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HBRCaseStudy-CorporateScandal

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Running head: Harvard Business Review Case Study - CORPORATE SCANDALS
HBR Case- Corporate Scandals
Okusolubo Gbenga Samuel
Student ID: 551695
Central Penn College
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Running head: Harvard Business Review Case Study - CORPORATE SCANDALS
Abstract
The case "Jeffrey Skilling, Bernie Madoff & the Other Smartest Guys in the Room"
presents two micro cases that describe some critical situations associated with the bankruptcies
of Enron and Bernard L. Madoff Investment Securities in 2001 and 2008, respectively. The first
micro case focuses on factors affecting the behavior of Arthur Andersen's managers and
employees in the Enron scandal, while the second micro case describes variables leading the
SEC to fail in identifying the illegal conduct of Bernie Madoff.
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Introduction
Motivation and promoting the company is the basic aim of Enron. The main aim of the
organization is to be of the world largest and well known energy company in the world. Enron
look like to be able to completing their mission and build a huge amount of assets. The company
had strong control over the organizational management, leadership style, and production which
gave them a big opportunity for uprising in late 1990’s. The company maintained its name and
looks like they can do nothing wrong.
Overview of the Company
Enron Corporation (former New York Stock Exchange ticker symbol ENE) was an
American energy, commodities, and Services Company based in Houston, Texas. It was founded
in 1985 as the result of a merger between Houston Natural Gas and InterNorth, both relatively
small regional companies in U.S. Before its bankruptcy on December 2, 2001, Enron employed
approximately 20,000 staff and was one of the world's major electricity, natural gas,
communications and pulp and paper companies, with claimed revenues of nearly $111 billion
during 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive
years. Almost immediately after the relocation to Houston, Enron began selling major assets
such as its chemicals division, Northern PetroChemicals, accepted silent partners in Enron
CoGeneration, Northern Border Pipeline and Transwestern Pipeline, and became a less
diversified company.[citation needed] Early financial analysts said Enron was accumulating
great debt and the sale of major operations would not solve the problem.
Enron was created in 1986 from a merger of Houston National Gas and InterNorth (a natural gas
pipeline company) with Ken Lay as its chair and CEO (Stein & Pinto, 2011). In 1988, the
Running head: Harvard Business Review Case Study - CORPORATE SCANDALS
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deregulation of electrical power markets took effect, and Enron transformed from a traditional
natural gas energy company focused on energy delivery through gas pipelines to an energy
broker company that brought buyers and sellers together (Sims & Brinkmann, 2003). Enron
transformed into a high-tech global enterprise that diversified into trading energy, water, weather
derivatives, broadband and electricity.
Leadership Style in Enron Case- Charismatic Leadership
Enron was led by charismatic leaders Ken Lay as well as Jeff Skilling who was said to
have “radiated so much charisma that he induced blind obedience in his followers” (Khurana,
2002). Charisma is a sought-after quality among corporate leaders (Khurana, 2002) and one that
has been correlated with leadership effectiveness (Hoffman, Woehr, Maldagen-Youngjohn, &
Lyons, 2011), but when overdeveloped, charisma is a quality that can lead to the dark side of
leadership. As charismatic leaders, Lay and Skilling had a clear and compelling vision for the
organization and were skilled in communicating their compelling vision of Enron and its culture
to all stakeholders—employees, shareholders, the media and the public—that the company was
“the most innovative culture in America” (Murphy & Ensher, 2008).
Charismatic leaders are also characterized as having heightened sense to the
environmental context of the organization and the ability to scan for environment for trends that
might require them to change their vision (Murphy & Ensher, 2008). Ken Lay, for example, was
acutely aware of the regulatory context of the business and believed that energy markets should
be deregulated and lobbied tirelessly for change on Capitol Hill. The power of deregulation gave
rise to new business opportunities for Enron. However, Lay also had sensitivity to the nature of
politics and the need to maintain relationships with politicians and became the largest contributor
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to the George W. Bush campaign. Lay, Skilling and other top leaders such as Andy Fastow, also
demonstrated risk-taking and deviation from the status quo, a characteristic found in charismatic
leaders (Murphy & Ensher, 2008). Fastow was the creator of hundreds of special purpose
entities—risky investments named after Star War’s characters that were designed to transfer
Enron’s debt outside of the company and get it off the books (Saporito, 2002; Schwartz &
Watkins, 2004). Charismatic leaders can bring much strength to their organizations, but this
same characteristic has also been defined as a “key ingredients of cultic dynamics” in Enron
leadership (Tourish, & Vatcha, 2005). Charismatic leaders may have a self-schema that reflects a
propensity toward authoritarian control (Murphy & Ensher, 2008), a defining characteristic
Enron’s top leadership.
The Culture of Enron
Enron’s leadership used its charisma to craft a strong organizational culture which was
both an extraordinary corporate and managerial success, and at the same time, a weakness that
eventually led to the company’s downfall. A cultural paradigm is a schematic which captures the
underlying assumptions on which a corporate culture is based. Figure 3 describes Enron’s
paradigm and serves as a basis for explaining the cultural artifacts that have emerged as the result
of these underlying values and assumptions (Schein, 1990). Enron’s leadership developed a set
of very clear cultural values that were explicitly and repeatedly communicated to employees and
guided their actions. Enron valued innovation, creativity, change and adaptability, and
competitive dominance of the marketplace—and the company richly rewarded employees who
achieved these objectives. The deregulation of the energy market was a “critical incident” that
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shaped Enron’s culture because the company was no longer bound by the regulations that
directed traditional gas pipeline companies; Enron was now able to exercise creativity in
diversifying into an energy trading company (Schein, 1990; Sims & Brinkmann, 2003). This
creative vision enabled Enron to embrace change and adapt to the marketplace in transforming
from a traditional energy company to one that diversified into brokering energy, broadband
services, electricity and weather derivatives (Gibney, 2005).
SWOT Facts: Strengths
Marketing and value delivery:
Enron did not become overnight an energy giant serving multitude of customers. Its
success comes as a result of marketing and value delivery. Marketing helps Enron to identify and
meet customer’s needs. In a hypercompetitive economy with increasingly rational buyers faced
with abundant choices, a company can win only by fine-tuning the value delivery process and
choosing, providing and communicating superior vales.
Another strength displayed Enron is that it gave awareness to it entire customers which
also cause its name as brand. Enron was ranked as seventh among 500 companies, Enron display
reliability as the biggest natural gas pipeline system company that operates in the United State.
Along with the with the energy level supply, the company also has advantage by keeping the
price reasonable and the service which they provide.
Weaknesses
Failed board of Directors:
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The question raised by the general public when the Enron saga started was where the
board of Directors was and how come they did not see mess coming. Probably, they are more
interested in the task and satisfied with the profit. Nevertheless, board of directors bears the big
responsibilities for not doing correctly their oversight. The board of directors failed to carry out
proper monitoring by acting through the committee, evaluate and influence, initiate and
determine the idea and best decision that suites the organization.
Conflict of Interest:
Even though at the time of Enron’s collapse the Sarbanes-Oxley Act was enacted yet, the
Internal Revenue Service require corporation to adhered to the Conflict of Interest Policy to
avoid wrong doing that can get it off the path. For any organization to be healthy and productive,
it needs to be strong in four core areas namely; (a) financial capital in terms of investments and
profits, (b) technological capital in terms of cutting-edge software and hardware, (c) human
capital in terms of knowledge, expertise and creativity, (d) social-spiritual capital in terms of
ethics, relationship, morals, meaning and purpose
Unethical Practices:
Hearing and reports indicate that Enron kept accounting documents hidden and well
manipulated with complicity of its auditing company. Enron unethical practices in particular has
become infamous for the questionable actions of its top executives in the form (1) off-balance
sheet partnerships used to hide the company’s deteriorating finances, (2) revenue from long-term
contracts being spread over multiple years, (3) financial reports being falsified to inflate
executive bonuses, and (4) manipulation of electricity market –leading to California energy
crisis. If one will pinpoint the major cause of Enron downfall, it will be its unethical practices.
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Enron Opportunities

The main opportunity which Enron has is its name and brand

One of the good point of Enron has that it’s know is well known in the market as energy
provider.

Enron can take many advantages for expanding their products as they are the main
supplier of gas pipeline and many other materials goods related to it.

In 1970’s deregulation of energy occurs in the market which allow Enron to rise and start
business in the market.
Conclusion
The HBR analysis performed on this case study helped to identify, among many, the
strengths, weaknesses, opportunities, and ethical culture of Enron. The analysis provide external
and internal factor the company had to deal with , the important question is to determine what led
to the collapse of an apparently wealthy company like Enron.
Despite Enron’s thorough ethics policy, a massive financial scandal took place that could
have been prevented by encouraging whistle-blowing throughout the organization. The auditing
system that the company had in place failed to serve its purpose in the detection of fraudulent
activity which shows a need for more comprehensive accountability. An organization is not an
individual but a collection of individuals working towards a common goal. Because of this,
companies need transparency as well as the means at all levels to be able to report unethical
activity on behalf of any held position regardless of hierarchical status. A company’s ethics
program should not be assessed based solely on how it looks on paper, but rather how it is
Running head: Harvard Business Review Case Study - CORPORATE SCANDALS
integrated into the culture of the organization and the amount of transparency and ethical
autonomy that is granted at all positional levels of the company.
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References
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Sage Publications, 1990a
Johnson C.E. (2015). Organizational Ethics: A Practical Approach, 3rd edition, Sage, 2015.
Northouse P.G. (2016). Leadership Theory and Practice, 7th edition, SAGE Publications,
Thousand Oaks, CA.
Sims, R. R., & Brinkmann, J. (2003). Enron Ethics (Or: Culture Matters More than Codes).
Journal Of Business Ethics, 45(3), 243-256.
Hays, J. B., & Ariail, D. L. (2013). Enron Should Not Have Been a Surprise and the Next Major
Fraud Should Not Be Either. Journal Of Accounting & Finance (2158-3625), 13(3).
Wilson, A. C., & Key, K. G. (2013). Enron Audit Failures: A Compromise of Ethics?. Feature
Edition, 2013(3), 50-68.
Yuhao, L. (2010). The Case Analysis of the Scandal of Enron. International Journal Of Business
& Management, 5(10), 37-41.
Gilbert, J. (2012). Ethics for managers: Philosophical foundations and business realities. New
York, NY: Routledge.
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