It is the third week of August, in 2001, and I am an accounting clerk in Sherry Watkins’s department. It has been a few days since Sherry met with Chairman Kenneth Lay to discuss her concerns about the “Raptor” partnership, which, according to our internal (departmental) investigation has lost Enron over $700 million (CNN Student News, 2002). The atmosphere in the office is extremely tense, and Sherry rarely smiles anymore: this has become a toxic work environment, and the whole team is on tenterhooks, expecting to be fired any minute because we took part in an investigation regarding what we think are direct usurpations of the law and examples of extremely unethical conduct and practices, and this is not an environment that encourages ethical checks and balances. In fact, as Sherry comes back into the office from a meeting with the other executives, she tells us that Andrew Fastow, our CFO, wants her fired and her computer seized. We are extremely nervous about what this means for our jobs. Sherry is an executive—if she is being treated like this, what will happen to those of us who are “rank and file”?
Sherry Watkins raised very legitimate questions about the Raptor partnership, perpetuating a fine example of ethical leadership by, when noticing financial discrepancies, asking questions. Her example of walking an uncomfortable walk, so to speak, had “her followers” (Mihelic, Lipicnik, & Tekavcic, 2010, p.3) willing to do the same to measure up to a code of ethics that should have supported ethical behavior at Enron. Her investigation and her attempt to seek clarification from multiple colleagues (who may have had knowledge about the partnerships) display a clear concept of systems theory, in which Watkins perpetuated an open feedback loop to encourage inputs into the investigation; the investigation itself was an adaptive mechanism that received input (that there was unethical conduct occurring) and sought to adapt to it by investigating the unethical conduct in an attempt to maintain Enron’s reputation and to protect its many stakeholders.
However, Andrew Fastow’s reaction, and Chairman Lay’s lack thereof, now pointed the company in a very different direction: this was a clear case of justifying unethical actions using the excuse, “it’s standard practice” (Mihelic, Lipicnik, & Tekavcic, 2010, p.4). In fact, Fastow later alleged that the activities for which he was convicted of criminal behavior, including the use of “off-balance-sheet vehicles” and “inflated financial assumptions” in Enron’s retirement plans were indeed common corporate practice then, and continue to be now in the present day (Elkind, 2013). These “standard practices,” then, fostered an environment in which unethical behavior was condoned and became a run-of-the-mill issue (Mihelic et al., 2010).
Fastow’s first reaction was to cover up all evidence of wrongdoing by firing the person who had brought discrepancies to the C-suite’s attention, and confiscating her computer (it is unclear as to whether or not the threat included Watkins’s subordinates), but what signals an even more significant breach of ethical conduct is that Lay, to whom Watkins brought her findings because she felt that to approach Fastow would effectively terminate her career (CNN Student News, 2002), and with whom any layperson would assume that the final responsibility lay, assured Watkins that he would investigate. Lay consequently delegated the responsibility to Enron’s legal firm at the time, Vinson & Elkins, who did not investigate the matter further and limited their response to a cautionary nine-page note including the phrases “bad cosmetics” and “a serious risk of adverse publicity and litigation” (Yardley & Schwartz, 2002). This sequence of events represents a system that went from open to abruptly closed; communication was not engaged in subsequently, resulting in what apparently was Enron’s C-suite maintenance mechanism, a desperate attempt to preserve the status quo by attempting to shut down all inquiry and ethical response in the form of Watkins’s investigation. The highly precarious nature of this so-called maintenance mechanism was revealed once Watkins performed her whistleblower actions, catapulting Enron toward what Almaney referred to as “the verge of disintegration” (Almaney, 1974, p.42).
Enron’s corporate goals and strategies were profoundly affected this unabashed disintegration of ethical corporate leadership: the majority of employees lost their employment, and shareholders and pensioners had their investments wiped out (CNN Student News, 2002). The reputation that Enron had crafted so carefully, skillfully melding their old-world roots as a utility company with their dotcom thought leadership (NPR), came crashing down in October of 2001.
A more effective approach by Enron’s executive team should have started with a top-down approach, given that Fastow was directly responsible for perpetuating a culture in which unethical practices were commonplace and condoned. Economist Milton Friedman may have argued in favor of a profit-driven approach for corporations in order to confer social and economic benefits (Silverstein, 2013), but it is clear from Enron’s example that a purely profit-driven approach is at best detrimental to a company’s ethical conduct and to a lucrative, responsible workplace, and at worst is completely catastrophic to a company that allows profit-making imperatives not tempered by ethical conduct.
Incorporating bi-directional feedback mechanisms at all levels of staff should be the primary remedy in Enron’s corporate culture: the leadership should themselves role-model ethical behavior (Mihelic, Lipicnik, & Tekavcic, 2010), including the perpetuating of ethical but uncomfortable actions, such as refusing to endorse inaccurate or inflated balance sheets and consequently addressing unhappy stakeholders. The rewarding of ethical behavior and the punishment of unethical behavior is also an important feedback mechanism that will not only encourage employees to engage in ethical behavior, but will also make them much more likely to report any unethical behavior (p.3,4) and will serve as an open feedback system (Almaney, 1074) that will act as competent adaptive and maintenance mechanisms.
References
Almaney, A. (1974). COMMUNICATION AND THE SYSTEMS THEORY OF ORGANIZATION. Journal Of Business Communication, 12(1).
CNN Student News. (2002, February 14). Enron’s Watkins warned Lay. Retrieved from CNN Student News: http://edition.cnn.com/2002/fyi/news/02/14/enron.watkins/
Elkind, P. (2013, July 1). The confessions of Andy Fastow. Retrieved from Fortune: http://fortune.com/2013/07/01/the-confessions-of-andy-fastow/
Mihelic, K. K., Msc, Lipicnik, B., Phd, & Tekavcic, M., Phd. (2010). Ethical leadership. International Journal of Management and Information Systems, 14(5), 31-41. Retrieved from http://ezproxy.snhu.edu/login?url=https://search-proquest-com.ezproxy.snhu.edu/docview/819649567?accountid=3783
NPR. (n.d.). The Fall of Enron . Retrieved from NPR: https://www.npr.org/news/specials/enron/
Schwartz, J. Y. (2002, January 16). ENRON’S COLLAPSE: THE LAW FIRM; Legal Counsel In Many Ways Mirrors Client. Retrieved from The New York Times: http://www.nytimes.com/2002/01/16/business/enron-s-collapse-the-law-firm-legal-counsel-in-many-ways-mirrors-client.html
Silverstein, K. (2013, May 14). Enron, Ethics And Today’s Corporate Values. Retrieved from Forbes: https://www.forbes.com/sites/kensilverstein/2013/05/14/enron-ethics-and-todays-corporate-values/