Examining_a_Business_Failure_Paper

Examining a Business Failure Paper Business failure occurs often in today’s current environment. Organizational behavior theories could prevent or explain a company’s failure. In the case of Enron, this company became one of the biggest frauds and failures in American history. The failures of this company became well known as the Enron scandal and the company is a symbol of corporate scandal and fraud. The scandal was an accumulation of poor management decisions. In this paper, I will describe how specific theories could have explained its failure. Enron Before the company became one of the biggest corporate frauds in American history, the Enron Corporation based in Houston, Texas, was a leading energy company that distributed electricity and natural gas across the country. The corporation employed more than 22,000 employees and at the end of 2000, the corporation earned revenue of $101 billion. The financial reporting in 2001 uncovered accounting inaccuracies that revealed a company that was no longer sustainable. Andrew Fastow chief financial officer and other executives of Enron concealed debt of billions from ineffective deals. The executives deceived the corporation’s board of directors and because of these deceptions 4,000 individuals lost their jobs and many more lost their investments. The Corporation at the end of in 2001 filed for bankruptcy protection. In 2004, the company came out of bankruptcy and later changed the company’s name to Enron Creditors recovery Corporation. The court found numerous executives guilty of various charges and sentenced them to jail. According to Enron Corporation (2010), “More than 30 people were charged with various crimes arising from Enron’s business practices.” Arthur Andersen, the company’s auditor was also held responsible by the court. Because of the scandal, the government put in place new regulations like the Sarbanes-Oxley Act to ensure the truthfulness of financial reporting. Leadership and Management The Enron scandal can be traced to leadership and management. Sims and Brinkmann (2003), found that: 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. (p. 252) If a leader is involved in ethical practices his or her followers will do the same. Unfortunately, for Enron this did not take place. The leadership of the company including Kenneth Lay, Jeffrey Skilling, and Andrew Fastow lied and deceived shareholders, employees, and analysts. For the leadership and management of Enron, the objectives and goals of the company turned into hiding huge debt that ran into the billions and instead present large profit margins. Each management function including planning, organizing, leading, and controlling was aimed in the direction of deceiving the shareholders of the corporation and presenting false accounting records. Several employees including accountants and finance opposed the misdeeds of the business but were overruled. According to Sims and Brinkmann (2003), “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 transgressions.” Those unrelenting employees with his or her objections were threatened with severe consequences. Kenneth Lay deceptively encouraged employees to invest in the company whereas he withdrew over $300 million in stock. This deception leadership practices was sure to fail. In actuality, the leadership and management let the company down and could not steer the company in the right direction. Leadership and management should have practiced more ethical behavior. In comparison, if the company’s leadership would have focused on ethical business practices the organization would have improved consumer confidence and protected the value of the company’s brand name. Ethics perform a vital role in arranging the resources and employees of the corporation to attain the success and objectives of the company. By not clearly depicting the true financial health of the company the leadership failed to abide by ethical business practices. Organizational Structure and Corporate Governance The Enron scandal can be traced to organizational structure. According to Tipgos and Keefe (2004), “The systemic problems at companies such as Enron, WorldCom, and Tyco International arose because of an imbalance of power in favor of top management in corporate organizations.” Kenneth Lay founder of Enron, left most of the responsibility to the president of the company Jeffrey Skilling and Chief Financial Officer Andrew Fastow. Because the administration of the corporation was in the hands of just two individuals, they concentrated on short-term success and not the long-term concerns of the company. This top heavy distribution of power led to decisions that made instant profits without thinking out the consequences that may lie ahead for the company. In comparison, if top management chooses to balance the power this would have prevented fraud and promoted truthful financial records. Instead, the combination of a top heavy organization structure and deceitful leadership led the corporation to desert essential business practices. Last, the Enron scandal can be traced to corporate governance. This failure could have been prevented if the corporation followed a suitable mode of corporate governance. Management and leadership should have implemented rules and processes that controlled the operations of the company. In comparison, if the company practiced corporate governance it would have promoted a culture in the business that supports good control, voluntary compliance, and transparency. According to Milne (2006), “Good governance reduces risks, probably enhances returns and definitely promotes ownership capitalism.” In particular, transparency leads to success; unfortunately, in the case of Enron the accounting records were done in such a complicated and difficult fashion that there is no evidence of transparency. This type of environment was perfect for corruption. A system that fostered corporate governance would have prevented the corporation from facing scandal and bankruptcy. Conclusion In conclusion, leadership, management, organizational structure and corporate governance were the major causes for Enron to fail. The leadership and management of the company facilitated a system in which lying and misleading were the norm. Leadership and management were busy making money. Greed and deception broke down the organizational structure, where morals and ethics no longer existed; by understanding the major factors that contribute to a major failure like Enron, future leaders and managers maybe able to prevent them. Reference Enron Corporation. (2010). Columbia Electronic Encyclopedia, 6th Edition, 1. Retrieved from EBSCOhost. Milne, J. A. (2006). Good Corporate Governance, Good Performance. Benefits & Compensation Digest, 43(5), 34. Retrieved from EBSCOhost. Sims, R. R., & Brinkmann, J. (2003). Enron Ethics (Or: Culture Matters More than Codes). Journal of Business Ethics, 45(3), 243-256. Retrieved from EBSCOhost. Tipgos, M. A., & Keefe, T. J. (2004). A Comprehensive Structure of Corporate Governance in Post-Enron Corporate America. CPA Journal, 74(12), 46. Retrieved from EBSCOhost.