Journal of Business Ethics (2005) 59: 347-360

DOI 10.1007/S10551-004-7308-2

Springer 2005

Agency Theory, Reasoning and

Culture at Enron: In Search of a
Solution

ABSTRACT. Applying evidence from recendy available

public information on Enron, I defined Enron's culture as
one rooted in agency theory by asserting that Enron's
members were predominandy agency-reasoning individuals. I then identified conditions present at Enron's
collapse: a strong agency culture with collectively noncompliant nonns, a munificent rare-failure environment,
and new hires with litde business ethics training. Turning
to four possible antidotes (selection, objectivist integrity,
integrity capacity, and stewardship reasoning) to an
agency culture under these conditions, I argued that the
currendy available ethics literature would have made litde
difference toward averting Enron's coUapse if any of the
recommendations from the relevant ethics literature had
been implemented. I conclude by identifying new
directions for business ethics literature in order to make it
more implementable under the conditions identified at
Enron. Essentially, we need a way to clearly determine (1)
the difference between connivance and commitment, (2)
what is meant by balance with regard to the multiple
dimensions of ethics and legal theories, and (3) the proper
balance between agency and stewardship reasoning.

Brian W. Kulik

Introduction

What can a corporate executive do to positively

influence organization-wide ethical conduct? The
ethics literature is replete with suggestions, including
selection and hiring of ethically-oriented employees
(Abdolmohammadi et al., 2003), establishing codes
of ethics (Gaumnitz and Lere, 2004), promoting an
ethical culture (Sims and Brinkmann, 2003), developing employees internally (Becker, 1998; Petrick
and Quinn, 2000), and taking a stewardship perspective (Davis et al., 1997). Given the well-known
recent corporate scandals, and especially the plethora
of now pubhcly available information that is available from Enron, two critical questions emerge.
First, if the suggestions from the literature cited
above had been implemented by Enron's top management team, could Enron's ethics shortcomings
have been avoided and bankruptcy averted? Second,
if the answer to the first question is "no," then in
what direction(s) must the relevant ethics literature
proceed before suggestionimplementation congruKEY WORDS: agency theory, Enron, integrity, integence is obtained?
rity capacity, organizational culture, stewardship theory,
unethical behavior
The case of Enron stands as a unique opportunity
to investigate the above critical questions because the
widespread interest in identifying Enron's downfall,
and what the business world should do about it, has
Briar] E. Kulik is a Ph.D. candidate in Management at
spawned a number of books and articles. In addition,
Washington State University's School of Business. His work
the previously private information now made public
focuses on the prevention of corporate corruption, corporate by the company's bankruptcy proceedings has shed
govemance and ethics, teamwork and diversity, and research
light on Enron's operations to a depth that is not
methods. His research to date has appeared in the Western
available from most other companies, public or
and National Academy of Management conference proceedprivate. For example, bankruptcy court-appointed
ings and the journal Organizational Analysis. He earned
examiner Neal Batson's third ihterim report (2003)
M.S. degrees from Washington State University and T7ie
found
that six financial institutions had 'actual
University of Cincinnati, and M.B.A. from Tlie University
knowledge' of Enron's wrongful conduct, gave
of Denver.

348

Brian W. Kulik

'substantial assistance' by aiding in the structuring

and funding of Enron's now infamous special-purpose entities, that the amount of money involved
was 'material,' and that such disguise harmed other
creditors. These findings may help define hmits to
strategic alliances more clearly and delineate a firm's
motivation for the creation of such alliances. In a
recent book by Smith and Emshwiller (2003), the
Wall Street Journal reporters who first made known
some of Enron's impropriety (specifically, special
purpose entities, or SPEs, named LJM and LJM2) to
the public, chronicled their work before and during
Enron's demise. This work may be interesting to
researchers in the tactical positioning that companies
use in the disclosure of negative information. Finally,
a book co-authored by Sherron Watkins (Swartz and
Watkins, 2003), former vice president at Enron,
details her involvement in Enron since 1993. Their
contribution was essentially an exposure of the cultural and chmatic conditions within which Enron
employees worked. There is a growing consensus on
the idea that Enron's culture, rather than the isolated
actions of a few individuals, was the key enabling
mechanism that allowed the widespread practice of
unethical and illegal behavior based on self-interest
(Bryce, 2003; Cruver, 2002; Fusaro and Miller,
2002; Mills, 2003; Sims and Brinkmann, 2003;
Swartz and Watkins, 2003; Windsor, 2004). However, no attempt has been made to link the characteristics of Enron's culture to a theoretical base that
might be used to both test the potential implementability of recommendations to practitioners in
the ethics hterature and the closeness of Enron's
culture to those of other firms.
This paper first establishes a theoretical base which
might be used (1) as a means in itself of providing
practitioners a way to avert future Enron-hke debacles by the identification and generalization of
Enron's culture and (2) as a test of the avertability of
Enron's downfall through some of the ethics literature's recommendations. To this dual end, I draw a
number of parallels between Enron's culture and
agency theory, a theory made popular by lawyers,
economists, and finance and management theorists,
that attempts to explain the effectiveness of corporate
govemance in publicly-held corporations. The next
section describes the key elements of agency theory
and how it is purported to work correctly. Then,
Enron's culture is identified as one centered in the

basic tenets of the agency relationship, with parallels

drawn between their dysfunctional culture and
agency theory's characteristics. In search of a solution
based on recommendations made in the ethics literature, I investigate alternative approaches that an
organization's cultural and ethical base might instead
be founded on, but I find hmits to their effectiveness
in correcting the problems in an agency culture. I
conclude by noting that, while enduring companies
cannot harbor cultures based purely in agency theory,
vital questions must be answered before specific and
effective measures can be taken to avert the emergence of a destructive culture such as Enron's.

Agency theory
Agency theory, as developed primarily by Jensen and
Meckling (1976), is a popular tenet in corporate
govemance today. For example, the ISI Social Science Citation Index finds that Jensen and Meckling's
(1976) work has been cited more than 3,000 times
since 1989 and every article in the Academy of
Management Review's 2003 special issue on corporate governance cited Jensen and Meckling (1976;
see Daily et al., 2003), and at least one textbook on
strategic management (Hitt et al., 2005) structures its
chapter on corporate governance around agency
theory. Typical of its use in articles concerned with
corporate governance. Daily et al. (2003) stated:
"Jensen and Meckling (1976) proposed agency
theory as an explanation of how the public corporation could exist, given the assumption that managers are self-interested, and a context in which
those managers do not bear the fuU wealth effects of
their decisions" (p. 372). Thus, one can hardly avoid
discussion of agency theory in any dialogue on
corporate govemance.
In particular, agency theory states that, in a public
corporation, there exists a central problem with regard to shareholders' interests: top management does
not always act to maximize shareholders' return on
investment. With regard to a corporate executive,
"agency costs will be generated by the divergence
between his interest and those of outside shareholders" Qensen and Meckhng, 1976, p. 313).
According to Rediker and Seth (1995), mechanisms
used to ahgn the interests of the manager with those
of the shareholders take the fomi of threats (of

Agency Theory, Reasoning and Culture at Enron

takeover, competition in product markets, and

competition in executive labor markets), monitoring
(from outside shareholders, boards of directors, and
according to Jensen, 1986, creditors under high debt
levels), and incentives (stock ownership, salary, and
perquisites). Unfortunately, these mechanisms are
limited in use because they are associated with costs
(called agency costs), so that there always exists an
'agency problem' (Fama, 1980) in that managers'
behavior will never be fully 'aligned' with the
interests of the firm's shareholders (or more generally, 'risk bearers' after Fama, 1980). Furthermore,
"it is likely that the most important conflict arises
from the fact that as the manager's ownership claim
falls, his incentive to devote significant effort to
creative activities such as searching out new profitable ventures falls" (Jensen and Meckling, 1976, p.
313). Said another way, in addition to agency costs,
divergence of interest also generates a divergence of
managerial attention to his or her own interests, and
not to the interests of the shareholders. Thus, agency
theory assumes that publicly held firms endure by
finding ways to efficiently solve the agency problem
by aligning their managers' behavior with shareholders' interests in such a way that agency costs are
low enough to allow for the creation of corporate
profits.
Unfortunately, some self-serving executives may
have interpreted this theory as a way to act in a selfserving, even unethical manner as long as they
operate within certain constraints (governance
mechanisms) and with an effort roughly proportional
to their incentives (a combination of pay and perquisites the 'pay package point'). As long as their
behavior is not outside the boundaries set by the
governance mechanisms in place, an 'anything-goes'
type of attitude may emerge, which can become the
foundation for an organization's culture. Below, I
elaborate on what is meant by an 'agency culture'
and offer evidence of its existence in the Enron case.

Agency culture: The Enron case

Until November 2001, Enron was a highly respected
organization. For example, in 1997, Business Week
named CEO Ken Lay one of the top 25 managers of
the year, followed by a positive profile on Enron's
electricity trading business (McWiUiams, 1997). For-

349

tune named Enron the most innovative company for

seven consecutive years prior to its downfall (Cruver,
2003; Swartz and Watkins, 2003), and as late as 2001 it
printed a glowing interview of Ken Lay (Hamel,
2001). An article appeared in Money as one of six
energy stocks that "can light up your profits" (Brush,
1997, p. 108). ChiefExecutive (1997) wrote a positive
profile of Ken Lay, stating that "Lay estimates competition will reduce consumer electricity bills by 30 to
40 percent which would be like a national tax cut of
around $70 billion." (p. 41). That same year (1997),
Ken Lay also attended the World Economic Forum,
and was an honored guest at the opening of Rice
University's James A. Baker III Institute for Pubhc
Policy (Swartz and Watkins, 2003). Even when near
bankruptcy, despite a falling stock price throughout
2001 and some negative press, a positive article appeared as late as November, 2001 in which the magazine Better Investing (2001) noted that "the
consensus opinion among the analysts making estimates was that Enron's earnings will grow at an
average annual rate of 17 percent over the next five
years" (p. 54), while on October 26, the Wall Street
Journal's article on Enron began: "Enron: Rarely have
so many analysts liked a stock they concede they know
so httle about" (Craig and Weil, 2001), an article that
was at least backhandedly positive in that the stock was
seen as still popular among investors even though it
was acknowledged that no one understood its balance
sheets. Furthermore, Enron had the support and
direction of consulting firm McKinsey and Co., case
studies were written by Harvard Business School
Publishing (Rangan et al., 1996; Tufano and
Bhatnagar, 1994), and a supposedly exemplary Enron
team was profiled in a popular teamwork book that is
still widely cited in the literature for its teamwork
theory (Katzenbach and Smith, 1993). Enron was also
popular from a societal point of view, as CEO Ken Lay
became a well-known philanthropist who contributed generously to a number of charities and pohticians' campaigns with personal and Enron funds.
Philanthropy was not limited to Lay, but Swartz and
Watkins (2003) and Bryce (2003) claimed that each
senior executive was involved in his or her favorite
charity. Taken collectively, one could conclude that
Enron had built up a considerable amount of reputational capital with politicians, minorities, local
businesspeople, charities, academia, investors, and the
business press. At the same time, however, unusually

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Brian W. Kulik

excessive perquisites were apparently consumed by

Enron employees at all levels of the organization
(Bryce, 2003; Cmver, 2002; Swartz and Watkins,
2003) as discussed in more detail below.
As Petrick et al. (1999) highlighted, reputational
capital is an important antecedent to sustainable
competitive advantage. How, then, could the
simultaneous building up of social capital and the
excessive, nonsustainable acquisition of pay and
perquisites by the very same corporate executives
have occurred? Identifying some of Enron's executives as anomalous "bad apples," with personahty
traits including "greed, dishonesty, arrogance, selfishness, cowardice, hypocrisy, disrespect, and injustice" (Petrick and Scherer, 2003, p. 40) ignores
Enron's prior popularity and the substantial social
capital that these same executives had shored up. To
alternatively point to 'the system' as flawed and in
need of more controls, such as the use of more,
better, and more transparent accounting mles
(Petrick and Scherer, 2003; Senate Subcommittee
on Investigations, 2002) may merely motivate immoral, but innovative executives, accountants, and
lawyers to find different ways around the new
controls (Mills, 2003). Instead, Enron's core behefs
and values must be investigated in an effort to query
just how Enron could be simultaneously popular and
insidious. Only then can one hope to curtail the
prohferation of corruption, what Petrick and Scherer
(2003) called "Enronitis" (p. 37), regardless of any
future accounting, SEC, or NYSE mle changes.
Below, I argue that Enron's core values and behefs were forged by the basic tenets of agency theory. My argument is in two steps: (1) Enron's senior
executives used agency reasoning to both determine
and explain their behavior and (2) this agency reasoning resulted in a corporate attitude throughout
the organization that led to a culturally accepted
behavioral norm: an agency culture.

Enron executives and agency reasoning

In speculative support of the first step of my argument,

note that many of Enron's executives were well educated in business and economics to be sufFiciendy
familiar vwth agency theory. For example. Ken Lay,
with a Ph.D. in economics, must have known about
agency theory as one of several economic theories

describing the mechanisms of corporate govemance.

His own Ph.D. work was centered in free market
theory (Fusaro and Miller, 2002), which he applied
both outwardly as a corporate strategy, or fomiula, for
success (Swartz and Watkins, 2003), and inwardly by
retaining, every six months, only the upper 85th percentile of Enron's employees after their semiannual
ranking by the firm's perfomiance appraisal (Crviver,
2002; Swartz and Watkins, 2003). Executives Jeffrey
SkiUing and Rebecca Mark, both Harvard MBAs, also
must have been familiar with agency theory. So too
should have Andy Fastow, with an undergraduate degree in economics (and Chinese) from Tufts University
and an MBA from Northwestern University. Finally,
Michael Kopper, who worked with Fastow on the
now-infamous SPEs, held an advanced degree from the
London School ofEconomics, and also must have been
famihar with agency theory. Even if agency theory
were not known among these and other executives,
one of its central assumptions, that of self-interested
parties (Eisenhardt, 1989), is certainly a fairly common
theory in many economics theories (Harrison, 1986),
and it is this assumption that is essential to thinking
within an agency theory framework.
If Enron's executives were taught agency theory
as part of their business/economics education, then
they may have used 'agency reasoning' in the design
of Enron's organizational stmcture and its policies.
Definition 1: Agency Reasoning is any behavior or
demonstration of rational thought that links corporate
govemance mechanisms (incentives and controls) with
individual behavior.
Thus, an individual expressing agency reasoning
might express that his/her low pay has a negative effect
on his/her incentive to maximize his/her company's
profits. This definition leads us to a proposition that
summarizes the first step of my argument:
Proposition 1: If Enron executives applied agency reasoning to both determine and explain their behavior,
then published material describing their behavior will
contain agency reasoning.
Evidence for agency reasoning by Enron executives

The first piece of evidence is an argument given to

the board of directors for approval of one of Fastow's
SPEs, LJM2:

Agency Tlieory, Reasoning and Culture at Enron

"Based on Fastow's presentation, the Directors envisioned a model in which Enron business units controlled the assets to be sold to LJM2 (or alternative
potential buyers) and would be negotiating on behalf
of Enron. Because each business unit's financial results
were at stake, the Board assumed they had an incentive
to insist that transactions were on the most favorable
tenns available in the market" (Powers, Troubh and
Winokur, 2002, pp. 152-153).
In other words, Enron's directors reasoned that the
'incentives' of agents for Enron's business units were
sufficiendy aligned with Enron's stockholders'
interests, and not with Fastow's. Following Rediker
and Seth (1995), the aligning mechanism that the
board of directors assumed was active in this case was
the threat of takeover (of losing one's job because of
the business unit's poor performance), which implies
further that mechanisms of monitoring perfomiance
and motivation through the incentive of a high pay
package point were also active. That Fastow, as
CFO, had sufficient control over the performance
review process and distribution of boriuses to
manipulate his own 'incentives' (Swartz and Watkins, 2003) is beside the point here: In his presentation to Enron's board of directors, the board itself
being an important govemance mechanism according to Hitt et al. (2005), Fastow apphed agency
theory to predict the behavior of Enron executives
in their negotiations with LJM2 by using an
'incentive' argument. In short, Fastow, and the
Enron directors in their approval of LJM2, applied
agency reasoning.
As further support for Proposition 1, I offer a
description of Rebecca Mark's closing of the second
phase of the Dabhol power plant deal (before the
first phase was completed) as described by Bryce
(2003):
"Mark prevailed. She got a bigger project. And a
bigger project meant no surprise a bigger bonus.
Getting the second phase of Dabhol approved right
away 'meant doubling or tripling her bonus,' said one
Enron employee who worked on Dabhol. 'I'll never
again underestimate the power of an incentive compensation program and the desire it can instill in
people" (p. 172).
Phase one was never finished at Dabhol and Enron
realized significant losses upon the failure of this

351

project. Mark, however, made money on the project

because she had 'incentive' to close the deal - the
biggest possible but no 'incentive' to show profitabihty from operations or even a finished project.
Thus, Mark allowed herself to follow her own selfinterest as long as the boundaries set by control
mechanisms (such as scmtiny by Enron's awardwinning board of directors or internal managerial
accounting efforts) were not crossed and sufficient
'incentive' was provided for through bonus pay:
Agency reasoning.

Evidence for agency reasoning by Enron employees

Leaders can have a major influence on an organization's culture (Schein, 1992) which in turn can act
as an important control mechanism for individual
behavior. Schein (1992) described culture as
emerging from the repeated resolution of recurring
problems in the same way over time. Thus, followers
may adopt their leader's values, beliefs, assumptions,
and expectations (Clawson, 2002) if these help solve
recurring problems. Schein's (1992) theory has recendy received some empirical support at the
supervisor-subordinate dyad level (Block, 2003),
wherein cultural dimensions of involvement, consistency, mission, and adaptability were observed to
be strongly and positively correlated with the
transformational leadership styles, weakly correlated
with the transactional style, and negatively correlated
with the laissez-faire style of leadership (see Yukl,
1998, for definitions of these three leadership styles).
These results suggest that leaders' values, beliefs,
assumptions, and expectations may at least partially
explain the behavior of followers, especially for
value-oriented transformational-style leaders. Furthermore, five of Schein's (1992) six primary leadership mechanisms of attention, reaction to crises,
role modeling and a leader's behavior, the allocation
of rewards, and criteria of selection and dismissal
have recently been used as a framework for
explaining why Enron's culture contradicted its own
code of ethics (Sims and Brinkmann, 2003). Thus,
assuming that Schein's leadership mechanisms were
active and effective, and that leaders' styles were
predominantly transfomiational (as Bryce, 2003,
suggested when describing the differences in styles
between the transactional-styled Kinder, and

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Brian W. Kulik

SkiUing, his transformational-styled successor as

C O O ) , the agency problem may be one of those
recurring problems identified by Schein (1992) that
allows leaders to propose their own solutions. Such
leaders may thereby influence their followers who
subsequently adopt their leader's solution. For
example, Jeffrey SkiUing, Enron's de facto leader
while acting as its C O O and then CEO (Bryce,
2003; Cmver, 2002; Swartz and Watkins, 2003),
apparently knew about and fostered his own agency
reasoning as a way of solving the problem of innovation and motivation among employees. Bryce
(2003) noted that Fastow "absorbed SkiUing's
methods of managing people and his view of the
world" (p. 202). It seems reasonable, then, to consider that Enron's employees at aU levels of the
organizational hierarchy - applied agency reasoning
as a means to solve the agency problem, and evidence of agency reasoning should appear in pubhshed stories of Enron employees:
Proposition 2: If employees at the lower levels of Enron's hierarchy frequendy applied agency reasoning to
both determine and explain their behavior, then
published material describing their behavior will
contain agency reasoning.
In support of Proposition 2, while numerous
examples were discovered, only three corroborating
excerpts are offered here. The first excerpt, from
Swartz and Watkins (2003), demonstrates employees' use of agency reasoning in their summarized
view of Enron's culture - what the authors termed a
'high risk/high reward' mentality:
"You deserved the best laptop and hotel room because
you were traveUng around the world booking million
dollar deals. You deserved to cheat on your spouse
because you were so stressed... booking million doUar
deals. On the edge, there were no rules to constrain
your thinking at the office and, as it happened, no rules
to constrain your behavior outside it. The youngest
traders bought themselves silver Porsche Boxters and
submitted $10,000 expense reports... They deserved
it" (p. 192).
If Rediker and Seth's (1995) substitution principle
were to be applied to the Enron case, one would
have to conclude that 'incentive,' in a combination
of many perquisites and high pay, was the active

control mechanism here, where aU of the other

govemance mechanisms lay domiant (referred to as
"no rules" in the above excerpt). Bryce's (2003)
account of employees' expectations was httle different:
"Flowers, first-class airfare, first-class hotels, limousines, new computers, new Palm Pilots, new desks
Enron employees began to expect the best of everything, all of the time. And there were salaries, lots of
salaries" (p. 134);
as was Cruver's (2003) account of his own behavior
and attitude:
"I continued taking business-related trips, staying in
the best hotels and eating in the best restaurants. These
were the perks that the majority of Enron employees
enjoyed - and it was fair trade for being on the road,
for being away from families, and for working fourteen-hour days. I considered it part of our compensation" (p. 73).
Taken together, evidence in Swartz and Watkins
(2003), Bryce (2003) and Cmver (2003) provide
corroborative support for agency reasoning's prevalence at lower levels in the organization's hierarchy:
individual behavior and motivation was explained by
a particular combination of pay and perquisites
Jensen and Meckling's (1976) 'pay package point'
where, in the Enron case, high levels of motivation
and incentive alignment (personal and corporate
interests) were associated with the high position of
each individual's pay package point.

Agency culture
A definition of agency culture

If individuals throughout both the upper and lower

levels of Enron's hierarchy employed agency reasoning, then one might generalize the Enron context
to a particular kind of culture that might develop
elsewhere. Thus, I assert that Enron executives applied a corporate governance theory as a basis for the
foundation of their organizational culture. It is one
thing to acknowledge the existence of the agency
relationship, but quite another to develop a corporate culture from agency theory's basic tenets. While
the idea that culture, rather than individual traits.

Agency Theory, Reasoning and Culture at Enron

may be the cause of corporate improprieties in
general (Paine, 1994) and white coUar crime in
particular (Sutherland, 1940) is not new, the contribution here is the idea that the basis for at least one
such improper culture is agency theory. N o connection between culture and agency theory has
explicitly been identified in the current body of
hterature.
Dejinition 2: Agency Culture is a type of culture
wherein members repeatedly solve the agency problem
with agency reasoning to the extent that agency-reasoned solutions become instilled in members' values,
beliefs, assumptions, and expectations.
Implications of a strong agency culture

As mentioned above, culture is considered an

important behavioral control mechanism of an
organization's members (Schein, 1992). In particular, strong culture - that is, a culture in which
there is a strong homogeneity of behefs held
throughout the organization is expected to decrease the cost of controls (i.e., reduce agency
costs), and increase financial perfomiance. R e cently, Sorensen (2002) found strong culture to be
less effective in conditions of volatility, but even
under these conditions, strong culture is expected
to serve a company well by providing a solid rule
base. At Enron, there appears to have emerged a
strong, homogeneous culture (Bryce, 2003; Cruver,
2002; Swartz and Watkins, 2003). For example,
within Enron Capital and Trade, Swartz and
Watkins (2003) described the culture as "almost
culdike" (p. 193) a very strong culture indeed.
The problem with Enron may therefore have been
that the strong culture was also an agency culture:
employees and owners assume a divergence of
interest from stockholders in the first place, and
then concentrated on that divergence of interest
throughout the duration of the employment contract. The first critical question in the paper can
now be addressed; specificaUy: Could Enron's
strong agency culture have been prevented or
avoided given alternatives to the resolution of the
agency problem provided in the ethics hterature? I
argue below that there currently is no solution for
an agency culture in the ethics literature given at
least four approaches: Selection, objectivist integrity, integrity capacity, and stewardship.

353

Agency culture: In search of an antidote

Integrity and selection

The idea that a manager should act with integrity is

not new. Fayol's (1949) second principle of management includes the following recommendation:
"The best safeguard against abuse of authority and
against weakness on the part of a higher manager is
personal integrity and a particularly high moral character of such a manager, and this integrity, it is well
known, is conferred neither by election nor ownership" (p. 22).
That is, after being selected manager, an individual
does not then suddenly increase his or her moral
character and personal integrity to match the
requirements of the position held, but moral character and personal integrity must pre-exist within the
individual's character. One might naively ask why
these additional factors should be considered. Isn't
technical and organizational skill sufficient for today's manager? Barnard (1968 [originaUy pubhshed
in 1938]) provides some further insight:
"That which is unique to the executive functions,
however, is that they also impose the necessity of
creating moral codes. Thus, to the moral problem of
individuals generally, organization adds in the case of
. the executive substantial increase of moral complexity,
and of tests of responsibility, and the function of creating moral conditions. The latter is a distinguishing
characteristic of executive work. .." (p. 274).
Barnard went on to assert that unresolved moral
dilemmas move up through the organizational
hierarchy until they are resolved. Therefore, a corporation's senior executives encounter only the most
difficult moral dilemmas that exist in the organization; they may often have no choice but to create a
new moral code to resolve a situation. This explains
why high moral character is important for managers
to possess, as the creation of new moral codes
through the resolution of moral dilemmas is an
important function of management.
One might suggest a solution based on these
preliminary assertions: Select only those employees
with high levels of moral character and integrity.
This was in fact the recommendation of at least one

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Brian W. Kulik

empirical study (Abdolmohammadi et al., 2003) of

accountants' weak ethical reasoning. However, such
a solution would not have been easily implemented
by Enron executives, even if attempted, because
Enron's main source of employees was graduates of
top-tier American MBA programs (i.e., the technicaUy and organizationaUy competent individuals)
who were apparently lacking the moral competency
recommended by Fayol (1949) quoted above, as
described by Swartz and Watkins (2003):
"Business was being reinvented, and as [new hires
fi-om recently-completed MBA programs] saw it, more
money could be made than ever before. These were
young men and women to whom $1 million a year did
not seem like an outrageous benefits package. They
didn't wish for luxuries, they expected them - flashy
cars, cutting-edge art, trekking trips to exotic locales"
(p. 58).
For the new hires entering Enron as described
above, agency reasoning matched expectations. Indeed, it may have been from the exposure and
learning in these MBA programs (MiUs, 2003) that
Enron's employees held fast to agency reasoning in
the first place, making it difficult for Enron to discover and hire employees out of MBA programs
who were both technically competent and nonagency reasoning. Thus, choosing individuals with
high integrity, a priori, may not have provided Enron
with sufficient quantities of talented employees
needed to develop a non-agency, moraUy-grounded
culture. Enron would have needed to embark on
internal efforts to ensure that employees.had at least
the external appearance of integrity as proposed
above by Barnard (1968 [1938]) and Fayol (1949).
Given such an environment, selection alone does
not appear to have provided a way to avert Enron's
agency culture. We must therefore turn our attention toward recommendations found in the literature
that emphasize internal processes designed to elevate
the moral character of existing employees.

Integrity and objectivist ethics

The first approach I consider toward internal employee development is that of objectivist ethics
(Becker, 1998), based on the philosophy of Ayn
Rand (Peikoff, 1991; Rand, 1964). This approach

begins with a number of axioms that are self-evident

through direct perception, and using the standard of
human ethics that is a person's hfe and happiness,
objective values are deyeloped, such as long-term
survival, well-being, reason, purpose, and self-esteem. Objectivists, then, "define integrity as loyalty,
in action, to rational principles (general truths) and
values... Integrity . . . requires acting in accordance
with rational values" (Becker, 1998, p. 157). Thus,
objectivist ethicists assume that each individual
rationally develops a moral code of principles and
values, and upgrades it periodicaUy based on the
congruence of observed results with one's own
long-term survival. The result is behavior that is
aligned with that code.
When this definition of integrity is applied to the
Enron case as a means by which its employees might
experience growth in moral character, one might
surmise that its senior executives indeed had a code,
agency reasoning, and acted on it according to their
expectations of at least their own long-term survival.
The principles of agency theory had failed none of
them in the past, as none of them had failed at
anything business-related before. In the munificent
times of the late 1990s, few were able to adjust their
moral codes through objective observation and rational analysis because failure was not prevalent enough to require adjustments to moral codes
developed during the executives' university educations and hierarchy-climbing work experience when
the set of codes was apparently being assembled
(Mills, 2003; Windsor, 2004). Perhaps this inability
to learn from failure explains why white-coUar crime
increases during boom times - the recent spate of
2002 bankruptcies, the junk bond/savings and loan
crisis of the eighties, and even the boom times of the
twenties that preceded the Great Depression was
accompanied by a notable increase in white-coUar
crime (MiUs, 2003; Sutherland, 1940). However, in
addition to Sutherland's (1940) suggestion that
white-coUar criminahty is learned, the objectivist
definition of integrity suggests that white-collar
criminality, once learned, also has no mechanism for
un-learning in a munificent, rare-failure environment. The point here is that, from an objectivist
viewpoint, one could conclude that Enron's executives acted on what they believed was their own
long-term self-interest, and so they acted with
integrity based on a set of up-to-date but rarely

Agency Theory, Reasoning and Culture at Enron

updated objective codes that was the basis of continued success to that point in their lives. One
cannot merely argue that executives' sets of codes
needed an infusion of integrity, because it may have
never lost its sense of integrity in the first place, at
least from an objectivist's point of view. Thus,
objectivist ethics fails to provide an antidote to
agency culture in a munificent, rare-failure environment. Clearly, waiting for failure to occur in
such an environment before employees learn
important moral lessons may be too htde too late for
organizations already exhibiting agency culture
characteristics. Again, we must look elsewhere in the
literature for any antidote to agency culture.

Integrity and integrity capacity

A second approach rooted in integrity is the multidimensional construct of integrity capacity as proposed by Petrick and Quinn (2000), and recently
applied to the Enron scandal (Petrick and Scherer,
2003). In short, integrity capacity explains that an
organization's members exhibiting high levels of
integrity capacity cognitively balance the use of four
ethics theories (teleological, deontological, virtue,
and systems development), combined with the balanced use of four legal tbeories (positive law, natural
law, civic responsibility, and social refomi) to develop (from coUective connivance to compliance to
integrity) and institutionalize a system of ongoing
moral improvement (Petrick and Quinn, 2000).
Integrity capacity assumes that any imbalance in the
above construct would likely lead to instances of
unethical behavior.
This approach would not have been effective in a
pure agency culture for two reasons. First, the temi
"balanced" in this construct is ambiguous. How can
ethical dilemmas be objectively balanced? Was
SkiUing "balancing" deontological and teleological
ethics equaUy by first rejecting Fastow's chief executive position in an early SPE named Chewco
(according to deontological ethics by foUowing
Enron's ethics code), but later approving Fastow's
chief executive position for SPEs LJMl and LJM2
(according to teleological ethics by maximizing
benefit to stakeholders after the code of ethics was
waived by the board of directors)? Second, Enron
executives may have actuaUy been operating under

355

coUective integrity as defined by Petrick and Quinn

(2000). Petrick and Scherer (2003) associated
Enron's employees with nomiative behaviors of
connivance and comphance, rather than coUectiye
integrity. The way for an organization to proceed
toward coUective integrity would be to anticipate
and avoid any behaviors today that wiU become
iUegal tomorrow, thus moving beyond 'mere'
comphance (Petrick and Quinn, 2000). However,
senior executives at Enron presented many of the
now-iUegal accounting practices of the SPEs as
'cutting-edge' practices to the board of directors
(Zandstra, 2002), suggesting that Enron executives
may have been trying to anticipate the direction of
future comphance, and were in fact changing the
current laws (such as deregulation of gas and electricity) to fit with their 'cutting edge' practices. This
appears at least on the surface to be an integritybased approach to such an extent that it won the
approval of Enron's board of directors. Furthermore,
Swartz and Watkins (2003) referred to widespread
deregulation as the "New Economy," and to Enron
as Houston's ambassador to it (p. 132). Impropriety
was acceptable in corporate life because it was seen as
"a game, the goal of which was to see how much
could be extracted without ever paying up" (p. 196).
In this sense, it could be argued that it was actuaUy
'coUective integrity' that Enron employees practiced
as defined by Petrick and Quinn (2000). In other
words, if integrity capacity were to be implemented
in its current state of development, it may be difficult
in non-compliance situations to discern between
connivance and commitment. What is legal, yet
nioraUy questionable today may be legally proscribed
tomorrow - or it may be both legal and moraUy
acceptable tomorrow. Enron executives may have
seen market deregulation, balance sheet management, and the privatization of corporate information
as trends foUowing the latter direction rather than
the foniier. Perhaps the crux of the matter here is the
development of the idea of coUective commitment,
in which managers are expected to be concerned
with answering the question, "What principled
system is worth multiple stakeholders' ongoing
participation and commitment?" (Petrick and
Scherer, 2003, p. 40). For Enron, deregulated electricity and gas markets were seen as just such a
'principled system' in which there were only
winners: Consumers paid fairer prices and Enron

356

Brian W. Kulik

employees realized high pay package points for their

services. Likewise, hiding debt and poorly performing assets through SPEs may have been regarded
as another 'principled system' with only winners:
Enron was able to keep its debt rating above junk
status (Bryce, 2003), thus keeping the company
operational and maintaining a high stock price based
on its considerable reputational capital. For this,
Fastow, architect of the many SPEs, undoubtedly
justified his huge personal gains by his creation of the
'principled system' that benefited the most stakeholders simultaneously. My point here is not to
defend the behavior of Enron executives by any
means, but to iUustrate how agency reasoning and
culture might circumvent the construct of integrity
capacity in its current form. It seems that more work
needs to be done in the construct of integrity
capacity before it can be apphed as a pragmatic
solution to the problematic agency culture.

Stewardship

Stewardship theory, developed as the antithesis to

agency theory, assumes that the agent's sense of
responsibUity has already aligned her or his interests
with that of the principal: "Stewardship theory defines situations in which managers are not motivated
by individual goals, but rather are stewards whose
motives are ahgned with the objectives of their
principals" (Davis et al., 1997, p. 20). Thus,
stewardship theorists assume that a 'pure' agency
relationship as put forth by Jensen and Meckling
(1976) does not, in reality, exist. While Eisenhardt
(1989) cited somewhat consistent evidence for the
agency relationship, there is more recent evidence
from perhaps finer-grained studies that the stewardship relationship may also be needed to more
completely explain empirical results (Conger et al.,
2001; EUoumi and Gueyie, 2001; Finklestein and
D'Aveni, 1994; Frankforter et al., 2000; Golden and
Zajac, 2001; Rediker and Seth, 1995). The discussion here does not concern the empirical existence
of agency and stewardship's prevalence in today's
corporations, but rather poses the question: Would a
culture based on stewardship a 'stewardship reasoning culture' solve the problem of an agency
culture? At first blush, one may have reason for
optimism: managers, when coalescing corporate

culture, could stress what objectives the firm and its

employees have in common. For Enron, chief
executives could have stressed the traders' love of
gambhng, Enron's exceUent reputation, and the flow
experience (Csikszentmihalyi, 1990; Csikszentmihalyi
and LeFevre, 1989) that results from taking risks as
an intrinsic reward for making profits while trading
gas and electricity. At Enron International, the idea
of making a difference to those in less fortunate
countries by providing more people in those countries access to basic utihties could have been advanced. In this way, the 'bonus' would have existed
in the form of intrinsic rewards rather than end-ofthe-year cash bonuses and stock options. But in this
sort of stewardship culture, power might swing over
to the profit-seeking fimi, which could manipulate
the stewardship perspective to underpay its
employees. As with the integrity capacity literature,
one might argue for a balance between agency and
stewardship, but again the term 'balance' suggests
more the existence of ambiguity in its application
than an implementable solution.

Discussion
Clearly, more work must be done before implementable recommendations may be applied on a
systemic, organizational level to counter any extant
agency culture. To make a difference, researchers
have until the next economic boom period, and
consequent wave of corporate improprieties, to find
implementable recommendations, if any exist. With
regard to the approaches discussed above, a number
of questions must be addressed before any solution to
the agency culture question might be found. Concerning integrity based on objectivism, its strength
hes in the idea that ethics are objective rather than
relative, and thus integrity means more than simply
doing what one beheves, but also in having behefs
based on rational values in the first place. However,
more work must be done in the development of the
sets of objective codes held by senior executives.
How and where are sets of objective, rational codes
of values developed? Are MBA and other university
business programs influential in altering an individual's integrity and mitigating agency reasoning?
Perhaps more importantly, how and when do these
codes change to account for new perceptions and

Agency Theory, Reasoning and Culture at Enron

experiences? With regard to the development of the

construct of integrity capacity, considerable progress
has already been made toward identifying the multidimensional and multi-step complexity involved in
creating an organizational system that is high in
integrity capacity. However, the key to the realization of integrity capacity's fuU and considerable
potential is first in the further elaboration of the temi
'balance' to account for the co-existence between
competing managerial, ethical, and legal theories,
and second in the clear distinction of the implementable differences between coUective connivance
and coUective commitment. Finally, while a stewardship-based culture goes a long way toward
reducing the proliferation of perquisites as compared
to an agency-based culture, a culture based purely on
stewardship is an equally unlikely and unbalanced
solution, so that a similar question of balance between agency and stewardship in any organizational
culture should be a pressing question for ethics
researchers.
This paper suggests at least two additional directions for ethics researchers. First, much more
empirical work needs to be done to detemiine just
how widespread the existence of an agency culture
actuaUy is in today's organizations both in corporations and in society in general. In particular,
exactly how is an agency culture detrimental to
organizations? Can poor performance be directly
related to the presence and/or prevalence of an
agency culture? Second, while this paper focused on
the immediately salient agency relationship as a
theoretical foundation, perhaps similar use has been
made of other economics and govemance theories
such as transaction cost economics or game theory.
Fusaro and MiUer (2002) suggested Coase's (1937)
free-market theory of fimi efficiency as a theoretical
basis for understanding Ken Lay's understanding of
market systems. Future work might address the
acculturation of other economics theories. For
example, what is the relationship, if any, between
the corporate use of outsourcing (as a means of
solving the recurring problems of internal cost and
quality) and the cognizance of transaction cost economics, and does it have similar moral-erosion effects on an organization's members as does agency
culture? Based on the theory and perspective
developed in this paper, an empirical study might
shed more light on that and related topics.

357

A potential limitation of this paper is the relevance

of an analysis of Enron in the first place: Since the
corporate scandals of 2002, has corporate culture in
America changed to the extent that the problems
attributable to Enron are no longer problems in
today's companies? I chaUenge the relevance of this
relevance argument by suggesting that white-coUar
crime is cychcal, always re-emerging in economic
boom times. While the questions raised in this paper
may (MiUs, 2003) or may not be immediately relevant to the present state of corporate America and
beyond, finding answers to the questions raised
herein wiU likely be directly applicable to the next
and future periods of widespread economic growth
and prosperity, as each such period may well be
accompanied by corporate scandals.

Summary and Conclusion

It has long been known in the fields of management,
social psychology, and organizational behavior that a
strong culture can act as a vital control mechanism
over individual behavior. The field of leadership has
to some extent investigated a leader's influence over
the culture that controls employees, and how an
organization arrives at a culture in the first place
(Schein, 1992; Sims and Brinkmann, 2003). If a
leader can influence her or his organizational culture, then it must be considered that the leader's
theories of govemance can be transformed into an
organizational culture that is then used as a general
method of solving problems. The 'best' cultures that
have been proposed are flat, empowered ones in
which pay is at least partly based on fair measures of
performance and innovation leads to quick adaptation and learning (Galbraith, 2002). The example of
Enron, which may be generahzable to examples of
other recently failed companies as well as currently
existing companies (MiUs, 2003), suggests the need
for researchers who apply a 'best culture' approach
to recognize that an irresponsible use of power
(Gandz and Bird, 1996) may be prevalent in an
empowered, innovative culture when incentives are
established on the assumption of a pure agency
relationship between a firm's ownership and its
employees.
Using recent hterature on Enron's operations, I
have argued for the existence of an agency culture that

358

Brian W. Kulik

may well be as detrimental to the long-term health of

corporate America as it was to Enron. I proposed that
an agency culture should be distinguishable from
other cultures because, in an agency culture,
employees tend to explain their behavior as controlled
by govemance mechanisms, defmed as agency reasoning. It is important to note that, compared to
criticisms of Enron's improprieties and illegal activities, agency culture was the conclusion reached after
juxtaposing Enron's popularity on the one hand, and
its unsustainable corporate improprieties on the other.
I further noted a number of undesirable behavioral
consequences that managers should expect to see in
their employees operating within an agency culture.
Lastly, I tumed to four possible antidotes to an agency
culture - selection, objectivist integrity, integrity
capacity, and stewardship to illustrate both the
shortcomings of these solutions and a future direction
for making these approaches implementable so that in
the future the emergence of an agency culture might
be averted. In short, we need to develop answers to a
strong agency culture that functions in a munificent,
few-failure environment containing new hires with
low ethical characteristics.
We are increasingly a culture that not only focuses
on the short term (Piety, 2004), but also on the
agency relationship in our pursuit of wealth. The
perils involved in this pursuit was noted by Weber
(2001 [originally published in 1905]), who wamed:
"In che field of its highest development, in the United
States, the pursuit of wealth, stripped of its religious
and ethical meaning, tends to become associated with
purely mundane passions, which often actually give it
the character of sport" (p. 124).
Agency culture seems to foster such a sporting character. In particular, the correction of an agency culture
toward the restoration of some sort of'rehgious and
ethical meaning' (Conroy and Emerson, 2004) could
be a priority for any model that claims to systemicaUy
infuse ethically appropriate behavior throughout any
organization, given the environmental conditions
identified herein. However, it appears at this critical
point in American and global corporate history that
infusion-of-ethics approaches such as integrity and
stewardship fall short of implementability. What we
need is an ethics approach that addresses the agency
problem directly; otherwise, current ethics ap-

proaches may not be as effective as they could be upon

practitioner implementation.

Acknowledgement
I would hke to thank Richard Reed and Jerry
Goodstein for their many helpful comments on
earher versions of this paper and Dave Lemak for
numerous discussions of the relevance of ethics in
the works of seminal authors in business.

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Department of Management and Operations,

Washington State University,
Todd 337, Box 644736,
Pullman, Washington 99164-4736,
U.S.A.
E-mail: bkulik@pullman.com