corporate culture of Enron and how it bred a scandal

Author- | Posted- | Updated: July 9, 2017 |

What was the role of the corporate culture of Enron in giving rise to the century’s worst financial scandal? How it shaped the disaster that gave birth to the SOX?

At the turn of the 21st century, the biggest scandal rocked the financial world. The Enron scandal turned out to be one of the worst cases that brought to light the lack of accountability among financial managers.  The corruption and lack of ethics at Enron pointed out several things most importantly a lack of culture. Apart from the annihilation of consumer trust, the scandal also showed the financial managers in poor light.  Most of all it showed the effect that lack of ethics in top management can have on organizational behaviour. To understand the ills inside the organization, it is better to analyse the Enron culture and its link with the scandal. A lack of culture of ethics and trust can have a devastating impact on the organization’s performance and this was highlighted the best in the form of the Enron scandal.

Before the scandal was unearthed, Enron had a good reputation in the society and among its consumers.  It had an image of an innovative company that could do great things. It had built power plants, operated gas lines, and had unique trade businesses. Its foundation had been laid in the year 1985. Then it dealt in electricity, natural gas, communication, paper and pulp. In 2001, the company had gone bankrupt. Analysts found that a lack of a culture of ethics was one of the most important reasons that the scandal occurred. Why the company reached its end in no time was because the company had continued to ignore ethics since its foundation.

There are several very important reasons that the businesses and business managers must focus on business ethics. Except for its greed for too much money the company had been doing very good business. Had its focus been on ethical business practices, the brand would have done much better and survived longer than it did. Its managers’ greed caused the early death of Enron. Managers and leaders need to demonstrate trust and ethics in their behavior and business practices so that the followers too may incorporate it into their behavior. Enron’s case was its contrary. Not just the managers and the leaders demonstrated their greed but also pushed the employees to follow the same lines.

Another important thing was the manager’s arrogance. They had simply spoilt the culture to focus on money and financial benefits. Competition when used positively can help companies perform but simply too much competition among the managers and the employees can be the nemesis of the corporate culture. If corporate culture rots, it makes the organization rot from the inside. So, culture is related to the organization’s mindset and a spoilt culture means a spoilt company.  The only focus of the entire company was financial gain and everyone was advised to do everything that led to money.

However, these were just the factors that were visible at the surface and there were many more factors that also led the company to its early death. Heavy focus on performance led to negative use of competition as a whip to herd the employees in the wrong direction. Skilling was the CEO of the company and he used a rank and yank system to goad the employees and managers. The result of the system was that the bottom 20% of the underperformers were always pushed out of the company. It made the employees compete against each other and this fierce competition gave rise to an environment of total distrust inside the environment. People competed with each other and the brand’s rivals aggressively. At the time the company was founded the focus had been on integrity and ethics but the focus was lost very soon after the foundation.

However good the intentions might have been at the outset they changed soon and the entire focus was shifted to the pursuit of financial gains. Organizational culture always has a very important relationship to ethics that cannot be neglected.  However, when it comes to culture, leadership plays a very important role in shaping the culture. Enron’s leadership discarded its role of the guardian of culture and instead became its annihilator. The use of power was made only to goad the employees and to make them do what the company and company leadership wanted without leaving any space for ethics. If the leadership keeps integrity and responsibility aside the entire company would be bound to follow. In Enron’s case too employees were following every line their management asked them to follow mindlessly. Ethics were to be put on the back burner and everything could be traded for financial gains.

Soon after the scandal had rocked the corporate world that the SOX was enforced. The main aim of SOX was to bring the companies’ focus on ethics and accountability which it did very well. While many companies found the laws too stringent still the way Enron had shaken consumer confidence the role of the law in restoring it was lauded heavily.  Organizational culture might have the solution to several big problems. It determines how ethically people are going to behave inside the organization. Most important thing is that the leadership and management must influence it in a way that improves performance and environment. The problems and solutions both are embedded in the organizational culture. Managers should carefully analyze the culture to see where the problems might be arising from and where the solutions can be found. Slight changes in the organizational culture can result in big changes in performance and productivity. Enron instead of the service formula, used the serve yourself formula. All its stakeholders were in the dark till the Pandora’s box opened. Had Enron focused on serving its stakeholders, the results would have been totally different. Since it did not, the financial world was subjected to heavy supervision through the application of the SOX.  So, if leadership does not focus on shaping the culture, unshaped cultures like that of Enron can shape a disaster.

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.