Analyzing Corporate Governance Case Study Essay … Case Study
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¶ … organizational governance case study of former energy company, Enron Corporation.
Interstate pipeline corporation, Enron was engaged in the business of supplying power to utilities ever since its establishment in the year 1985. An InterNorth-Houston Natural Gas merger led to its founding. In the next two decades, the corporation quickly developed into the world's largest energy company. By the end of the 20th century, the company ranked amongst the leading global electricity, communications, and natural gas companies as well as among the most admired companies across the globe (Skilling v. United States, 2010). As competition grew in the years that followed its establishment, the company decided to invest in international markets and diversify, in order to retain its position in the market. However, these activities ended in large unanticipated losses for the company. In the year 1999, after making yet another erroneous decision of venturing into the broadband and fiber optics market, the company accrued too many significant losses and the company started witnessing a rapid downfall. However, Enron made its losses known to the world only in October of 2001.
Michael Novak, author of Business as a Calling: Work and the Examined Life, writes in his book that Enron's former Chief Executive and Chairman, Kenneth Lay claimed that he was fully aware of legal, ethical and moral behavior, as well as what these meant from the point-of-view of leading people and organizations. His introductory statement in the revised 64-page-long edition of Enron's ethical code, released in July of 2000, indicates that employees and managers at Enron, its affiliates, and subsidiaries are duty-bound to conduct business affairs honestly and ethically, and in keeping with all relevant laws (Enron Case Study PDF). The chairman further indicated that this ethical code contained policies which the organization and its directorial board approved, and which were responsible for its reputation as an honest, respectable and fair business entity. The ethics code further specified that employees ought not conduct themselves in a way that indirectly or directly proves harmful to Enron's best interests, or brings financial gain to employees, derived separately as a direct result of their employment with Enron. It is surprising how, given Lay's open commitment to conducting business ethically and the company's ethics/conduct code, the company suffered such a dramatic collapse, going from its reported 2000 revenue of 101 billion dollars and roughly 140 billion dollars in the next year's first 3 quarters, to bankruptcy by year-end (Enron Case Study PDF).
Background Leading to Issue
On 16th October, 2001, Enron Corporation announced its decision to take a 544-million-dollar after-tax fee against earnings linked to dealings with LJM2 Co-Investment, L.P.; this partnership was forged and overseen by Fastow (Enron's former Executive Vice President
and Chief Financial Officer). Furthermore, it announced a 1.2-billion-dollars decrease in shareholder equity linked to trade with the same partnership (Enron Background Statement for Case Study PDF). Not even 30 days had passed and the company issued another worrisome announcement that -- owing to accounting errors connected with its dealings with the limited partnership, LJM1(another Fastow partnership) and related-party business entity, Chewco, it was going to restate its 1997-2001 financial statements. Kopper, an employee of Enron Global Finance, whose immediate superior was Fastow, was charged with managing Chewco. The restatement, just like the previous reduced shareholder equity and fee against earnings, was extremely large. The total reported earnings/profit of Enron Corporation were reduced in this restatement by whopping amounts of: 28 million dollars in the years 1997 (of a total of 105 million dollars), 133 million dollars in the year 1998 (of a total of 703 million dollars), 248 million dollars in the year 1999 (of a total of 893 million dollars), and 99 million dollars in the year 2000 (of a total of 979 million dollars). Reported shareholder equity was reduced in the restatement by sums of 258 million dollars (1997), 391 million dollars (1998), 710 million dollars (1999) and 754 million dollars (2000). The restatement showed a 711-million-dollar debt rise in the year 1997, 561 million dollars in 1998, 685 million dollars in the year 1999, and 628 million dollars in 2000. Also, the company declared, for the first time, the fact that it discovered that Fastow earned over 30 million dollars from the limited partnerships, LJM1 and LJM2. All of the above announcements served to destroy investor trust and market confidence in Enron, and the company declared bankruptcy less than a month later (Enron Background Statement for Case Study PDF).
Business Matters/Stakeholders (Those Responsible for Collapse)
Enron is thought to have an organizational culture of overconfidence, which led the company to believe it could deal with increasingly greater amounts of risk easily and overcome any danger. Sherron Watkins states that Enron Corporation's unspoken instruction to employees was to do nothing but make numbers; stealing or cheating was fine as long as one wasn't caught. However, if one did, all one had to do was beg for another chance, which would be offered. In short, the corporate culture of Enron hardly promoted the important values of integrity and respect. Rather, it undermined them, through its stress on decentralization, as well as its employee compensation program and performance appraisal system (Enron Case Study PDF). The company's compensation plan was apparently focused on enriching company managers and not on generating shareholder profit. It encouraged employees to inflate contractual value despite lack of real cash generation, and break rules. Its bonus program promoted inflated deal valuation on Enron's books and the adoption of non-customary accounting practices. In fact, the former practice became a widespread occurrence at Enron; partnerships were created for the sole purpose of hiding losses and avoiding the repercussions of accepting responsibility for problems (Johnson, 2003).
Officials at Enron manipulated data for protecting personal interests and deceiving the public (of its dividends and shares); however, the depth of their dishonesty is yet to be explored fully. Board members as well as executives maintain that they had no clue regarding the depth of Enron's limited partnerships forged and managed by Kopper and Fastow, which did not appear in its official financial records. However, both Lay and Skilling were possibly aware of the suspicious nature of their organization's accounting tactics. The Permanent Subcommittee on Investigations -- a division of the United States Senate's Committee on Homeland Security and Governmental Affairs -- which looked into the issue of Enron's collapse, reached the conclusion that the board was well aware of most of the wrongdoings at Enron and problems it faced. Board members purposely dispensed with the clause on "conflicts of interest" in Enron's ethical code, which would have effectively prevented the forging of the aforementioned troublemaking special limited partnerships (Johnson, 2003). Company personnel quickly followed the top executives' lead. They started hiding expenses, claiming nonexistent profits, and deceiving energy regulators, among other things. Officials of the corporation behaved irresponsibly and failed to take requisite action, exercise appropriate oversight, and accept responsibility for Enron's ethical miscues. The Chief Executive downplayed the timely warnings he received of financial irregularities and some of the board members could not comprehend corporate operations or numbers. Frequently, employees were left to take important decisions by themselves; managers encouraged them to just make numbers by hook or crook. Following Enron's total collapse, not a single individual came forward to bear the blame for its downfall. When asked to answer to congressional committees, Fastow and Lay decided to claim 5th Amendment privilege against forced self-incrimination. While Skilling testified, he asserted that he was clueless of any illegal activity within the corporation. Enron officials decided to first be loyal to themselves, rather than to other company stakeholders, namely, stock holders, rate payers, business partners, foreign governments, local communities, etc. Furthermore, they broke employees' trust. Employees were led to believe the CEO's optimistic declarations. For instance, in August of 2001, Lay stated that he had never felt more optimistic about Enron's prospects. The very next month, only a few weeks prior to Enron's total collapse, he urged personnel to take up its stock, as Enron was fundamentally sound. Lay continued these exhortations even while unloading his personal shares (Johnson, 2003). Enron employees were not only betrayed, but lost their jobs as well as retirement savings.
The company's relationships with internal as well as external stakeholders were characterized by glaring inconsistencies. The average employee was coerced into vesting his/her retirement plan in company stock and, in the critical period when stocks were rapidly declining, was not allowed to sell his/her shares. Meanwhile, top management could unload its shares whenever it desired. Also, while 500 officials were given "retention bonuses" equaling 55 million dollars, laid-off employees received a small percentage of their severance pay. The company accorded royal treatment to its friends (Johnson, 2003). It utilized political donations, in particular, for gaining special treatment from governmental agencies. Enron was the highest contributor to George Bush's campaign; furthermore, company officials made substantial donations to Republican as well as Democratic Senate and House members. In exchange for these contributions, Enron could nominate… [END OF PREVIEW]
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