Leaders from Enron Are Accountable for Its Downfall - Essay Example

? Provide critical arguments in support or against the ment that ‘Leaders from Enron are accountable for its downfall as they were not ethicallyand morally responsible’. Table of Contents Table of Contents 2 Introduction 3 About the company 3 Rise of Enron 4 Cause for downfall of Enron 6 Functions of Operations management 6 Mark-to-Market Accounting 8 Off the balance sheet record 9 Corporate Governance 9 Influence of poor performance of management for Enron downfall 10 Recommendations for Best Practices 13 Reference 13 Bibliography 16 Introduction The sudden collapse of Enron Corporation for bankruptcy was one of the largest failures in business in the history of U.S and mankind. It came as a shock for many people of the society who are directly or indirectly related with the company and its reverberations was felt on a global scale. Prior to this incident, Enron was considered as the one of the best place to work for. The board of directors of Enron was rated amongst the top five US companies according to the Fortune magazine. Though the company seems to be very highly praised by outsiders but internally the company had a much decentralized decision making structure and financial control system which made very difficult for outsiders to get a clear view of the company activities and its operations (O’Rourke, 2007, p.199). This problem is not only due to the poor managerial performance but also due to the departmental issues which are involved in the process of ruining the ethical values and the principles of the company. The executives and the managers are the primary people responsible for the downfall of the company for not maintaining the corporate culture and transparencies in the business process. If the operational management team have worked in a proper manner in full force it could have been possible for Enron Corporation to escape the tragedy (Spedding & Rose, 2007, p.543). About the company Enron being one of the most innovative companies in America for six consecutive years and was ranked 7th on the fortune 500 companies. The Houston, Texas based firm was considered as one of the greatest energy trading companies of the world (Sterling, 2002, p.111). In the year 2000 the company reached its summit with above 19,000 people and approximately with a annual revenue of more than $100 billion. The mission statement of the CEO Kenneth Lay was not only to become the greatest company in the energy sector but also to become the world largest company. With the deregulation in the energy sector during 1980’s the business became very risky both for the customer as well as for the companies. At this critical situation Enron came with an indigenous solution of leveraging its large network of pipelines for the construction of the gas bank to act as intermediary in the transaction process which in turns lowers the risk in the market. Enron introduced a concept of buying and selling on a certain dates at a certain price with an extra premium to ensure safety against risk. The man behind this innovative idea came from the CEO and President of the firm Jeffrey Skilling. He then introduced many more products along with the gas bank. The products include various derivatives of energy and swap for Enron’s trading partners and stakeholders (Fusaro & Miller, 2002, p.31). These products give the option to the people to buy gas in the future at a predetermined fixed price which gives the company the opportunity to trade at a fixed price even when the market price is floating. This innovative strategy gave the firm immense opportunity growth irrespective of the market condition (Lawrence & Weber, n.d., p. 450-451). Rise of Enron With the new innovative way of business Skilling began to change the whole corporate culture of Enron. He recruited the best professionals from the industry to compete with the largest and most prestigious investment banks. With the immense growth and reputation for the outsiders the internal culture slowly transformed to a darker tone. With the harshest employee ranking system, Skilling instituted the performance review committee (PRC). Everyone in the committee was involved in performing their work as there were scaling to measure their work which results to climbing of post within the organization. Employees with this practice started to catch more deal without thinking about long term potential for the firm and just believed the practice of do-deal and post earning. This generated strong competition amongst the employees and confidentiality and secrecy began to rise. Coincidentally during the year 1990s the US economy experienced the longest bull market in history. The young professionals recruited by the company have no experience about extended bear market. Every venture expanded massively during the year and new investments were made. Then the company moved towards the deregulation of the electric utilities and slowly became one of the major political players in US (Fernando, 2009, p.297). Revenue of the firm grew from $2 billion to $7 billion along with 1000% increase in total workforce from 200 to 2000. The same concept of gas tank was implemented in every sector and everyone was willing to trade on these sectors. Then Enron most innovative development of Enron Online (EOL) came into play which succeeded overnight as Enron was a counterparty in every transaction which was made through this system and also because Enron’s safe transaction credit system gave community the confidence to invest. With more and more online transaction broadband companies shaped up and in the same strategy of gas and electricity trade Enron started of with the plan of telecommunication network. With heavy investment into telecommunication with very low return Wall Street rewarded this strategy with $40 on the stock price which was planned to be discounted later when the business stands up strong. In August 2000 stock rice of Enron hit all time high $90.56 and the company was named as one of the most innovative companies of the world for its creative approach to success (Thomas, 2002, p.2). Cause for downfall of Enron Functions of Operations management In order to understand the reasons for bankruptcy and the level of influence by the management in the quality performance of Enron, particularly in operations management of the company, it important to understand the main functions of Operation Management and its impact in different functions of the organization. The task of the Operational Management department is to transform the inputs into desired outputs effectively and efficiently. The outputs are in the form of manufacturing and profit for the firm. But with the modern trend in business plans the Operational Management departments is not only responsible for working within that small domain rather it is deployed in any area where the firm wants to achieve its objectives. For instance the service companies believe in delivery process improvement where as the non-profit or public sectors learn improve and optimize the internal operation of the company for critical situations with limited resources (Waters, 2006, p. 96). The Operational management is concerned with the additional benefits with a product or services. It has to take the responsibility for the design and delivery processes of the service or product i.e. managing the functions of the product, technological involvement in the project etc (Galloway, Rowbotham & Azhashemi, 2000, p. 7). For any commercial company it’s very important to meet the demand of the customer, stakeholders, employees and shareholders and improve performance according to their expectations (Waters, Waters, 1999, p.26). Operational management department needs to understand the business strategic decision making process and have to work according to those constraints and will have to provide necessary inputs to fulfill the task of the organization in a smooth manner (Chase, 2006, p. 24). The department is not responsible for making strategies but its role is to contribute into the strategic thinking. It is concerned with translating the strategic objective into actions and to design, implement and improve the service or product of the firm and also the delivery process. Operational management department needs to understand the market trend and change according to the market and also to understand the effect of one change into the other aspect of the business processes (Johnston, 2007, p. 34). Operational management department also needs to evaluate the technological changes which have an impact on the delivery capability of the organization and have to incorporate their conclusions into the strategic processes. So it has to think very dynamically and systematically across the platform. With the emergent of new trends and developments the operational management department will have to find new perspectives and build new objectives which arise in that connection. Various activities like Total quality management, global supply chain management, planning software are some emerging trends in business now-a-days (Shim, Siegel, 1999, p. 2). Total Quality Management of operational management has become one of the most important improvements to produce high quality product or services to meet the challenging market demands. There is a big relation between the quality of a product or service with the market share. If the firm fails to evaluate the quality of product it looses ground very soon. A major share in the market depends on the quality standard maintained by the Operational Managers. With improved quality a firm reduces cost, increase customer satisfaction, increase customer loyalty and also improves the financial and market performance (Boyer, Verma, 2009, p. 30). Since the operational managers fulfill several important activities in different functions of the organization they are the indispensable components of the company. They are responsible for the daily activities and functioning of the organization. Mark-to-Market Accounting For the energy trading business Enron Corporation incorporated the approach of “mark-to-market accounting” in the mid of 1990’s and the company used it at an unexpected scale for the different transactions. Under this approach of mark-to-market rules, whenever Enron have outstanding energy or other derivative contracts i.e. assets or liabilities on the balance sheet on each quarter they adjust them with the fair market value and booking unrealized gain and losses to their income statement for that particular period. This type of technique leads to difficulties in valuation in future especially for gas industry where there are often no quoted prices for the base valuations. Companies make there own valuation based on assumptions without any base in this type of technique. For companies like Enron who continuously beat the earnings estimates, it is often possible to have an overstated earning estimation. Even the profit margin can’t be calculated exactly in this approach of ‘mark-to-market’ (Thomas, 2002, p. 2). Off the balance sheet record Enron during the year 1990s was leading the market and assumed to be the market maker with its wide range of products. With this growth it also began to presume increasing debt amount. Enron’s new business ventures need high capital investments. But with heavy indebtedness the company started facing problems because company’s business strategy demands creditworthiness. Since Enron cant reflect a rock solid situation financially other parties would be unwilling to invest of Enron projects with the promise of delivering in future. Thus to maintain the cash flow through credit system the company had to maintain an investment grade balance sheet so that investor feel safe but unfortunately many new ventures of the company fell much short than their expectation (Lawrence & Weber, n.d., p. 456). Corporate Governance Corporate Governance is very essential in every aspect of the business. This board of directors carries out there responsibilities very effectively in order to integrate the different processes of the business. The Chief Executive officer appointed by the board needs to be very responsible and evaluate different ideas from the team and implement the strategic plans. The board needs to understand the needs of the customer and should take care of the people involved in the business. Every decision should be properly evaluated the company to identify any possible threats from the particular decision (Colley, 2005, p.3). Even in the strongest company there can be a failure of corporate governance and corporate collapse. Employees, Creditors and the Investors are often get seduced by the companies reputation in the market. The accounting division needs to be rational to avoid failure due to this type of blindness towards a company. The Enron leaders, Kenneth Lay and Jeffrey Skilling, took the advantage of their reputation in the market and grew massively at a very fast pace before they encountered the crash due to their unsustainable business plans. Influence of poor performance of management for Enron downfall After knowing the operational management role in an organization we need to evaluate whether Enron’s operational management have performed their duties or not and also to find the quality level for the different activities performed by them. According to the official source Enron did have the operational management department who performs setup accounts, agency agreement for the customers, invoice verification, setup data transfer for invoice, algorithms testing for invoice and transfer of file and reporting requirements to the customers. The scope of the operational department at Enron is not broad enough. Some other departments are also involved to perform the role of operational department. The commodity management department, energy asset management department, operation facility management, capital management solution department and the financial operations departments are the departments which work together with operational department. These departments are mainly concerned with the functions which are executive in nature and it lacks integration between the departments. There is no co-ordination between the departments and it lacks the systematic vision and responsibility. There are no creative aspects neither controls in the operation of these departments (Enron Energy Services, 2000). Corporate culture is one of the important aspects which reflect in the quality of the company. The limited scopes which are assigned to the operational departments of Enron Corporation affected the performance quality within the firm as there was no integrity amongst the departments which is very important for influencing the ethical values through out the organization. There is also no clear accountability with the company. Enron’s management failed completely to comply with these vital tasks (Petrick, Quinn, 1997, p. 42). The attitude and the reason behind downfall of Enron Corporation on the superficial level seem quite uncomplicated. It’s a combined as well as the individual action of the corporate arrogance which was gradually created within the organization (Solomon, 2007, p. 34). Though Enron’s reputation was on the rise in the market but its domestic environment deteriorate in a significant manner. Jeffrey Skilling, the CEO of Enron, founded the Committee of Performance Review which was one of the toughest employee review system of the country. But with this type of system there is a great competition between the employees and this results to the lack of integrity as every employee tries to hide there sources and wants to close deals without thinking about the future plans which will benefit the company in long term. The only things the employees are concerned with are the score obtained by them which will lead to the profit of the firm. But the employees are not worried whether the deal is feasible for the firm in achieving long term business or not (Macintosh & Quattrone, 2009). Skilling have the reputation of replacing 15% of the employees every year of the Enron’s workforce. Thus to retain jobs everyone is concerned with short time goal (Rowley, Schneider, 2004, p. 222). This helped the company to thrive during that time without any proper control and restriction. Secrecy is maintained in every deal by each employee who gradually polluted the corporate culture. Particularly in finance division the deals are done in haste without paying enough attention to vision, goal and strategy of the company. No risk management rules are complied with, which resulted towards the financial imbalance. Therefore the problem behind Enron’s bankruptcy is not only due to the wrong accounting practices. After analyzing the managerial practices it cannot be concluded that only the financial department is responsible for the downfall of Enron and the stakeholders and its employees. The main reason behind the fall of the leader in energy business is due to the poor performance of the management as well as the operational management department (Myron, 2004). There it is quiet evident that Enron collapsed not for any one particular reason. It’s a result of many interrelated reasons which is due to the poor functions of the operational departments and the managerial performance. The operational department failed to perform its duty effectively and it didn’t contribute towards the shaping of the company’s ethical and moral values. The top management maintained the hierarchy system and there is no integrity in the organization. In spite of repetitive warning by the vice president, Sherron Watkins who is referred as the whistle blower for the scandalous financial practice the leaders didn’t took care of the problem and continued with their own way of business (Dubrin, 2008, p. 189). The leaders of Enron, Kenneth Lay and Jeffrey Skilling, forgot the philosophy of management. The formulation of corporate strategies and the communication culture of the company changed drastically after the change in board of control and it was not complaint with the values of the company which was initially set by the company. The strict and terribly harsh hierarchy with competitive performance evaluation system founded by the Chief Executive Jeffrey Skilling perverted the ethical base and values of the company. Integrity, communication and loyalty are replaced by profit earning without evaluating the method in the process. The employees are motivated with reward system for following the wrong practices. There was no transparency of the different actions of the firm, thus the stakeholders and employees are always kept under curtain about the exact financial position of the firm. The entire top management is mainly responsible for this new culture in the organization overlooking the ethical and moral values of a leader for growth and profit of the company but without thinking about its sustainability in near future. Recommendations for Best Practices The corporate world is composed of cultures. Ethical climate are needed to be very well examined in regards to the motive of the employees about pursuing organizational growth. While assessing the employee, their attitudes, perception, values are needed to be evaluated carefully. The company should appoint a board of control to look after the maintenance of code of conduct by the employees. The company should operate with the highest possible transparency to gain trust and loyalty from the stakeholders and employees. A separate auditing firm should be consulted to look after the financial aspects of the company. Communication between all levels of the organization should be maintained properly so that everybody can share their views and ideas in the business plans. The ethical conduct of the company should be translated into corporate systems for a fair and responsible business practices (Gilman et.al, 2011). Reference Boyer, K., Verma, R., (2009), Operations and Supply Chain Management for the 21st Century. Cengage Learning. Chase, (2006), Operations Management for Competitive Advantage. Tata McGraw-Hill Education. Colley, J., (2005), What is corporate governance?. McGraw-Hill Professional. Dubrin, A., (2008), Leadership Research Findings, Practice And Skills, 2008 Edition. Dreamtech Press. Enron Energy Services, (2000), Our Energy Management Capabilities.. [Online]. Available at: http://www.enronenergyservices.com/capabilities.html . [Accessed On: April 19th 2011]. 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