An Ethical Analysis of the Enron Scandal

The Enron scandal is one that left a deep and ugly scar on the face of modern business. As a result of the scandal, thousands of people lost their jobs, some people lost their entire pensions, and all of the shareholders lost the money that they had invested in the corporation after it went bankrupt. I believe that Kenneth Lay, former Enron CEO, and Jeffrey Skilling behaved in an unethical manner without any form of justification, but the whistleblower, former Enron vice president Sherron Watkins, acted in a way that upheld moral principles.

I can understand Jeffrey Skilling’s motivation, since money and greed are very powerful forces, occasionally driving even the most honest individuals to commit horrible acts. I might understand a destitute individual committing a dishonest act in order to feed themselves or their children, but Jeffrey Skilling was by no means destitute and had no just cause to even consider deceptive accounting. Personally, I am constantly faced with situations where it is possible for me to be dishonest and steal expensive items from the company I work for, but I choose not to since these things are needed by the company and are owned by the shareholders. I believe that I have no right to steal anything since I am living very comfortably, with respect to most humans, and I am satisfied with my economic position. If Jeffrey Skilling had looked at the Enron situation from a perspective similar to mine, he probably would not have seen any reason to do what he did.

Sherron Watkins’s actions, in my opinion, were perfectly orchestrated in a very ethical manner. She noticed something suspicious about the accounting, so she took a closer look and didn’t just ignore the problem. When she realized the depth of the situation, she reported it to the people that could do something about it in the organization, even reaching the top man, Kenneth Lay. When the company refused to correct the situation, she went to the media, which forced the problem to be fixed by causing shareholders to dump their investments in Enron. In her memo written to Kenneth Lay, she expressed concerns that her 8 years with Enron would not be worth anything after the scandal, but she went ahead anyways despite these fears about her future employment.

Sure, people lost their jobs and pensions when the news came out, but that was not the fault of the whistleblower. It was the fault of those who forced her to take the story outside of the company. It was Jeffrey Skilling’s fault in the first place that the unethical accounting was being done, but the company could easily have fixed the problem internally without going bankrupt. If Kenneth Lay had actually done something about the problem, share values might have gone down after the corrected financials came out, but the company would probably have survived. I have seen companies in far worse situations reverse their fortunes by replacing management and making their processes more efficient.

I think that whistle blowing is a very courageous and selfless act, since it exposes the person to economic, personal, and sometimes physical attacks. I am reminded of the story of Jeffrey Wygand, a tobacco company scientist, who blew the whistle by declaring that tobacco company executives knew about the dangers of smoking and considered cigarettes “nicotine delivery devicesâ€, but did not care about the health problems caused by smoking. After blowing the whistle, he was threatened by his company, fired, and followed by unknown people for quite some time afterwards. I have never blown the whistle personally, but I can easily see how dangerous it would be, given the vulnerable situation that it places the person in.

Although I think that Jeffrey Skilling should be given the most blame for the corruption at Enron, that does not mean that Kenneth Lay is not deserving of some blame for what happened. He was the lead figure at the corporation and he should have been watching the accounting to make sure that no illegal actions were being taken by the employees. Sure, he might not have had an accounting background, but he could have hired independent consultants to look at the financials and make sure that nothing unethical was being done. I might have been able to give him the benefit of the doubt if the corruption was very far down the chain, but accounting is very closely related to upper management (in most businesses) and Skilling seemed to be someone that Kenneth met with frequently.

As the leader of a publicly-held corporation, a CEO’s foremost duties are to produce a profit for shareholders, a responsibility which Kenneth Lay might have followed in the short term, but not in the long term. Sure, some shareholders might have made a return on their investment if they sold their stock before the collapse, but all of the long term investors who were loyal to the company ended up being punished for that loyalty. Kenneth Lay betrayed the shareholders through deception and lack of foresight into the consequences of Enron’s accounting practices. A CEO is also supposed to care for the people who work for him by giving them job security and benefits, but Kenneth Lay ultimately failed in this area as well since his inaction ended up costing most of them their jobs and pension funds invested in company stock.

The actions of Kenneth Lay seem to be those of a manager who doesn’t care about what his sub-managers are doing as long as the machine is running smoothly and profits are rolling in. When the whistleblower informed him of the suspicious activities of his underlings, he decided not to do anything about the situation. Instead, he forced the whistleblower to go outside the company and caused the resultant financial collapse of Enron.

I think that a manager needs to at least question the actions of people under them in order to ensure that a company or organization is behaving in an ethical manner. A manager who does not manage often becomes a mere puppet, providing a clean façade for a possibly corrupt and evil organization.

I think that if Kenneth Lay and Jeffrey Skilling had applied the Kantian concept of reversibility, and asked themselves how they would feel if their employer betrayed them and caused them to lose their life savings, they would have acted differently. I believe reversibility is one of the best ways to evaluate the ethicality of decisions since it forces a person to think about what the other person feels like. Part of their punishment should be to spend time with the victims of their actions to see the effects that the Enron collapse has had on them.

It is also interesting that Kenneth Lay grew up in poverty, but he was willing to throw away all of his progress just to make some extra money. Since he came from a humble background, I would think that he would have been able to better empathize for the common man and the lesser-paid employees of Enron. However, it appears that his success excessively inflated his ego, causing him to turn down President Bush’s offer to make him secretary of commerce since it was “below†him.

In conclusion, I find that the actions of Kenneth Lay and Jeffrey Skilling were clearly unethical and not justified by need. The whistleblower’s actions, on the other hand, were very ethical and represented the selfless things that human beings are capable of doing. It is very unfortunate that the Enron situation occurred at all, but it is fortunate that it was exposed in a somewhat timely manner and the people responsible are being brought to justice.

Lessons from the Enron Scandal
On March 5, 2002, Kirk Hanson, executive director of the Markkula Center for Applied Ethics, was interviewed about Enron by Atsushi Nakayama, a reporter for the Japanese newspaper Nikkei. Their Q & A appears below: Nakayama: What do you think are the most important lessons to be learned from the Enron scandal? Hanson: The Enron scandal is the most significant corporate collapse in the United States since the failure of many savings and loan banks during the 1980s. This scandal demonstrates the need for significant reforms in accounting and corporate governance in the United States, as well as for a close look at the ethical quality of the culture of business generally and of business corporations in the United States. N: Why did this happen?

H: There are many causes of the Enron collapse. Among them are the conflict of interest between the two roles played by Arthur Andersen, as auditor but also as consultant to Enron; the lack of attention shown by members of the Enron board of directors to the off-books financial entities with which Enron did business; and the lack of truthfulness by management about the health of the company and its business operations. In some ways, the culture of Enron was the primary cause of the collapse. The senior executives believed Enron had to be the best at everything it did and that they had to protect their reputations and their compensation as the most successful executives in the U.S. When some of their business and trading ventures began to perform poorly, they tried to cover up their own failures.

N: Why didn’t the company’s directors protect the employees and investors? H: The board of directors was not attentive to the nature of the off-books entities created by Enron, nor to their own obligations to monitor those entities once they were approved. The board did not pay attention to the employees because most directors in the United States do not consider this their responsibility. They consider themselves representatives of the shareholders only, and not of the employees. However, in this case they did not even represent the shareholders well-and particularly not the employees who were shareholders. N: Why didn’t anyone stop Skilling, Lay and Fastow?

H: Jeffrey Skilling and Andrew Fastow changed the business strategy and corporate culture of Enron. In the process, they appeared to make Enron very innovative and very profitable. When the stock is rising and the shareholders are getting rich, there is little incentive for the board of directors and the investment community to question the executives very closely. The board is at fault for permitting the suspension of Enron’s own code of conduct to permit the conflicts of interest inherent in the off-books corporations controlled by Fastow. A few analysts recommended their clients stay out of Enron, but not many. N: Could you tell me how the corporate governance should be changed? H: I do not think the rules of corporate governance will be changed in significant ways. But boards of directors need to pay closer attention to the behavior of management and the way the company is making money.

In too many American companies, board members are expected to approve what management proposes-or to resign. It must become acceptable and mandatory to question management closely. There is little chance the U.S. governance rules will be changed to make boards responsible to the employees as well as to the shareholders. However, board members would be foolish not to pay more attention to how employees and customers and business partners are treated. These greatly affect the long-term value of the shareholders’ investment. N: Don’t you think this scandal damaged the new economy’s fundamental system? H: Enron is a prominent example of a “new economy” company. Kenneth Lay and Jeffrey Skilling claimed that Enron was the most innovative company in the United States and at times tried to intimidate reporters or analysts who questioned their strategy. In the new economy, new kinds of companies have been created.

Enron’s collapse will encourage investors, analysts, reporters, and employees to ask “old economy” questions about these new economy companies: How does this company make money? Can it sustain this strategy over the long term? How do those who work in and with this company feel about it? The new economy has lost some of its appeal after the collapse of many dot.com companies and of Enron. N: Can we believe analysts’ strong “buy” recommendations from now on? H: Many have questioned the overly optimistic “buy” recommendations analysts have issued in recent years, fearing they had conflicts of interest because of the underwriting business their firms did for dot.coms or because of the investment industry culture which rewarded analysts who were bullish on the new economy. I think there will be much closer scrutiny of analysts’ recommendations in the months and years ahead, and a close look at the conflicts of interest of individual analysts.

Analysts who are always bullish will be less likely to be believed. N: What reforms should Congress, the SEC, and others institute post-Enron? H: I believe accounting regulations should be altered to prohibit ownership of both auditing and consulting services by the same accounting firm. Accounting firms are already moving to sever their consulting businesses. The SEC should probably adopt additional disclosure requirements. Various regulators should tighten requirements for directors to be vigilant and provide protections for whistleblowers who bring improper behavior to public attention. But, in the final analysis, the solution to an Enron-type scandal lies in the attentiveness of directors and in the truthfulness and integrity of executives. Clever individuals will always find ways to conceal information or to engage in fraud. N: How can credibility be recovered with investors?

H: U.S. firms and foreign firms listed on U.S. stock exchanges will need to demonstrate that they have eliminated all off-books accounts which distort the public’s understanding of the financial health of the organization. They may need to pledge that they will not suspend the company’s code of conduct, or at least report to the public when they do. Finally, every company will need to demonstrate that its board of directors is vigorous, vigilant, and that its procedures will enable it to uncover any questionable behavior. Companies may need to adopt a set of “governance best practices” to regain the trust of the market. N: Some say Enron’s collapse was caused by its stock options system. Do you think the executive compensation system should be reformed, and if so, how? H: The stock option system is not itself the problem.

Excessive stock options and excessive corporate compensation give corporate executives too many incentives to manipulate the financial accounts and the stock price of the company. When huge cash or options bonuses are dependent upon achievement of one or a few narrowly defined profit or growth goals, the temptation to manipulate the numbers to get the rewards will be too great. The problem is not the stock option system but the excessive compensation given to executives in the United States, particularly compared to the salaries of regular employees of the company. U.S. companies should look more like Japanese companies in the ratio of the salaries of top executives to those of regular employees. N: Will stock prices continue to be down because the investors’ faith has been shaken? The other day the blue chips like GE and IBM had to reassure investors about the strength of their financial controls.

H: I believe the stock prices of new economy companies will continue to show an “Enron effect” for many months to come. Until an individual company convinces the market that it has rid itself of any questionable practices and has improved its governance systems, it will not be evaluated fully. N: Don’t you think this kind of scandal will be a bad influence on the U.S. economy, which
is recovering from recession? H: Enron has clearly done some damage to the U.S. economy, but it will not hold up recovery from the current recession. The fundamental health of the U.S. economy is strong and now getting stronger. Some individual new economy companies will have depressed stock prices for some time, but they, too, will recover as they demonstrate that they are prepared to prevent Enron-like behavior. N: You mentioned in Newsweek magazine that Enron will become the morality play of the new economy. Could you give me a more concrete idea what you mean by this? H: I do believe Enron will be the morality play of the new economy.

It will teach executives and the American public the most important ethics lessons of this decade. Among these lessons are: 1. You make money in the new economy in the same ways you make money in the old economy – by providing goods or services that have real value. 2. Financial cleverness is no substitute for a good corporate strategy. 3. The arrogance of corporate executives who claim they are the best and the brightest, “the most innovative,” and who present themselves as superstars should be a “red flag” for investors, directors and the public. 4. Executives who are paid too much can think they are above the rules and can be tempted to cut ethical corners to retain their wealth and perquisites. 5. Government regulations and rules need to be updated for the new economy, not relaxed and eliminated