Key Stakeholders Essay

Key Stakeholders Essay.

Question 1: Who were the key stakeholders involved in, or affected by, the collapse of Enron? How and to what degree were they hurt or helped by the actions of Enron management? Answer: Enron’s board was made up of 17 members. Out of 17, 15 were outsiders and only 2 were insiders. These two key stakeholders were insiders of Enron named Kenneth L. Lay (Enron CEO) and Jeffrey Skilling (President & Enron COO). They were helped my Enron management in lot many ways. Company gave huge compensations to these executives like Skilling held 5% stake in retail energy unit, which was almost equal to $100 worth of stock in 1998.

Company often used to lend money to its top executives and later these leans weren’t recovered if the terms of their contracts were fulfilled.

In 2001, each director of company was extraordinarily compensated. Each executive received $381,000 in total compensation. But later, after Enron scandal, these stakeholders were hurt a lot also. Shareholders and Mutual fund investors lost around $70 billion in market value.

Two major banks called J.P. Morgan Chase and Citigroup were the one who faced major write downs on bad loans. Not only did Enron Creditors, shareholders and bondholders lose out, confidence also fell across the market, as investors questioned the integrity of the financial statements of other companies in which they held stock.

Question 2: Considering all aspects of the case, what factor or factors do you believe most contributed to the collapse of Enron? In your answer, please consider both external and internal factors.

Key Stakeholders Essay

The failure of Enron Essay

The failure of Enron Essay.

1) What were the individual factors that contributed to the failure of Enron? Briefly explain two key factors.

Enron collapsed in large part because of the unethical practices of its executives. Egoism (Self interest) was one of the major factors contributed to the failure of Enron. Enron’s executives put their own interests above those of their employees, company and the public, and failed to exercise proper oversight or shoulder responsibility for ethical failings. They allowed themselves to be motivated much more by what would benefit themselves than what would truly benefit the company.

Money, greed, arrogance and hubris led company executives to lose focus on working for the good of the company and to act unethically (Gini,2004). Abuse of power to make decisions which were beneficial economically and politically to themselves and the company, was one of the key factors that led to Enron’s failure.

Company leaders used insider information and traded millions of dollars in company stock, borrowed from subsidiaries with no intent to repay the loans (Wilke, 2002) , and avoiding federal taxes even though some of its subsidiaries, like Portland General Electric, collected tax payment from customers (Manning & Hll, 2002).

Such behaviors of moral failure at the top and irresponsible behaviors led to the collapse of Enron. The unethical behavior of Enron’s leaders appears to be the product of both individual and situational factors. Greed was the primary motivator of both managers and their subordinates at Enron (Cruver, 2002).

Optimistic earnings reports, hidden losses and other tactics were all designed to keep the stock price artificially high. Lofty stock values justified generous salaries and perks, deflected unwanted scrutiny, and allowed insiders to profit from their stock options. Greed was not limited to top Enron executives, however. Meeting earnings targets triggered large bonuses for managers throughout the firm, bonuses that were sometimes larger than employees’ salaries. Rising stock prices and extravagant rewards made it easier for followers as well as leaders to overlook shortcomings in the company’s ethics and business model.

2) What were the organizational factors that contributed to the failure of Enron? Briefly explain two key factors.

Leadership, Culture and Management controls were the key organizational factors that contributed to the failure of Enron. Company executives and managers directly impact the ethical direction of a company. When the executives and managers are ethical, employees are more likely to act ethically. When a company lacks committed ethical leadership, as did Enron, ethical standards will not be maintained. Because Enron lacked ethical leadership, it experienced a breakdown in its corporate structure and culture (Gini, 2004). Eventually, the entire company collapsed as a result. Enron created a culture obsessed with the bottom line and not with ethical behavior. The company culture demanded conformity and penalized dissent. Consequently, employees adopted and complied with the culture demanded by the company’s leaders.

Once leadership has crossed the line to unethical behavior, unethical acts can become accepted in daily activities and employees have many reason for remaining quiet. The system (a harsher variant of one used at many companies) encouraged cutthroat competition and silenced dissent. Followers were afraid to question unethical and or illegal practices for fear of losing their jobs. Instead, they were rewarded for their unthinking loyalty to their managers (who ranked their performance) and the company as a whole (Fusaro & Miller, 2002). The maximization of profit was aggressively taken to such an extreme that the leadership trait of integrity became a non-factor within the culture at Enron.

This lack of integrity was a serious flaw within the organizational structure and culture of the company for while important group members, like Andrew Fastow, began encountering situations requiring the honest disclosure of financial information; few employees or group members were provided with the external motivation from Skilling’s leadership to tell the truth about Enron’s real financial situation. Those individuals that did have the integrity to speak honestly about Enron’s financial losses were dismissed, demoted, or summarily fired by those in power in a process known in the Enron lexicon as “rank and yank”

3) What were the social factors that contributed to the failure of Enron? Briefly explain two key factors.

From a group perspective, Enron’s executives and employees were influenced by groupthink. Groupthink involves group members hiding or discounting information to maintain group cohesion. The group members collectively overestimate the group’s morality and ability, ignore contradictory information, and pressure each other to preserve conformity. The company hired and promoted individuals who were highly motivated by monetary rewards and promotions.

Enron then provided the employees with incentives to take risks and focus on making profits, no matter the means. Anderson audit firm also played part in the downfall of Enron. When the accounting firm found out about the scandal, they should have said “NO” to Enron and should have reported SEC. Instead, they took their share of money to help to cover Enron’s debts and losses. Enron’s collapse was devastating in many regards. Thousands of people lost their jobs and their retirement savings, the energy industry was greatly affected. The greatest damage was to people’s trust in businesses and their leader.

The failure of Enron Essay

External causes for Enron to collapse Essay

External causes for Enron to collapse Essay.

1) Deregulation

Deregulation of the U.S. energy industry made possible Enron’s emergence as a major corporation, but also ultimately may have contributed to its collapse. The company successfully seized the opportunity created by deregulation to create a new business as a market maker in natural gas and other commodities. Enron successfully influenced policymakers to exempt the company from various regulatory rules, for example in the field of energy derivatives. This allowed Enron to enter various trading markets with virtually no government oversight.

Arguably, regulation might have prevented Enron from taking some of the risks and making some of the mistakes which it did. While deregulation may initially have helped Enron, by allowing it to create and enter new markets, it later hurt the company by removing the very restraints that might have kept it from becoming fatally overextended.

2) Lax regulatory enforcement

Arguably, government regulatory agencies failed to exercise sufficient oversight or to enforce the rules that were on the books.

Regulatory bodies that failed to enforce the rules governing Enron’s actions included the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC), and the Commodities Futures Trading Commission (CFEC).

3) Weak and ambiguous accounting standards

Hindsight makes it fairly clear that the accounting standards promulgated by the Financial Accounting Standards Board (FASB) were too weak and too ambiguous with respect to the complex trading transactions and financial structures that Enron established and operated. Two areas stand out as ones of particular concern. First, the rules apparently permitted the widespread use of market-to-market (MTM) accounting in areas for which it was not originally intended. Second, the 3 percent rule for outside ownership of SPEs was arguably too low to maintain genuine independence. An underlying issue was that corporate practice (e.g., sophisticated online trading of complex financial derivatives) had outpaced the work of the rules makers, leading to the application of rules in situations for which they were not originally designed.

4) A lack of independence on the part of the company’s auditors and law firms working for the company

A key external issue was conflict of interest on the part of accounting and law firms working for Enron. Arthur Andersen, the company’s accounting firm, arguably had a conflict of interest in that Arthur Andersen provided both external audit services and internal consulting for Enron. If Arthur Andersen were to challenge the propriety of Enron’s financial statements in its annual audit, it ran the risk of jeopardizing its lucrative consulting and “inside” accounting work for its client. Moreover, relations between the two firms were unusually close, possibly undermining Arthur Andersen’s objectivity and independence. Similarly, Vinson & Elkins, Enron’s outside law firm, was seemingly under pressure not to question the legality of the Special Purpose Entities (SPEs) too closely, since Enron was a major client of the firm.

5) Inadequate campaign finance and lobbyist rules.

Enron made extensive legal use of various techniques of political influence, including engaging the services of lobbyists, making extensive contributions to political campaigns, particularly using soft money, and hiring former government officials. One of the external causes, then, may have been campaign finance and other rules that permitted such legal exercise of corporate influence in policymaking.

6) Weak stakeholder oversight.

A case can be made that external stakeholders–especially large institutional investors such as pension and mutual funds–failed to exercise due diligence. These institutional investors were happy to make handsome returns on their extensive investments in Enron in the late 1990s, but failed to become actively involved in corporate governance at the company until it was too late.

External causes for Enron to collapse Essay