2020. 3. 1. 16:21ㆍ카테고리 없음
San Francisco, California. The US West Coast was an early target for its aggressive and misguided expansion.Skilling’s vision was to transform Enron into a giant, asset-light operation, trading power generally and his next target was trading electricity. Lay was lobbying Washington hard to deregulate electricity supply and in anticipation he and Skilling took Enron into California, buying a power plant on the west coast.Enron’s national reputation rested on the rapid expansion of its domestic business and its steadily growing revenue and earnings from trading. So on the back of his track record, Skilling was appointed Chief Operating Officer by Ken Lay and he then embarked upon transforming the whole of Enron to reflect his vision.Observing the dotcom boom, Skilling decided Enron could create a business based on a broadband network which could supply and trade bandwidth and he set out to build this at a great pace.However, the experiment in deregulation in California didn’t work well and in due course was reversed with recriminations all round.
The second half of this Enron case study assesses business ethics and the impact on corporate governance, as measured against our Five Golden Rules.Ethical assessmentEnron didn’t start out as an unethical business. As we have seen in this case study, what introduced the virus was the pursuit of personal wealth via very rapid growth. This led to the introduction of quite extreme incentive schemes to attract and motivate very bright and driven people, which, in turn, led to an unhealthy focus on short term earnings.The next step was, naturally, to look at how earnings could be massaged to achieve the aggressive revenue and earnings targets. Since the massaged figures for growth in earnings still left a shortfall in cash, Enron quickly maxed out on its borrowing abilities.But issuing more equity would have hurt the share price, on which most of the incentives were based.
So schemes had to be created to produce funding secretly and this funding had to be hidden. In this way, an amoral and unethical culture developed in Enron in which customers, suppliers and even colleagues were misled and exploited to achieve targets. And the top management, who were rewarding themselves with these same incentive schemes, boasted that a pure, market-driven ethos was propelling Enron to greatness and deluded themselves that this equated to ethical behaviour. Lay even lectured the California authorities, whom Enron was cheating, that Enron was a model of business ethics.Finally, the respected Arthur Andersen allowed greed for fees to over-rule the strong business ethics tradition of its founder and caused it to succumb to bending and suspending its professional standards, with fatal results. Impact on Corporate GovernanceOur five Rules of Good Corporate Governance start with the need for an ethical culture. Having established that Enron’s culture became progressively more deficient in this regard, let’s consider briefly the impact of this failure in business ethics on the other Rules. Clear goal shared by all key stakeholdersLay and, particularly Skilling, engendered in all the staff of Enron the goal of driving up the share price to the virtual exclusion of all else.
The goal of achieving a long term satisfaction from a stable customer base took a distant second place to signing up deals. In California, the customers were deliberately exploited by the traders to the maximum extent their ingenuity could achieve. Even internally, the Chief Finance Officer’s funding scheme was designed to make him rich at his employer’s expense.
Strategic managementAs a McKinsey consultant specialising in strategy, Skilling had a very clear vision, at least initially, of what he wanted Enron to achieve. However, he wasn’t interested in management per se and allowed operational management to wither.
But his vision of a huge trading enterprise wasn’t carried down to the next level of developing and implementing practical business plans, as evidenced by his crazy launch into broadband, a field in which he had no personal knowledge or experience and in which Enron had almost no capability or likelihood of raising the funds required to implement the project Organisation resourced to deliverSkilling became COO on the departure of a very tough and experienced predecessor. Even at that point, Enron had been expanding at a rate which outran its ability to set up appropriate and adequate administrative systems and controls. Added to which it had always been short of funds. Skilling’s lack of interest in operational management meant that on his appointment at COO, he made a poor situation much worse by making bad managerial appointments. His focus on rapid growth incentivised by very generous compensation schemes, and with inadequate spending controls, created a totally dysfunctional organisation.
Transparency and accountabilityFrom the early stages, Enron’s focus on earnings and share price growth and the related financial incentives led to a necessary lack of transparency as the figures were fiddled. One could argue that Enron felt very much accountable to their shareholders for delivering consistent above average growth in Enron’s market capitalisation. However, this growth was achieved by subterfuge and deception. Certainly the dealings in California were as far from transparent as it was possible to be. Finally, we bring a unique perspective to this Enron case study by using our proprietary survey tool, the ACGi, to rate the company, as at June 2000, and drawing conclusions from the results.Conclusion and rating by our Survey toolThe flaws in Enron should have been spotted from early on, and indeed were periodically commented on by various observers from the early nineties onward.
Enron Scandal Summary
If independent ethical and corporate governance surveys had been conducted by independent parties they would have highlighted the growing problems. To illustrate, consider the hypothetical survey summarised in the following chart.The scores out of ten (high is good) result from a set of questions which aim at deriving an independent, unbiased view from the interviewees, based on observations of corporate behaviour.
Enron Scandal Explained
What we have called the “sniff test” represents the personal view of the interviewee and would take into account their gut feel about the corporation and its management and owners. The highlighted scores would point the observer to clear problem areas. If you found this summary useful, you may be interested in our full ebook:. 52 pages of detailed analysis of the Enron scandal. An annotated walk-through of the history and ethics of the company. Detailed explanations of the governance failures leading to the scandal. Guidance for students of corporate governance.
Annexe with lessons for setting up stakeholder researchYou will also get a FREE version of our rating tool to adjust the scores according to your own assessment of the information presented in the full Enron Case Study. Our website may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with ACG, including providing you with more relevant advertising. Click on the different category headings to find out more. You can also change your cookie preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.