous debt Enron was incur­ring. It also sent a mes­sage to employ­ees that full and com­plete dis­clo­sure is not a require­ment, or even recom– mended. If the com­pany achieved short-term ben­e­fits by hid­ing infor­ma­tion, it was acceptable.

Enron’s lead­ers also ignored, then denied seri­ous prob­lems with their busi­ness trans­ac­tions and were more con­cerned about their per­sonal finan­cial rewards than those of the com­pany. For exam­ple, when the company’s stock price began to drop as the prob­lems were becom­ing pub­lic, the com­pany was tran­si­tion­ing from one invest– ment pro­gram to another. While the employ­ees were unable to sell their stock, the exec­u­tives were quickly sell­ing off many of their shares. Another exam­ple is the exec­u­tives’ lack of integrity in com­mu­ni­cat­ing to the employ­ees and investors. They main­tained that the com­pany was finan­cially sta­ble and that many of their emerg­ing prob­lems really were not too seri­ous, even though they knew the truth and were mak­ing finan­cial deci­sions to pro­tect their per­sonal gains.

In ret­ro­spect, the lead­er­ship of Enron almost cer­tainly dic­tated the company’s out­come through their own actions by pro­vid­ing per­fect con­di­tions for uneth­i­cal behav­ior. Michael Joseph­son, Pres­i­dent of the Joseph­son Insti­tute of Ethics, aptly described these con­di­tions as they relate to the char­ac­ter of lead­er­ship: “Peo­ple may pro­duce spec­tac­u­lar results for a while, but it is inevitable that tech­niques depend­ing so heav­ily on fear as a moti­va­tor gen­er­ate sur­vival strate– gies that include cheat­ing, dis­tor­tion, and an inter­nal com­pet­i­tive ethos char­ac­ter­ized by a look-out-for-number-one atti­tude.… Just as the des­tiny of indi­vid­u­als is deter­mined by per­sonal char­ac­ter, the des­tiny of an orga­ni­za­tion is deter­mined by the char­ac­ter of its lead­er­ship. And when indi­vid­u­als are derailed because of a lack of char­ac­ter, the orga­ni­za­tion will also be harmed” (Joseph­son, 1999).

Allo­ca­tion of rewards

The behav­ior of peo­ple rewarded with pay increases or pro­mo­tions sig­nals to oth­ers what is nec­es­sary to suc­ceed in an orga­ni­za­tion – this is

what Schein calls the “allo­ca­tion of rewards”- mech­a­nism. To ensure that val­ues are accepted, lead­ers should reward behav­ior that is con­sis­tent with the val­ues (and actual rewards count obvi– ously more than promised rewards, cf. Sims and Brinkmann, 2002).

The reward sys­tem cre­ated by a leader indi– cates what is prized and expected in the organi– zation. This view is in line with a basic man­age­ment doc­trine. When an instance of eth­i­cal achieve­ment occurs – for instance, when some­one acts with integrity and honor – the organization’s lead­ers must reward it. Such an effort sends as clear a mes­sage to the rest of the orga­ni­za­tion as when an orga­ni­za­tion rewards an employee who acts uneth­i­cally (see e.g. Larimer, 1997). Enron’s reward sys­tem estab­lished a “win– at-all-costs” focus. The company’s lead­er­ship pro­moted and retained only those employ­ees that pro­duced con­sis­tently, with lit­tle regard to ethics. Skilling sin­gled out one of his vice pres­i­dents, Louise Kitchen, for her results-oriented approach to Enron’s online busi­ness. Kitchen had started the company’s Internet-based trad­ing busi­ness even though Skilling repeat­edly turned down her requests to begin such a pro­gram. Kitchen ignored the for­mer CEO’s deci­sion and instead used already-allocated funds to pull the new net­work together. Or, as a for­mer Enron vice pres­i­dent who attended the meet­ing described it best. “The moral of this story is break the rules, you can cheat, you can lie, but as long as you make money, it’s all right” (quoted after Schwartz, 2002).

The company’s com­pen­sa­tion struc­ture con– trib­uted to an uneth­i­cal work cul­ture, too – by pro­mot­ing self-interest above any other inter­est. As a con­se­quence, the team approach once used by Enron asso­ciates dete­ri­o­rated. Per­for­mance reviews were pub­lic events and poor per­for­mance was ridiculed (or employ­ees were fired through a “rank and yank” process). The strongest per– form­ing units even went as far as to “ignore” com­pany pol­icy – grant­ing unlim­ited vaca­tion time as noted ear­lier as long as the work got done, ignor­ing Human Resources’ com­plaints (Bartlett and Glin­ska, 2001).

Extremely high bonuses were doled out to exec­u­tives who behaved in desir­able ways, e.g. in

the form of stock options) which in turn incited exec­u­tives to keep the stock price up at any cost (Lard­ner, 2002). Annual bonuses were as high as $1 mil­lion for traders, and for exec­u­tives they were even higher). Enron devel­oped a rep­u­ta­tion for both inter­nal and exter­nal ruth­less­ness where employ­ees attempted to crush any com­pe­ti­tion and was con­sid­ered extremely aggres­sive for a non-investment bank (McClean et al., 2001). Addi­tion­ally, the exec­u­tives at Enron played favorites, invit­ing top per­form­ers to spend week­end vaca­tions with the exec­u­tive staff. The best work­ers (deter­mined through day-to-day bot­tom line results) received stag­ger­ing incen­tives and exor­bi­tant bonuses. One exam­ple of this was Car Day. On this day, an array of lav­ish sports cars arrived for the most suc­cess­ful employ­ees (Broughton, 2002).

Reten­tion bonuses that were paid shortly before the com­pany declared bank­ruptcy to about 500 exec­u­tives ranged in value from $1,000 to $5 mil­lion (pos­si­bly as a reward for help with set­ting up the prob­lem­atic finan­cial part­ner­ships that led to the company’s down­fall). Over­all, Enron’s reward sys­tem rewarded indi­vid­u­als who embraced Enron’s aggres­sive, indi­vid­u­al­is­tic cul­ture and were based on short-term prof­its and finan­cial measures.

Cri­te­ria of selec­tion and dis­missal (how lead­ers hire and fire employees)

Schein’s (1985) last mech­a­nism by which a leader shapes a cor­po­rate cul­ture, describes how a leader’s deci­sions about whom to recruit or dis­miss sig­nals a leader’s val­ues to all of his employ­ees. The selec­tion of new­com­ers to an orga­ni­za­tion is a pow­er­ful way of how a leader rein­forces cul­ture. Lead­ers often uncon­sciously look for indi­vid­u­als who are sim­i­lar to cur­rent orga­ni­za­tional mem­bers in terms of val­ues and assump­tions. Some com­pa­nies hire indi­vid­u­als on the rec­om­men­da­tion of a cur­rent employee. This tends to per­pet­u­ate the cul­ture because the new employ­ees typ­i­cally hold sim­i­lar val­ues. Promotion-from-within poli­cies also serve to rein­force orga­ni­za­tional culture.

Ken Lay placed an imme­di­ate focus on hiring

the best and smartest peo­ple, those who would thrive in a com­pet­i­tive envi­ron­ment. Skilling shared Lay’s phi­los­o­phy. Skilling hired only Ivy– league grad­u­ates with a hunger for money that matched his. He hired peo­ple who con­sid­ered them­selves the best and the bright­est and were out to for­ward their own causes. Stan­ford and Har­vard grad­u­ates, who would have oth­er­wise worked on Wall Street, these peo­ple were paid well to work in Texas and to build the Enron cul­ture. Their reward for giv­ing up the allure of Sil­i­con Val­ley and Wall Street was a high salary and a large bonus opportunity.

Skilling per­pet­u­ated a focus on short-term trans­ac­tional endeav­ors from the very begin­ning by hir­ing employ­ees that embod­ied the beliefs that he was try­ing to instill: aggres­sive­ness, greed, a will to win at all costs, and an appre­ci­a­tion for cir­cum­vent­ing the rules. This was the same cul­ture of greed that brought tur­moil to Salomon Broth­ers on Wall Street in the early 1990s. Divorce rates among senior exec­u­tives were sky– rock­et­ing as well. Instant grat­i­fi­ca­tion, both per– son­ally and pro­fes­sion­ally, was part of the Enron cul­ture and Skilling did every­thing he could to sur­round him­self with indi­vid­u­als who had sim­i­lar val­ues and assump­tions and fit­ted into the Enron culture.

The way a com­pany fires an employee and the ratio­nale behind the fir­ing also com­mu­ni­cates the cul­ture. Some com­pa­nies deal with poor per– for­m­ers by try­ing to find them a place within the orga­ni­za­tion where they can per­form bet­ter and make a con­tri­bu­tion. Other com­pa­nies seem to oper­ate under the phi­los­o­phy that those who can­not per­form are out quickly (Sims and Brinkmann, 2002).

Enron car­ried out an annual “rank and yank” pol­icy where the bot­tom fif­teen to twenty per­cent of pro­duc­ers were let go or fired after a for­mal eval­u­a­tion process each year. Asso­ciates graded their peers, which caused a great amount of dis­trust and para­noia among employ­ees. Enron’s employee reviews added to the compe– tition by review­ing job per­for­mance in a pub­lic forum and send­ing the bot­tom 5% to the rede– ploy­ment office – dubbed the “office of shame” (Frey and Rosin, 2002). What bet­ter way to develop a dis­trust­ful work envi­ron­ment than to

pit employ­ees against one another and as Larry Bossidy, for­mer CEO of Allied Sig­nal recently noted “forced rank­ing pro­motes bad employee morale” (2002), a win-at-all costs men­tal­ity, and a will­ing­ness to cross the eth­i­cal line (Wolfe, 1988; Sims and Brinkman, 2002).

The occur­rence and han­dling of inter­nal whistle-blowing also tells a lot about a corpo– rate cul­ture. At Enron, employ­ees who tried to blow the whis­tle were pun­ished, e.g. by career set­backs and hos­til­ity (cf. e.g. not least the enron– gate web­site). The most well-known whis­tle– blower, Sher­ron Watkins, recounted how her fears about being fired for speak­ing out led her to reach out to Ken Lay through anony­mous warn­ings. She even pub­licly stated that Andrew Fas­tow tried to have her fired once he found out that she was the author of the anony­mous memo to Lay (Ham­burger, 2002). Watkins reported that her com­puter was con­fis­cated and she was moved to another office after she sub­mit­ted her let­ter to Ken­neth Lay. Another employee, Jeff McMa­hon, also spoke up against the con­flicts of inter­est seen in the off book part­ner­ships. As a reward for his actions, he was reas­signed to a new job.

On the other hand, those who closed their eyes to the wrong doings were rewarded. Or with the words of a for­mer Enron employee: “It was very clear what the mea­sures were and how you got pro­moted at Enron. That absolutely dri­ves behav­ior … get­ting the deal was para­mount at Enron” (Hansell, 2002). A Hous­ton head­hunter described the free­dom given by Skilling when he was Enron’s CEO to loyal employ­ees metaphor– ically: “Once you gained Jeff’s trust, the leash became really long” (Zell­ner, 2002).

The selec­tion and rewards sys­tem was con­sis– tent with the cul­ture at Enron. It pro­moted greed, self­ish­ness, and jeal­ousy within the orga­ni­za­tion. Enron’s exec­u­tives selected those employ­ees who shared their aggres­sive, win-at– all-costs men­tal­ity. Their short-term view may have pre­vented them from see­ing what the long– term costs of this kind of per­son­al­ity could be on the orga­ni­za­tion as a whole.

Final com­ments and sug­ges­tions for future work

The story of Enron sounds smart and stu­pid at the same time. Deeply defec­tive lead­er­ship from Lay and Skilling played a sig­nif­i­cant role in cre­at­ing the company’s cul­ture that led to it’s 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. This dete­ri­o­ra­tion did not go entirely unno­ticed. Indi­vid­ual employ­ees at Enron, audi­tors at Ander­son and even some ana­lysts who watch the finan­cial mar­kets, noticed aspects about the Enron sit­u­a­tion that did not seem right, long before the pub­lic became aware of Enron’s trans– gres­sions. There were whistle-blowers but the Enron lead­ers did not listen.

What existed in Enron’s cul­ture that kept indi– vid­ual employ­ees from expos­ing the exec­u­tive wrong­do­ers? And what about the Enron way per­mit­ted the exec­u­tives to behave the way that they did? Enron’s cul­ture is a good exam­ple of group­think (cf. eg. Janis, 1989; Moore­head, 1986) where indi­vid­u­als feel extreme pres­sure not to express any real strong argu­ments against any co-workers’ actions. Although very indi­vid­ual– istic, the cul­ture at Enron was at the same time con­formist, or quot­ing Glenn Dick­son, a for­mer Enron Risk Man­ager: “The pres­sure was – you just didn’t have a choice but to approve the deals once every­body had their heart set on that deal clos­ing” (ABC News, 2002). Employ­ees were loyal in an ambigu­ous sense of the term, i.e., they wanted to be seen as part of the star team and to par­take in the ben­e­fits that that honor entailed. Some for­mer Enron employ­ees com– mented that: “loy­alty required a sort of group– think. You had to ‘keep drink­ing the Enron Water’ …” (Stephens and Behr, 2002). John

Alar­ial, a for­mer midlevel man­ager at Enron noted that: “Enron’s aggres­sive busi­ness tac­tics were embraced by the rank and file, … even if (authors addi­tion) … many sus­pected it was a house of cards” (ABC News, 2002). Employ­ees were focused on the bot­tom line and “pro­moted short term solu­tions that were imme­di­ately finan– cially sound despite the fact that they would cause prob­lems for the orga­ni­za­tion as a whole … rules of eth­i­cal con­duct were merely bar­ri­ers to suc­cess” (Sims, 1992).

Enron’s top exec­u­tives set the tone for this cul­ture. Per­sonal ambi­tion and greed seemed to over­shadow much of their cor­po­rate and indi– vid­ual lives. They strove to max­i­mize their indi– vid­ual wealth by ini­ti­at­ing and par­tic­i­pat­ing in scan­dalous behav­iors. Enron’s cul­ture cre­ated an atmos­phere ripe for the uneth­i­cal and ille­gal behav­ior that occurred.

Two of the most impor­tant lessons to learn from the Enron cul­ture his­tory is that bad top man­age­ment moral­ity can be a suf­fi­cient condi– tion for cre­at­ing a self-destructive eth­i­cal cli­mate and that a well-filled CSR and busi­ness ethics tool­box can nei­ther stop nor com­pen­sate for such processes.3

Enron’s new CEO, turnaround-specialist Stephen Cooper could use (or should one rather say needs to use) the same five leader’ influ­ence mech­a­nisms (Schein, 1985) used above for a turn­around of Enron’s cul­ture and eth­i­cal climate:

Atten­tion – Cooper needs to focus atten­tion on improv­ing the moral cli­mate of the organi– zation by look­ing at the long-term impli­ca­tions of employee’s actions instead of only the most recent bot­tom line profits.

Reac­tion to Crises – Cooper should swiftly react to the cri­sis fac­ing the com­pany by com– ply­ing with author­i­ties and fir­ing eth­i­cal wrong– doers. The com­pany must stop the lying, cov­er­ing up eth­i­cal and legal trans­gres­sions, and try­ing to pre­serve those eth­i­cal wrong­do­ers at any cost.

Role Mod­el­ing – Cooper must con­vey the image of the moral man­ager (Trevino et al., 2002). He must set the exam­ple of hon­esty and integrity for the rest of the organization.

Allo­ca­tion of Rewards – Using rewards and dis­ci­pline effec­tively may be the most powerful

way for Cooper to send sig­nals about desir­able and unde­sir­able con­duct. That means reward­ing those who accom­plish their goals by behav­ing in ways that are con­sis­tent with stated val­ues and it must be assumed that a lack of com­mit­ment to eth­i­cal prin­ci­ples will ensure that employ­ees will not be promoted.

Cri­te­ria for Selec­tion and Dis­missal – Cooper must bring employ­ees into Enron who are com– mit­ted to eth­i­cal prin­ci­ples and usher out all old employ­ees con­nected to eth­i­cal mis­con­duct. The com­pany must have clear poli­cies on the cri­te­ria for selec­tion and dis­missal that employ­ees under– stand.

In other words, Enron’s new CEO, Stephen Cooper, must take a proac­tive stance to pro­mote an eth­i­cal cli­mate and must be the Chief Ethics Offi­cer of the orga­ni­za­tion (Trevino et al., 2000), cre­at­ing a strong ethics mes­sage that gets employ­ees’ atten­tion and influ­ences their thoughts and behav­iors. Exec­u­tive com­mit­ment to eth­i­cal behav­ior is an impor­tant way of sus– tain­ing an eth­i­cal orga­ni­za­tional cul­ture (Weaver et al., 1999). Cooper must find ways to focus the organization’s atten­tion on ethics and val­ues and to infuse the orga­ni­za­tion with prin­ci­ples that will guide the actions of all employ­ees. New (and first of all cred­i­ble) val­ues could be the glue that holds things together at Enron, and these val­ues must be com­mu­ni­cated (by deeds) from the top of the orga­ni­za­tion. Employ­ees must under­stand that any sin­gle employee who oper­ates out­side of the orga­ni­za­tional value sys­tem can cost the orga– niza­tion dearly in legal fees and can have a tremen­dous, some­times irre­versible impact on the organization’s image and cul­ture. Employ­ees must trust that whistle­blow­ers will be pro­tected, that pro­ce­dures used to inves­ti­gate eth­i­cal prob­lems will be fair, and that man­age­ment will take action to solve prob­lems that are uncovered.

Our skep­ti­cal view regard­ing any com­pen– satory use of the CSR and busi­ness ethics tool­box (i.e. as long as morally dis­putable lead– ership cre­ates a bad moral cli­mate) does not imply any rad­i­cal rejec­tion of CSR and ethics tools as such (Schein would have called such tools “sec­ondary artic­u­la­tion and rein­force­ment mech– anisms”, such as “orga­ni­za­tional sys­tems and pro– cedures” and “for­mal state­ments of organizational

phi­los­o­phy, creeds and char­ters”, see Schein, 1985, pp. 237–242). Once tools are under­stood as (“sec­ondary”) cat­a­lysts for (“pri­mary”) lead– ership influ­ence, it is more fruit­ful to ask for con– ditions under which eth­i­cal tools such as codes could fur­ther and rein­force a given organization’s eth­i­cal cli­mate (cf. Brinkmann and Ims, 2003, esp. table #3) and how Schein’s five mech­a­nisms could be oper­a­tional­ized in terms of avail­able tools.

In our intro­duc­tion we men­tioned briefly Enron’s image of being an excel­lent cor­po­rate cit­i­zen, with all the cor­po­rate social respon­si­bil­ity (CSR) and busi­ness ethics tools and sta­tus sym­bols in place. It was sug­gested that this was a key aspect or dimen­sion of the Enron case, as a case of deceiv­ing cor­po­rate cit­i­zen­ship and of sur­face or facade ethics (which also has con– trib­uted to the cre­ation of a new word, Enron Ethics). As an aca­d­e­mic field we owe the gen­eral pub­lic and the busi­ness pub­lic a thor­ough doc– umen­ta­tion, analy­sis and dis­cus­sion of how Enron and other com­pa­nies with a sim­i­lar record and rep­u­ta­tion could “instru­men­tal­ize” (and thus dis– credit) ethics and CSR for mere facade purposes.

It has also been men­tioned that such a focus deserves and requires a paper on its own, at least. As an open end to this paper we should like to draft briefly a typol­ogy with moral cul­ture types and tran­si­tions which such a paper could address, as a pro­lon­ga­tion of the present paper and as a bridge-building towards a more self-critical busi­ness ethics busi­ness and busi­ness ethics disci– pline. The typol­ogy is made up of two dimen– sions, eth­i­cal­ness of an orga­ni­za­tion cul­ture or what has been called eth­i­cal or moral cli­mate, and pres­ence of busi­ness eth­i­cal tools or arti­facts, such as ethics offi­cers, codes of ethics, value state–

ments and the like. If one for prac­ti­cal pur­poses dis­tin­guishes dichoto­mously between low and high one ends up with a four-fold table as shown in Table I.4

As men­tioned above, Enron looks at first sight like “type I”, sim­i­lar to what Kohlberg might have called moral “pre-conventionalism”, like a clas­si­cal busi­ness ethics case, with a typ­i­cal mix of “amoral­ity” and “immoral­ity” (cf. for the dis­tinc­tion Car­roll and Meeks, 1999). For headline-journalism and pub­lic opin­ion Enron and World.com are sim­ply bad and rot­ten, one just didn’t know before it was too late, and this shows once more an urgent need for more leg– isla­tion and ethics. Our the­sis is that Enron (and prob­a­bly quite a num­ber of other com­pa­nies wait­ing to be dis­cov­ered) is an at least as good illus­tra­tion of “type II”, of window-dressing ethics, with talk­ing instead of walk­ing, ethics as rhetoric. While “type II” looks mod­ern or at least fash­ion­able, “type III” looks like the old– fash­ioned type of moral busi­ness, from the days before the dis­ci­plines of busi­ness ethics, CSR, mar­ket­ing and pub­lic rela­tions were invented, with col­lec­tive moral con­science (bor­row­ing E. Durkheim’s term) as con­sis­tent label and con­tent, per­haps addi­tion­ally com­mu­ni­cat­ing moral hum– ble­ness, with a touch of British under­state­ment. The final “type IV” refers to a moral role-model busi­ness cul­ture in the age of mar­ket­ing and pub­lic rela­tions, with walk­ing the talk, with show­ing and con­fess­ing openly its col­lec­tive moral con­science (call it self-reassurance, or more U.S.-style self-marketing, to put it stereo­typi– cally). In other words, a future paper should pri– mar­ily deal with a doc­u­men­ta­tion and crit­i­cism of “window-dressing ethics”, of how to fur­ther processes towards col­lec­tive moral conscience,

with more or less mar­ket­ing of the good exam­ples, and of how to pre­vent degen­er­a­tion towards “window-dressing ethics”. We often won­der if we would pre­fer hon­est amoral­ity and immoral­ity to dis­hon­est moral­ity. But still, we choose to read the paper title of Tonge et al. (2003) opti­misti­cally: “The Enron story: you can fool some of the peo­ple some of the time …”.

Notes

1 Cf. in addi­tion the Enron-story books for sale as of today by Ama­zon, see bookhttp://www.amazon. com/exec/obidos/ASIN/0471265748/millerriskadv– 20/002–3887103-5927230.

2 For exam­ple, Enron had promised CIBC World Mar­kets the major­ity of the prof­its from Project Brave­heart for ten years, or in the event of fail­ure Enron would be oblig­ated to repay CIBC its entire $115.2 mil­lion invest­ment. Not only did Enron book the earn­ings pre­ma­turely, but it was also forced to repay CIBC its full investment.

3 For a draft of pos­si­ble “latent, neg­a­tive func­tions” of eth­i­cal codes cf. Brinkmann and Ims, 2003, esp. table #2. 4 Thanks to col­league Knut Ims from the Nor­we­gian School of Busi­ness Admin­is­tra­tion for a dis­cus­sion about this typology.

Ref­er­ences

ABC News – World News Sun­day: 2002, ‘Pro­file: The Shad­owy World of Enron’s Cor­po­rate Cul­ture’ (Jan­u­ary 27).

Bartlett, C. A. and M. Glin­ska: 2001, ‘Enron’s Trans­for­ma­tion: From Gas Pipeline to New Econ­omy Pow­er­house’ (Har­vard Busi­ness School Press, Boston, MA).

Brinkmann, J. and K. Ims: 2003, ‘Good Inten­tions Aside (Draft­ing a Func­tion­al­ist Look at Codes of Ethics)’, forth­com­ing Sum­mer 2003 in Busi­ness Ethics: A Euro­pean Review.

Broughton, P. D.: 2002, ‘Enron Cock­tail of Cash, Sex and Fast Liv­ing’, News. Telegraph.co.uk (On-line jour­nal) (Feb­ru­ary 13).

Brown, K. and H. Sender: 2002, Enron’s Board Fires Arthur Ander­sen: Ques­tions Arise About Auditor’s Actions’, The Wall Street Jour­nal [On–

line]. Avail­able: http://wsjclassroomedition.com/tj

011802 enron.htm. Car­roll, A. B. and M. D. Meeks: 1999, ‘Mod­els of

Man­age­ment Moral­ity: Euro­pean Appli­ca­tions and Impli­ca­tions’, Busi­ness Ethics: A Euro­pean Review 8, 108–116.

Cohan, J. A.: 2002, ‘I Didn’t Know and I was Only Doing My Job. Has Cor­po­rate Gov­er­nance Careened Out of Con­trol? A Case Study of Enron’s Infor­ma­tion Myopia’, Jour­nal of Busi­ness Ethics 40, 275–299.

Daily Press: 2002, ‘Trou­bles Widely Known, Exec Says’ (Feb­ru­ary 15), p. A1.

Dowd, M.: 2002, ‘Enron, Hol­ly­wood Ver­sion’, The Roanoke Times (Feb­ru­ary 10), 1.

Eavis, P.: 2001, ‘Enron Reaps What Its Cow­boy Cul­ture Sowed’, TheStreet.com [On-line]. Avail­able: http://www.thestreet.com/markets/ detox/10004675.html.

Eichen­wald, K.: 2002, ‘Report Lays Out Trou­bles At Enron: Inter­nal Inves­ti­ga­tion Finds Prof­its Over­stated To Executive’s Enrich­ment’, The New York Times [On-line]. Avail­able: http://www. austin360.com/aas/business/020302/3enrong.html.

Explain­ing the Enron Bank­ruptcy’: 2002, CNN.com (Jan­u­ary 12). Avail­able: http://www.cnn.com.html. Frey, J. and H. Rosin: 2002, ‘Enron’s Green Acres’,

The Wash­ing­ton Post (Feb­ru­ary 25), 1. Gru­ley, B. and R. Smith: 2002, ‘Anatomy of a Fall: Keys to Suc­cess Left Ken­neth Lay Open to Dis­as­ter’, The Wall Street Jour­nal (April 26), pp. A1,

A5. Ham­burger, T.: 2002, ‘Watkins Tells of ‘Arrogant’

Cul­ture; Enron Sti­fled Staff Whistle-Blowing’, The

Wall Street Jour­nal (Feb­ru­ary 15), pp. A3, C1. Hansell, G.: 2002, ‘The Fall of Enron Pres­sure Cooker Finally Exploded’, The Hous­ton Chron­i­cle [On– line]. Avail­able: http://www.russreyn.com/news/

newsitem.asp?news=235. Janis, I.: 1989, Crit­i­cal Deci­sions: Lead­er­ship in Policy

Mak­ing and Cri­sis Man­age­ment (Free Press, New

York). Joseph­son, M.: 1999, ‘Char­ac­ter: Linch­pin of

Lead­er­ship’, Exec­u­tive Excel­lence 16(8), 13–14. Lan­ders, J.: 2002, ‘Enron Exec’ Silence Is No Shock Tes­ti­mony Would Have Fol­lowed Hard-hitting Report On Activ­i­ties. The Dal­las Morn­ing News [On-line], Avail­able: http://www.kmsb.com/

business/news/506152 enron.html. Lard­ner, J.: 2002, ‘Why Should Any­one Believe You?

What Ruined Enron Wasn’t Just Account­ing. It Was a Cul­ture that Val­ued Appeal­ing Lies Over Incon­ve­nient Truths. Are You Sure Your Company

Is All That Dif­fer­ent?’ Busi­ness 2.0 [On-line]. Avail­able: http://www.business2.com/articles/mag/ 0/1640.37748.FF.html.

Larimer, L. V.: 1997, ‘Reflec­tions on Ethics and Integrity’, HRFo­cus (April), 5.

Lewis, M.: 1989, Liar’s Poker (Nor­ton, New York). McClean, B., J. Sung Rev­ell and A. Hel­yar: 2001, ‘Why Enron went Bust: Start with Arro­gance. Add Greed, Deceit, and Finan­cial Chi­canery. What Do You Get? A Com­pany that Wasn’t What it was Cracked Up to Be’, Busi­ness 2.0 [On-line]. Avail­able: http://www.business2.com/articles/mag/

print/0.1643.36124.FF.html. Moore­head, G. and J. R. Mon­ta­nari: 1986. ‘An

Empir­i­cal Inves­ti­ga­tion of the Groupthink

Phe­nom­e­non’, Human Rela­tions 39, 339–410. New York Times: 2002, ‘Prof­its At Enron Energy Ser­vices’, [On-line] (Feb­ru­ary 14). Avail­able: http://www.nytimes.com/learning/students/pop/

arti­cles. Pearce, J. A., II, T. R. Kramer and D. K. Robbins:

1997, ‘Effects of Man­agers’ Entre­pre­neur­ial Behav­ior on Sub­or­di­nates’, Jour­nal of Busi­ness Ven­tur­ing 12, 147–160.

Pet­rick, J. A. and J. F. Quinn: 2002, ‘Man­age­ment Integrity Capac­ity Neglect and Enron: Stake­holder Dam­ages and Reme­dies’, paper pre­sented at the 9th Inter­na­tional Con­fer­ence Pro­mot­ing Busi­ness Ethics, Nia­gara Uni­ver­sity, Nia­gara Falls, NY, Oct 23–25, 2002.

Schein, E.: 1985, Orga­ni­za­tional Cul­ture and Lead­er­ship (Jossey-Bass, San Fran­cisco, CA).

Schwartz, J.: 2002, ‘Darth Vader. Machi­avelli. Skilling Set Intense Pace’, The New York Times (Feb­ru­ary 7), 1–2.

Sims, R. R.: 1992, ‘The Chal­lenge to Uneth­i­cal Behav­ior in Orga­ni­za­tions’, Jour­nal of Busi­ness Ethics 11, 505–513.

Sims, R. R.: 2002, ‘Lead­er­ship, Orga­ni­za­tional Cul­ture and Ethics’, Teach­ing Note (Grad­u­ate School of Busi­ness, Col­lege of William and Mary, Williams­burg, VA).

Sims, R. R.: 2000, ‘Chang­ing an Organization’s Cul­ture Under New Lead­er­ship’, Jour­nal of Busi­ness Ethics 25, 65–78.

Sims, R. R. and J. Brinkmann: 2002, ‘Lead­ers as Moral Role Mod­els: The Case of John Gut­fre­und at Salomon Broth­ers’, Jour­nal of Busi­ness Ethics 35, 327–339.

Stephens, J. and P. Behr: 2002, ‘Enron’s Cul­ture Fed Its Demise: Group­think Pro­moted Fool­hardy Risks’, Wash­ing­ton Post (Jan­u­ary 27), A01.

Stern, G.: 1992, ‘Audit Report Shows How Far

Cham­bers Would Go For Prof­its’, The Wall Street

Jour­nal (Octo­ber 12), A1. Tonge A., L. Greer and A. Law­ton: 2003, ‘The Enron

Story: You Can Fool Some of the Peo­ple Some of the Time …’, Busi­ness Ethics: A Euro­pean Review 12, 4–22.

Tracin­ski, R.: 2002, ‘Enron Ethics’, Cap­i­tal­ism Mag­a­zine [On-line] (Jan­u­ary 28). Avail­able: http://www.capitalismagazine.com/2002/january/ rwt.enron.htm.

Trevino, L. K., L. P. Hart­man and M. Brown: 2000, ‘Moral Per­son and Moral Man­ager: How Exec­u­tives Develop a Rep­u­ta­tion for Eth­i­cal Lead­er­ship’, Cal­i­for­nia Man­age­ment Review 42(4), 124–142.

Trevino, L. K. and K. A. Nel­son: 1995, Man­ag­ing Busi­ness Ethics: Straight Talk about How to Do It Right (John Wiley & Sons, New York).

U.S. Con­gres­sional Hear­ing: 2002 (Feb­ru­ary 6), Wash­ing­ton, DC.

Vogt, A. J.: 2002, ‘Inter­view with Larry Bossidy: The Way It Is’, Across the Board (May/June), 31–37. Weaver, G. R., L. K. Trevino and P. L. Cochran:

1999, ‘Cor­po­rate Ethics Pro­grams as Con­trol Sys­tems: Influ­ences of Exec­u­tive Com­mit­ment and Envi­ron­men­tal Fac­tors’, Acad­emy of Man­age­ment Jour­nal 42, 41–57.

Wil­let, B. and T. Always: 2002, ‘For Investors, X Marks the Spot, Whether They Choose To See It Or Not’, FallStreet.com [On-line]. Avail­able: http://www/fallstreet.com/Spotlight/jan2502/htm.

Wolfe, D.: 1988, ‘Is There Integrity in the Bot­tom­line: Man­ag­ing Obsta­cles to Exec­u­tive Integrity’, in S. Sri­vastva (ed.), Exec­u­tive Integrity: The Search for High Human Val­ues in Orga­ni­za­tional Life (Jossey-Bass, San Fran­cisco), pp. 140–171.

Zell­ner, W.: 2002, ‘Jeff Skilling: Enron’s Miss­ing Man’, Busi­ness Week Online (Feb­ru­ary 11).

3 Comments

Post a Comment

Your email is never shared. Required fields are marked *