Case Study On Enron’s Bankruptcy: Identifying Problems, Leadership Theories, And Solutions

Identifying problems from case study

Case study about the biggest bankruptcy case in Australia.
 

The study is a detailed analysis of a case study related to bankruptcy in U.S.A. The analysis of the case study seeks to identify the inherent problems in the organization and what lead to the downfall of the organization. It will explain the events in the case study with the use of different theories on leadership. It will analyze those theories and ideas to find solutions to the problem identified in the case study. Based on the issues identified, effective solutions will be provided to improve similar kind of situations in the organization. It will recommend the best solution available for the problem and give detailed information on how specific solutions need to be implemented to bring the change in the organization. It will also identify types of unethical behavior demonstrated in the case study and what intervention needs to be done minimize this kind of behavior in an organization.

The case study is about the biggest bankruptcy case in Australia. It is about US Company Enron formed by the merger of natural gas pipeline companies Houston Natural Gas and Internorth in 1986. In 15 years time span the company expanded to other products like natural gas, electricity, and communication. The company’s downfall became evident from the third quarter of 2001. During that period, the stock market collapsed all of a sudden. Enron could not make new borrowings, and eventually, they ran out of cash. This leads to loss of confidence in leaders of Enron. Though their assets and earnings showed a satisfactory progress of the company but it was just an illusion. Due to partnership and financial deal with the different company, they were in a huge burden of debt. They created false earnings, avoided taxes and hide losses. Another major problem was a conflict of interest. The employees were not united for common objectives. At Enron, the employee appraisal was based on profit generated by the employee but not on delivering core values of the organization.

There were also unethical practices in the organization. The proof was the case of California was they used unethical means to generate extra profits. They were involved in just raising the companies to share and undermined ethical issues in practice. Even after the retirement of Enron’s CEO Jeff Skilling, Ken Lay also followed his steps. They continued to buy more shares and ultimately failed completely and became bankrupt. Board of Directors should monitor unethical behavior in an organization, but they were Enron’s CEO themselves were into unethical practice. There was no proper collaboration between employees, and the Directors did not brief on partnerships. Many were sued in the company for insider trading. Though Enron’s values were “Respect, Integrity, Communication, and Excellence”, but it was not followed in reality. Therefore, major problem analyzed was the conflict of interest (Individualism), lack of borrowings, massive debts and unrestrained pursuit of profit.  The risk-taking a culture of Enron further promoted unethical practices (Leonidou et al., 2013). 

Explanation of case studies by theories on leadership

The action of CEOs of Enron will be identified by relevant theories on leadership. One of them is the ‘Trait theory’. This theory suggests that characteristics of a person make them a good leader. Common traits include empathy, integrity, good decision making skills, etc. This believes influences one’s action. But Enron failed because both CEO’s Jeff Skilling and Ken Lay were lacking in this regard. Though they were involved in creating more profits and earnings, but they did not pay heed to unethical means of achieving it (Colbert et al., 2012).

Another theory is the behavioral theory of leadership. It explains the involvement of leaders in team and organization development. Kurt Lewin developed this theory, and he identifies three types of leaders- autocratic, democratic and Laissez-faire leaders. According to the case study, it can be analyzed that the Board of Directors at Enron were autocratic leaders. They did not consult team, there was no briefing on new development or partnerships, and they did not encourage new input from employees. They were just in the pursuit of profit irrespective of unethical means (Chemers 2014).

Leaders can influence organization both positively and negatively. Leaders at Enron had risk taking a culture. They even paid a bonus to employees who manipulated profit estimates. So they encouraged all sorts of unethical behavior in the organization ultimately leading to its downfall. Culture in an organization is created by actions of leaders, focus of leaders, how they reward or penalize employees and their attention to resource development in the organization. Good leaders focus on the above points to nurture and develop the organization culture. They help in molding and shaping the culture of the organization. They act as role models whose actions employees try to emulate. They are the reason for the long-term effectiveness of the organization. They set up an environment within which each team members strive and work together for the excellence of the organization (Klein et al., 2013).

Enron was dealing with major issues like the conflict of interest, unethical means of business, huge debt, lack of effective leaders, bankruptcy situation and unfair ways of earning profits. This section suggests some solutions to the suggested problems identified in the case study.

One of the biggest problems was the error of action of leaders at Enron. They had poor leadership skills, and they could not manage a team according to company’s core values. Their focus was only on generating profits, no matter it comes by what means. Such action is encouraged in the organization only because of faulty leaders. This problem can be solved only if leaders take the initiative to improve situations. Leaders may be affected by factors which are beyond the workplace culture. At Enron, they were facing financial problems due to the sudden collapse of the stock exchange. This kind of situations distracts the focus of leaders. So they could have addressed problems in organization and took logical steps to solve it with team member’s effort. Poor leadership has an impact on overall turnover, employee satisfaction, productivity and culture of the organization. If leader accepted the responsibility for the problem and spent their time on reviving and inspiring workplace, the major problems can be solved. Strategic leadership gives clarity of vision and provides a chance for the team members to pursue it in an ethical manner. They provide tools and resources for avoiding obstacles in the work environment (Schoemaker et al., 2013).

Affect of leadership on culture

Another major problem with Enron was an accumulation of huge debt ultimately leading to bankruptcy. Organizations can effectively deal with such situation if they perceive things beforehand. The first step towards dealing with such situation is to do a realistic assessment of company’s expenditure and profit. In the case of a financial problem, one can contact creditors and make the modified payments plan that reduces their burden of debts. Any company must have debt management plan in place to better deal with such situations. So Companies should analyze financial situations from the beginning and manage expenditures to avoid accumulation of debts in future. Taking the right amount of debt and at the right time also help in making situations better. Huge debts could be managed by making better borrowing decision earlier. But once it is too late for retroactive financial analysis, there are only two options left. One is to try to save the problem by settling accounts and an exit strategy that minimizes financial risk. The first option can be executed by cutting cost, contacting employers to improve business model and contacting creditors for lowering interest rates or restructuring payment options. The loan could be consolidated by one payment option which reduces monthly cost and does not put debt burden. The last and the final route is filing for bankruptcy. Though it requires services of a bankruptcy attorney, it is a better option for reducing the debt burden. If any business has assets lesser than debts, bankruptcy allows to pay only the value of assets and not the entire amount (Segal, 2013).

Another solution is required for unethical behavior in organizations. If this kind of issues is not addressed, it will lead to serious consequences, and ultimately the organization will suffer for it. There were several unethical practices at Enron such as manipulation of profits for employees, unethical pursuits for profit, etc. A human resource manager could play a role in tackling in unethical issues. To actively address unethical behavior at work, Company’s direct can take steps like creating a strict code of ethics in the organization. It establishes those values which are critical for particular business and creates a framework of objectives for the workplace. Such framework helps employees to understand the boundaries within which they have to work. The ethical vision of the company should be communicated to each employee in the form of a broadly written statement. There should be a clear protocol for reporting unethical behavior in the workplace. It could be in the form of meeting with team manager or supervisor. Managers can play a role in helping employees identify and handle ethics violation. New employees could be given ethics training to increase the effectiveness of ethical code. Creating a better and ethical workplace will ultimately lead to improved work process, happier environment and success of business (Jacobs et al., 2014). 

A lot of have been said about the possible solutions to the problem identified in the case study. Another recommendation is related to the effort of team members. Companies prosper due to good team management, and it may also collapse due to the disordered and chaotic team. So team development could be a significant intervention to solve the problem. Improvement in this section will help in getting work done efficiently, and the competent team can also handle all hurdles or obstacle in business (Fransen et al., 2013).

Suggest solutions to the problem

Effective team and good leadership skill is the key to success in the workplace. Building a successful team also depend on the leadership. These approaches could be taken by Enron to improve their problems in the workplace. The following are the ways for team development and accessing the sustainability of team in organization:

Clarity about work: The leader must access how well they are accepted by their team members and evaluate areas where they can improve. A leader must ensure that they modify approaches to strengthen the team and lead them to achieve new heights. Making each member aware about the accuracy and clarity of task is important in this regard.

Getting to know each member of the teams: It is important for leaders to know the strength and weakness of each team members. It encourages better cooperation in work. Leaders can give the particular task to skillful members and provide training to those members who are lacking in some specific aspects of work. Great leaders know exactly which members to utilize in the urgency of the task and handling tricky situations.

Defining clear goal and responsibilities: Once leaders recognize the fundamental skills of each team member, their next task is to define role and responsibilities clearly to each one of them. Each team member is dependent on each other. Talent in the individual should be identified not just by the ability to perform a task but also by checking whether they will fit into organization culture or not.

Being proactive with feedback: Getting regular reviews and feedback about teams performance helps a team to improve and develop each day. It will help a team to stay on the right track. One should not give feedback only when the problem arises. Constant and proactive feedback is the key to the success of a team and organization (Broadbent 2013). 

Conclusion

From the analysis of case study about Enron Company, it can be concluded that most organization suffers from similar problems. Problems like financial losses and unethical behavior are common in all organization. But what distinguishes a successful organization from their opposite counterpart is the role of leaders. Effective leaders take the organization forward. But leaders at Enron were more involved in profitable pursuits, but they forgot about ethical issues and core values of the company in their quest for unfair means of money. So the report analyzed the specific problems in the company and suggested relevant solutions to those problems. It explained several theories on leadership style. Finally, it gave ways of effectively implementing a solution to the problem. 

Reference

Broadbent, M. (2013). Focus early on team member capability. Government News, 33(2), 12.

Chemers, M. (2014). An integrative theory of leadership. Psychology Press.

Colbert, A. E., Judge, T. A., Choi, D., & Wang, G. (2012). Assessing the trait theory of leadership using self and observer ratings of personality: The mediating role of contributions to group success. The Leadership Quarterly,23(4), 670-685.

Fransen, J., Weinberger, A., & Kirschner, P. A. (2013). Team effectiveness and team development in CSCL. Educational psychologist, 48(1), 9-24.

Jacobs, G., Belschak, F. D., & Den Hartog, D. N. (2014). (Un) ethical behavior and performance appraisal: the role of affect, support, and organizational justice. Journal of business ethics, 121(1), 63-76.

Klein, A. S., Wallis, J., & Cooke, R. A. (2013). The impact of leadership styles on organizational culture and firm effectiveness: An empirical study.Journal of Management & Organization, 19(03), 241-254.

Leonidou, C. N., Leonidou, L. C., Coudounaris, D. N., & Hultman, M. (2013). Value differences as determinants of importers’ perceptions of exporters’ unethical behavior: The impact on relationship quality and performance.International Business Review, 22(1), 156-173.

Schoemaker, P. J., Krupp, S., & Howland, S. (2013). Strategic leadership: The essential skills. Harvard business review, 91(1), 131-134.

Segal, D. (2013). High debt and falling demand trap new vets. New York Times, 23.