What Enron Reveals About the Corrupting Nature of Corporations
Table of Contents
The Ethical Corporate Culture
We vilify the bastards of business, like Enron leadership, but can we truly place the entire blame on those individuals when they are leading an organization that exists for the purpose of profit making? The leadership of Enron, most notably by Academics and career professionals, are often discussed in the context of corporate ethics, in which ethics are not operationalized to form the corporate culture, or that leadership drives ethics, good or bad. This view of ethics has merit but overlooks the obvious issue that the primary focus of corporations is making money, from a fiduciary and competitive standpoint, which often countermands ethical behavior. As such all corporations are not prone to corruption (as if some disease infected the company) but are corrupt and corrupt members accordingly.
Living in a capitalist society blinds people to the nature of capitalism which is high-risk, profit-making through enterprise. We assume this nature is correct because we know nothing else, but the truth is profit-making is one of the least noble practices because it seeks earnings and nothing else. People argue this point, citing that corporations produce valuable products that improved society. Without a doubt, modern healthcare improved lifespans with treatments, such as vaccines. Likewise, technology companies have produced smartphones, which have greatly increased the ability to communicate and access information. Again, the bias of living in a capitalist society colors these outcomes with positivity overlooking the fact that these products are not public goods but instead available to anyone with money. Though good intentions and profit-making are not mutually exclusive, achieving this end is so difficult as to be nearly impossible simply because enterprises, big and small, are not designed with the public good in mind but the perpetuation of the organization for profit-making at both the individual and organizational level.
The Enron Catastrophe
On December 2, 2001, Enron, a conglomerate corporation supplying electricity, natural gas, communications, and paper products, filed for Chapter 11 bankruptcy. At the time, it was the largest company in the United States to ever file for bankruptcy. Enron employed over 20,000 people and was believed to have revenues around $100 billion.
The bankruptcy proceedings revealed the company perpetrated a long-term accounting fraud that concealed its true financial condition. This deception involved complex financial structures that misled investors and creditors about Enron's true financial performance and health.
The fallout from the Enron scandal was extreme, calling into question the accounting practices of other publicly traded companies. It led to a loss of confidence in corporate governance and financial reporting, resulting in significant regulatory changes.
The scandal was a key reason for the creation of the Sarbanes–Oxley Act of 2002. This act made CEOs and accounting firms legally culpable for fraudulent and misleading financial reporting, marking a significant shift in corporate accountability.
The Enron scandal was a complex interplay of poor accounting practices and an unethical corporate culture, culminating in financial failure. The most significant of these practices included financial statements that did not accurately reflect the company's operations and finances. Consequently, shareholders and analysts were misled into believing that the company was in a better financial condition than it actually was. One of the unethical practices involved in this scandal was the concealment of liabilities within limited liability companies owned by Enron. This effectively kept large amounts of debt off the balance sheet, distorting profit and loss figures.
The unusual accounting and financial reporting first caught the eye of Wall Street reporter Bethany McLean, who questioned Enron’s tremendous stock value, which was 55 times the company’s earnings. Questions continued to rise concerning Enron’s accounting practices, eventually leading to an SEC investigation. It was then revealed that Enron had inflated its stock value by misleading investors since 1996. Unable to continue operating as stock prices fell, Enron imploded under its debt, leaving bankruptcy as its only option.
The Dissonance of Corporate Purpose & Ethics
What went so disastrously wrong at Enron became a symbol of so-called "corporate corruption." The company had a long history of cutting corners, hiding debt, and using a bottom-line thinking or profit-at-any-cost method of operation. An ex-employee of Enron stated,
Enron fostered a growth-at-any-cost culture that was defined by the company’s top executives. It was all about taking profits now and worrying about the details later. The Enron system was ripe for corruption.
As the story goes, Enron’s corporate culture became infected with unethical thinking and self-serving actions. Business ethics Professor Manuel Velasquez cited this corruption of culture as a problem that started in the ’90s when business was booming, making businesses "ripe" for corruption, cutting corners, and taking shortcuts. This type of environment is what Valesquez and many other ethicists believe, at least in part, led to Enron executives adopting an ends-justify-the-means approach to operations.
If we consider this bottom-line thinking as the explanation for how companies like Enron become so corrupted, then the natural answer becomes better oversight and operationalizing of ethics with the organization to deter corruption. The problem with oversight is not a new problem but what is new is the realization that the overseers are the one's most prone to corruption. Massive fraud like Enron did not start at the bottom and race upwards but instead trickled down into the culture of the company. Employees and contractors act in accordance with the leadership and if leadership is okay with cutting corners or lying, these members will take that cue. Oversight then becomes a tremendous issue because who oversees the CEO? The Board? Well, in the case of every large-scale fraud, especially with regard to accounting or money handling, the Board must provide authorization. Millions of dollars in junk loans and fraudulent LLC subsidiary creations could not have occurred at Enron without Board approval. Whether it was too much trust in management or lack of attentiveness does not matter, because the Board failed to provide ethical oversight in blind satisfaction to the profit they seemingly made.
Operationalizing ethics offers a similar outcome since the obvious problem arises from whom you are operationalizing ethics for?
According to a Harvard Business Review article, this is not only a matter of conviction, but also of structure. The authors recommend four methods to facilitate ethical conduct: Align ethical values with strategies and policies, maintain ethical awareness, incentivize ethical behavior through various rewards, and promote ethical standards in everyday activities.
If managers, employees, or any stakeholder become the targets of operationalized ethics, then this only works if the upper management and leadership is inclined to enforce it. Beyond how you operationalized the ethics of leadership and management, the overarching question becomes how do you operationalize ethics in a practical, profitable manner for a company as a whole? Clearly a problem since most companies don't do it, and ethical issues continue to plague the corporate world.
The Corrupt Nature of Companies
Despite obvious issues, these ethical operationalizing solutions, now curcriculized, seemingly become the backbone of management degrees from almost every university and espoused by most major corporations in ethics statements, visions, and missions, yet the majority of companies do not implement such measures, and the ones that dedicate to this end still suffer large ethical indiscretions. For whatever reasons, company failure to comply or operationalize ethics means these solutions did not inspire companies to be ethical. That is because companies are not ethical; they are unethical by nature because profit-making is not an activity that is inherently good or bad but is at extreme risk of being unethical because ethics reduce profit.
- Compliance Costs: Implementing ethical guidelines often requires significant investment in training, monitoring, and enforcement mechanisms.
- Legal Expenses: Corporations may need to hire legal counsel to ensure their practices are in line with ethical standards and regulations.
- Reduced Operational Flexibility: Ethical constraints may limit the range of profitable activities a corporation can engage in.
- Public Relations Costs: Maintaining a positive public image in the face of ethical scrutiny can be costly.
- Increased Wages: Ethical companies often commit to paying their employees a living wage, which can be higher than the market rate.
- Supply Chain Alterations: Ethical sourcing and fair trade practices may involve higher costs than traditional sourcing methods.
- Reduced Exploitation: Companies cannot exploit customers or employees for profit if they are committed to ethical practices.
- Investment in Sustainable Practices: Transitioning to environmentally friendly operations can involve significant upfront costs.
- Transparency Requirements: Ethical companies often commit to transparency, which can require costly reporting and disclosure practices.
- Lower Risk-Taking: Ethical guidelines may discourage high-risk, high-reward business strategies.
- Increased Accountability: Greater accountability often means more checks and balances, which can slow down decision-making and increase costs.
- Product or Service Modifications: Ensuring products or services meet ethical standards may require costly modifications.
- Increased Employee Benefits: Providing better benefits packages in line with ethical guidelines can increase expenses.
- Community Investment: Many ethically-driven companies invest in their local communities, which doesn’t always provide a direct financial return.
- Long-term Focus: Ethical companies often prioritize long-term sustainability over short-term profits, which can reduce immediate profitability.
People argue that ethics prioritizes long-term sustainability over short-term profits which reduces risk of unethical behavior, but this idea is at best somewhat effective considering that some of the largest oldest companies are often at the center of serious ethics violations.
- Walmart: The U.S. Equal Employment Opportunity Commission (EEOC) charged Walmart with gender and race discrimination.
- Amazon: Faced legal battles over allegations of racism and sexism.
- McDonald’s: Accused of discrimination and harassment.
- Pinterest: Faced lawsuits over allegations of a toxic company culture.
- Johnson & Johnson: Taken to court over allegations of racism and sexism.
- Google: Faced new legal battles this year over allegations of racism and sexism.
- Uber: Paid out multimillion-dollar settlements for discrimination, harassment, and retaliation lawsuits.
- Fox News: Settled multiple discrimination and sexual harassment lawsuits.
- Riot Games: Paid out settlements for discrimination, harassment, and retaliation lawsuits.
- UPS: Faced legal battles over allegations of discrimination.
- Coca-Cola: Settled multiple discrimination lawsuits.
- Target: Paid out settlements for discrimination lawsuits.
These are just some examples of discrimination and racism ethics violations to say nothing of financial accounting and operations claims, which are extremely damaging not just to individuals, as in the case of discrimination, but to society as a whole since everyone must pay the cost of multibillion dollar fraud:
- FTX: A trading platform for crypto investors, was accused by the U.S. Securities and Exchange Commission of defrauding its investors by steering money from the company into another venture between 2019 and 2022.
- Theranos: Initially heralded as an innovative health care technology company, was exposed as having unworkable technology in 2015. Federal and state regulators filed fraud charges against the company, which dissolved in 2018.
- FTE Networks Inc.: The Securities and Exchange Commission charged the former CEO and CFO of FTE Networks Inc., a network infrastructure company formerly based in Naples, Florida, with conducting a multi-year accounting fraud.
- Wirecard: A German company that specializes in payment transfer and processing. In the beginning of 2020, auditors uncovered a massive $2 billion gap between the company’s reported assets and its actual cash balance.
In capitalist society, profit is king, and firms operate toward that end as a need and desire. Firms do not operate in the interest of the person but in the interest of the firm, more specifically, shareholders. The best of companies prove they care little for the individual and operate for the welfare of the firm: layoffs, firings, reduction in wages, etc. You can argue these actions ensure other's have jobs, but since no single individual except the highest ranking (highest paid) members, whose value to the company is questionable, such as CEOs, are assured security, this argument has no weight.
You cannot operationalize ethics in an unethical operation. It is like trusting your money to a bank operated by criminals.
What Works May Not be Possible at this Time
As long as we wear our capitalist blinders, the solutions to corporate fraud will always take the form of new laws and new policies to deter or to catch these corruptions, but these solutions will never work and the outcome become larger government, more red tape, and costlier administration fees: all of which is already proven by the need for the Sarbanes/Oxley Act, which came in response to WorldCom and other frauds.
The firm itself needs to change focus from profit-making to more productive and lasting aims meant to better humanity, not line pockets. In many ways we are close with company's enacting visions and missions going beyond profit, but these components of the firm need to be the authority. If we wish to end corporate corruption, we need to change the reasons for why companies exist, such that profit seeking is not the reason for their existence or to keep them existing. Profit-at-all-cost thinking needs to be replaced with ethics-over-profit considerations and purpose for engaging in commerce (how does this company improve life).
This solution is not possible at this time because of capitalist bias embedded in law, such as fiduciary responsibility that compels firms to seek profit. This would mean enacting more socialist programs to reduce fear of people losing jobs, such as free healthcare or housing. Financial, but more so, security strengthens ethics. Insecurity and lack well-being entices a person to steal or cut corners if they feel they or their family's welfare is at risk. Society would need a complete overhaul, such that firms could operate for the betterment of people and not profit.