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Enron: What Caused the Ethical Collapse?

Introduction
Kenneth Lay, former chairman and chief executive ofcer (CEO) of
Enron Corp., is quoted in Michae !ova"#s $oo" Business as a Calling:
Work and the Examined Life as sayin%, &' (as fuy exposed to not ony
e%a $ehavior $ut mora and ethica $ehavior and (hat that means
from the standpoint of eadin% or%ani)ations and peope.* 'n an
introductory statement to the revised Enron Code of Ethics issued in
+uy ,---, Lay (rote. &/s ofcers and empoyees of Enron Corp., its
su$sidiaries, and its afiated companies, (e are responsi$e for
conductin% the $usiness a0airs of the companies in accordance (ith a
appica$e a(s and in a mora and honest manner.* Lay (ent on to
indicate that the 123pa%e Enron Code of Ethics re4ected poicies
approved $y the company#s $oard of directors and that the company,
(hich en5oyed a reputation for $ein% fair and honest, (as hi%hy
respected. Enron#s ethics code aso speci6ed that &/n empoyee sha
not conduct himsef or hersef in a manner (hich directy or indirecty
(oud $e detrimenta to the $est interests of the Company or in a
manner (hich (oud $rin% to the empoyee 6nancia %ain separatey
derived as a direct consequence of his or her empoyment (ith the
Company.*
Enron#s ethics code (as $ased on respect, inte%rity,
communication, and exceence. 7hese vaues (ere descri$ed as
foo(s.
8espect. 9e treat others as (e (oud i"e to $e treated
ourseves. 9e do not toerate a$usive or disrespectfu treatment.
8uthessness, caousness and arro%ance don#t $eon% here.
'nte%rity. 9e (or" (ith customers and prospects openy, honesty
and sincerey. 9hen (e say (e (i do somethin%, (e (i do it:
(hen (e say (e cannot or (i not do somethin%, then (e (on#t
do it.
Communication. 9e have an o$i%ation to communicate. ;ere (e
ta"e the time to ta" (ith one another . . . and to isten. 9e
$eieve that information is meant to move and that information
moves peope.
Exceence. 9e are satis6ed (ith nothin% ess than the very $est
in everythin% (e do. 9e (i continue to raise the $ar for
everyone. 7he %reat fun here (i $e for a of us to discover 5ust
ho( %ood (e can reay $e.
<iven this code of conduct and Ken Lay#s professed commitment
to $usiness ethics, ho( coud Enron have coapsed so dramaticay,
%oin% from reported revenues of =>-> $iion in ,--- and
approximatey =>2- $iion durin% the 6rst three quarters of ,--> to
decarin% $an"ruptcy in ?ecem$er ,-->@ 7he ans(er to this question
seems to $e rooted in a com$ination of the faiure of top eadership, a
corporate cuture that supported unethica $ehavior, and the
compicity of the investment $an"in% community.
Enrons Top Leadership
'n the aftermath of Enron#s $an"ruptcy 6in%, numerous Enron
executives (ere char%ed (ith crimina acts, incudin% fraud, money
aunderin%, and insider tradin%. Aor exampe, Ben <isan, Enron#s
former treasurer, (as char%ed (ith t(o3do)en counts of money
aunderin%, fraud, and conspiracy. <isan ped %uity to one count of
conspiracy to commit fraud and received a prison term, three years of
post3prison supervision, and 6nancia penaties of more than => miion.
?urin% the pea ne%otiations, <isan descri$ed Enron as a &house of
cards.*
/ndre( Aasto(, +e0 C"iin%, and Ken Lay are amon% the most
nota$e top3eve executives impicated in the coapse of Enron#s
&house of cards.* /ndre( Aasto(, former Enron chief 6nancia ofcer
(CAO), faced DE counts of money aunderin%, fraud, and conspiracy in
connection (ith the improper partnerships he ran, (hich incuded a
Bra)iian po(er pant pro5ect and a !i%erian po(er pant pro5ect that
(as aided $y Merri Lynch, an investment $an"in% 6rm. Aasto( ped
%uity to one char%e of conspiracy to commit (ire fraud and one char%e
of conspiracy to commit (ire and securities fraud. ;e a%reed to a
prison term of >- years and the forfeiture of =,D.E miion. +e0 C"iin%
(as indicted on FG counts of (ire fraud, securities fraud, conspiracy,
ma"in% fase statements on 6nancia reports, and insider tradin%. Ken
Lay (as indicted on >> crimina counts of fraud and ma"in% miseadin%
statements. Both C"iin% and Lay ped not %uity and are a(aitin% tria.
7he activities of C"iin%, Aasto(, and Lay raise questions a$out
ho( cosey they adhered to the vaues of respect, inte%rity,
communication, and exceence articuated in the Enron Code of Ethics.
Before the coapse, (hen Bethany McLean, an investi%ative reporter
for Aortune ma%a)ine, (as preparin% an artice on ho( Enron made its
money, she caed Enron#s then3CEO, +e0 C"iin%, to see" cari6cation
of its &neary incomprehensi$e 6nancia statements.* C"iin% $ecame
a%itated (ith McLean#s inquiry, tod her that the ine of questionin%
(as unethica, and hun% up on McLean. Chorty thereafter /ndre(
Aasto( and t(o other "ey executives traveed to !e( Hor" City to meet
(ith McLean, ostensi$y to ans(er her questions &competey and
accuratey.*
Aasto( en%a%ed in severa activities that chaen%e the
foundationa vaues of the company#s ethics code. Aasto( tried to
concea ho( extensivey Enron (as invoved in tradin% for the simpe
reason that tradin% companies have inherenty voatie earnin%s that
aren#t re(arded in the stoc" mar"et (ith hi%h vauationsIand a hi%h
mar"et vauation (as essentia to "eepin% Enron from coapsin%.
/nother Aasto( venture (as settin% up and operatin% partnerships
caed reated party transactions to do $usiness (ith Enron. 'n the
process of ao(in% Aasto( to set and run these very ucrative private
partnerships, Enron#s $oard and top mana%ement %ave Aasto( an
exemption from the company#s ethics code.
Contrary to the federa prosecutor#s indictment of Lay, (hich
descri$es him as one of the "ey eaders and or%ani)ers of the crimina
activity and massive fraud that ead to Enron#s $an"ruptcy, Lay
maintains his innocence and ac" of "no(ed%e of (hat (as happenin%.
;e $ames virtuay a of the crimina activities on Aasto(. ;o(ever,
Cherron 9at"ins, the "ey Enron (histe$o(er, maintains that she can
provide exampes of Lay#s questiona$e decisions and actions. /s
Bethany McLean and feo( investi%ative reporter Jeter E"ind o$serve.
&Lay $ears enormous responsi$iity for the su$stance of (hat (ent
(ron% at Enron. 7he pro$ems ran (ide and deep, as did the deception
required in coverin% them up. 7he company#s cuture (as his to
shape.* Ktimatey, the actions of Enron#s eadership did not match the
company#s expressed vision and vaues.
Enrons Corporate Culture
Enron has $een descri$ed as havin% a cuture of arro%ance that ed
peope to $eieve that they coud hande increasin%y %reater ris"
(ithout encounterin% any dan%er. /ccordin% to Cherron 9at"ins,
&Enron#s unspo"en messa%e (as, LMa"e the num$ers, ma"e the
num$ers, ma"e the num$ersIif you stea, if you cheat, 5ust don#t %et
cau%ht. 'f you do, $e% for a second chance, and you# %et one.#*
Enron#s corporate cuture did itte to promote the vaues of respect
and inte%rity. 7hese vaues (ere undermined throu%h the company#s
emphasis on decentrai)ation, its empoyee performance appraisas,
and its compensation pro%ram.
Each Enron division and $usiness unit (as "ept separate from
the others, and as a resut very fe( peope in the or%ani)ation had a
&$i% picture* perspective of the company#s operations. /ccompanyin%
this emphasis on decentrai)ation (ere insufcient operationa and
6nancia contros as (e as &a distracted, hands3o0 chairman, a
compiant $oard of directors, and an impotent sta0 of accountants,
auditors, and a(yers.*
+e0 C"iin% impemented a very ri%orous and threatenin%
performance evauation process for a Enron empoyees. Kno(n as
&ran" and yan",* the annua process utii)ed peer evauations, and
each of the company#s divisions (as ar$itrariy forced to 6re the o(est
ran"in% one36fth of its empoyees. Empoyees frequenty ran"ed their
peers o(er in order to enhance their o(n positions in the company.
Enron#s compensation pan &seemed oriented to(ard enrichin%
executives rather than %eneratin% pro6ts for sharehoders* and
encoura%ed peope to $rea" rues and in4ate the vaue of contracts
even thou%h no actua cash (as %enerated. Enron#s $onus pro%ram
encoura%ed the use of non3standard accountin% practices and the
in4ated vauation of deas on the company#s $oo"s. 'ndeed, dea
in4ation $ecame (idespread (ithin the company as partnerships (ere
created soey to hide osses and avoid the consequences of o(nin% up
to pro$ems.
Complicity of the Investment Banking
Community
/ccordin% to investi%ative reporters McLean and E"ind, &One of the
most sordid aspects of the Enron scanda is the compicity of so many
hi%hy re%arded 9a Ctreet 6rms* in ena$in% Enron#s fraud as (e as
$ein% partners to it. 'ncuded amon% these 6rms (ere +.J. Mor%an,
Citi%roup, and Merri Lynch. 7his compicity occurred throu%h the use
of prepays, (hich (ere $asicay oans that Enron $oo"ed as operatin%
cash 4o(. Enron secured ne( prepays to pay o0 existin% ones and to
support rapidy expandin% investments in ne( $usinesses.
One of the reated party transactions created $y /ndre( Aasto(,
"no(n as L+M,, used a tactic (here$y it (oud ta"e &an asset o0
Enron#s handsIusuay a poor performin% asset, usuay at the end of a
quarterIand then se it $ac" to the company at a pro6t once the
quarter (as over and the Learnin%s# had $een $oo"ed.* Cuch
transactions (ere $asicay smo"e and mirrors, re4ectin% a reationship
$et(een L+M, and the $an"s (herein &Enron coud practicay puc"
earnin%s out of thin air.*
Epilogue
7he Enron Code of Ethics and its foundationa vaues of respect,
inte%rity, communication, and exceence o$viousy did itte to hep
create an ethica environment at the company. 7he fu extent and
expanation of Enron#s ethica coapse is yet to $e determined as e%a
proceedin%s continue. Aourteen other Enron empoyeesImany hi%h
eveIhave ped %uity to various char%es: >, of these are a(aitin%
sentencin%, (hie the other t(o, one of (hom is /ndre( Aasto(#s
spouse, have received prison sentences of at east one year. +uries
have convicted 6ve individuas of fraud, as (e as /rthur /ndersen,
the accountin% 6rm hired $y Enron that shared responsi$iity for the
company#s frauduent accountin% statements. 7hree of the convicted
individuas (ere Merri Lynch empoyees invoved in the !i%erian
$ar%e dea (ith Aasto(. Ken Lay and +e0 C"iin%, aon% (ith 8ichard
Causey, Enron#s former chief accountin% ofcer, are a(aitin% tria. Lay
faces >> crimina counts, C"iin% faces FG crimina counts, and Causey
faces F> crimina counts. Aive executives from Enron#s $road$and
division are aso a(aitin% tria. 7hree $an" executives from Britain (ho
had $een invoved in a compicated series of deas in a Aasto(
partnership are 6%htin% extradition. 'n addition, there are >>2
unindicted co3conspirators in the federa %overnment#s case a%ainst
Lay and C"iin%.
uestions for !iscussion
>. 9hat ed to the coapse of Enron under Lay and C"iin%@
,. ;o( did the top eadership at Enron undermine the foundationa vaues of
the Enron Code of Ethics@
F. <iven Kenneth Lay#s and +e0 C"iin%#s operatin% $eiefs and the Enron
Code of Ethics, (hat expectations re%ardin% ethica decisions and actions
shoud Enron#s empoyees reasona$y have had@
2. ;o( did Enron#s corporate cuture promote unethica decisions and
actions@
G. ;o( did the investment $an"in% community contri$ute to the ethica
coapse of Enron@
Cources
7his case (as deveoped from materia contained in the foo(in% sources.
E"ind, J., McLean, B. (+uy >,, ,--2). Ken Lay 4un"s i%norance test. Aortune, http.MM
(((.fortune.com, accessed ?ecem$er >G, ,--2.
Enron Code of Ethics. 7he Cmo"in% <un 9e$ site, http.MM(((.thesmo"in%%un.com, accessed ?ecem$er >G,
,--2.
Enron. ;ouston Chronice Cpecia 8eport. (?ec. >>, ,--2). ;ouston Chronice, http.MM
(((.chron.comMcsMC?/Mstory.htsMspeciaMenronM>1,2E,,, accessed ?ecem$er >G, ,--F.
Enron 7imeine. ;ouston Chronice, http.MM(((.chron.comMcontentMchroniceMspeciaM
->MenronMtimeine.htm, accessed ?ecem$er >G, ,--F.
Ao(er, 7. (Octo$er ,-, ,--,). 7he pride and the fa of Enron. ;ouston Chronice, http.MM
(((.chron.comMcsMC?/Mstory.htsMspeciaMenronM>1,2E,,, accessed !ovem$er ,G, ,--F.
Aood, M. (Ceptem$er >-, ,--F). Ex3Enron executive %oin% to prison. <isan pea may speed cases.
;ouston Chronice, http.MM(((.chron.comMcsMC?/Mstory.htsMspeciaM
enronM,-D-D2F, accessed !ovem$er ,G, ,--F.
McLean, B. (?ecem$er D, ,-->). 9hy Enron (ent $ust. Aortune, http.MM(((.fortune.
com, accessed ?ecem$er >G, ,--2.
McLean, B., E"ind, J. (Octo$er >F, ,--F). Jartners in crime. Aortune, http.MM(((.
fortune.com, accessed ?ecem$er >G, ,-->.
McLean, B., E"ind, J. (Octo$er >F, ,--F). Jartners in crime, part ,. Aortune, http.MM
(((.fortune.com, accessed ?ecem$er >G, ,-->.
Mehta, C.!. (Octo$er >2, ,--F). Empoyees are the $est ine of defense. Aortune, http.MM (((.fortune.com,
accessed ?ecem$er >G, ,--2.
!ova", M. (>DD1) Business as a Cain%. 9or" and the Examined Life. !e( Hor". 7he Aree Jress.
Ctrip cu$s, daredevi trips, => miion paychec"s. (Octo$er ,, ,--F). Excerpt from B. McLean and J. E"ind, 7he
Cmartest <uys in the 8oom, printed in Aortune, http.MM(((.fortune. com, accessed ?ecem$er >G, ,--2.

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