Ethics and Corporate Social Responsibility - Enron - Essay Example

? Ethics and Corporate Social Responsibility a Case Analysis of Enron This paper examines the Enron Case. The paper focuses on some important elements and aspects that led to the corporate collapse of the energy giant in the early 21st Century. From the case study, there are some elements of corporate social responsibility, governance and other matters that led to the eventual collapse of Enron. This research will focus on some important issues that relate to Ethics and Corporate Social Responsibility Theory. In doing this, the following objectives will be addressed: 1. An assessment of whether Enron's long-time Chief Executive acted immorally or not. 2. An evaluation of the potential role of corporate social responsibility in saving Enron in line with the criticisms of CSR by Friedman and Barry. 3. An assessment of whether Enron should have favoured some stakeholders ahead of others or not. 4. An evaluation of whether codes of conducts and stated core values have an effect on a business or not. Question 1 The Role of the CEO in the Enron Scandal This portion of the research examines whether Enron chief, Kenneth Lay acted immorally or not. In order to examine the issue well, the paper would use a broad range of assessment of morality to identify whether actions of Lay were appropriate or not. Each of these issues would be examined critically. Dominant and Unfettered Power and Control It is apparent that Kenneth Lay had dominant and unfettered powers and control over activities of Enron. This is because he had stayed in power for a very long time and had a lot of control in decision making. Although this in itself is not immoral, it created the impetus for a lot of immoral and amoral activities to be carried out by Lay in conjunction with his fellow managers and directors. Ideally, a business needs to have some kind of control and checks to ensure that managers do not abuse the system (Crawford, 2006 p114). This reason justifies the need for the establishment of an Independent Board of Directors and a Management team. Again, the board needs to be headed by a person who is different from the CEO in order to create an ideal situation where no one in the top hierarchy can get uncontrolled power over the activities of the company. In the case of Kenneth Lay, he was the CEO and the Chairman of the Board of Enron for 17 years and had unfettered powers which contributed to a lot of wrongs in the company. Disregard for Core Principles Kenneth Lay stated that the core principles of Enron were communication, respect, integrity, and excellence. However, there is strong evidence that he led the company to override the very standards he set and the system that was meant to safeguard the implementation of those standards. George and Jones identify that overriding standards and principles means disregard of rules and regulations for reasons that are not consistent with the best interest of the business (2009). As such, there is evidence that Kenneth Lay did things that undermined the core guiding principles that he set for Enron. First of all, he claimed that communication was key. However, there were major reporting issues in Enron that led to its collapse. Secondly, he claimed that respect was a key principle. However, it is apparent that some stakeholder groups like employees were given tough treatments and their rights were blatantly disregarded. Thirdly, Enron claimed to seek integrity but in reality, they had serious issues with truthfulness and the attempt to disguise the reality in its financial situation to maintain a positive image with the public and other stakeholders. Finally, Enron stated that they sought excellence. Although they might have been a leading business at some point in their history, they used unsustainable systems and structures to attain this end. This led to major long term issues which culminated in the collapse of the company. Since Kenneth Lay had extensive powers to ensure that the core principles that he had outlined would be honoured and he failed to do so, there is a major control weakness that his administration had. As such, it could be said that Lay failed to live up to expectation in controlling the organisation as a whole and he could not check the immoral activities. Thus, in terms of playing his role as a director or executive of the company, he is ultimately accountable for the immoral and amoral actions that occurred in Enron during his tenure as CEO and Chairman of the Board. Wrong Accounting One of the biggest things that kept Enron going even after it had undertaken a lot of immoral activities was the wrong and misleading accounting systems and methods they had. The Gas Bank project was meant to purchase energy; petroleum, gas and electricity and sell them to third parties. Enron had to rely on a network of cooperation with partner firms and businesses around the world. However, Enron managed to use various agreements like swaps and hybrids to present a strong case that they had some legal control over the energy they sold. Meanwhile, the company did not own the energy sold, and as such, the ideal thing they should have done would have been to declare that they were just traders and hence did not own the energy resources. However, Enron disclosed the gas and other things in their financial statements as though they were their own and hence overstated their profits. This gave a misleading picture of the activities of the company. Off balance sheet financing is defined as “a process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business” (Gowthorpe and Blake, 1998 p24). One of the common methods is the recording of leases as though they are a firm's legal asset (Kimmel et al, 2011). This is exactly what Enron did when they overstated profits by recognizing that the energy resources in Gas Bank were theirs. Internal Controls Clearly, under Lay, the internal controls of Enron were weak. This is because the company had loose systems that could be exploited by people in various positions down the hierarchy. And since the Chairman and CEO was primarily accountable to the shareholders for the conduct of the various managers, Lay was guilty of not being able to set up a system to control his subordinates. All the activities at the lower levels of the hierarchy of Enron were mainly profit oriented. In other words, people were judged solely on their ability to deliver financial results. Thus, a lot of important ethical activities were overlooked. The payment of cash for meeting targets was a wrong system that forced employees to override the controls. Also, the threat to dismiss 15% of the underperforming employees gave a motivation for employees to use various tactics to survive. This led to dishonesty which the internal controls were not strong enough to detect and prevent. High Risk Appetite Since everything was based on rewarding people based on profits and what they contributed to the company, there was the need for various employees to stick together. This led to massive politicization within Enron. Thus, there were various units and interest groups that could seek high risks like the entry to India and unwarranted globalization. Due to the fact that there was limited risk management within Enron itself, many of the high risk activities aimed at improving the remuneration of individual workers and managers were undetected. As CEO and Chairman, Lay should have had a system of monitoring risks in order to safeguard the interest of shareholders. Familiarity and the Lack of Transparency First of all, Arthur Anderson, the Audit firm of Enron and the lawyers of Enron had a longstanding relationship with Enron. Due to this, their independence [particularly Arthur Anderson] was compromised. Due to this, they were impeded from carrying out their duties as auditors and objective advisers. Although this might be a nonmoral issue because there were few laws at that time banning longstanding relationships between auditors and their clients at that time (Bruik, 2011), the ultimate responsibility for this form of immorality reverts to Lay. This is because there is evidence that he condoned or put the auditors in a tough position due to familiarity. Once familiarity was in place, there were transparency issues. This is because Lay could cover up a lot of things by showing that things were alright in Enron when he knew, or ought to have known that things were really in a bad state. However, his ability to control the auditors who were the people who had the duty of blowing the whistle on him, enabled him to present a good face of the company when things were indeed very bad. Also, Lay condoned with the various dismissals of employees who were seen to be pursuing transparency. This puts lay in the position of being fully responsible for some of the efforts to cover up Enron's aggressive trading activities and inappropriate accounting systems and methods. Insider Trading In spite of coming out to assure the public that everything in Enron was good, Lay sold $4million worth of his stock the day that an attempt to expose issues in the company was made and he boldly countered it. This shows that although Lay came out to claim that things were alright, he knew that the company was on the verge of collapse. So he went ahead and sold his stocks in the company. This amounts to insider trading. And as such, he acted immorally. In conclusion, Kenneth Lay had numerous immorality issues that led to the eventual collapse of Enron. He was involved in double standards, he failed in his duty as a steward to shareholders' wealth because he failed to put in place good internal controls and manage risks. Kenneth Lay also reduced transparency and connived with the other stakeholders of the company to suppress information. He gave the public misleading information and also got involved in insider trading. These are immoral acts that Kenneth Lay got involved in as the CEO and Chairman of the Board of Enron and as such, bears the greatest responsibility for the ethical issues in Enron which led to the collapse of the company. Question 2 Critical Analysis of Corporate Social Responsibility and Enron Milton Friedman came up with a lot of arguments against Corporate Social Responsibility in his 1970 article. In light with his criticism, he stated that: 1. Shareholders are the primary stakeholders of a business and as such, the management owe a primary duty to satisfy their needs. 2. Shareholders' primary needs is to maximise their dividends. As such, every business has a duty of ensuring that profits increase. 3. The management and executive of a company are agents of the shareholders and as such, their primary function is to serve the shareholders and meet their needs. 4. Philanthropy and corporate social responsibility is only valid if it increases profits of the company. 5. Directors are not primarily employed to become philanthropists. They are employed to meet the needs of the shareholders and if a philanthropy activity they are undertaking is not in line with the needs of the shareholders, then it is wrong and must be cancelled. Friedman's argument therefore places Corporate Social Responsibility behind the needs of meeting shareholders' desire for more dividends. Barry also argues that Corporate Social Responsibility reduces competition on the markets, reduces shareholders' wealth and leads to the politicization of the business (2000: 2002) These facts come with some important considerations that are relevant to the Enron case. First of all, the management of Enron, particularly Kenneth Lay and other top managers owed a duty to the owners of the company. This was a primary duty that they had to honour at all costs. And this could be done through the focus on providing transparent information, proper controls and checks and balances in order to meet the end of maximising profits for shareholders. However, in this case, the focus either drifted or was incompatible with the core aims of honouring shareholder interests. From an assessment of the Enron case study, it appears that the management of Enron failed to play their stewardship role as was required of them. On the other hand, it could be seen that they were trying to play that role but they did it through a system that was not compatible with the best interest of the shareholders. Either way, it can be said that Enron failed to meet the primary responsibility of securing the primary interests of shareholders because of the absence of a proper corporate social responsibility system. From the case, Enron's management sought to provide the best results for their shareholders but they sought to satisfy other stakeholders in a negative manner. Thus, they sought to give employees benefits that were unrealistic and to an extent, against the interest of shareholders since the use of share options as remuneration could potentially alter the shareholding structure of the company. This was clearly not in the best interest of the shareholders. Hence, it can be argued that the lack of proper corporate social responsibility led to the collapse of Enron. This is because there were absolutely no self regulating mechanisms and systems that kept the company on course. Corporate social responsibility includes governance and control of a company meant to ensure that a company works in a responsible manner to all stakeholders. In spite of the fact that Enron failed to focus solely on its shareholders, it also failed to put in place mechanisms that were essential to keep the business in the rightful path. This led to the eventual collapse of the company. Barry (1991) stated that ethical elements of corporate social responsibility could confront problems, lessen risks and improve systems. This means that a business would need to put in place measures that would ensure that all the different stakeholders get the best of everything that they desire through a regulated and ethical system of rules and regulations. From the Enron case, the corporate social responsibility system was highly limited and there is evidence to support this. It includes: The Override of Core Principles It is apparent that the core principles were being overridden from the top of the organization. This shows that the CSR structures and systems were weak. This confirms Barry's position that CSR causes a firm to lose money (2000). This is because all the funds spent by Enron to promote CSR principles that they eventually disregarded was a waste of money. And as such, it was a disincentive to the company's operations and existence. Lack of Internal Controls and Ethical Responsiveness There was a complete lack of internal controls in the company. The company was not very ethical in its approach to risks and accounting. The management was ready to be dishonest. This lack of ethics and other CSR systems led to the demise of Enron. As such, it is worthy to point out that the wrong CSR systems led to the collapse of the company. Disregard of Stakeholder Interests There was a complete disregard of some important stakeholder needs and requirements. The company did very little to protect the interests of important stakeholders like those who raised the red flag and demanded some kind of reforms. In essence the management's activities were not controlled. On the other hand, the interests of stakeholders like employees were not really taken into account. The decision to fire 15% of employees who were judged to be incompetent at year end was a harsh one that should have been treated with some degree of care if the right corporate social responsibility structures were in place. In conclusion, Friedman and Barry have a strong point in arguing that businesses must exist to further the need of shareholders. However, this need can only be best met if the business operates in a manner that allows for sustained improvement and growth of the company as a going concern. In the case of Enron, the company attempted to honour the interest of shareholders through inappropriate means. They did this by blatant disregard for corporate social responsibility standards. This affected the long-term growth of the company and led to the collapse. So from this scenario, it can be said that corporate social responsibility might be the best option for a business if it protects the business and guarantees shareholders that the business will thrive as a going concern. Question 3 Enron and Stakeholder Satisfaction This portion of the essay examines whether or not Enron should have satisfied some stakeholders more than others. Enron had several stakeholders. This include shareholders, employees, suppliers, government, regulators, service providers amongst others. From the scenario, it appears that the reaction of Enron's managers to the different stakeholder views varied and this had consequences to the activities of the company and the ultimate collapse. 1. Shareholders: The management of Enron sought to increase their earnings albeit unethically through uncontrolled risks and the use of creative accounting to keep them happy and content. 2. Employees: The company had tough measures against employees. They were fired on a regular basis and were motivated to do more through financial incentives. Employees who tried to demand transparency were often dismissed. This means that employees were not well satisfied. 3. Auditors: Enron's auditors were kept in check by the top tier managers of Enron, this kept them from taking any steps that could leak information to the management of Enron. Although this was to protect the management of Enron, the auditors also suffered with the collapse of Enron. 4. Energy partners: Enron provided important support to oil companies and other electric companies through financing them and other things. This gave them the money to expand their operations From the arguments of Friedman and Barry, CSR and stakeholder satisfaction are desirable as long as they support the organisation's quest to provide maximum profits to shareholders. In this case, some of these activities were clearly meant to protect the management of Enron, rather than seek the best interest of shareholders. As such, it could be said to be wrong. However, in an ideal setting, there is always the need for management to examine and check the details and demands of each stakeholder group and satisfy them in an ethical manner to create a win-win situation for the organisation. The Mendelow scale is used to identify stakeholders with high or low power or influence (Norton, 2008). In the case where the level of interest is high and the power of the group is high, the stakeholder group is a key player and they must be managed closely. In the case of Enron, shareholders were the key players. As such, their interest should have been put first. And care should have been taken to provide accurate figures to satisfy them Where a stakeholder group has a high interest but low power, they need to be kept informed. This is the case of the the energy partners and companies. They should have been kept informed about trends and matters and their opinions taken seriously. In a situation where the the stakeholders have a high power and low influence, they need to be kept satisfied. In the case of Enron, the Securities Exchange Commission, which was responsible for the regulation of financial statements should have been kept satisfied. As such, Enron should have taken reasonable steps to provide financial statements that were free of misstatements and compliant with relevant standards. Failure to do this led to the scandal. Finally, stakeholders with low influence and low power need to be monitored. In this case, employees were in that category. The management of Enron failed to monitor them closely. This led to numerous malpractices which caused the collapse of the company. In conclusion, it is good for a business to control its stakeholders and provide appropriate reactions to their activities. Enron failed and protect its management which led to the scandal. Question 4 Role of Code of Conduct in Large Businesses In the case of Enron, the management did not seem to have a structured code of ethics. Although they had standards to guide the activities and performance, these standards were blatantly disregarded from the top of the organisation. This is because they were broad principles that were quite vague. As such, they were prone to being overridden by the management of Enron. However, Quigley (2008) identifies that it is important for large businesses to streamline their ethical systems and structures. This is done through the formulation of formal codes that guide the activities of employees right from training and compliance (Fisher and Lovel, 2003). This is integrated into the organization through the formation of an ethics and compliance unit that sees to the monitoring and implementation of ethics in the organisation. Collins identifies that according to best practices in management, there is the need for the company to maintain a board of directors which has independent members who oversee the monitoring and observance of ethics (2009). Some of these activities are done through the Risk Committee which evaluates the risks of the company in a proactive manner. There is also the Audit committee which keeps an eye on the internal controls and structures and ensure that the business is doing the right thing. Also, there is the Remuneration Committee which is also independent and fixes the remuneration of directors. These committees have an equal standing at the top of the organisation and can prompt changes and prevent one single member of the organisation from overriding the system. From the Enron case, it is apparent that Kenneth Lay was both the head of the Board and the CEO. This means that no one could challenge his authority. Due to this, he got away with a lot of negative activities which led to the the scandals. However, where there are structures at the top tier of the company to define the structures like the ethical framework, an ethical unit can be set up in the organisation to monitor and control ethical matters and affairs. Once this is done, the important committees on the board meant to monitor risks and other ethical problems can work in collaboration with the unit. Quingley (2008) states that a good ethical structure that is well defined and under the control and oversight of the board of directors has the following advantages: 1. It streamlines rules and regulations. 2. It prevents politics in the interpretation of ideal standards and gives a straightforward pattern for going about business. 3. It defines sanctions which keeps people from going off course and 4. It is a system of communication through which people can get yardsticks for their preferences. Clearly, all these were missing in Enron. This led to the collapse of the company. Had there been any such standards and an independent board to monitor it, there would have been a positive impact on the employees and they would have had objective standards to abide by (Cragg, 2005). However, in Enron, there was no such standards and the board and management took advantage of these loopholes and did a lot of amoral and immoral acts that were detrimental to Enron. References Barry, N. (1991) “The Morality of Business Enterprise” Hume Paper 13 Aberdeen: Aberdeen University Press Barry, N. (2002) “The Stakeholder Concept of Control is Illogical and Impractical” The Independent Review Vol 6 No 4 pp541 – 554 Bruik, A. (2011) Corporate Governance and Business Ethics London: Springer Collins, D. (2009) Essentials of Business: Cases in Organisational Ethics Hoboken, NJ: John Wiley and Sons. Cragg, W. (2005) Ethics Codes, Corporations and the Challege of Globalisation Surrey: Edward Elgar Crawford, C. J. (2006) Compliance and Communication: The Evolution of Enlightened Corporate Governance New York: XCEO Inc. Fisher, C. M. and Lovel, A. (2003) Business Ethics and Values New York: FT Prentice Hall Friedman, M. (1970) “The Social Responsibility of a Business is to Increase Profits” New York Times 13 September George, J. M. and Jones G. R. (2009) Understanding and Managing Organizational Behaviour New York: Prentice Hall Gowthorpe, C. and Blake J. (1998) Ethical Issues in Accounting London: Taylor and Routledge Kimmel, P. D., Weygrandt, J. J. and Kieso, R. E. (2011) Financial Accounting: Tools for Business Decision Making Hoboken, NJ: John Wiley and Sons Norton, A. (2008) CIMA Official Learning System: Integrated Management London: Elsevier Quigley, M. (2008) Encyclopedia of Information Ethics and Security New York: IGI Group Read More