Enron Scandal

Introduction
Corporate managers are expected to maximize investor returns while complying with
regulatory standards, avoiding principal-agent conflicts of interest, and enhancing the
reputational capital of their firms (Useem 1996; Whitman 1999). The recent arrests and
resignations of top U.S. managers, however, indicate an increasing level of managerial
negligence and corporate irresponsibility on Main Street and on Wall Street that has eroded
domestic and global trust in U.S. markets (Elliott and Schroth 2002; Mitchell 2002). The U.S.
stock market volatility has added to the political pressure to bring 1930s-style regulatory
reform to businesses (Lorenzetti 2002). Corporate irresponsibility in the Enron scandal, for
example, has provoked multiple lawsuits and unprecedented outrage from a range of
stakeholders with demands for democratizing structures of corporate power, improving
managerial accountability, and legislating regulatory reform (Cruver 2002; Fusaro and Miller
2002; Swartz and Watkins 2002).
The Enron scandal involves both illegal and unethical activity and the courts of law will
determine the precise extent of civil and criminal liability that accrues to the perpetrators
(Verschoor 2002; Fusaro and Miller 2002). People commit fraud, for instance, for a wide range
of motives including perceived lack of effective deterrent punishment and rationalization of
acceptability of illegal activity (Albrecht and Searcy 2001). To control fraud by focusing on only
one dimension, such as more effective deterrent punishments, is like trying to put out a
skyscraper fire with a garden hose. In addition, people harbor myths, such as organizations
cannot proactively detect or prevent fraud, which only result in disempowered resignation to
the inevitability of corruption and more future Enrons (Albrecht and Searcy 2001).
The focus of this article, however, is on understanding the complex, interdependent moral
roots that embed the multiple motives for Enron legal malfeasance and to provide more than a
moral garden hose to address these issues. Simplistic inspirational exhortations to do the right
thing, recommendations to impulsively follow what feels comfortable at the time, windowdressing organizational codes of conduct, or appeals to ad hoc abstract moral theories are
unlikely to provide practical guidance to todays managers in the responsible analysis and
resolution of urgent moral and/or legal issues (Badaracco 1997). What is needed is an
interdependent moral and legal framework that discloses the complex roots of inappropriate
managerial decisions and provides comprehensive practical remedies to reduce the likelihood
of Enronitis and future white-collar crimes. Such a structured framework and set of remedies
are presented through discussion centered around the following issues: the neglect of integrity
capacity by managers, Enron executive practices that led to stakeholder harms, and
recommendations for improving managerial integrity capacity in light of the Enron scandal.

The Neglect of Integrity Capacity by Managers

The neglect of managerial integrity capacity is at the moral root of Enrons legal and financial
problems. What is legally permissible today, but morally questionable, may well become legally
proscribed tomorrow. Thus, it is important for managers to proactively understand and attend
to the multiple dimensions and moral antecedents of illegal activity (Paine 1994). Integrity
capacity is the individual and collective capability for the repeated process alignment of moral
awareness, deliberation, character, and conduct that demonstrates balanced judgment,
enhances ongoing moral development, and promotes supportive systems for moral decision
making (Petrick and Quinn 2000). It is one key intangible asset that acts as a catalyst for
reputational capital and its erosion can jeopardize the survival and credibility of organizations
and markets (Petrick, Scherer, Brodzinski, Quinn, and Ainina 1999). The spectacle of top Enron
executives pleading the Fifth in Congressional hearings about managerial immoral and illegal
conduct is a vivid example of the consequences of the neglect of individual and organizational
integrity capacity (Cruver 2002; Swartz and Watkins 2002). Furthermore, the frantic effort of
Arthur Andersen, LLP, one of Enrons critical stakeholders whose integrity capacity and
reputation were shattered by their unprofessional auditing services, to stem the tide of fleeing
clients while negotiating with other Big Five accounting firms for sale of parts of its business, is
another dramatic example of the costs of integrity capacity neglect (Toffler and Reingold 2003).
Managers and organizations with high integrity capacity are likely to exhibit a coherent unity of
purpose and action in the face of accountability pressures rather than resort to moral evasions
or other forms of irresponsible managerial decision-making (Petrick and Quinn 2000). Managers
and organizations with low integrity capacity (those that do not walk the talk in the process of
daily transactions, those that exercise poor or distorted judgment in policy formulation, those
that never morally mature beyond manipulative acquisitiveness and domination rituals, and
those that refrain from enacting supportive contexts for sound moral decision making) erode
their reputational capital and engender management distrust and stakeholder wrath (Sejersted
1996).
Many managers implicitly adopt the myth that the top management interest is always
synonymous with corporate success and public welfare (Mokhiber and Weissman 1999). Since
fifty-one of the worlds largest economies are corporations, many corporate executives are
often not held accountable for betrayal of multiple stakeholder interests; they expect
aristocratic privileges without accountability (Kelly 2001). By succumbing to greed in secretly
exercising stock options and to dishonesty in falsely reporting the performance reality of the
firm to other stakeholders, top Enron managers abandoned the basic standards of process
integrity capacity. The exposure of integrity capacity neglect by managers justifies the need to
focus on the guidance offered by the construct of integrity capacity in the Enron scandal.

Enron Executive Practices and Stakeholder Betrayals

In December, 2001 Enron, the seventh largest U.S. corporation, collapsed and produced the
second largest corporate bankruptcy to date in U.S. history (Cruver 2002; Fusaro and Miller
2002). More than ten Congressional committees are currently pursuing inquiries, over thirty

Enron-related bills have been introduced to address the scandal-related problems, and the full
extent of collateral damage to a wide range of Enron stakeholders is yet to be determined.
While the definitive account of the Enron scandal is yet to be written, some key elements are
clear. First, rising stars like former Enron CEO Jeffrey K. Skilling and ex-Enron CFO Andrew S.
Fastow created and implemented business ideas that led to major problems, which could not
be legally or ethically fixed, resulting in their downfall (Fusaro and Miller 2002). Second, among
the big ideas was the creation of an asset light company by applying Enrons trading and risk
management skills to power plants and other facilities owned by asset heavy outsiders. To
maintain a high credit rating and raise capital, Enron relocated many of its assets off the
balance sheet into complex off-the-book partnerships or Special Purpose Entities (SPEs). The
problem with this big idea was that some SPEs required Enron to kick in stock if its rating and
stock price fell below a certain point. In fact, Enron was left holding a financial liability of over
$5 billion in debt. When its stock and asset values began declining, Enron was immediately
vulnerable to financial overextension (Cruver 2002). Third, another big idea was the expansion
of Enrons energy trading expertise into a wide array of new commodities to spur earnings
growth everything from paper goods to metals to telecommunication broadband capacity
(Swartz and Watkins 2002). The problem was that Enron tried to do too much, too fast, with
little or no return (Fusaro and Miller 2002). Enron invested $1.2 billion in fiber-optic capacities
and trading facilities, but the telecommunications broadband market collapsed. Furthermore, it
could never generate adequate profits from energy trading in markets, such as metals, to cover
the billion dollar mistakes (Cruver 2002). In effect, people, processes, policies and principles
that aided and implemented the rush to financial growth at any cost all contributed to the
Enron scandal.
A partial identification of Enron stakeholders and the business practices that betrayed their
interests are provided in Part I of the Appendix. Part I consists of sixteen stakeholder groups
divided into primary stakeholders, secondary stakeholders, and tertiary stakeholders, along
with specific Enron business practices that led to major stakeholder moral harms.
The Enron scandals adverse moral impact on the primary stakeholders is evident in Part I.
Enrons top managers chose stakeholder deception and short-term financial gains for
themselves, which destroyed their personal and business reputations and their social standing.
They all risk criminal and civil prosecution that could lead to imprisonment and/or bankruptcy.
(Board members were similarly negligent by failing to provide sufficient oversight and restraint
to top management excesses, thereby further harming investor and public interests (Senate
Subcommittee 2002). Individual and institutional investors lost millions of dollars because they
were misinformed about the firms financial performance reality through questionable
accounting practices (Lorenzetti 2002). Employees were deceived about the firms actual
financial condition and deprived of the freedom to diversify their retirement portfolios; they
had to stand by helplessly while their retirement savings evaporated at the same time that top
managers cashed in on their lucrative stock options (Jacobius and Anand 2001). The
government was also harmed because Americas political tradition of chartering only
corporations that serve the public good was violated by an utter lack of economic democratic

protections from the massive public stakeholder harms caused by aristocratic abuses of power
that benefited a select wealthy elite.
The Enron scandal also harmed secondary and tertiary stakeholders. For example, Enron top
managers pressured Arthur Andersen to certify maximum-risk, questionable accounting
practices in part to retain their lucrative consulting business and, by acceding to this pressure,
Arthur Andersen won huge contracts in the short run but ultimately lost their professional
credibility and client base (Toffler and Reingold 2003). A parallel process occurred in the legal
profession when Enron managerial pressure on Vinson and Elkins to legally condone investor
and employee fraud prevailed. Again, Citigroup, J.P. Morgan, and Merrill Lynch made over $200
million in fees from deals that helped Enron and other energy firms boost cash flow and hide
debt, and, by failing to exercise their own adequate due diligence, they multiplied the harm
done to other stakeholders. The industrys reputation, furthermore, was tarnished by Enrons
aggressive market leadership practices, the taxpaying public incurred additional shifting risk to
eventually cover bankruptcy collateral damage, and ultimately Americas stature as a model of
democratic capitalist practices was replaced by fear of the global export of Enron-like corporate
irresponsibility and crony capitalism (Mitchell 2002; Sirgy 2002).
These
multiple
stakeholder
damages
can
be
viewed
as
the result of serious lapses in the four dimensions of management integrity capacityprocess,
judgment, development, and system as indicated in Part II of the Appendix. Understanding and
correcting these lapses provides a structured way to address the moral roots of current
stakeholder remedies and reduce the likelihood of future Enrons.

Process Integrity Capacity and Enron

Process integrity capacity is the alignment of individual and collective moral awareness,
deliberation, character, and conduct on a sustained basis so that reputational capital results
(Petrick and Quinn 2000; Rest, Narvaez, Bebeau, and Thoma 1999). The need to address lapses
in process integrity capacity is manifest by the routine fragmentation of managerial moral
attention and behavior that arouses stakeholder concern about the moral hypocrisy of
management practices (e.g., Enron top managers tout their public relations images as
responsible corporate citizens while defrauding investors and employees and secretly lining
their own pockets with diverted funds) (Brunsson 1989; Messick and Bazerman 1996).
While it is unlikely that Enron executives failed to perceive the relevant moral issues, it is clear
that they were not sensitive to them. They appeared to be erroneously and overly confident of
their initial distorted perceptions of morally acceptable business conduct, and when challenged,
as Fastow was regarding the appropriateness of his financial structures, retaliated against
accusers and sought information in ways that confirmed what they already believed (Messick
and Bazerman 1996). Since top management and board members ignored whistleblower
feedback, they became morally blind, deaf, and mute, thereby diminishing their capacity for
ethical awareness and eventual strategic responsivenessfor which they are held morally

accountable
(Cavanagh
and
Moberg
1999;
Swartz
and
Watkins
2002).
Moral deliberation, the second component of process integrity, is the capacity to engage in the
critical and comprehensive appraisal of causal factors and recognized moral options to arrive at
a balanced and inclusive reasonable decision/resolution/policy that provides a standard for
future determinations (Petrick and Quinn 1997). The decision making style of the SkillingFastow-Kopper circle demonstrated a tendency to suppress all but one aspect of a moral
decision, i.e., its short term financial impact, and to exclude other parameters that might inhibit
decisive action or constrain executive perks (Messick and Bazerman 1996). Enron managers and
board members, who poorly analyzed and resolved moral conflicts of interest through selfcentered policies also ignored or trivialized the harm caused to other stakeholders. For their
diminished capacity for balanced moral deliberation Enron managers are held morally
accountable (Fusaro and Miller 2002; Swartz and Watkins 2002).
Moral character, the third component of process integrity, is the individual and collective
capacity to be ready to act ethically. The greed, dishonesty, arrogance, selfishness, cowardice,
hypocrisy, disrespect, and injustice that characterized top Enron executives intentions discloses
their culpable motives and the corrupting workplace culture they created (Sennett 1998). The
overemphasis on personal financial gain at the expense of others destroyed any remnant of
employee trust. The visionless accumulation of rapid wealth exposed the absence of leadership
wisdom and the deliberate obfuscation of financial structures to preclude a fair picture of the
financial health of the firm eroded their characters; they de-humanized themselves and others
with whom they interacted. The lack of the political virtue of citizenship is particularly
damaging to internal and external character cultivation (Logsdon and Wood 2002).
Moral conduct, the fourth component of process integrity, is the individual and collective
carrying out of justifiable actions on a sustained basis. Managers that exhibit ethical conduct
develop a reputation for dependability and alignment of moral rhetoric and reality but the
duplicitous exploitation of employee retirement savings exposed the cruel behavioral hypocrisy
of top Enron executives (Cruver 2002).

Judgment Integrity Capacity and Enron

Managers can attempt to evade full moral accountability by compartmentalizing and
fragmenting their handling of management and ethics issues. One way to address this evasion
is to enhance judgment integrity capacity, the capability of analyzing complete moral results,
rules, character, and context in management practices (Petrick and Quinn 2000). The way Enron
executives manage implicitly commits them to certain ethics theories, and just as simplistic,
distorted managerial judgments produce poor results in handling behavioral complexity, so also
do simplistic, distorted ethical judgments produce poor results in handling moral complexity
(Paine 1994; Petrick and Quinn 2000).
For business leaders and their firms, exhibiting judgment integrity means being held
accountable for achieving good outcomes (results-oriented teleological ethics), by following the

right standards (rule-oriented deontological ethics), while strengthening the motivation for
excellence (character-oriented virtue ethics), and building an ethically supportive environment
within and outside the organization (context-oriented system development ethics). Although all
four theories of ethics (teleological, deontological, virtues, and system development) can be
isolated, the main point is that all four theories are necessary to fully analyze and resolve moral
conflicts.
Business leaders that overemphasize or underemphasize good results, right means, virtuous
character, and morally supportive contexts when facing morally complex problems incur the
same adverse consequences as managers that cannot handle behavioral complexity (i.e.,
offended individuals, neglected opportunities, eroded trust, and corrupt environments). Enron
executives, greedily pursued short-term economic returns while manipulating the rules of their
industry, ignoring the negative morale impacts of their bad example. They exhibited poor moral
judgment when they were callously indifferent or ruthlessly hostile to contextual constraints.
The narrow focus on financially elite results by Enron executives, particularly Lay, Skilling,
Fastow, and Kopper, resulted in tragic consequences. Their evasion of regulatory rules, their
corrupting abuse of power and use of political influence, their suspension of organizational
moral code and elimination of extra-organizational guidelines, victimized many innocent
stakeholders (Fusaro and Miller 2002).

Developmental Integrity Capacity and Enron

Developmental integrity capacity according to Logsdon and Yuthas (1997) and Rest et al. (1999)
is the cognitive improvement of individual and collective moral reasoning capabilities. Moral
reasoning moves from preconventional self-interested regard (collective connivance) through a
stage of conforming to external conventional standards (collective compliance), and finally, to a
stage of postconventional commitment to universal ethical principles (collective integrity).
Collective connivance is a molar stage of moral development characterized by the use of direct
force and indirect manipulation to determine moral standards. According to Sejersted (1996)
managers who sustain this stage of collective moral development are either issuing threats of
force (e.g., Get it done now or else) or developing exclusively exploitative relationships based
on mutual manipulation (e.g., Whats in it for me? and Forget the others.). Collective compliance
is the intermediate molar stage of moral development characterized by the use of popular
conformity to work processes and adherence to externally imposed standards. Managers who
sustain this stage of collective moral development are either admonishing employees to secure
peer approval by getting with the program or commanding them to comply with organizational
hierarchy and externally imposed regulations. Collective commitment is the highest molar stage
of moral development characterized by the use of democratic participation and internalized,
principled regard for other stakeholders as a basis for determining moral standards (Petrick and
Quinn 1997). Managers who sustain this stage of collective moral development are either

surveying democratic majority trends or responding to the question, What principled system is
worth multiple stakeholders ongoing participation and commitment?
The literature on organizational ethical climate assessment and development is crucial to
understanding how morally underdeveloped organizations facilitate unethical and illegal
activity (Trevino, Butterfield, and McCabe 1998; Dickson, Smith, Grojean, and Ehrhart 2001).
The ethical climate of organizations at different levels has been demonstrated to influence
process and judgment dimensions of integrity capacity (Wimbush, Shepard, and Markham
1997; Barnett and Varcys 2000).
With respect to Enrons developmental integrity capacity, the Senate Subcommittee Report on
the role of the Board of Directors in Enrons collapse concluded that the firm had developed a
pervasive culture of deception (Senate Subcommittee 2002). As such it was designed and
operating at the level of connivance. CEO Lay used direct force to fire any possible successor
with whom he disagreed and either he or other top Enron managers used indirect force to
deceive and manipulate employees and other stakeholders for top executive advantage.
Whatever standard operating procedures were developed at the level of conformance were
honored only to the extent that they did not infringe upon executive perks or interfere with top
executives exercising a type of feudal control over internal subjects. When external compliance
threatened to restrict Enron corporate prerogatives, aggressive tactics to reduce or eliminate
regulatory standards were routinely employed. The extent and degree to which illegal noncompliance was the cultural norm at Enron will be determined in the courts. Enron did not
reach the commitment level; it never democratized its power structures so that employee and
community input could shape strategic direction or restrain executive perks. For all intents and
purposes, the work culture of Enron was that of a moral jungle where abuse of power
dominated principled economic democratic norms; it was a moral powder keg ready to
explode.

System Integrity Capacity and Enron

System integrity capacity is the alignment of organizational infrastructure and extraorganizational environment to provide a supportive context for sound moral decision making
(Driscoll and Hoffman 2000; Petrick and Quinn 2000). Managerial system accountability today is
determined by the extent to which leaders continually improve the organizations moral
infrastructure and work to improve the external organizational environment, so that moral
performance can be realistically sustained (LeClair, Ferrell, and Fraedrich 1998).
At the organizational level, one of the key system decisions is whether to focus on a
compliance-directed system or an integrity-directed system (Petrick and Quinn 2000). Although
both systems can be complementary, world-class managers are expected to design and adhere
to moral codes that ensure a supportive intra-organizational context (barrel) for enhancing
individual (apples) process, judgment, and developmental integrity capacity. One guideline for
building a compliance-based system is the U.S. Federal Sentencing Guidelines for Organizations

(FSGO). Organizations that install a compliance-based system with whistleblower protection

and uniform enforcement of company code violations invest in this ethical risk management
technique to minimize potential financial losses in the event of illegal activity (LeClair et al.
1998). The integrity-directed approach entails processes for internalizing organizational system
moral improvement through regular organizational ethics needs self-assessments, ethics
measures in all business functions, and benchmarked disclosures in annual audits (Petrick and
Quinn 2001). The fact that Enron executives engaged in illegal activities and overrode their own
organizational code of ethics with impunity indicated that the moral infrastructure at Enron was
too weak to constrain a culture that supported rampant immoral and illegal activity.
In addition to the intra-organizational system, the extra-organizational system needs to be
shaped by managers. Managers can comply with and proactively foster regulatory standards to
eliminate or control corruption outside the organization and support those domestic and
international groups that do likewise. Managers can support harsher penalties for white-collar
criminals and tougher, fraud-detection professional association accounting standards.
Managers can partner with industry, public, and nonprofit organizations to enhance
stakeholder relations in an economically democratic manner rather than only focusing on
ruthless means to extend market leadership.
Enron executives, using campaign contributions and aggressive political lobbying to affect
industry deregulation, limit liability, and minimize reporting; corrupted rather than cultivated a
morally supportive external environment (Cruver 2002). Unlike other business scandals that
involved managers who ran beneath the government radar for unacceptable business conduct,
Enron executives worked to eliminate any government radar stations that could warn and
regulate unacceptable business conduct (Swartz and Watkins 2002). Their brazen undermining
of system integrity indicates the need for extensive reform and multiple stakeholder remedies
that strengthen the moral environment and enhance the prospects of stakeholder economic
democracy.

Recommendations
Capacity

for

Improving

Managerial

Integrity

If managers cannot afford to neglect integrity capacity as an important management strategic

asset, the following three practices can serve as proposed remedies. These remedies are
recommended for improving the moral resources of managers. First, the more aware managers
and other stakeholders are of the nature and importance of integrity capacity as a strategic
asset, the more likely it is that they can cooperate in nurturing it and avoid the adverse effects
to its stakeholders of integrity capacity neglect (Petrick and Quinn 2001). By gaining
competence in the conscious, balanced integration of management and ethics approaches,
managers can hold themselves and other stakeholders accountable for principled decisions that
inclusively and systematically address moral results, rules, character, and context. Thus,
Practice I deals with managerial and organizational learning.

Practice I: Provide education for managers to increase awareness of the importance of (a)
sustaining process and developmental integrity capacity as a strategic management asset and
(b) of accountability for developing judgment integrity by balancing management and ethics
competencies.
Second, in addition to reformed U.S. accounting and financial reporting standards, the social
and environmental accounting literature (SEAL) is now sufficiently well developed in Great
Britain, continental Europe, and Australasia to generate auditing and reporting mechanisms
that are responsive to changing patterns of stakeholder accountability (Lehman 1999). The Shell
Report 2000, for example, is available online. This report comprehensively documents the
economic, social, and environmental performance of the Royal Dutch/Shell Group of
Companies, and acknowledges areas for environmental improvement in Shell holdings in
Nigeria. The transparency of this process of deepening stakeholder relationships around core
financial, as well as non-financial, values enhances the moral credibility and reputational capital
of the manager and the firm. It is just this broader sense of managerial context accountability
that is entailed in system integrity capacity as a management strategic asset. Practice II is based
on accountability.
Practice II: Expand the scope of managerial accountability to include system integrity capacity
development, including the regular implementation of transparent economic, social, and
environmental accounting systems.
Third, one of the chief impediments to system integrity improvement is the uncritical
acceptance of the belief that the exclusive fiduciary duty of corporate management is the legal
maximization of investor profits by means of a hierarchic power structure. On the contrary,
expanding the scope of managerial fiduciary duty to all stakeholders, especially employees and
community, by means of an economic democratic power structure would create a system more
conducive to system integrity capacity development (Kelly 2001; Petrick and Quinn 2001). It is
this formal recognition of employee and community contributions, for example, to corporate
wealth and democratic participation in corporate governance during the Information Age that
are often precluded and devalued in conventional accounting and financial documents
(Mokhiber and Weissman 1999; Petrick 1998; Petrick and Scherer 2000). Practice III is based on
stakeholder economic democracy in corporate governance.
Practice III: Expand the scope of managerial fiduciary duties to include institutionalized
stakeholder democratic participation in corporate governance.
Given these three practices to improve moral resources and ethical decision making within the
organization, Part III of the Appendix provides some possible remedies for current and future
victimized Enron stakeholders.