ENRON was a Texas energy company and one of the biggest corporate collapses in world history.
Shareholders filed a $40 billion lawsuit after the company's stock price, which achieved a high of US$90.75 per share in mid-2000, plummeted to less than $1 by the end of November 2001.
Many executives at Enron were indicted for a variety of charges and some were later sentenced to prison, including CEO Lay and CFO Skilling. Arthur Andersen was found guilty of illegally destroying documents relevant to the SEC investigation, which voided its license to audit public companies and effectively closed the firm.
By the time the ruling was overturned by the U.S. Supreme Court, audit firm Arthur Andersen had lost the majority of its customers and had ceased operating. AA was the biggest of the big 4 audit firms and ceased to be. Lately, we have seen PWC, a big 4 firm operating in Australia embroiled in ethics accusations and very poor media coverage.
On paper, Enron had a model board of directors comprising predominantly outsiders with significant ownership stakes and a talented audit committee. In its 2000 review of best corporate boards, Chief Executive included Enron among its five best boards.[Even with its complex corporate governance and network of intermediaries, Enron was still able to "attract large sums of capital to fund a questionable business model, conceal its true performance through a series of accounting and financing maneuvers, and hype its stock to unsustainable levels."[6
The reward system needs a special mention. Although Enron's compensation and performance management system was designed to retain and reward its most valuable employees, the system contributed to a dysfunctional culture that became obsessed with short-term earnings to maximize bonuses. I still see this today in Corporate Australia - individual bonuses rather than team-based and connected to ST outcomes - especially in the finance industry. At Enron employees constantly tried to start deals, often disregarding the quality of cash flow or profits, in order to get a better rating for their performance review. Additionally, accounting results were recorded as soon as possible to keep up with the company's stock price. This practice helped ensure deal-makers and executives received large cash bonuses and stock options.[
Enron's collapse can be largely attributed to the corporate culture it nurtured, which focused on profits and growth at any cost and was riddled with unethical practices. Here's a closer look at how the firm's culture played a significant role in its downfall:
Lack of Ethical Framework: Enron's culture lacked a strong ethical foundation. The management openly encouraged aggressive financial practices and bending rules for personal gain and company profits.
Profit-Driven Approach: Enron's executives created a culture where the only thing that mattered was the generation of profits and an increase in stock price. This led to unethical business and accounting practices, illegal activities, and the ultimate fall of the company.
Manipulation and Deception: With profit at the helm, manipulation and deception became embedded in the culture. Complex financial statements and dubious off-the-record entities were designed to hide debts, inflate profits, and improve the appearance of the company’s financial health.
Lack of Accountability and Transparency: The culture did not embed accountability and transparency. Mistakes and bad decisions were often covered up rather than conceded, admitted and dealt with responsibly.
Irresponsibility Towards Stakeholders: There was a lack of responsibility towards stakeholders. From employees to investors, Enron’s culture placed the company’s needs and goals above the stakeholders’ interests.
Toxic Leadership: The leadership encouraged a culture where taking high-level risks was rewarded. The senior executives set a dangerous precedent by participating in and promoting unethical and risky behaviour, believing they were invincible.
Suppression of Dissent: There was an environment of fear and intimidation where dissent or criticism was not tolerated. Agreeing with senior leaders was the norm, leading to a lack of critical assessment of the company’s strategy and decisions.
In conclusion, a toxic and unethical corporate culture played a crucial role in Enron's downfall. It enabled the spread of unethical practices and reduced the capacity of the organization to recognize and correct its course before disaster ensued.
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