A 1 credit first-year seminar at Washington University in St. Louis taught by Dr. Jill Stratton designed to teach students what constitutes bad leadership and how we can work towards creating positive, effective leadership.
Tuesday, March 20, 2012
Enron Case: Questions
Briefly outline the main elements of bad leadership that contributed to Enron's collapse AND answer the following question:
There were several factors that brought about the Enron collapse. Before going into specifics, I think it is necessary to understand the general business culture in Enron. Enron, based on the recommendations of a consulting firm it had close relations with, practiced a form of promotion they fondly referred to as the "yank and rank". The purpose of the system was to instill a hugely competitive atmosphere and catapult the "stars" to the top. In addition, Enron went to great lengths to establish company loyalty. As a direct result within Enron itself there was a culture of extreme competition that was constantly seeking the next big leader. As such, when people eventually made it to the top they were extremely narcissistic and were not good at listening to others or going to others for advice. Also, this created an atmosphere where it was difficult to hold a dissenting opinion. The problem was that when Enron clearly was having trouble each new leader did not come clean with the problems and instead covered them up and attempted to 'fix' them, because they knew they were the 'best' there is. What actually got Enron into so much financial trouble also came from this reliance on stars - each person was allowed to essentially do whatever project they wanted which led to many bad business decisions and attempted mergers. Outside of Enron, the accounting firm was complicit in helping them fudge their numbers. Also, the followers failed to put an end to it and the board did little to hold Enron accountable, but as I pointed out earlier, It was not an environment conducive to this kind of action. In summation, there is a lot of blame to go on everyone's shoulders.
To answer the question, I think this could absolutely happen again. Its not difficult to have a company where the leaders are narcissists and the followers can't speak up. All it takes is a little complicit action on the behalves of auditors. Even outside of a major corporation like Enron things like this can happen - e.g. Ponzi schemes. Its human nature. No one thinks they are below average and everyone wants to make it rich, quick.
It is possible to conclude that the Enron scandal was the result of sneaking around the GAAP (Generally accepted accounting principles). However, the high level decisions that led to such practices show that the fall of Enron should be largely blamed on the leaders of the company. Kenneth Lay was a narcissistic man, who believed too much in his success rate. He expanded the business to the point where it was no longer sustainable and rather disastrous for the company. Also, his company was built on the “star” system; they treated the talented employees as stars, and they were allowed to dream big and do their dream projects. Considering the fact that Lay saw himself as a talented star himself, there was an excuse for him to venture his ideas and dream big. The combination of narcissism of the leader and the wrong business model eventually brought havoc to the company. Furthermore, Lay did not have others who could speak up to him, because of the “rank and yank” system. This structural problem worsened Lay’s narcissism and enlarged the problem Enron faced. Also, it is important to question what kind of people Lay surrounded himself with. Skilling and Fastow, who did the book work to cover up the company’s debts and fake the earnings, were both close to Lay. Also, it is worth to note that the board of directors was composed of a lot of “close friends” of Lay. We have seen from Bay of Pigs example that this can give wrong indications to the leader and lead him to make illogical decisions.
I think the Enron scandal can happen again. Companies always work around the system to exaggerate their incomes and lower their debts. Enron was caught, and other companies are yet to be caught. From one point of view, such immoral decisions are made by leaders of many companies to protect the company. Typically, the reason for such false bookkeeping is to keep the stock holders content. If stock prices fall and the company collapses due to honest bookkeeping, then all the employees will lose their jobs and their families will have to suffer without income. But on the other hand, it is true that such practices are illegal and immoral. The leaders of companies have to face such choices every day: is it more important to be moral, or to keep the food on the table for so many families?
I also think that one of the main reasons for Enron's collapse was Lay's narcissism. As Enron became more successful, I believe that Lay became more confident as well as narcissistic. Because of this, he could dream big and hire others to dream big as well. However he was blindsided by this invincibility, which eventually led to the company's corruption and its downfall.
The main points of bad leadership that explains the demise of Enron are as follows: 1. The working environment – Enron favored a system called “yank and rank”, in which the employees who had the best credentials, who earned the most, and were the most noticeable in the eyes of the management, were promoted very quickly with no regard to the amount of experience they had or whether they were suited for the leadership role. This created an environment which harsh competition, in turn making it hard for employees to develop other important business skills, such as working in a group, or seeing things beyond immediate profit. Also, the “yank and rank” system caused people who were not necessarily suited for leadership roles to get to the top very quickly, creating a vicious cycle in which the company was not led by people who knew the importance of “good followership”, an important factor to the smooth running of a company. 2. Dishonesty – I think that probably the thing that led to such a huge downfall was the general dishonesty of the company. Even if there was a problem, it is astonishing how no one in the company attempted to do something about it, until one employee was brave enough to point it out in a memo. Part of this is the work environment that I discussed above, but the fact that the leaders of the company were not competent enough to do what was good for the company must also be considered. A good leader would have recognized that not addressing the problems and covering over would eventually lead to the demise of the company – yet the Enron management failed to do so. I think that another Enron can very well happen – it is incredible how blind people can get when they attain huge power and have so much more to lose than the average person. The Enron case served as a good lesson to many for a decent period of time, yet we still have corruption in business and government. Obviously, not enough people have learned from Enron’s disaster.
The collapse of Enron was clearly caused by many factors and like similarly complicated situations, it would be unwise to suggest that it was the result of the misguidance of just one or even just a few people. The company felt compelled to misrepresent their performance because of the economic climate of our society. That is certainly not to say that those in Enron in not responsible for its collapse, but rather it points to the potential of another such misrepresentation of facts to happen again in the future of our country. Enron began using the services of McKinsey & Company Consulting Firm. Skilling, at that point an employee of McKinsey, advised Enron on response tactics to the markets deregulation. Eventually he became CEO of Enron. The excessive growth under Skilling and McKinsey’s guidance, into areas such as electricity, water, and broadband, lead Entro to become much less stable. As did the “Rank-and-Yank” system implemented under the advice of McKinsey. I believe these factors which lead to the instability to the company, the false or misleading financial statements, and eventual cover-ups.
All of these behaviors were initiated to some extent, due to the highly competitive market in which Enron was competing and the ever increasing demands of its shareholders. Therefore although more regulations have been put in place to prevent such behavior, we still reside in a society that fosters such actions. Although people may have temporarily been wary of companies and top executives, I believe that we easily forget. I also think, that even if we are distrusting, we aren’t necessarily preventing these sorts of financial collapses from happening again.
I agree with Molly when she says that "even if we are distrusting, we aren't necessarily preventing these sorts of financial collapses from happening again." I think the economy today encourages people to make as much money as quickly as possible. Therefore as much as we try to prevent corruption and instability within large businesses, it is bound to happen due to humans' inherent ambitions to become successful and make money.
In my opinion the bad leadership that lead to Enron's collapse was a three tiered collapse: the specific leaders involved in Enron, the "yank and rank" system Enron employed, and the cover-up that ensued after the illegal accounting practices.
The specific CEOs and executives involved in the Enron case are part of the Bad Leadership that lead to its collapse. The specific leaders involved made bad decision after bad decision not only after the collapse of Enron, but on the companies basic set-up (i.e. yank and rank). The lack of respect for employees in the case of Sherron Watkins being ignored was a huge mistake on the part of the actual people in power.
The "yank and rank" system that was discussed so much in class was a system Enron adopted because of a consulting firm and lead to a constant cycling of leaders in Enron. There was always a push to move up in the company, and not much accountability to stay or care for one's current position in the company. I think this system was bad leadership on the consulting company, yes, but at the end of the day it was Enron's decision to accept the consulting company's advice and not look into other options.
The cover-up of the accounting practices was huge in the collapse of Enron. In many cases throughout history, it is not the act that gets one in trouble, but the cover-up. This could partially be interpreted as the case with Enron. The continual cover-up with accounting practices lead to the court-hearings and subsequent jail sentences for several Enron executives.
I think there is definitely a possibility of an Enron happening again. The level of wealth Enron received lead to the misconception that the company was all powerful. That level of wealth and power is not going away, neither is the bloated egos and misconceptions it creates. Companies like Enron before it's collapse are around today, and will be around in the future, yet nothing has changed to prevent "The Enron Case." And even if powerful legislation was drafted-part of what Enron did was "illegal." Laws can be broken. "Enrons" will always exists, so "Enron Cases" always will.
I think there were many elements of bad leadership involved in Enron’s fall. Most obviously is the board of directors, CEO, and other high ranking officials. They oversaw all the fraudulent acts and knew their actions were illegal. When an employee would feebly try to mention the falsehood of their practices, these leaders would ignore the employees comments. These leaders certainly weren’t incompetent. They were very clever. But the fact that they were willing to break laws and ignore their employees makes them bad leaders. Another group of people responsible for this scandal were the SEC and other auditing bodies that failed to identify the illegality of Enron’s financial reports. In this case incompetent leadership is pretty apparent. These governmental forces failed to do their job and the result was a majorly scandalous fraud. The other group of people who deserve some blame is the followers in Enron; that is to say the employees who knew about the scandal but went along with it anyway are just as much to blame as their ‘leaders’ in the company. While there were a few employees who expressed concern, most of them more or less blindly followed without any resistance. Accepting and partaking in the companies illegal actions makes this group responsible as well.
Another Enron could definitely happen now. Though it would be much harder with tightened regulation by way of Sarbanes Oxley and the PCAOB, companies have proven they can fool auditors and the government. They just have to be more creative now. The other thing is any new law that comes out will not be able to address every issue and loophole that will arise in the future. Accounting will get more and more complex along with technology, and innovative accounting practices will develop alongside new business practices, ideas and strategy. Even though there is an awareness of shady accounting practices amongst publicly traded companies now there is still a good chance something similar will happen in the future. Who knows; perhaps one is even happening right now in 2012.
Enron followed a similar rise-and-fall pattern of the other failed corporations we discussed in class: a well-qualified leader emerges at the appropriate time to take over a budding company. Through an innovative new marketing strategy, the company grows exponentially, but then the undesirable characteristics begin to appear. Because of this, many of the common faults of bad leadership helped lead to Enron’s downfall, such as greed, belief one is above normal standards, an unquenchable thirst to expand indefinitely, and an obsession with the image of their company. The main difference making Enron’s failure stand out was the inner workings of the corporation. Employing the “rank and yank” system, Enron employees could never find a sense of belonging in the company, but rather fierce competitive attitudes and constant fear of being fired. While in the short-term, this might make lower employees work harder, once they made it high enough in the ranks, it didn’t matter what they did. Louise Kitchen, purposefully going behind the company’s back for a project she wasn’t even particularly good at, was actually rewarded by being promoted to President of Enron Online. Top executives, while maintaining a relatively low salary, had unbelievable bonuses from stocks and forgiven loans. Ultimately, this “War for Talent” led to the exact opposite, and no one could properly fight back against the looming downfall. Enron also falsely assumed their company as a whole was as intelligent and successful as the individual employees.
Another “Enron” could certainly happen again; although we’ve become more aware of dishonest companies and setting up blockades for them, the companies in turn while find new ways to cheat the system. We’ve already seen more large companies fail since Enron’s collapse. The government can also do little to restrict the exact actions a firm can take within itself.
Enron’s bad leadership steamed from the culture inside the organization. They valued talent more than actual results. These values fostered gifted individuals to become bad leaders. Talented individuals could be unproductive but as long as they showed talent they would be continuously promoted, creating a narcissistic society where these individuals can do no wrong. The result of Enron’s talent cache was many individuals who each had their own direction, and the freedom to start whatever projects so pleased them. The lack of organization and direction in the company led to losses in profits. The company felt it had to hide these losses and this resulted in accounting scandals in order to cover up their failure. Usually it would be the responsibility of a consulting firm such as McKinsey to correct this malpractice, but they were the ones who propagated the culture in the first place. With no corrective action, Enron accumulated increasing losses until it could no longer be covered up by corrupt accounting practices.
It is most certainly possible that a case like Enron could reoccur. We live in a capitalist society and people will try whatever it takes to make money. On paper, Enron seemed like an impressive company destined for greatness because if its talent acquisition, but the company failed due to this same reason. This failure had a huge effect on the economy as well as countless people’s livelihood. Despite these huge consequences, the Enron case has already floated out of society’s consciousness. It has only been ten years since this incident and I knew very little about it, and I imagine most people my age have similar knowledge of the event. Pretty soon this case will be completely forgotten by society, and another company will try the same formula Enron used that looked so good on paper. Although there are new laws to prevent the accounting scandals that occurred, narcissistic leaders will find new ways to cover their failures.
There were several factors that brought about the Enron collapse. Before going into specifics, I think it is necessary to understand the general business culture in Enron. Enron, based on the recommendations of a consulting firm it had close relations with, practiced a form of promotion they fondly referred to as the "yank and rank". The purpose of the system was to instill a hugely competitive atmosphere and catapult the "stars" to the top. In addition, Enron went to great lengths to establish company loyalty. As a direct result within Enron itself there was a culture of extreme competition that was constantly seeking the next big leader. As such, when people eventually made it to the top they were extremely narcissistic and were not good at listening to others or going to others for advice. Also, this created an atmosphere where it was difficult to hold a dissenting opinion. The problem was that when Enron clearly was having trouble each new leader did not come clean with the problems and instead covered them up and attempted to 'fix' them, because they knew they were the 'best' there is. What actually got Enron into so much financial trouble also came from this reliance on stars - each person was allowed to essentially do whatever project they wanted which led to many bad business decisions and attempted mergers.
ReplyDeleteOutside of Enron, the accounting firm was complicit in helping them fudge their numbers. Also, the followers failed to put an end to it and the board did little to hold Enron accountable, but as I pointed out earlier, It was not an environment conducive to this kind of action. In summation, there is a lot of blame to go on everyone's shoulders.
To answer the question, I think this could absolutely happen again. Its not difficult to have a company where the leaders are narcissists and the followers can't speak up. All it takes is a little complicit action on the behalves of auditors. Even outside of a major corporation like Enron things like this can happen - e.g. Ponzi schemes. Its human nature. No one thinks they are below average and everyone wants to make it rich, quick.
It is possible to conclude that the Enron scandal was the result of sneaking around the GAAP (Generally accepted accounting principles). However, the high level decisions that led to such practices show that the fall of Enron should be largely blamed on the leaders of the company.
ReplyDeleteKenneth Lay was a narcissistic man, who believed too much in his success rate. He expanded the business to the point where it was no longer sustainable and rather disastrous for the company. Also, his company was built on the “star” system; they treated the talented employees as stars, and they were allowed to dream big and do their dream projects. Considering the fact that Lay saw himself as a talented star himself, there was an excuse for him to venture his ideas and dream big. The combination of narcissism of the leader and the wrong business model eventually brought havoc to the company.
Furthermore, Lay did not have others who could speak up to him, because of the “rank and yank” system. This structural problem worsened Lay’s narcissism and enlarged the problem Enron faced. Also, it is important to question what kind of people Lay surrounded himself with. Skilling and Fastow, who did the book work to cover up the company’s debts and fake the earnings, were both close to Lay. Also, it is worth to note that the board of directors was composed of a lot of “close friends” of Lay. We have seen from Bay of Pigs example that this can give wrong indications to the leader and lead him to make illogical decisions.
I think the Enron scandal can happen again. Companies always work around the system to exaggerate their incomes and lower their debts. Enron was caught, and other companies are yet to be caught. From one point of view, such immoral decisions are made by leaders of many companies to protect the company. Typically, the reason for such false bookkeeping is to keep the stock holders content. If stock prices fall and the company collapses due to honest bookkeeping, then all the employees will lose their jobs and their families will have to suffer without income. But on the other hand, it is true that such practices are illegal and immoral. The leaders of companies have to face such choices every day: is it more important to be moral, or to keep the food on the table for so many families?
I also think that one of the main reasons for Enron's collapse was Lay's narcissism. As Enron became more successful, I believe that Lay became more confident as well as narcissistic. Because of this, he could dream big and hire others to dream big as well. However he was blindsided by this invincibility, which eventually led to the company's corruption and its downfall.
DeleteThe main points of bad leadership that explains the demise of Enron are as follows:
ReplyDelete1. The working environment – Enron favored a system called “yank and rank”, in which the employees who had the best credentials, who earned the most, and were the most noticeable in the eyes of the management, were promoted very quickly with no regard to the amount of experience they had or whether they were suited for the leadership role. This created an environment which harsh competition, in turn making it hard for employees to develop other important business skills, such as working in a group, or seeing things beyond immediate profit. Also, the “yank and rank” system caused people who were not necessarily suited for leadership roles to get to the top very quickly, creating a vicious cycle in which the company was not led by people who knew the importance of “good followership”, an important factor to the smooth running of a company.
2. Dishonesty – I think that probably the thing that led to such a huge downfall was the general dishonesty of the company. Even if there was a problem, it is astonishing how no one in the company attempted to do something about it, until one employee was brave enough to point it out in a memo. Part of this is the work environment that I discussed above, but the fact that the leaders of the company were not competent enough to do what was good for the company must also be considered. A good leader would have recognized that not addressing the problems and covering over would eventually lead to the demise of the company – yet the Enron management failed to do so.
I think that another Enron can very well happen – it is incredible how blind people can get when they attain huge power and have so much more to lose than the average person. The Enron case served as a good lesson to many for a decent period of time, yet we still have corruption in business and government. Obviously, not enough people have learned from Enron’s disaster.
The collapse of Enron was clearly caused by many factors and like similarly complicated situations, it would be unwise to suggest that it was the result of the misguidance of just one or even just a few people. The company felt compelled to misrepresent their performance because of the economic climate of our society. That is certainly not to say that those in Enron in not responsible for its collapse, but rather it points to the potential of another such misrepresentation of facts to happen again in the future of our country. Enron began using the services of McKinsey & Company Consulting Firm. Skilling, at that point an employee of McKinsey, advised Enron on response tactics to the markets deregulation. Eventually he became CEO of Enron. The excessive growth under Skilling and McKinsey’s guidance, into areas such as electricity, water, and broadband, lead Entro to become much less stable. As did the “Rank-and-Yank” system implemented under the advice of McKinsey. I believe these factors which lead to the instability to the company, the false or misleading financial statements, and eventual cover-ups.
ReplyDeleteAll of these behaviors were initiated to some extent, due to the highly competitive market in which Enron was competing and the ever increasing demands of its shareholders. Therefore although more regulations have been put in place to prevent such behavior, we still reside in a society that fosters such actions. Although people may have temporarily been wary of companies and top executives, I believe that we easily forget. I also think, that even if we are distrusting, we aren’t necessarily preventing these sorts of financial collapses from happening again.
I agree with Molly when she says that "even if we are distrusting, we aren't necessarily preventing these sorts of financial collapses from happening again." I think the economy today encourages people to make as much money as quickly as possible. Therefore as much as we try to prevent corruption and instability within large businesses, it is bound to happen due to humans' inherent ambitions to become successful and make money.
DeleteIn my opinion the bad leadership that lead to Enron's collapse was a three tiered collapse: the specific leaders involved in Enron, the "yank and rank" system Enron employed, and the cover-up that ensued after the illegal accounting practices.
ReplyDeleteThe specific CEOs and executives involved in the Enron case are part of the Bad Leadership that lead to its collapse. The specific leaders involved made bad decision after bad decision not only after the collapse of Enron, but on the companies basic set-up (i.e. yank and rank). The lack of respect for employees in the case of Sherron Watkins being ignored was a huge mistake on the part of the actual people in power.
The "yank and rank" system that was discussed so much in class was a system Enron adopted because of a consulting firm and lead to a constant cycling of leaders in Enron. There was always a push to move up in the company, and not much accountability to stay or care for one's current position in the company. I think this system was bad leadership on the consulting company, yes, but at the end of the day it was Enron's decision to accept the consulting company's advice and not look into other options.
The cover-up of the accounting practices was huge in the collapse of Enron. In many cases throughout history, it is not the act that gets one in trouble, but the cover-up. This could partially be interpreted as the case with Enron. The continual cover-up with accounting practices lead to the court-hearings and subsequent jail sentences for several Enron executives.
I think there is definitely a possibility of an Enron happening again. The level of wealth Enron received lead to the misconception that the company was all powerful. That level of wealth and power is not going away, neither is the bloated egos and misconceptions it creates. Companies like Enron before it's collapse are around today, and will be around in the future, yet nothing has changed to prevent "The Enron Case." And even if powerful legislation was drafted-part of what Enron did was "illegal." Laws can be broken. "Enrons" will always exists, so "Enron Cases" always will.
I think there were many elements of bad leadership involved in Enron’s fall. Most obviously is the board of directors, CEO, and other high ranking officials. They oversaw all the fraudulent acts and knew their actions were illegal. When an employee would feebly try to mention the falsehood of their practices, these leaders would ignore the employees comments. These leaders certainly weren’t incompetent. They were very clever. But the fact that they were willing to break laws and ignore their employees makes them bad leaders.
ReplyDeleteAnother group of people responsible for this scandal were the SEC and other auditing bodies that failed to identify the illegality of Enron’s financial reports. In this case incompetent leadership is pretty apparent. These governmental forces failed to do their job and the result was a majorly scandalous fraud.
The other group of people who deserve some blame is the followers in Enron; that is to say the employees who knew about the scandal but went along with it anyway are just as much to blame as their ‘leaders’ in the company. While there were a few employees who expressed concern, most of them more or less blindly followed without any resistance. Accepting and partaking in the companies illegal actions makes this group responsible as well.
Another Enron could definitely happen now. Though it would be much harder with tightened regulation by way of Sarbanes Oxley and the PCAOB, companies have proven they can fool auditors and the government. They just have to be more creative now. The other thing is any new law that comes out will not be able to address every issue and loophole that will arise in the future. Accounting will get more and more complex along with technology, and innovative accounting practices will develop alongside new business practices, ideas and strategy. Even though there is an awareness of shady accounting practices amongst publicly traded companies now there is still a good chance something similar will happen in the future. Who knows; perhaps one is even happening right now in 2012.
Enron followed a similar rise-and-fall pattern of the other failed corporations we discussed in class: a well-qualified leader emerges at the appropriate time to take over a budding company. Through an innovative new marketing strategy, the company grows exponentially, but then the undesirable characteristics begin to appear. Because of this, many of the common faults of bad leadership helped lead to Enron’s downfall, such as greed, belief one is above normal standards, an unquenchable thirst to expand indefinitely, and an obsession with the image of their company. The main difference making Enron’s failure stand out was the inner workings of the corporation. Employing the “rank and yank” system, Enron employees could never find a sense of belonging in the company, but rather fierce competitive attitudes and constant fear of being fired. While in the short-term, this might make lower employees work harder, once they made it high enough in the ranks, it didn’t matter what they did. Louise Kitchen, purposefully going behind the company’s back for a project she wasn’t even particularly good at, was actually rewarded by being promoted to President of Enron Online. Top executives, while maintaining a relatively low salary, had unbelievable bonuses from stocks and forgiven loans. Ultimately, this “War for Talent” led to the exact opposite, and no one could properly fight back against the looming downfall. Enron also falsely assumed their company as a whole was as intelligent and successful as the individual employees.
ReplyDeleteAnother “Enron” could certainly happen again; although we’ve become more aware of dishonest companies and setting up blockades for them, the companies in turn while find new ways to cheat the system. We’ve already seen more large companies fail since Enron’s collapse. The government can also do little to restrict the exact actions a firm can take within itself.
Enron’s bad leadership steamed from the culture inside the organization. They valued talent more than actual results. These values fostered gifted individuals to become bad leaders. Talented individuals could be unproductive but as long as they showed talent they would be continuously promoted, creating a narcissistic society where these individuals can do no wrong. The result of Enron’s talent cache was many individuals who each had their own direction, and the freedom to start whatever projects so pleased them. The lack of organization and direction in the company led to losses in profits. The company felt it had to hide these losses and this resulted in accounting scandals in order to cover up their failure. Usually it would be the responsibility of a consulting firm such as McKinsey to correct this malpractice, but they were the ones who propagated the culture in the first place. With no corrective action, Enron accumulated increasing losses until it could no longer be covered up by corrupt accounting practices.
ReplyDeleteIt is most certainly possible that a case like Enron could reoccur. We live in a capitalist society and people will try whatever it takes to make money. On paper, Enron seemed like an impressive company destined for greatness because if its talent acquisition, but the company failed due to this same reason. This failure had a huge effect on the economy as well as countless people’s livelihood. Despite these huge consequences, the Enron case has already floated out of society’s consciousness. It has only been ten years since this incident and I knew very little about it, and I imagine most people my age have similar knowledge of the event. Pretty soon this case will be completely forgotten by society, and another company will try the same formula Enron used that looked so good on paper. Although there are new laws to prevent the accounting scandals that occurred, narcissistic leaders will find new ways to cover their failures.