The Collapse of Enron
Case Study
The Collapse of Enron
Brenda Harkins
“The world’s greatest company”, CEO Kenneth Lay wanted the Enron Corporation to be known as. This corporation went to its knees shortly after Lay made those announcing words touting Enron as “the world’s greatest company”. The collapse of this Fortune 500 corporation affected thousands of stakeholders. Stakeholders are numerous and their interest is as diverse as the many included in this group. Stakeholders are any in the group who have a risk of loss because of a course of action or the lack of action taken by a company, corporation or entity. The key stakeholders were the 4,000 employees laid off, the thousands of employees who’s retirement plans became worthless, shareholders, mutual fund investors, two banks and even other corporations; because a lack of trust was placed due to Enron’s actions. These stakeholders lost not only jobs that provided necessities to their families but also a secure retirement plan for their elderly years. The employees were the ones who lost the most in the long run. They had placed not only their trust for the present but also for their futures. Sure shareholders, mutual fund investors and a couple of banks lost; but those shareholders are not staking all that they can afford to lose; as well as they know there is always a risk in investing; that is their business. Employees have a different view as a stakeholder they depend on the corporation to do everything it can to hold up its end of the bargain they have with them. This bargain is nothing more and nothing less than what their employment contract agreement states. Enron executives and their accountants acted no different than every “run of the mill” crook.
The guiltiest entities in my books are the legislative actions of de-regulation in the 1980’s of the energy industry, the unethical commodities trading of Enron executives and the auditing firms. The de-regulation was supposed to lead to lower prices, greater efficiencies and better service, none of which have happened even thirty years later. The de-regulation was a catalyst for the Enron Corporation and their “gas bank” and the leverage buying and selling scheme. With Enron being successful with the “gas bank” trading they reached out and sought after other commodities that were being de-regulated as well; such as electricity and water. Enron was very instrumental in the whole de-regulation of the energy industry they staffed a Washington D.C. office with over 100 lobbyists, and spent millions of dollars contributing to congressional campaigns. “Talk about being in bed with the government” Enron was tucking all of Washington D.C. in at night and leading the nightly prayers. This steamed all the way to the Bush White House and most of us unguarded citizens didn’t have a clue to the existence let alone the ramification of this unethical behavior. Which I might add put nearly all of the Mom and Pop gasoline businesses; ‘out of business’ and made the major oil and gas industry leaders wealthier than they had ever been.
So, Enron could continue a favorable rating and maintain financial support from investors they created phantom partnerships. These partnerships were to show favorable financial statements and to conceal Enron’s very large losses. Enron executives and board of directors repeatedly approved insufficient financial reports. I believe this “hide your head in the sand” practices were done by the board of directors because of the hefty compensations they received for meeting five times each year. Some of the compensations paid to the directors were more than twice that of companies which compared to Enron. Last but certainly not the least to blame for this business collapse was the audit company of Arthur Andersen. Andersen audit firm simply ignored several fundamental financial problems these financial problems were the things that ultimately brought Enron tumbling down.
As much as people hate government regulations, actually if the government regulations of the energy industry had not been lifted the whole Enron collapse may never have occurred. So government regulations being in place would be one way to prevent this kind of repeated action. Another regulatory issue was the ‘commodities futures regulation’ changes in 1992 which exempted the energy industry from this regulation. Yet another issue of regulatory problems was the Securities and Exchange Commission in 1997 which exempted Enron from the Investment Company Act of 1940. Corporate managers can be instrumental in preventing a disastrous event such as the one with Enron by simply being and practicing ethical behavior with an open books attitude to financials. Corporate managers can also take pride in what they do and if they know of illegal or unethical behavior; they can take the “Whistle Blower” route and reveal these to the necessary agency which can put a stop to the illegal and unethical behavior. Stakeholders, need to exhibit caution when investing and relying on a corporation to meet their basic needs for now and the future. Making good decisions on who stakeholders work for or who they place their faith and money in to do the right thing is ultimately up to each individual stakeholder. Stakeholders must pay due diligence in their research when looking for employment and investing their money. Pay close attention to the corporate culture, this will tell many stories of the corporation. Corporate culture is truly an important information tool.
Reference
Lawrence, A. T. & Weber, J. (2010). Business and Society, Stakeholders, Ethics, Public Policy. (Thirteenth ed., p. 541,553). New York: McGraw-Hill/Irwin.
The Collapse of Enron
Brenda Harkins
“The world’s greatest company”, CEO Kenneth Lay wanted the Enron Corporation to be known as. This corporation went to its knees shortly after Lay made those announcing words touting Enron as “the world’s greatest company”. The collapse of this Fortune 500 corporation affected thousands of stakeholders. Stakeholders are numerous and their interest is as diverse as the many included in this group. Stakeholders are any in the group who have a risk of loss because of a course of action or the lack of action taken by a company, corporation or entity. The key stakeholders were the 4,000 employees laid off, the thousands of employees who’s retirement plans became worthless, shareholders, mutual fund investors, two banks and even other corporations; because a lack of trust was placed due to Enron’s actions. These stakeholders lost not only jobs that provided necessities to their families but also a secure retirement plan for their elderly years. The employees were the ones who lost the most in the long run. They had placed not only their trust for the present but also for their futures. Sure shareholders, mutual fund investors and a couple of banks lost; but those shareholders are not staking all that they can afford to lose; as well as they know there is always a risk in investing; that is their business. Employees have a different view as a stakeholder they depend on the corporation to do everything it can to hold up its end of the bargain they have with them. This bargain is nothing more and nothing less than what their employment contract agreement states. Enron executives and their accountants acted no different than every “run of the mill” crook.
The guiltiest entities in my books are the legislative actions of de-regulation in the 1980’s of the energy industry, the unethical commodities trading of Enron executives and the auditing firms. The de-regulation was supposed to lead to lower prices, greater efficiencies and better service, none of which have happened even thirty years later. The de-regulation was a catalyst for the Enron Corporation and their “gas bank” and the leverage buying and selling scheme. With Enron being successful with the “gas bank” trading they reached out and sought after other commodities that were being de-regulated as well; such as electricity and water. Enron was very instrumental in the whole de-regulation of the energy industry they staffed a Washington D.C. office with over 100 lobbyists, and spent millions of dollars contributing to congressional campaigns. “Talk about being in bed with the government” Enron was tucking all of Washington D.C. in at night and leading the nightly prayers. This steamed all the way to the Bush White House and most of us unguarded citizens didn’t have a clue to the existence let alone the ramification of this unethical behavior. Which I might add put nearly all of the Mom and Pop gasoline businesses; ‘out of business’ and made the major oil and gas industry leaders wealthier than they had ever been.
So, Enron could continue a favorable rating and maintain financial support from investors they created phantom partnerships. These partnerships were to show favorable financial statements and to conceal Enron’s very large losses. Enron executives and board of directors repeatedly approved insufficient financial reports. I believe this “hide your head in the sand” practices were done by the board of directors because of the hefty compensations they received for meeting five times each year. Some of the compensations paid to the directors were more than twice that of companies which compared to Enron. Last but certainly not the least to blame for this business collapse was the audit company of Arthur Andersen. Andersen audit firm simply ignored several fundamental financial problems these financial problems were the things that ultimately brought Enron tumbling down.
As much as people hate government regulations, actually if the government regulations of the energy industry had not been lifted the whole Enron collapse may never have occurred. So government regulations being in place would be one way to prevent this kind of repeated action. Another regulatory issue was the ‘commodities futures regulation’ changes in 1992 which exempted the energy industry from this regulation. Yet another issue of regulatory problems was the Securities and Exchange Commission in 1997 which exempted Enron from the Investment Company Act of 1940. Corporate managers can be instrumental in preventing a disastrous event such as the one with Enron by simply being and practicing ethical behavior with an open books attitude to financials. Corporate managers can also take pride in what they do and if they know of illegal or unethical behavior; they can take the “Whistle Blower” route and reveal these to the necessary agency which can put a stop to the illegal and unethical behavior. Stakeholders, need to exhibit caution when investing and relying on a corporation to meet their basic needs for now and the future. Making good decisions on who stakeholders work for or who they place their faith and money in to do the right thing is ultimately up to each individual stakeholder. Stakeholders must pay due diligence in their research when looking for employment and investing their money. Pay close attention to the corporate culture, this will tell many stories of the corporation. Corporate culture is truly an important information tool.
Reference
Lawrence, A. T. & Weber, J. (2010). Business and Society, Stakeholders, Ethics, Public Policy. (Thirteenth ed., p. 541,553). New York: McGraw-Hill/Irwin.