Business_Failure

Abstract This paper will aim to discuss the death spiral that happened to ENRON from the late 90’s to the early 2000—that is, in accordance with the parameters of organizational behavior theories. The mentioned discussion will constitute reasons why the six-time “most innovative company” company filed bankruptcy, why despite the staggering rise of its stock price the then second largest company in the world created had to come up with an “innovative” method of manipulating its financial statements to hide more than twenty-five billion worth of debts. Also, this paper will aim to discuss how the concept of organizational behavior theories could have prevented the infamous Enron collapse. ENRON Business Failure There is a classical story of boom and bust cycle among companies in the world market since time immemorial. However, this was not the sole reason why Enron spiraled into a catastrophe in 2001 feeding the media and the world market scandals upon scandals. The former darling of the Wall Street was once just a small company in Nebraska that ballooned into the fifth largest company in the United States. Over the course of years, many have attributed the downfall of the company to its questionable publication of its financial standing. The scandal of the company’s devious accounting methods had overshadowed an equally important reason why its failure eventually become one of the most shocking and beyond solution disaster in the world economy to date. In fact, a host of solutions had been proposed since the culmination of the scandal that included greater shareholder empowerment, shareholders’ board of trustees, privileging accounting principles over accounting rules, a reduction of outside regulation of accounting practices and requiring auditors to judge the substance of disclosure (and, of course, most notably the Sarbanes-Oxley legislation) (Free, Macintosh, and Stein, 2007). Clearly, the role of management, business ethics, culture and environment had been overlooked. More or so, Enron’s management control systems in the aspect of leadership and culture has a big effect on how and why Enron became a major catastrophe. The scandal and fraud that is Enron should made the people realize that insufficient attention to changes in leadership and culture in a company can weaken any booming endeavor for any organization. Money-wise, what happened to Enron was an almost replica of John Law’s Mississippi company. Organizational methodology-wise, it was the pioneer of such a large-scale intra-cultural and leadership mismanagement—that is aside from pioneering fraudulent publication of financial statements. Organizational behavior is defined as a field of study that investigates the impact that individuals, groups, and structure have on behavior within the organizations for the purpose of applying such knowledge toward improving an organizations effectiveness; specifically organizational behavior focuses on how to improve productivity; reduce absenteeism, turnover and deviant workplace behavior; and increase organizational citizenship behavior and job satisfaction (Robbins & Judge, 2007)). Every employee from the top officers, board of directors, internal and external directors have a particular but equally important voice in the organization. The top managers in Enron lavishly compensated themselves despite their promise to act on their commitment to do their investors better. Jeffrey Skilling the then appointed CEO of Enron did not only lead the company through suicidal and beyond risky investments but also altered the cultural norms and leadership bearing in the company. During his term in Enron, the company has morphed from a modest-scale company into a full-scale Wall Street trading player. It started specializing in the financial engineering of derivatives, options and hedges involving commodities such as broadband, fibre optics and paper goods (Free, Macintosh, and Stein, 2007). It did not take long before the company ventured on becoming the greatest energy bank in the world—creating the longest pipeline for energy in the world which will become a vehicle of their failure in the future. As Enron began to diversify under the risk-driven CEO’s directions, it also started entering markets that it didn’t have a core competency of. Its mercenary corporate culture combined with the subverted control infrastructure meant that Enron lost its ability to keep track of relevant risks (Free, Macintosh, and Stein, 2007). With Ken Lay’s political connections with the current president and the chairman of the US Federal Reserve, deregulation was not only implemented but interest rates were only raised once from 1995-1999. This caused a stock bubble and Enron’s stock price increased to almost four times. With funds ballooning, the company ventured on more markets—far riskier than they should have. This clearly reflects that whatever kind of leadership and the kind of culture any company has will have its certain effect in the company’s system, success, and failure. As in this case, Skilling demonstrated control all over the organization that he even was able to manipulate accounting records to meet analysts’ expectations. Special purpose entities were used to mask their true earnings management. Compensation was later on a big issue at Enron’s failure. Most of its top executives had houses at River Oaks and they were being paid an average of 5.3 million dollars (PBS; The ascent of Money, 2009)And other employees were just under the power of the faulty top managers and were either ignored (if they dared question the faulty manipulations) or kicked out of the organization. Enron demonstrated once employees align themselves with a particular corporate culture including of course, their superiors’ decision and organizational practices, they become liable to lose their personal principles and tolerate ethical lapses that they would have previously condemned. They eventually become easy prey on the manipulations and machinations of organizational leaders. And in Enron’s case, they were being motivated rather well with the awaiting extravagant compensation. So they damn the business ethics and look forward to the compensation because that is the way of their culture. In fact, Enron’s failure can be attributed to numerous risks associated with degenerate cultures: the risk that a culture motivating and rewarding creative entrepreneurial deal making may provide strong incentives to take additional risks, thereby pushing legal and ethical boundaries; resistance to bad news creates an important pressure point of culture; and internal competition for bonuses and promotion can lead to private information and gambles to bolster short-term performance. At Enron, these risks ultimately subverted the company’s elaborate web of controls (Free, Macintosh, and Stein, 2007). Conclusion In conclusion, Enron failed not only because of unethical accounting procedures but also its employees were not doing what they should be ethically doing and in fact were driven to commit lapses in obedience to a faulty leader. They did not have an ethical culture to begin with from which any employee can voice out his criticisms without endangering his or her job. Top managers or any leaders for that matter should be responsible enough in leading the whole organization with a clear vision through ethical and honest ways in order to fully fulfill their responsibilities and commitment to the public and investors. Failures are always parts of any organization, however with a well-established organizational leadership, culture, and practices, such failures can be minimized if not avoided. References Free, C., Macintosh, N., & Stein, M. (2007). July/August 2007 MANAGEMENT CONTROLS: THE ORGANIZATIONAL FRAUD TRIANGLE OF LEADERSHIP, CULTURE AND CONTROL IN ENRON . Retrieved from http://www.iveybusinessjournal.com/article.asp'intArticle_ID=701 Robbins, S. P., & Judge, T. A. (2007). Organizational Behavior (12th ed.). Retrieved from https://ecampus.phoenix.edu/content/eBookLibrary2/content/eReader.aspx The Ascent of Money [2009]. Available from PBS.