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Enron

Enron Corporation was an American energy company that before its bankruptcy employed over 20,000 people
and was the world’s leader in natural gas, paper and pulp and communications. With claimed revenues of 111
billion dollars in 2000, Fortune named Enron “American’s Most Innovative Company” for six consecutive
years.

As part of our Ethics discussion, we will be watching academy award-nominated documentary Enron: The
Smartest Guys in the Room (2005). A summary of the film follows:

The video is based on the best-selling book of the same name by Fortune reporters Bethany
McLean and Peter Elkind. It is a multidimensional study of one of the biggest business scandals
in American history. The chronicle takes a look at one of the greatest corporate disasters in
history, in which top executives from the 7th largest company in this country walked away with
over one billion dollars, leaving investors and employees with nothing. The film features insider
accounts and rare corporate audio and video tapes that reveal colossal personal excesses of the
Enron hierarchy and the utter moral vacuum that posed as corporate philosophy. The human
drama that unfolds within Enron's walls resembles a Greek tragedy and produces a domino effect
that could shape the face of our economy and ethical code for years to come.

The film provides some valuable information about ethics in business and today’s corporate culture; however, it
is rated R for its language and brief nudity. I am informing you of the content and if you are not comfortable
watching the movie, another assignment will be given to you. This assignment is worth 8% of your final grade.

Answer the following questions. Please number each question or answer below using this document. It does not
have to be in essay format.

1. Provide a short background of the company/documentary (one paragraph).

The Enron Corporation was a famous American energy company that had a lot of success and fame before it
went bankrupt. It was the biggest company in the natural gas, paper and pulp, and communications businesses,
with more than 20,000 employees. Fortune called Enron "America's Most Innovative Company" for six years in
a row because of its creative business plans and $111 billion in sales in 2000. However, the company went
bankrupt because it did illegal things and lied on its books. Nominated for an Academy Award, the 2005
documentary "Enron: The Smartest Guys in the Room" looks into the shocking events that happened in the
company and shows how corporate greed can have terrible results.
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2. Is Skilling a manager or a leader? Or both? If he is a leader, what is his leadership style (make sure to
clearly identify a theory discussed in class)?

One of the main people involved in the Enron scandal was Jeffrey Skilling, who was CEO and was seen as both
a boss and a leader in the company. Skilling is a type of leadership that fits with the idea of transformational
leadership. This idea stresses how important it is for a leader to be able to inspire and urge their followers to do
amazing things. Skilling was known for having a charming and convincing personality, which helped him get
people to support Enron's vision and goals. He got people to think outside the box and push the limits by
pushing them to take risks and come up with new ideas. But it's important to remember that Skilling's way of
leading was also marked by illegal actions, like changing financial statements, which did cause Enron to fail in
the end.

3. How does Jeffrey Skilling rate on the “big five” personality traits? (tip: list the big five traits and analyze
Skilling on each trait)
A lot of people use the "Big Five" psychological traits, which are also called the "Five Factor Model," to
figure out what kind of person someone is. Some of these traits are neuroticism, agreeableness,
conscientiousness, openness, and extraversion. Using what we learned from the Enron video, we can look at
how Jeffrey Skilling rated each trait:

(1) Openness: Skilling was known for being very open because he was always looking for new ways to do
things. He pushed his workers to try new things and be brave, which showed that he was open to change and
non-traditional ways of doing things.

2. Carefulness: Skilling showed a strong carefulness. He was very focused on getting things done and
making Enron successful. However, it is important to remember that some of his actions were motivated by
unethical behavior, which goes against the good things about being careful.

3. Extraversion: Skilling had a lot of extraversion. People said he was charming, convincing, and able to
hold people's attention with the way he spoke. Skilling was a great boss at Enron because he could get
people involved and motivated.

4. Agreeableness: The Enron video makes it harder to judge Skilling's agreeableness. People knew him for
being aggressive and demanding, but they also knew him for being good at persuasion. This points to a
lower level of agreeableness because he might not have put a high value on keeping good relationships with
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other people.

5. Neuroticism: The video doesn't say much about Skilling's neuroticism. However, the fact that he was
involved in unethical behavior and the court problems that followed suggest that he may have had higher
levels of neuroticism, a personality trait that can cause stress and unstable emotions.

It's important to keep in mind that these opinions are based on the small amount of information available
from the Enron documentary. A more in-depth study would be needed to get a full picture of Skilling's
personality.

4. Search online what Machiavellianism is. What is the relation between Skilling and Machiavellianism?
Machiavellianism is a psychological trait that includes being sneaky and manipulative, only caring about
yourself, and ready to trick and take advantage of others to get what you want. It was named for Niccolò
Machiavelli, an Italian philosopher who wrote "The Prince," a book about power and how to use it in
politics.

When looking at the documentary about Enron, there are some things about Jeffrey Skilling's actions that
remind us of Machiavellianism. Skilling was known for getting what he wanted by planning ahead and
sometimes being sneaky. He was ready to break the law and do bad things to stay in charge and make Enron
as much money as possible. The way Skilling led, by putting self-interest and power-seeking first, is similar
to Machiavelli's ideas of trickery and cunning.

5. Who was Arthur Anderson? What was the role of Arthur Andersen in the scandal?

Arthur Andersen was a well-known accounting business that opened in 1913. It did tax work, accounting, and
consulting for many companies, including Enron, which is one of the biggest energy companies in the US.

Arthur Andersen was a big part of the Enron crisis because it was Enron's outside auditor. As an auditor, their
main job was to look over and check Enron's financial records to make sure they were correct and followed
accounting rules. However, it turned out that Arthur Andersen had done things that were not ethical and had not
done its auditing tasks properly.
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Arthur Andersen was linked to the scandal because it did a number of things that were not proper. Some of the
questionable accounting methods used by Enron were allowed by the company. For example, special purpose
entities (SPEs) were used to change financial statements and hide debt. There was also proof that Arthur
Andersen workers destroyed documents to hide evidence that linked Enron's activities to wrongdoing.

Because Arthur Andersen was involved in the crisis, it had to deal with legal and regulatory issues. Because of
the loss of the documents, the company was charged with obstruction of justice in 2002. The company went out
of business because of this, and it was finally found guilty in 2002. Because of this, Arthur Andersen shut down
its auditing business, and its image was badly damaged.

6. Identify 3 unethical behaviors in the documentary.

2. Insider Trading: Insider trading was another unethical act shown in the program. CEO Jeffrey Skilling
and CFO Andrew Fastow were among the leaders at Enron who broke the law by trading Enron stocks
based on information that wasn't available to the public. They used their roles and the fact that they knew
how the company really was doing financially to get rich at the expense of other shareholders.

3. Destruction of Documents and Obstruction of Justice: The documentary also showed how unethical it was
for Enron workers and the company's auditor, Arthur Andersen, to destroy documents and get in the way of
the law. Authorities started looking into what Enron was doing, and workers were told to destroy documents
to hide proof of wrongdoing. This act of obstruction of justice slowed down the investigation and showed
that the company was acting in an illegal way.

Here are a few examples of the unethical things that happened in the Enron program. This movie shows the
dishonesty, greed, and lack of morals that developed at Enron and eventually caused its demise.

7. What were the factors that contributed to the unethical behaviors? List and explain 3 factors.
1. Pressure to Meet Unrealistic Financial Goals: One big reason why people at Enron did bad things was
that they were under a lot of pressure to meet unrealistic financial goals. Enron had a culture that was built
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on performance and put a lot of emphasis on short-term profits and rising stock prices. High-stakes
situations like these made workers feel like they had to do unethical things to meet unrealistic expectations
and keep their jobs at the company.

2. Lack of Ethical Leadership: Another reason was that Enron did not have any ethical leaders. CEO Jeffrey
Skilling and CFO Andrew Fastow, along with the rest of the company's executives, set the tone at the top by
putting profits ahead of doing the right thing. They created an environment where workers were urged to
make money at all costs, even if it meant doing things that were wrong. The lack of strong ethical leadership
made it easy for unethical behavior to spread throughout the company.

3. Weak Corporate Governance and Oversight: Enron's illegal behavior was caused in large part by weak
corporate governance and oversight. The board of directors of the company did not do its job of keeping an
eye on things and holding management responsible. There were problems because some board members had
ties to Enron that went beyond their job duties. Because there wasn't any independent oversight, leaders
could commit fraud with little trouble. Also, Arthur Andersen, the auditing company that was supposed to
look over Enron's financial statements, didn't do its job carefully or on its own, which made the unethical
behavior even easier to get away with.

All of these things made it possible for bad behavior to not only be accepted but also be rewarded. Under a
lot of stress to meet financial goals, with bad leadership and inadequate management and supervision, Enron
was set up for widespread fraud and dishonesty that eventually caused its demise.

8. Describe the Enron culture? (Think about the encouragement of extreme sports, the review system). Would
you want to work for a place like this (assume they are ethical)?

Some of the things that made the Enron culture special were the support for extreme sports and the
company's own review system. Though these things were true, it's important to remember that Enron's
culture was ruined by illegal behavior and a focus on short-term profits.

1. Supporting Extreme Sports: At Enron, taking risks was seen as normal, and the company used extreme
sports to show how it ran its business. Employees were told they could do things like rock climbing, skiing,
and flying for fun. The focus on risky sports was meant to encourage people to be brave, eager to try new
things, and ready to take risks in order to succeed.
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2. Performance Review method: The "rank and yank" method was Enron's way of reviewing employee
performance. Under this method, employees were ranked from best to worst based on how well they did
their jobs. The worst-performing employees could be fired. The goal of this method was to make the
workplace competitive so that workers would always be trying to do better than their coworkers. But this
method also made the workplace very competitive, and workers felt like they had to do bad things to keep
their jobs and avoid being ranked at the bottom.

At first, the idea of a society that is both risk-taking and competitive might seem appealing. However, it is
important to think about what this would mean for ethics at work. The way things were at Enron eventually
led to a lot of shady behavior and the company going out of business. So, even if we assume that the
company is now moral, it would still be smart not to work there if it encourages people to take huge risks
and puts too much stress on competition and individual performance.

Ethical behavior, teamwork, and long-term success should be valued in a healthy work atmosphere. It is
very important to find a company that values honesty, openness, and a good place to work.

9. Enron’s performance review committee (PRC) determined the salaries and bonuses of employees on a
semiannual basis. Is this type of committee a successful tool in organizations?

Performance review committees (PRCs) can determine pay and bonuses in corporations, which can be good and
bad. It relies on committee composition, transparency, and corporate goals. Some factors:

Performance Review Committee Benefits:

1. Objective Decision-Making: A committee-based method can assist evaluate employees' performance more
objectively by combining perspectives and removing prejudices.

2. Fairness and Equity: The committee can distribute salaries and incentives fairly by examining more criteria
and inputs. This can reduce bias and standardize the process.
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3. Consensus Building: The committee can help reach consensus and make decisions. Including numerous
stakeholders allows for discussions, arguments, and different perspectives, leading to more thorough
conclusions.

Challenges of a Performance Review Committee:

`1. Time and Resources: Creating and sustaining a performance evaluation committee takes time and money.
Regular meetings, coordination, and review can be time-consuming and distract from other activities.

2. Bias and Subjectivity: Committees lessen biases but cannot ensure objectivity. Committee members may still
have biases, interests, or relationships that affect decision-making.

3. Transparency and Communication: The committee's decision-making process and pay and bonus reasons
must be transparent. Transparency issues can cause employee unhappiness and unfairness.

To successfully implement a performance assessment committee in an organization, examine the following

1. Committee Composition: For fair appraisal and decision-making, the committee should comprise members
from different levels, departments, and perspectives.

2. Clear Criteria and Guidelines: Performance evaluation, compensation ranges, and bonuses should be
outlined. This provides decision-making uniformity and transparency.

3. Training and Accountability: Committee members should be trained in fair evaluation and held accountable
for their decisions. The committee's performance can be assessed regularly to find areas for improvement.
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4. Employee Feedback and Input: Involving employees in performance reviews can improve transparency and
engagement. This can be done through surveys, feedback sessions, or employee committee involvement.

In conclusion, performance review committees can be valuable in businesses, but their success depends on
composition, transparency, and organizational goals. An effective committee-based salary and bonus system
requires checks and balances, openness, and fairness.

10. If you were one of the ethical employees, what would you do?

If I were an ethical worker in the setting of the documentary about Enron, I would make it a priority to follow
ethical rules and do things that encourage openness, honesty, and responsibility. I would think about taking
these steps:

1. Report Problems: If I learned of any unethical or illegal behavior in the company, I would tell the right
people about it, like management, human resources, or an ethics hotline. Whistleblowing can help bring
attention to possible wrongdoing and start the investigations that are needed.

2. Get Help: If I wasn't sure what the moral consequences of a choice or action would be, I would get help from
trusted teachers, advisors, or the company's ethics department. Talking to other people and looking for different
points of view can help me make better, more moral decisions.

3. Keep records of incidents: If I saw or experienced unethical behavior, I would keep detailed records of it,
including dates, times, people involved, and any proof to back it up. This paperwork might be useful if more
action or reporting is needed.

4. Maintain Integrity: I would try to keep my own integrity by not taking part in or supporting any actions that
aren't moral. It's important to stick to morals even when things get tough and to fight any urges to give up your
beliefs.
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5. Back Transparency: I would push for the group to be more open and honest, encouraging honest
communication and taking responsibility. Promoting an open society can help stop unethical behavior and help
people make moral choices.

6. Lifelong Learning: I would take advantage of chances for lifelong learning and professional growth that have
to do with ethics and corporate governance. This can help me keep up with the latest best practices and get
better at making moral choices.

7. Work with Ethical Colleagues: I would look for and work with other people who value ethics and honesty as
much as I do. Getting to know other ethical professionals can help you with support, advice, and your overall
power when you're fighting for ethical behavior.

As an honest worker, my ultimate goal would be to make the workplace a good place to be, hold myself and
others responsible, and make decisions that are in line with my personal and professional values.

11. How the Enron scandal could have been avoided?

Several ethical and transparent company policies could have prevented the Enron scandal. Key actions may
have been taken:

1. Strong Corporate Governance: Enron might have had independent board members and frequent audits to
oversee its corporate governance. This would have prevented organizational power abuse and ensured
responsibility.

2. Ethical Leadership: A company's leadership sets its ethical tone. Enron might have promoted integrity and
ethics by elevating leaders who value transparency, honesty, and ethical decision-making.

3. Ethical guidelines and Training: Enron might have had explicit ethical guidelines that outlined expected
behaviors and ethical decision-making. Employees may have received regular ethics and compliance training to
understand their responsibilities.

4. Whistleblower Protection: Enron should have provided a confidential way for employees to report concerns
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or possible malfeasance without repercussions. This would have encouraged employees to report unethical
conduct.

5. Independent Oversight and Auditing: These may have identified and addressed inconsistencies and unethical
conduct. Fraud can be prevented by regular internal and external audits.

6. Ethical Risk Management: Enron needed a strong ethical risk management system to identify and minimize
ethical issues. This requires rigorous risk assessments, controls, and monitoring for unethical activity.

7. Transparency and Disclosure: Enron might have prioritized financial reporting transparency and timely and
accurate stakeholder disclosure. This would have fostered trust and prevented deception.

8. External Regulation and Enforcement: Regulators are vital to business behavior. Stronger laws and
enforcement could have caught and prevented Enron's unethical practices.

Enron might have strengthened its ethics and promoted transparency, integrity, and accountability by taking
these precautions.

12. Could another scandal of this magnitude happen again?

While it's hard to forecast the future, similar controversies can happen again under certain conditions. The
Enron crisis teaches the significance of attention in preventing such disasters. These elements could cause
another scandal:

1. Unethical Leadership: Organizations that prioritize short-term benefits and unethical activities over long-term
sustainability and integrity can foster wrongdoing.

2. Weak Corporate Governance: Lack of independent board members or internal audits might allow fraud to go
undetected.

3. Financial Pressures: Companies facing financial difficulties or heavy market competition may be tempted to
alter financial statements or inflate earnings unethically.

4. Complex Financial systems: Complex financial and commercial systems can become difficult to understand
and monitor, making them vulnerable to fraud.
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5. Poor Regulation and Enforcement: Unethical activity can thrive in the absence of robust regulations.

6. Lack of Transparency: Fraud is simpler to hide when organizations don't report transparently and notify
stakeholders.

7. Culture of Silence: Unethical activities might be hard to find and fix in a culture that discourages
whistleblowing.

Lessons from scandals like Enron have led to increased awareness and policies to prevent such occurrences.
Transparency, ethics, and accountability are promoted by tougher company and regulatory procedures.
However, constant vigilance and ethical behavior are necessary to avert similar scandals.

13. What regulations or other changes might be implemented to deter or prevent such conduct?

Other regulations changes which can be implemented to deter or prevent such conduct are:

1. Strong Corporate Governance: Enron might have had independent board members and frequent audits to
oversee its corporate governance. This would have prevented organizational power abuse and ensured
responsibility.

2. Ethical Leadership: A company's leadership sets its ethical tone. Enron might have promoted integrity and
ethics by elevating leaders who value transparency, honesty, and ethical decision-making.

3. Ethical guidelines and Training: Enron might have had explicit ethical guidelines that outlined expected
behaviors and ethical decision-making. Employees may have received regular ethics and compliance training to
understand their responsibilities.

4. Whistleblower Protection: Enron should have provided a confidential way for employees to report concerns
or possible malfeasance without repercussions. This would have encouraged employees to report unethical
conduct.

5. Independent Oversight and Auditing: These may have identified and addressed inconsistencies and unethical
conduct. Fraud can be prevented by regular internal and external audits.
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6. Ethical Risk Management: Enron needed a strong ethical risk management system to identify and minimize
ethical issues. This requires rigorous risk assessments, controls, and monitoring for unethical activity.

7. Transparency and Disclosure: Enron might have prioritized financial reporting transparency and timely and
accurate stakeholder disclosure. This would have fostered trust and prevented deception.

8. External Regulation and Enforcement: Regulators are vital to business behavior. Stronger laws and
enforcement could have caught and prevented Enron's unethical practices.

Enron might have strengthened its ethics and promoted transparency, integrity, and accountability by taking
these precautions.

14. What are three lessons learned from the failure of Enron?

Numerous important lessons have been learned from Enron's mistakes. The Enron scandal taught us three
important lessons:

How Important Ethical Leadership Is: The Enron incident made it clear how important ethical leadership is in
businesses. It showed how important it is for leaders to put honesty, openness, and responsibility first. Top
leaders need to set a good example and create an environment where morals and ethics are valued.

2. Strong corporate governance is needed: Enron showed how important strong corporate governance systems
are. To keep an eye on things and make sure they follow the law and ethical standards, companies should have
independent boards of directors, internal controls, and good audit groups. Putting in place checks and balances
can help stop wrongdoing and find scams.

Value of Openness and Truth: One reason Enron went bankrupt was that it wasn't open about its financial
information. The scandal made it clear how important it is to give correct and timely financial information to
people who need it. Companies should report in a clear and complete way, and they shouldn't use tricks to get
information. Transparency helps people trust each other and make smart choices.

The lessons learned have had a big effect on how businesses work and how rules are made. They led to stricter
rules being put in place, like the Sarbanes-Oxley Act, which are meant to improve company governance,
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financial reporting, and accountability. Because of the Enron scandal, people should remember what happens
when you act unethically and how important it is to keep business ethics high.

15. Find a current example of an unethical company and briefly explain (it has to be an ethical issue from
2023/2024).

Shein, a fast-fashion retailer, has gained popularity due to its ultra-low prices and wide variety of clothing
options. The company's sales have surpassed that of H&M and Zara without physical stores. Shein has built a
following with Gen Z, primarily in their teens and early 20s, by marketing clothing that can cost as little as $3
an item and using social media influencers to promote its brand.

However, behind Shein's success lies legal allegations of copyright infringement and intense U.S. scrutiny over
alleged forced labor practices and inhumane conditions for workers who produce the inexpensive clothing. The
U.S.-China Economic Security and Review Commission flagged numerous "controversial" business practices
by Shein and its rival, Temu, a Chinese shopping app.

Critics have raised concerns about Shein's environmental impact and questionable business ethics. They argue
that most environmental waste and damage comes from overconsumption, leading to unnecessary and
disposable consumption. The fast-fashion model can be detrimental to the environment due to massive amounts
of textile waste and the natural resources required to produce their items.

Clothing waste has doubled since 2000, and the United States and Europe produce 30 million tons of clothing
waste annually. Less than 1% of that clothing is recycled. One of the biggest issues with Shein is their lack of
disclosure, as they are one of the biggest private companies and do not disclose their volume of production,
where they source materials, and their emissions.
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