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Running Head: FINAL PROJECT TWO: ENRON

Final Project Two – Milestone Two: Profile of a Struggling Company Chosen Company: Enron Jane Doe Dr. Bekim Belica OL-215 Principles of Management Southern New Hampshire University August 22, 2021

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Final Project Two: Enron

2 Introduction

A merger between Houston Natural Gas and InterNorth based in Omaha in 1985 gave birth to Enron being an interstate pipeline company. Enron was an energy-trading and utilities company based in Houston, Texas. Kenneth Lay, former CEO of Houston Natural Gas, became the CEO of Enron after engineering the merger and then acquired the post of chairman. Enron expanded from the pipeline sector into the broadband services unit and Enron online in 1999 and became the largest business site in the world (CBC News, 2006). They experienced rapid growth in early 2000 becoming the sixth-largest energy company with revenue reaching $100 billion USD, generating nearly $5.3 million per each of its 19,000 employees (Forbes, 2002). In August of 2001, Enron’s’ newest CEO Jeffrey Skilling, resigned after six short months and being the chief reason for the company revamp. After his departure, cracks in their financial status began to appear and Enron reported its first quarterly loss in four years, totaling $618 million. This paper will tell of the downfall of the company and how management practices led to that downfall and consequent bankruptcy. After the bankruptcy and fraud, Enron was acquired by Dynegy Inc, a banausic Houston energy company.

Profile: Current Management Planning Enron filed for Chapter 11 bankruptcy in December of 2001 after fraudulent accounting falsely inflated the success of the company. In order to understand how practices led to the dissolving of the company, we look to the past and analyze how the practices affected the outcome. Enron was formed in 1985 when Kenneth Lay set in motion the merger that made this company one of the largest energy-trading companies. In the 1990’s, in order to generate profits and cash flow, Mr. Lay hired McKinsey & Co to assist in strategy development. A young

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consultant, Jeffrey Skilling, was assigned to the engagement. Lay was so impressed with Skilling that in 1990 tasked him with running a new division called Enron Finance Corp. “Under Skilling’s leadership, Enron Finance Corp. soon dominated the market for natural gas contracts, with more contacts, more access to supplies and more customers than any of its competitors.”, with increasing market power and accuracy of future price predictions there was a guarantee of superior profits [ CITATION Tho02 \l 1033 ]. Enron expanded to create an associate analyst program under the management of Jeffrey Skilling who was named CEO in February 2001. Skilling changed the management and leadership style of the company to recruit only the best and changed the business culture. “cultural norms arise and change due to what leaders tend to focus their attention on, their reactions to crises, their role modeling, and their recruitment strategies” [ CITATION fre07 \l 1033 ]. “After an accounting scandal, a bankruptcy filing and mass layoffs, Enron has gone from model of management vision to case study for management obfuscation” [ CITATION Bar01 \l 1033 ]. The changing of the business culture and values under Skilling’s leadership led to the demise of the company. “Once a new and possibly corrosive value system emerges, employees are rendered vulnerable to manipulation by organizational leaders to whom they have entrusted many of their vital interests.” [ CITATION fre07 \l 1033 ]. Being nearly acquired by the Dynegy Inc. company would have prevented 100% of Enron’s employees from losing their jobs initially but after Enron filed for bankruptcy the deal failed to materialize. Dynegy officials and employees were charged with fraud after their faulty management practices and accounting inflated their success (Phillips, 2015). Skilling and many others were charged for their crimes and sentenced to several years in prison, a light sentence to some for the injustices they caused to so many.

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Profile: Employees' Perception and Culture Mr. Shankman, COO of Enron Global Markets, “said Enron was special because it ''didn't have a corporate hierarchy to encumber creativity.''” [ CITATION Bar01 \l 1033 ]. Enron had an entrepreneurial culture that rewarded employees for innovative ideas. Enron associates were pampered with a long list of perks and received merit-based bonuses under Skilling’s management in exchange for grueling schedules and high qualifications of the best and brightest holders of an MBA. “Skilling instituted the performance review committee (PRC), which became known as the harshest employee-ranking system in the country. It was known as the “360-degree review” based on the values of Enron—respect, integrity, communication and excellence (RICE). However, associates came to feel that the only real performance measure was the amount of profits they could produce” [ CITATION Tho02 \l 1033 ]. Previous employees were given opportunities to start new business units where the culture of the company “encouraged creativity and rewarded new ideas that worked, they say, even though its dark side, an almost manic drive to experiment with new methods and conquer new markets” [ CITATION Bar01 \l 1033 ]. This comes from the employees that worked at Enron, prior to its downfall. The environment encouraged acting on impulse that often led to the company losing money as well as profits, creating a culture of competition and damaged morale where employees tried to take work away from one another and undermine company health for ideas and projects. “Enron officials and management experts insist it was not the corporate culture that brought Enron down; it was accounting mistakes or the ballooning debt of hard assets, like

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projects in Brazil and India.” [ CITATION Bar01 \l 1033 ]. Greed, fraud, and lacking integrity gave way to shady accounting practices that brought the company to its knees and nearly 6,000 people lost their jobs and retirement savings because of it. Profile: Communication “Enron’s code (of ethics) stressed the following four key principles: communication, respect, integrity and excellence, and included phrases such as “we treat others as we would like to be treated ourselves”…” [ CITATION fre07 \l 1033 ]. In the early Enron days, communication was valued to increase innovation and company profits and by the downfall of the company employees were afraid to voice their concerns for fear of losing their incomes. The company communication went from being open to non-existent making it easier to get away with the biggest bankruptcy in U.S. history. “The Enron demise, then, points to numerous risks associated with degenerate cultures: the risk that a culture motivating and rewarding creative entrepreneurial deal making may provide strong incentives to take additional risks, thereby pushing legal and ethical boundaries; resistance to bad news creates an important pressure point of culture; and internal competition for bonuses and promotion can lead to private information and gambles to bolster short-term performance. At Enron, these risks ultimately subverted the company’s elaborate web of controls.” [ CITATION fre07 \l 1033 ].

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Management Plan Recommendations: Implemented and Communicated To prevent the scandal and bankruptcy that led to the end of Enron, jobs, retirement savings, and stockholder confidence, management should have acted ethically and provided the employees with the mindset to do the same. “Skilling’s leadership was critical in fashioning an organizational culture valorizing risk taking, a mercenary approach to profit making and a winat-all costs trading approach…Skilling handed out extremely large pay cheques, bonuses and stock options to traders who met their earnings targets” (Free et al, 2007). Rather than reward employees for earnings that were unethical just to boost profits and executive rewards there should have been more monitoring of good, fair trades and contracts to make sure they were smart business decisions for the company and not just to benefit the employees. A key factor for transformational leadership is trust; the belief that integrity, fairness, and predictability are evident in dealings with others [ CITATION Car13 \l 1033 ], Skilling used both transformational and transactional leadership in his time at Enron earning the trust of his followers, “he followed the transactional approach to make sure that every employee is giving his best effort to get the work done on time, so that he is eligible for rewards. At the same time he also added some transformational methods to make the employees feel that they are equally involved in organizations development” [ CITATION UKE18 \l 1033 ]. It is imperative for the company to have trustworthy leaders who have the organizational goals in the forefront of decision making, not the lining of their pockets. Communication with management and employees on a regular basis can help to develop this trust and make it easier

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for employees to come to management for help or should an issue arise. For example, an employee is observed making unethical decisions/acts of behalf of the company, if there is the trust of leaders it is more likely to be reported than joining in on the action. Passive management by exception leaves the employees to make their own decisions until a problem arises and then they come in (Carpenter et al, 2007), this made it easier for employees to act in a way that maximizes their profit at the expense of their integrity. Management Plan Recommendations: Sustained and Monitored Enron’s’ downfall was deeply rooted in the way management acted on behalf of the company. Hiding losses by using SPE’s to keep the balance sheets looking healthy rather than be forthcoming with the company financials shows that the accounts were not monitored. Recommendations for future consideration include accurate reporting that is audited on a regular basis. This is to continuously prove that the company does not have anything to hide. Transparency in financial documents shows that ethical standards are followed, and management made smart decisions with company investments. High-risk, high-debt, and capital-intensive investments played a large role in Enron’s bankruptcy. “As Enron entered market areas where it did not enjoy a comparative advantage, its mercenary corporate culture combined with the subverted control infrastructure meant that Enron lost its ability to keep track of relevant risks.” (Free et al, 2007). Entering the market of trading and becoming a Wall street type business gave way to a competitive culture within the company. Under Skilling’s management, employees were very cut-throat when making trades and toed the ethical line to meet earnings targets. It is recommended that rewards are not offered according to earnings, or that the reward system is reconfigured to valid deals made that are good deals. This

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ties into monitoring, making sure that the deals are ethical and have all the correct numbers so that nothing is altered for personal gain. Management Plan Recommendations: Increased Employee Performance “The overall lack of integrity on the part of leadership helped to foster a “me-first” and “dog-eat-dog” attitude within the rank and file of Enron. As time passed, those attitudes crystallized into cultural values and norms heavily influencing narcissistic patterns of behavior demonstrated, most vividly, by the cut throat environment of Enron’s financial trading floor.” (Peterson, n.d.). Having a company culture that encourages teamwork and values integrity is something that Enron should strive to have. The path-goal theory of leadership is recommended for the future of Enron, with leaders having different styles for different situations and environments. Leaders in this theory can be directive by providing specific directions for employees, supportive via bestowing emotional support to workers, participative thru involving employees in decision-making, or achievement oriented by way of setting goals for employees and encouraging them to achieve the goal (Carpenter et al, 2013). Any of these theories will help to increase the culture of the company and encourage ethical dealings between customers and the company. With the increased integrity of the company and its dealings, consumer confidence in the business would be increased leading to growing profits and happier employees. Happy workers lead to increased production and people going above and beyond for a company that supports and values its people over profits. Management Plan Recommendation: Decision Making Enron used the creative decision-making model for personal gain, using risk-taking with the motivation of increasing their profits, and the time pressure to complete the job as quick as

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possible to reap the benefits/rewards (Carpenter et al, 2013). Using the rational decision-making model is recommended for Enron’s future, identifying alternatives that would best meet the desired outcome would be in the best interest of the company. Following the eight steps of this model allow weighing criteria and evaluating the alternatives to make the best possible decision for the company and then evaluating the decision for any alterations necessary to reach the desired outcome. Bounded rationality may also be an effective decision-making model for the company because it limits the amount of alternatives to be considered, as long as satisficing does not occur, it could be effective (Carpenter et al, 2013). Using this model can prevent analysis paralysis because it reduces time spent on researching information and places a limit on considerable information before the decision is made. Enron should focus on their roots in the energy business and use either of the above mentioned models before deciding to invest in foreign companies that hold high financial risk. Conclusion: Organizational Culture “Almost faster than you can say mark-to-market accounting, management controls disappeared once Jeff Skilling became CEO of Enron.” [ CITATION fre07 \l 1033 ]. The use of financial documentation and accounting practices that hid from everyone the debt the company was actually in, left shareholders and employees devastated. Employees did their jobs not knowing the greed that was going on at the top management level would leave them and their futures in jeopardy. The scandal of Enron was one that people will not forget and inspired the SEC to create new guidelines for business financial transparency and the Sarbanes-Oxley Act to give protections to those who speak out against company practices. “Managers must always remember that a culture created through a reckless and overly aggressive leadership style can lead to individuals taking actions that can subvert even state-of-the-art management controls”

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[ CITATION fre07 \l 1033 ]. The management styles and leadership within the company made Enron employees and shareholders alike suffer, showing the importance of company culture and strategy aligning with business goals. Using the P-O-L-C framework to design the company and having controls in place to monitor financial data will help to have a successful company.

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References Barboza, D. (2001, December 12). MANAGEMENT; Victims and Champions of a Darwinian Enron. Retrieved from The New York Times: https://www.nytimes.com/2001/12/12/business/management-victims-and-champions-ofa-darwinian-enron.html?auth=login-google1tap&login=google1tap Carpenter, M., Bauer, T., Erdogan, B., & Short, J. (2013). Principals of Management Version 2.0. Irvington, New York, U.S.A: Flat World Knowledge. CBC News. (2006, May 25). The rise and fall of Enron: a brief history. Retrieved from CBC News; Business: https://www.cbc.ca/news/business/the-rise-and-fall-of-enron-a-briefhistory-1.591559 Forbes. (2002, Jan 15). Enron The Incredible. Retrieved from Forbes: https://www.forbes.com/2002/01/15/0115enron.html?sh=516a57683c9c Free, C., Macintosh, N., & Stein, M. (2007). MANAGEMENT CONTROLS: THE ORGANIZATIONAL FRAUD TRIANGLE OF LEADERSHIP, CULTURE AND CONTROL IN ENRON. Ivey Business Journal(July/August). Retrieved from https://iveybusinessjournal.com/publication/management-controls-the-organizationalfraud-triangle-of-leadership-culture-and-control-in-enron/ Lanier, M. (2012, April 11). 6 STEPS TO CHANGE YOUR ORGANIZATIONAL CULTURE. Retrieved from HR Outsider; Insights on Organizational Transformation, High Performing Culture and Leadership: https://hroutsider.wordpress.com/2012/04/11/6steps-to-change-your-organizational-culture/ Segal, T. (2020, September 22). Enron Scandal: The Fall of a Wall Street Darling. Retrieved from Investopedia: https://www.investopedia.com/updates/enron-scandal-summary/ Thomas, W. (2002, April 1). The Rise and Fall of Enron. Retrieved from Journal of Accountancy: https://www.journalofaccountancy.com/issues/2002/apr/theriseandfallofenron.html UKEssay. (2018, November). Organizational Culture and Leadership Styles of Enron. Retrieved from UK Essays PRO: https://www.ukessays.com/essays/management/theorganizational-culture-and-leadership-styles-of-enron-management-essay.php

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