Write a executive summary on Enron leadership and its failure

Though many different explanations are offered for the collapse of Enron, the nation’s seventh largest corporation, yet it’s leadership was an obvious factor that contributed to Enron’s demise. It will be completely erroneous, however, to think that the leaders of Enron were anything but superb. From 1997-2001, the leaders of this company transformed Enron into a “corporation of the new millennium” and a favorite of investors and analysts. Most leaders of Enron like Chairman Kenneth Lay, Chief Executive Officer Jeffrey Skilling and Chief Financial Officer Andrew Fastow met all the conventional criteria for good leadership.

They all possessed the fundamental nature of leadership, which was to influence other people into their beliefs and their values. They had bold market leading vision and were able to create an innovative fast-paced organizational culture that attracted the best and brightest of people. Lay had been described as a pioneering leader and a true visionary, Skilling was described as one of the top five CEOs in America and CFO Magazine gave Fastow an award for excellence for his work in Enron as a financial wizard. They were able to transform a $4 billon dollar natural gas distribution company to a $40 billion dollar major trader in both gas and electricity, as well as other businesses.

But this only tells half the story about the leadership; the other half hides below the surface. While the company openly touted the value system of Respect, Integrity, Communication and Excellence (RISE), the leaders of the company failed to integrate these core values into their operations. In fact the leaders disapproved any messages of dissent and were dismissive of critics. They encouraged a “yes man” culture that throttled dissent and disagreement. “Enron had a ruthless and reckless culture that lavished rewards on those who played the game, while persecuting the others” (Chaffin and Fidler, 2002). Under the leadership of Skilling, the company enforced a highly decentralized management and control structure, which gave complete authority and freedom to the subordinates to pursue economic opportunity any way they see fit.

With very little oversight or control and very few reviews of decisions, the management lost track of the company’s mission and failed in their most fundamental leadership responsibility to be informed about the company’s operations (Seeger and Ulmer, 2003). Instead of setting the moral and ethical tone in the organization, Lay and Skilling established corporate model and methods of pursuit of wealth using any means, even by breaking rules if necessary. Behr and Witt (2002) wrote, “Enron was a fundamentally self-destructive institution, a house of cards where human error and a culture of ambition, secrecy and greed made collapse inevitable”. But Byrne (2002) probably summarized it the best by saying “The unrelenting emphasis on earnings growth and individual initiative, coupled with a shocking absence of the usual corporate checks and balances, tipped the culture from one that rewarded aggressive strategy to one that increasingly relied on unethical corner-cutting. In the end, too much leeway was given to young, inexperienced managers without the necessary controls to minimize failures”.

The collapse of Enron started to happen when these leaders started redirecting the company from an aggressive to a deceptive route. Skilling’s “mark-to-market” high risk accounting that falsely inflated profits, and Fastow’s extensive undisclosed off-the-books activity of creating third party partnership companies as hedges solely to hide losses were two most immediate factors that led to Enron’s ultimate demise.

Beginning year 2001, all the deceits and lies of these leaders started getting revealed and the consequences were extreme. Most of the top leaders of Enron were either fired or resigned, and later prosecuted for insider trading, securities fraud, wire fraud, conspiracy and lying on Enron financial statements.

In the wake of Enron debacle, many organizations scrambled to ensure full disclosure of their financial statements. But it is a true but a sad fact that corporate leaders are not always responsible leaders and so it was important that corporate function be placed under state and federal regulation. It is the duty of corporations to make money and it is the responsibility of government to set the corporate boundaries on how they make that money. Most observers agree that Sarbanes-Oxley Act of 2002 was the most important piece of legislation affecting corporate governance, financial disclosure and the practice of public accounting and hope that this act will protect investors by improving the accuracy and reliability of corporate disclosures. (“Sarbanes-Oxley”)

References:

Chaffin, J. & Fidler, S. (2002, April). Enron revealed to be rotten to the core. Retrieved

November 15, 2005, from http://specials.ft.com/enron/FT3L4NIOSZC.html

Seeger, M.W. & Ulmer, R.R. (2003, August). Explaining Enron. Management

Communication Quarterly, 17(1), 58-84.

Behr, P. and Witt, A. (2002, July). Visionary dream led to risky business. The Washington Post.

Bryne, J. A. (2002, February). At Enron, the environment was ripe for abuse. Business Week.