Business_Failure

Failure of Enron Corporation Enron Corporation, called America’s most innovative company for six consecutive years by Fortune Magazine, was the world’s leading energy company. Enron was formed in 1985 by a merger of Houston Natural Gas and InterNorth, involving the transmission and distribution of electricity and gas throughout the United States, but majority of its growth was due to the pioneering marketing and promotion of power and communication bandwidth commodities as well as its related risk management derivatives (Columbia Electronic Encyclopedia, 2009). Under new leadership Kenneth Lay and Jeffrey Skilling, Enron adopted an aggressive growth strategy. To ‘seal the deal’, they hired Andrew Fastow as CFO and it was he, that helped to create the complex financial structure for Enron (Reinstein & Weirich, 2002). One could say that Enron began to plummet as soon as the company shifted its focus from regulated natural gas domestically to international energy, water and broadband communications – as these were volatile and risky hedging transactions (Reinstein & Weirich, 2002). Engaging in these risky transactions, enabled Enron’s stock to rise but when these three new areas went sour, the stock plummeted as well. Enron’s management did not disclose these losses and liabilities on their financial records nor to the investors of the corporation (Reinstein & Weirich, 2002). Despite Enron being called the most innovative and having alleged annual revenue of one hundred billion dollars, Enron collapsed in 2001. One might ask how an organization such as this files Chapter 11 Bankruptcy in a matter of years; the answer is simple, a case of poor organizational behavior and poor decisions made by upper level management. This paper will identify the management and leadership failures which led to the untimely demise of Enron Corporation, as well as how the failure of this organization could have been predicted. In addition, it will also show how proper organizational behavior of management and leadership could have impacted the structure of Enron in a more positive light. Robbins & Judge (2007) define organizational behavior as a study “that investigates the impact that individuals, groups and structure have on behavior within organizations for the purpose of applying such knowledge toward improving the organization’s effectiveness….” (Robbins, et al, 2007 p. 34). Organizational behavior can help develop an effective environment in an organization; the organizational behavior model states that there are three levels of analyses that affect organizational behavior (Robbins & Judge, 2007). These levels are the individual level, the group level and the organizations systems levels (Robbins & Judge, 2007). Enron’s failure were most impacted at the individual level – where people enter an organization with intact characteristics that can influence how they behave at work and the group level. A prime example, Enron’s CEO Kenneth Lay and President Jeff Skilling who entered Enron with their own perceptions of how an organization should be run and their definitions of success, were driven by those perceptions and characteristics of greed and as a result turned a profitable organization into failure. Enron’s mission statement stated that they valued respect, integrity, communication and excellence which was controversial as these were traits which the leaders of the organization lacked. Enron did not value integrity because they were not honest when it came time to report their finances. Driven by turning a profit, management went to great lengths to hide the facts. In fact they hired the best business graduates from the nation’s top business schools and lavished them with high salaries, bonuses, benefits, 401k’s and gifts to ensure that they were working together for a common purpose – to cover up their fraudulent activities. Organizational structure of a company is the apportionment of responsibility and authority among members of an organization. There was a breakdown in the organizational structure of Enron, as top management made important decisions but was not keeping the company’s objectives in mind. Management was more focused on the profits of deals rather than the long term consequences ahead. Enron’s leadership could not encompass the organization; neither could they provide the necessities to surpass what lied ahead. Both the success and failure of an organization are dependent on the collective efforts made by senior leadership, the board of directors and both internal and external auditors. Contrary to popular belief, a CEO, President or Chairman of the board does not solely run a company. The main responsibility of an auditor, both internally and externally, is to ensure that an organization adheres to financial protocols, rules and regulations by paying keen attention to the organization’s finances. Enron’s demise was a result of failure within the corporate governance- senior leadership, the board of directors and both internal and external auditors (Lee, 2001). The executive team, in an attempt to produce a business enterprise that would drive an abundance of wealth to shareholders with the help of the auditors, decided to alter the organization’s financial situation by inflating their numbers to make the company look more profitable than it was in actuality The board of directors also failed, as they allowed high-risk accounting, extensive undisclosed off the books activities and excessive executive compensation (Lee, 2001). They witnessed numerous indications of questionable practices by the executive team over the years but chose to ignore them (Reinstein & Weirich, 2002). The audit committee should have been more critical of its auditors and their work. Given that earnings and prices of stocks were at a continuous high, the auditors were led to believe that there was no need to investigate Enron’s finances. Employees of Enron also facilitated the company’s failure, the organization had over a hundred attorneys, accounting staff and financial advisors, consisting of several trained accountants but all seemed to operating in a manner that was consistent with supporting those ‘shady’ decisions made by the executive management. Enron’s failure was not merely the result of questionable activities by executive management; it was a combination of a breakdown in management, the lack of ethical leadership and organizational structure and poor organizational behavior. There was an apparent imbalance of power and structure throughout the entire organization, where there were several individuals having duplicate roles. An efficient leader is supposed to lead by example (Yukl, 2006) and lead from a clear ethical standpoint, rather than engaging in deceitful techniques and practices to cheat investors and turn a profit. Enron’s leadership was severely lacking in ethics, as a result failure was inevitable. References Enron corporation. (2009). Columbia electronic encyclopedia. New York: Columbia University Press. Susan Lee. (2001, December 26). The Dismal Science: Enron's Success Story. Wall Street Journal (Eastern Edition), p. A11. Retrieved March 14, 2010, from ABI/INFORM Global. (Document ID: 96747555). Reinstein, A., & Weirich, T. (2002). Accounting issues at Enron. CPA Journal, 72(12), 20 Retrieved from http://search.ebscohost.com/login.aspx'direct=true&db=f5h&AN=8735560&site=ehost-live Robbins, S. P., & Judge, T. A. (2007). Organizational behavior (12th ed.). Upper Saddle River, NJ: Pearson Education. Retrieved from, LDR/531 website. Yukl, G. (2006). Leadership in organizations (6th ed.). Upper Saddle River, NJ: Pearson Education. Retrieved from, LDR/531 website.