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Enron Failure,1

Enrons Management Failure

Scott Vu

Business Management-40
Professor Chen
Enron Failure,2
November, 20, 2012
To live the way we do and to be able to complete our every day actives and task
such as taking a shower, watching television, and cooking we as people need certain
means to make it possible for us to do so. Electricity and natural gases are two of the
many things that make it possible to live our daily life as we do. If you lived in the U.S.
there was a good chance you got these energy sources from the company Enron. Enron
was one of the worlds leading energy companies that provided electricity, natural
gasses, bandwidth internet connection, and risk fnancial services to clients all over the
world. In 1985 Kenneth Lay merged Houston Natural Gas, with Omaha, Nebraska's
InterNorth to form the energy company Enron. As a corporation Enron was considered
one of the highest growing companies in the U.S. with being ranked seventh on the list
of Americas largest companies (Handson, 2005). With being one of the largest growing
companies in the United States, Enron was named Americas most innovative
companies and 100 best companies to work for from the year of 1996 to 2000 by
Fortune Magazine (Handson, 2005). With being one of highest growing companies,
Enron also came across to being one of the largest failing corporations in U.S. history.
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Enron was founded to be a poorly managed and very unethical company that lacked
integrity, responsibility, creativity and control. Enron was founded guilty of false
accounting, hiding money and amount of proft made, and lied about debts in order to
keep a clean record. These traits lead to the death of what was considered to be one of
Americas most innovative companies. This paper hypothesis that the collapse of Enron,
one of the largest corporate bankruptcy in U.S. history was caused by poor
management strategies and unethical activities within the management and corporation,
therefore the paper will engage in the following; frst how poor management strategies
and control played a role in the collapse of Enron, second how unethical activities and
decisions within the corporation lead to the bankruptcy of Enron, and last of all how
leadership had a major role in the collapse of Enron.
Poor management strategies and control was one of the major reasons to
Enrons death as a company. For a company to achieve its full potential and to keep
stability, good management strategies, planning, and control needs to take place. Olear
(2008) defnes good management strategies as identifcation and description of the
strategies that managers can carry so as to achieve better performance and a
competitive advantage for their organization. Management control systems, involving
tools such as budgets, performance measures, standard operating procedures and
performance-based remuneration and incentives, seek to elicit behavior that achieves
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the strategic objectives of an organization (Kaplan 1984; Merchant 1998). Enron did not
practice the proper ways and rules of management control system. Enron failed at
presenting their performance measures and budgets by concealing their derivative
losses and only providing their profts and earns. This poor management control action
lead to the false advertisement that Enron was much bigger and proftable than what
they really were. As Enron continued to lie and hide about their real earnings and debt,
they became a stronger company and took advantage of others such as their stock and
shareholders, employees, and the clients they worked with. When Enron was fnally
caught in the act of fraud, practicing false performance measures and budgets, the real
Enron was reviled, by hiding so much debt and losses Enron dogged themselves in a
major debt hole. Stock markets crashed for Enron, shareholders lost money, thousands
of employees lost their jobs, and other companies that worked with Enron were efected
as well. As a result of this major fraud and poor management control, Enron fled
bankruptcy in December 2001. To say that this action of fraud was a good idea can be
defended, top managers made strategic decisions to better the companies performance
and competitive advantages, but in doing so in a manner that Enron has it creates a
unethical movement and an example of management control gone wrong. To let
activities such as fraud take place, management control failed to control themselves
and employees, causing bad management strategies to take place. Failure of standard
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operation procedures such as keeping a stricter rules and guidelines for employees to
follow and keeping an ethical value is another example of bad management control with
Enron. Bad management control trickles down to unethical values, poor decisions, and
failure to control situations and for Enrons case it ultimately lead to failure and
bankruptcy. Poor control over management decision was one of the many factors why
Enron failed.
Unethical actions and motives was the other major reason for the outcome of
Enrons failure. Enron is a classic example of a company whose ethical
pronouncements were decoupled from the rest of its operations (Weaver, Trevino, &
Cochran 1999). Enrons code of ethics consisted of four major points; communication,
integrity, respect, and excellence (Davis, 2005). According to businessdictionary.com
code of ethics is a written set of guidelines issued by an organization to its workers and
management to help them conduct their actions in accordance with its primary values
and ethical standards. Code of ethics with in a corporation helps establish and reinforce
organizational value, importance, and integrity. Ethics also conducts better decision
makings, leading to good management strategies and control for companies to create
better competitive positions. Everyone with in a corporation has a role in establishing the
right ethical climate, especially the leaders or top managers. Top managers and leaders
have a major role in creating a ethical climate, because of their high role and importance
Enron Failure,6
in a company, their ethical actions and decision making will efect others as well. Top
managers lead by example and control, by being ethical others will follow and take the
right path. Another ethical role of being top manager and making management
decisions is to enforce ethics, encourage it, and rewarding it. Ethics is the way to
establish the right values and morals with in a business, and that is why every business
and corporation should practice it. Unfortunately not everyone follows the right ethics.
Enron as a company has tried to create an ethical community by creating codes of
ethics to follow, but due to the frauds and accusations Enron has accumulated on
themselves they are a example of how unethical values within a corporation can result
to failure. As Enron became one of the leading companies in america their motives
changed from providing energy and helping others, to becoming a greedy money and
power hungry corporation. As Enron reputation grew in the world, employees greed
grew as well, creating a more competitive atmosphere. Due to this atmosphere
employees wanted to achieve more in the company and leading to more motivation of
success. The motivation of success with in the corporation lead to corruption and
secrete dealings and trading with in the company (Clark 2007). Other unethical actions
that took place with in Enron was the hiring and employee analysis process. Macintosh
(2007) Under Enrons management control system they established the Per Review
Committee system , witch was to align employee action with the companys strategic
Enron Failure,7
objectives, retaining and rewarding superior performers on a fair and consistent basis.
Every six months each employee received a formal performance review that consisted
of formal feedback that included revenue generation. With this system Enron corrupted it
by cheating employees of ratings, by failing the employees that do not have the
capabilities to proceed in unethical actions and keepings the ones do and can generate
the most revenue by any means necessary. By doing so Enron has shaped and formed
a unethical culture and value with their business. The last example of unethical nature in
Enron was the accounting fraud. Fraud showed the world that Enron was a company
that insisted and allowed their employees to be unjust, lairs, and cheaters. All of these
traits are unethical values.
The last reason to why Enron failed was due to the lack of proper leadership and
culture. According to Smith from business. mattprindle. com, leadershipis the ability to
adapt the setting so everyone feels empowered to contribute creatively to solving the
problems (Smith, 2010). Leadership is important to business and a big company such
as Enron because it creates a setting to where people will fll empowered, motivated,
creative, and eggier to work harder for what they need and want to do for their business.
Good leadership is one of the keys to management control, and creating a culture of
good ethics. As Enron failed to follow the proper management control and code of
ethics, they also failed at providing good leadership to all of their employees. Example of
Enron Failure,8
poor leadership skills is by allowing the actions of accounting fraud and internal trading.
This action represented by top leaders and managers shows that the leadership of
Enron was weak. Poor leadership decisions such at this empowers people to do wrong
to get certain objectives done for the leaders. It also sent a message to employees that
full and complete disclosure is not a requirement, or even recommended. If the
company achieved short-term benefts by hiding information, it was acceptable (Smith,
2010). Leadership is to set examples and settings to where people have the willingness
and creativity to provide contributions in any way that is needed, but by setting bad
examples and Enron has twisted the moral values and perspectives of the employees to
do wrong and unjust things to contribute. The leadership of Enron almost certainly
dictated the companys outcome through their own actions by providing perfect
conditions for unethical behavior (Smith, 2010).
Enrons history can not be overlooked by there mistakes and failures, they were
considered one of the leading and growing companies in the United States at one point.
Enron has accomplished many positive things such as providing thousands of jobs
world wide, providing energy to people all over the world, and simulated the economy.
Like many good things, they sometimes come to an end. With all the success Enron has
created we still can not forget about how mistakes with in a companies management
strategy, code of ethics, and leadership can ultimately bring a powerful company such
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as Enron to a crumble. Enron has committed fraud that represented of who they really
were as a company, how management had no control of performance procedures, how
unethical values created a way of wrong doing, and how poor leadership can result to a
unethical culture. By providing evidence and support the hypothesis that the collapse of
Enron, one of the largest corporate bankruptcy in U.S. history was caused by poor
management strategies and unethical activities within the management and corporation
concludes to be supportive and true.
Clark. R. (April 2007). How Poor Business Ethics Led to the Collapse of Enron.
Retrieved on November 18, 2012 from http://ezinearticles.com
David, D. (2005). Enron Lesson for Everyone. Retrieved on November 18, 2012 from
http://www.es.northropgrumman.com Enron Lessons for Everyone
Handson, k. (August 2005). What Really Went Wrong With Enron? A Culture of Evil?.
Retrieved on November 18, 2012 from http://www.scu.edu
Kurdina, A. ( August,2005). The Collapse of Enron: Managerial Aspects. Retrieved on
November 18, 20012 from http://ezinearticles.com/
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Macintosh, N. (July 2007). Management Controls: The Organizational Fraud Triangle of
Leadership, Culture and Control in Enron. Retrieved November, 18, 2012 from
olear, G. (2008). Successful Management Strategies. Retrienved on November 18,
2012 from http://newenglandcondo.com
Smith, S. (January 2010). What is Leadership. retrieved on November 18,2012 from