Introduction

Enron, through the leadership of its former Chairman and Chief Executive Officer (CEO)
Kenneth Lay, had in place an intensive board-approved 64-page Code of Ethics which highlighted the
organization’s core values – respect, integrity, communication, and excellence. With the development of
the Code of Ethics, Kenneth Lay had emphasized therein the organization’s apparent commitment to
business ethics, and in his words, he wrote, “As officers and employees of Enron Corp., its subsidiaries,
and its affiliated companies, we are responsible for conducting the business affairs of the companies in
accordance with all applicable laws and in a moral and honest manner.”

However, even with the existence of the Code of Ethics, this did not guarantee Enron’s adherence
thereof. Enron’s key senior management officers – Kenneth Lay (CEO), Jeff Skilling (Chief Operating
Officer), and Andrew Fastow (Chief Financial Officer), led the organization’s unethical behavior and
abuse of industry practices through the conspiracies of various criminal acts such as fraud, money
laundering, falsification of financial reports, and insider trading. The supposed “tone-at-the-top” (i.e.,
corporate culture as promoted and embodied by Senior Management) lacked efforts in promoting respect
and integrity throughout the organization. Moreover, the organization’s compensation program was
geared towards the greater benefit of the key executives rather than the shareholders. Additionally, the
annual performance evaluation process, otherwise known as “rank and yank”, forced employees to
manipulate peer evaluations to secure their own positions in the organization. Said evaluation process
resulted in unjust termination of the lowest ranking one-fifth of the organization’s employees. Although
Kenneth Lay had an outright denial of the accusations and turned all the blame instead to Andrew Fastow,
Sherron Watkins – Enron’s key whistleblower, maintained that the organization’s weak standing
emanated from Lay’s leadership and lack of enforcement of ethical culture.

The complete disregard of the Code of Ethics and its core values, and connivance with external
parties such as the investment banking sector (i.e., J.P. Morgan, Citigroup, and Merrill Lynch) and
auditing firm Arthur Andersen led Enron to a massive ethical collapse and corruption. Key people
involved in the massive fraudulent scheme such as Enron’s key executives and employees, individuals
from Merrill Lynch and Arthur Andersen, and bank executives from Britain have been duly investigated
and/or convicted with various counts of criminal acts following the investigation of the authorities.

Statement of the Problem

Due to Enron's notable downfall as a result of a massive ethical collapse and unprecedented
corruption, it is inevitably raised what was lacking in Enron’s management. If given another chance, how
can Enron build a culture of integrity to foster trust and confidence in the workplace?

Statement of Objectives

The goal of this research is to recognize the importance of ethical standards in building a
foundation of trust and confidence in the workplace. Allowing synergy to occur in order to attain higher
levels of achievement, provide better results, and increase the value of relationships.

Point of View

Enron’s mismanagement led to the filing of bankruptcy in 2001. The downfall happened mainly
due to the massive unethical practices. As indicated on Enron's Code of Ethics, the company embodies
four core values of Respect, Integrity, Communication, and Excellence (RICE). This research will assume
the viewpoint of Enron’s management after the company’s great ethical collapse and attempt to provide
recommendations on how the company’s integrity and credibility can be revived.
SWOT Analysis

Strengths Weaknesses

● A market leader and innovator in the energy ● Failure to communicate the RICE Values as
supply chain industry (Moncarz et al., 2006) stipulated in Enron’s Code of Ethics (Seeger
● Marketing and value management established & Ulmer, 2003)
Enron as a leader in the industry (Nshisso, ● Lack of responsibility and openness to signs
2010) of problems (Seeger & Ulmer, 2003)
● Established RICE Values in its Code of Ethics ● Failed corporate governance (Moncarz et al.,
(The Smoking Gun Website, 2006) 2006)
● Effective risk management through the use of ● Use of aggressive earnings standards that is
Special Purpose Entities (SPEs) (Healy & hard to communicate to concerned
Palepu, 2003) stakeholders (Moncarz et al., 2006)
● Conflicts of interest were abundant in the top
management (Nshisso, 2010)
● The corporate culture fostered greed, fraud,
and unfair employment practices (Nshisso,
2010)
● Use of mark-to-market strategy to hide
economic losses. (Segal, 2020)
● Duty to comply: Failure to live up to
company’s claims (DesJardins, 2019)
● Product Safety, Duty of Disclosure & Not to
Misrepresent: failure to disclose the risk of the
service/product (DesJardins, 2019)

Opportunities Threats

● Access to a high supply of quality energy ● Deregulation of electric power industry

(Nshisso, 2010) (Moncarz et al., 2006)
● Before the collapse of Enron, the clean energy ● Lack of systemic legal and regulatory
movement had started to change the energy structure (Santa Clara University, 2002)
supply chain industry which Enron could ● Due Care Theory: The scandal had already
utilize as a known industry innovator tainted the credibility of Enron to provide due
(Nshisso, 2010) care in the future (DesJardins, 2019)
● There was an opportunity for the company to
expand in the Asian Region and engage in
mergers and acquisitions (Nshisso, 2010)

Alternative Courses of Action

The Markulla Center for applied Ethics in Santa Clara University (2002), emphasized the three
reasons that led to the downfall of Enron. First, SCU (2002) noted group influences that lead to shared
beliefs in an organization. Despite the negative shared beliefs created, it should be highlighted that the
shared aspect of fraudulent activities made it the norm inside Enron. Second, these shared beliefs
inevitably became the company culture that governed involved individuals’ interactions with each other
and external stakeholders. This instance is what led to the unfair treatment received by rank and file
employees who were outside Enron’s top management bubble. Finally, SCU (2002) looked into laws and
regulations that existence or lack thereof became a catalyst for unethical behavior in Enron to be
cultivated.

Guided by these considerations, the following alternative courses of action were created to
address the need of Enron to build a culture of integrity to foster trust and confidence in the workplace:

ACA 1: Strengthen Board and Management Oversight

Dettman and Klemash (2019) demonstrated that 52% of a company’s market value is determined
by its intangible assets which include corporate culture. Similarly, Seeger & Ulmer (2003) constitute
Enron’s downfall mainly on the failure to responsibly communicate. Such failure is centered on the three
executives who had greatly contributed to the creation of the shared values within the company.

These scenarios perfectly illustrate the importance of board and management oversight. In Grace
et al.’s commentary on the American Bar Association (2019), they noted that corporate governance
scandals such as Wells Fargo led to a shift in focus in terms of governance. The strategy of “tone at the
top” relates corporate culture to be highly dependent on a company’s management. This supports the
scenario in which Enron’s management was able to influence the overall culture of the company. By
shifting the focus on checks and balances, Grace et al (2019) argued that gaps in roles, responsibilities,
and relationships as elements in firm governance, controls, and oversight systems will be addressed.
Grace et al (2019) also added that this strategy should include defining a set of consequences for failure to
act within the set of acceptable standards within the company (ethics, values, and corporate culture), as a
method of creating accountability.

Another important element of this alternative approach is the need to regulate incentives for
higher management. Hodak and Bistrong (2017) used stretch goals in sales to illustrate how perverse
incentives can distort individual and corporate performance. Affiliated Motors Inc., Executive Eric
Feldman noted that perverse incentives include target awards which is a pay-for-performance approach
that creates a culture of “cutting corners”. This perverse incentive structure steepens the pay-for-
performance curve which may mean millions of dollars for middle to high-level managers. By removing
these incentive structures, Enron may be able to abolish this foundation of unethical behavior in Enron.

To combat conflict of interests such as the mark-to-market strategy to hide Enron’s economic
losses (Segal, 2020), Enron can impose a full disclosure clause in all employee contracts including that of
the management. The full disclosure and conflict of interest clauses shall be aligned in existing
government regulations. Finally, these board oversight checks and balances measures shall be
appropriately disclosed to the public and the shareholders to alleviate any concerns on credibility and
accountability.

ACA 2: Enforcement of an Effective Corporate Governance Framework

The Organization for Economic Co-operation and Development (OECD) provides that corporate
governance’s purpose is to help build an environment of trust, transparency, and accountability necessary
for fostering long-term investment, financial stability, and business integrity, thereby supporting stronger
growth and more inclusive societies (OECD, 2015). It further provides that corporate governance is
anchored within the six principles such as 1) ensuring the basis for an effective corporate governance
framework; 2) the rights and equitable treatment of shareholders and key ownership functions; 3)
institutional investors, stock markets, and other intermediaries; 4) the role of stakeholders; 5) disclosure
and transparency; and 6) the responsibilities of the board.
 An effective corporate governance framework should be in agreement with the rule of law and
applicable regulations and acknowledge industry best practices to strengthen its business integrity as well
as its competitive advantage in the market. Compliance with legal requirements is pivotal for every
business organization as it is its duty to its stakeholders to protect their interests, and thereby build a
foundation of trust. Moreover, it is equally important that shareholder rights (e.g., transfer of shares,
access to timely and accurate information, participation in key governance decisions such as the
nomination of the board of directors, key executives, or auditors, etc.) should also be embedded in a
corporate governance framework to elevate the confidence of the investors or shareholders, and for their
protection from resource allocation misuse or misappropriation from the key people of the organization.

Effective corporate governance also relates to internal and external stakeholders’ access to
transparent information which is deemed as a weapon against corruption. Transparency within the
workplace promotes increased employee value and engagement, fosters healthy organizational culture,
and founded trust between an employer-employee relationship. While it is important to be transparent to
internal stakeholders, external stakeholders should also have access to relevant and material information
(e.g., audited financial statements, periodic regulatory and public disclosures, etc.) of the organization as
this improves the public’s understanding of the organization’s structure, economic performance, ethical
standards, corporate social responsibility, among others.

And finally, the responsibility of the board of directors being the tone-at-the-top should be highly
enforced to promote high ethical standards within the organization. The board has a key role in setting the
ethical tone of a company, not only by its own actions but also in appointing and overseeing key
executives and consequently the management in general (OECD, 2015). High ethical standards are in the
long-term interests of the company as a means to make it credible and trustworthy, not only in day-to-day
operations but also with respect to longer-term commitments (OECD, 2015).

ACA 3: Instill ethical leadership in the workplace

“We don’t need to choose between being good and being successful. What is best for us is to live
in a world we make better by promoting ethical values and modeling ethical behavior”, Yohan Goldson
stated in an article about the seven principles of ethical leadership. Is it having a lot of cash? A large
house? A fulfilling job? These questions come to mind when we’re asked to define what success looks
like. But whatever our own definition is, an effective approach is to instill ethics and integrity, and using
codes of conduct, and ensure sound corporate governance and management control. Setting the tone at the
top: the board of directors and management at all levels of the business demonstrate the importance of
integrity and ethical principles in supporting the system of internal control by their instructions, actions,
and conduct.

Ethics, like any other discipline, must be practiced consistently. We don't need to be noble about
it; we just need to be smart. When all is said and done, we will discover that being noble and being smart
are one and the same. Taking action is the most important step after determining what ethics is. We have
an obligation to apply these principles to our attitude and our behavior. And the application of ethical
actions steps are as follows 1) Evaluate informational integrity 2) Evaluate emotional bias 3) Cultivate
empathy through understanding 4) Translate awareness into action 5) Recognize that acting ethically is in
your own best interest and lastly 6) Learn from a mentor. Once we apply the principles of ethics to our
professional lives, we improve the chance that those same principles will seep out into the world of social
and political engagement, restoring civil society, providing our communities with a new lease on life, and
driving ever greater prosperity. Political and social issues are prevalent issues that are still being
experienced in today's business world. One of the most damaging misconceptions we face is the idea that
we can prevent financial misconduct by simply legislating laws for compliance of employees but
ironically not being perpetrated by the top management leaving additional regulations would have made
no difference. Over-regulation reduces work productivity and, as a result, creates new problems. The
more complex the regulation, the easier it is to manipulate and circumvent the law. Individuals make up
society. The more responsible one behaves, the more responsible others will feel. They are expected to act
the same way. And the more selfish or foolish one acts, the more those actions become the norm. That is
why, despite its shortcomings and limitations, the utilitarian framework thrives.

We need to understand that emotions are so strong that the mere mention of social or political
ideology prevents the fair conversation from taking place making any peaceful settlement impossible. But
there is one thing that all of us can agree on: we want to make more money. And the way to make more
money is not by treating other people like products or resources, but by treating them like partners. Trust
is fostered through ethics. Trust encourages loyalty. Loyalty generates passion. Employees who feel a
sense of belongingness take pride in the organization’s mission are contented. Almost every expert agrees
that happy employees are the key to wealth, prosperity, and success. That is why having high ethics is
helpful for business. Companies with the highest ethical ratings outperform those that are not. An ethical
culture fosters efficiency, quality, devoted staff, and loyal consumers and, as a result, increased revenues.

Recommendation

On account of Enron’s ineffective leadership, there should be strict implementation and

materialization of its code of ethics. Employees, executive or not, should be compensated for good
conduct and must be penalized for terrible deeds and poor performance. In lieu, a strengthened check and
balance execution in every department, especially in the Audit function, shall be supervised rigorously.
The reason behind that is to avoid overlooking any company malpractice. In addition, it helps in solving
any issues that may arise in the future. Aside from these, it is salient to hire the most competent and
trustworthy workers, mainly for higher-ups. Executives act as role models for the employees. If they
behave without restraint, those below them will do the same. For a company to progress and thrive,
excellent leadership shall be carried out. Workers are the heart of a company, assuming that they are
taken care of properly, its life is prolonged: otherwise, it would collapse.

With these in mind, the researchers utilized Enron’s RICE values as stipulated in its Code of
Ethics to come up with the following decision criteria to effectively measure which among the
recommended alternatives would best answer the need of Enron to build a culture of integrity to foster
trust and confidence in the workplace:

Decision Criteria Definition Rationale

Respect Embody the value of the Virtue Ethics

company’s existing Code of - Enron’s employees should recognize and
Ethics. Take charge in fostering respect the essence of the existence of their
good treatment and instill zero company’s Code of Ethics by simply
tolerance for disrespectful manners abiding by it; thus, they shall act
such as arrogance, callousness, and respectfully with consideration of other
ruthlessness. people.

Justice and Fairness

- Enron’s management should treat
everyone equally to stimulate respect with
everyone regardless of position.

Integrity Ensure strong ethical principles Virtue Ethics

 within the company. - Enron’s employees should incorporate
their moral principles in their work and
workplace.

Justice and Fairness

- Enron’s management should strongly
adhere to a consistent showcase of their
ethical values.

Ethics of Care
- Enron’s management should ensure
integrity in their workers’ performance by
employing a performance monitoring tool.

Communication Prioritize and emphasize honesty Ethics of Care

and transparency in the flow of - Enron’s management and employees
communication and information should exchange accurate and truthful
dissemination within the company. information with one another to avoid
unprecedented issues and problems within
the workplace.

Rights
- Enron’s management should disclose
important information to the employee as it
is their right; employees should also
disseminate salient information to the
management to secure a good flow of
communication and information in the
workplace. Giving no room for unwanted
business malpractice and corruption. Such
rights as the right to information and
communication rights.

Excellence Promote excellence in every aspect Rights

of the company. Delivering the - Enron’s management and employees
best service possible for both the should always be secure in bringing the best
employees and customers. out of each other. In the context of the right
to work and the right to express their ideas
with freedom.

Utilitarian
- The company should not overlook
everyone’s actions and guarantee the best
performance all the time: hence, protecting
both the employee and the company.

Ethics of care & Justice and Fairness

- Due care and diligence should be the
norm when providing service to all
stakeholders.
Justification & Conclusion

Weights Decision Criteria ACA 1 ACA 2 ACA 3

V S V S V S

20% Respect 1 0.2 2.5 0.5 3 0.6

50% Integrity 2 1.0 3 1.5 2.5 1.3

20% Communication 3 0.6 3 0.6 2.5 0.5

10% Excellence 2.5 0.3 3 0.3 2 0.2

Total Scores 8.5 2.1 11.5 2.9 10 2.6

* V= Value based on ranking (highest = 3; lowest = 1)
* S = Weights x Value

Guided by the decision criteria above, the three alternatives recommended were given a score
between 1 to 3 with 1 being the lowest and 3 being the highest based on how appropriately and effectively
each alternative responds to the requirements of each decision criteria.

Based on the rubric, ACA 2 which is to enforce an effective governance framework within the
organization, received the highest score of 2.9. The second alternative substantially covers the identified
decision criteria anchored on Enron’s core values of respect, integrity, communication, and excellence.
As such, the recommended alternative satisfies the following ethical frameworks:

Utilitarian The recommended alternative requires decision-making based on the interest

of both internal and external stakeholders.

Rights The recommended alternative requires Enron to adhere to government

regulations and ensure stakeholder access to transparent, timely, and relevant
information such as audited financial reports.

Ethics of Care The recommended alternative requires due care on all workplace transactions.
This alternative would allow Enron to rebuild its interpersonal relations based
on care and benevolence.

Justice and Fairness The recommended alternative requires that due diligence be fulfilled and the
duty to comply is adhered upon as it is what is due for each stakeholder. The
alternative which centers on building accountability and responsibility
effectively satisfies this requirement.

Virtue Ethics Finally, the recommended alternative promotes morality in the workplace.
Enforcing corporate governance provides guidance that both leaders and
 employees at Enron could adhere to in order to embody an ethical and moral
work life.

In conclusion, among the presented alternatives, only ACA 2 addresses both employee and
management responsibility in creating a culture of integrity in the workplace. While ACA 1 and 3 both
address the leadership aspect of this case, empowering employees could be an effective means of check
and balances.

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