Leadership Theories And Unethical Behavior In Enron: An Analysis

Comprehension

1. How can what happened at Enron be explained by some of the theories of leadership that you have looked at?

2. In what ways does leadership influence culture?

3. What can be done to reduce the type of unethical behaviour demonstrated in this case? What are your recommendations?

Leadership is an important aspect for a successful business. The business success is influenced by a sustainable and healthy culture along with a good leadership strategy adopted by an efficient leader. In every small or large organization, a well adopted leadership culture could be identified which helps to promote the organizational culture leading to a successful business. On the other hand, an inappropriate leadership style adopted by the leader or an inefficient leader could lead to the downturn movement of the business profitability and sustainability (Hargreaves & Fink, 2012). Here, in this assignment, the major focus is the organization Enron Corporation which is a well known energy company and was the largest bankruptcy reorganization in American history. The organization was known to experience the largest audit failure.

There were a number of pitfalls recognized in Enron’s management system as well as in leadership management which contributed in the failure of the organization. It has been revealed from the case scenario of the organization that the senior management misled the board of directors and there were a number of issues in financial reporting which were not presented in front of the share holders (Gaines, 2012). Thus, it could be said that improvement in the leadership would help the organization and senior management to avoid these kinds of problems. Here, in this assignment, the major purpose is to explain the incidence of the organization Enron based on the leadership theories. In addition, how the leadership included the organizational culture would also be discussed here. Then the recommendations for reducing these kinds of unethical behavior in the workplace would be discussed in the organizational context.

The organization Enron showed both simple and complex which should be followed. The organization showed issues in leadership, organizational culture, rewards, unethical behavior and other issues. On the other hand, the complex issues include unraveling financial dealings. The Enron shareholders filed a $40 billion lawsuit after enhanced stock price of the organization (Tonge, Greer & Lawton, 2003). It has been revealed that the CEO Jeffrey Skilling established a staff of executives by using the accounts loopholes and poor financial reporting. In this way, billions of dollars in debt from their failed projects and deals were hidden. The chief financial officer of the company along with the other executives misled the board of directors and audit committee of the company for regarding the high-risk accounting practices. In addition, they pressurized the audit accountancy partner to avoid these issues (Spillane, 2012). It has been revealed that various executives of Enron were charged for these kinds of activities. The organization showed to have individualism culture. The leadership and management culture influenced only focus upon uncontrolled pursuit of profit which thereby interfered with the ethical behavior and following ethical codes by some employees.

1. Analysis and Problem Diagnosis

The organizational culture showed that the senior management employed the risk taking culture in the organization and offered rewards for extra profits achieved by the employee and the staffs are encouraged to manipulate their profit estimates. The performance review committee forced the employees to be into the line by controlling them in such ways. The executives and senior management made false commitment regarding their treatment with employees (Day & Antonakis, 2012). The appraisal scheme for the employees led to the promotion and bonus for the employees at the top of the organizational hierarchy and dismissal of the employees at bottom line. In this unethical way, the senior management of the organization fired 15-20 % employees having lowest performance which were replaced by the new employees and this cycle was carried throughout the successive years (Tonge, Greer & Lawton, 2003). It was the major downside of Enron’s business. The CEO of the company Jeff Skilling depicted that his only priority, being the CEO of Enron is to keep the stock price up. However, from his comment, it is clear that the CEO is only concerned about the company’s profit in any way which should not be the case (Dorfman et al., 2012). As a CEO, he should be responsible for empowering his subordinates with good treatment. Thus, he showed his aggressive nature which influenced his autocratic leadership nature. 

There are various kinds of leadership theories which help the leaders to shape their leadership skills and culture under which they are going to apply the leadership strategies. Here, the situation can be explained as having a negative impact of leadership upon the employees and the organizational sustainability and growth (Alvesson, 2012). A lack of appropriate and ethical leadership has been identified in the organizational context which led the organization towards failure and bankruptcy. In this context, a number of theories can help to explain the organizational leadership and the incidences happened in Enron. Here, different kinds of leadership theories would be explored.

The first theory which could be explored to explain the situation in Enron is the Behavioral theory of leadership. This theory focuses upon the behaviors of leaders. The leaders can adopt any of three types of leadership style including autocratic, democratic or laissez-faire leadership. Here, according to the argument of Shao, Feng and Liu (2012) the autocratic leaders attempt to take their decisions without taking ideas from their subordinates or without consulting with the fellow team mates. This leadership style helps to make decision within very short period of time and it helps to get successful outcomes when there is no need for inputs from the other members.

2. Leadership and Culture

In Enron, it has been seen that, the senior management team as well as the CEO of the company was following the autocratic leadership style. It has been depicted by Schaubroeck et al., (2012) that the autocratic leadership is not suitable for employee’s satisfaction and empowerment. It allows the employees to feel less valued which affects their performance. In the autocratic leadership, sometimes, the leaders do not allow employees to take part in organizational decisions which could enhance employee’s dissatisfaction. Sometimes, in autocratic leadership, the leaders force the subordinates to do some job without asking their perspectives or willingness to do the work. With this theory, the status of Enron Corporation can be discussed. In the organization, the CEO showed aggressive skills along with the individualism culture which depicts that the CEO is not involving employees in organizational decision making processes (Kabasakal et al., 2012). The CEO depicted that the rule in California are terrible, that showed disrespect towards the national legislative framework. In spite of discussing with the subordinates about the ways to enhance their profit margin, the CEO depicted that the rules are pushed at the edge in an effort for making profit in a business. He was influencing his subordinates through these types of thought and manipulating them to gain more profit.

Another theory can be useful to discuss the status of internal powers in the organization ‘French and Raven’s five forms of power’ theory. This theory depicts that understanding from where the power is coming in the workplace. According to the theorists, there are five bases of power in the organization. Legitimate- the power of legitimate comes from the perspective that the person has the formal right to the right to expect compliant and obedient from others. However, this power is being misused in Enron. The performance review board has been shown to force the employees to come into line which is an unethical practice (Wilderom, van den Berg & Wiersma, 2012). Reward- This power is the result of individual’s ability for compensating employee’s compliance. However, the senior management team as well as the CEO, Skilling are not compensating the compliance of the employee’s efforts who are at the bottom of organizational hierarchy and were showing biasness towards the employees who are at the higher levels of organizational structure by promoting and rewarding them (Acar, 2012). Expert- This power comes from the high level of knowledge and skills of a person. In the Enron’s case study, experts were not properly valued; they were only guided by the higher authorities (Reeves & Ventura, 2012). Coercive- This power comes from the belief by which one can punish others for noncompliance. However, the CEO and senior management did not follow this theory. They attempted to fire 15 % employees yearly for low performance which is against the business ethics (Moynihan, Pandey & Wright, 2012).

3. Recommendations

In the transactional leadership theories, the value of positive and mutually beneficial relationship within the team members and leaders has been highlighted. Here, the transactional theory highlights that development of a mutual reinforcing environment can be done by rewarding employees for their excellence and improvement in performance (Steers, Sanchez-Runde & Nardon, 2012). The transactional leaders are more efficient in developing mutual relationship with subordinates.

Culture of an organization can be defined as the set of perceptions, beliefs, norms and values followed in the organization. Cultural aspects are the pillar of the organization. There is a strong relationship within the leadership and organizational culture. Based on the strategies adopted by the leader, the culture is developed (Dickson et al., 2012). It is because the employees and fellow staffs would follow the direction guided by their leader. Therefore, the leadership skills and strategies would be reflected in the organizational culture. The values, beliefs, perceptions set the organizational norms which are followed by the employees. In this context, the values and norms of the leaders would be the major factor while setting the organizational norms because the employees would also reflect the cultural aspects similar to the leader (Hermalin, 2012). Thus, the leadership style and strategies are very much important in analyzing the organizational culture.

The theoretical model provided by Edgar Schein revealed the relationship within organizational culture and leadership. According to the theorist, the organizational culture can be directly as well as indirectly influenced. The direct mechanism includes exemplary behavior, perception, opinion, status. On the other hand, the indirect influences include formal guidelines, organizational mission, organizational design, rituals and corporate identities (Rockstuhl et al., 2012). According to the theorist, the “leadership is the source of values and beliefs and the most central issue for leaders is to understand the deeper levels of culture.” There are three sources of cultures, the first one is values, beliefs and assumptions of founders, the second one is learning experience of the members and the third one is the new beliefs gained from the new members (Alvesson & Spicer, 2012). Three levels of culture include artifacts, espoused beliefs and values and the basic underlying assumptions.  In this context, the leadership style of the leader would influence the assumptions of the organizational culture.

In the context of Enron Corporation, the individualism culture was influenced by the autocratic leadership style adopted by the CEO Skilling and senior management. They attempted to rule and control their subordinate employees by forcing them to enter into their guided line (Slavin et al., 2012). On the other hand, the higher authority shaped the culture in such a way which promotes the unethical behaviors of the employees as well as the higher authorities. In this model, it has been depicted that the leader and the leadership culture shapes the organizational strategies, objectives and philosophies, undertaken by the organization. In this context, Skilling depicted about his noncompliance with the national business rules and from the history of the organization, the noncompliance and unethical practices of the organizational executives has been revealed which reflects about the unhealthy culture in the organization which is the reason behind the organizational failure (Erkutlu, 2012).

Conclusion

There are a number of ways to reduce these kinds of unethical behavior in the organization through the improvement of leadership skills and style. The senior management and the CEO should adopt an employee friendly leadership style which will promote ethical behavior of the employees with a healthy culture in the organization. Ethical leadership is the key to socially responsible business. Thus, in this context, the following recommendations are provided.

The leaders of the company should adopt an employee-friendly leadership style. At first, the skills related to the democratic leadership should be learned and the employee friendly environment should be provided. The democratic leadership skills would promote the establishment of god relationship with the employees. The employees would be allowed to take part in the organizational decision and the employees would be felt valued and would be motivated to perform better. The democratic leadership would enhance the employee’s support through ethical practices in organizational performance and reward system.

The transformational leadership style should be adopted by the leader for adopting change management strategies which would help to improve the situation. The major aspect which should be changed is cultural principles and morals which would be then followed by the employees. The change management is needed for improving the situation. The major goal is to include ethical environment where the employees would get job security and they would be valued as the organizational asset. In the ethical environment, no discrimination or biasness would be allowed.  New and efficient management team should be appointed for reviewing the performance of employees based on which they would be rewarded without discrimination.

The HR department should adopt the principles of ethical leadership while managing the human resource. They should not separate ethics from day to day business and they should make the executives aware that the ethics is ‘the way they operate their businesses. The new HR management team would review any kinds of negative interpersonal behavior which can hinder the development of trust within the employees and leader. The HRM department should be aware of the ethical and professional codes and should follow all the legislations and business rules while dealing with the employee’s issues. The HRM staffs would be trained in such a way that they would undertake strict action upon addressing any kinds of unethical behavior from either higher or lower level staffs, it would keep the organizational ethics high. The recruitment and termination process should be stricter.

The training of staffs is needed to make them aware of the ethical codes and professional responsibilities. When the employees would be aware of their professional responsibilities and the ethical culture followed by the organization, there would be no chance of ethical misconduct in from the side of the employees. Whenever, the employees would feel to be valued they would attempt to follow the ethical codes in the business. For ongoing ethical journey, once-in-a-year training program should be followed.  

Conclusion

In conclusion, it can be said that leadership is one of the key aspect in the organizational context which is important for a healthy and well-established culture in the organization. In this context, the organization, Enron Corporation shown to be the biggest bankruptcy in U.S. history. The leadership skills and management of the organization was responsible for the organizational failure. From the case scenario, the financial down turn and the related causes were analyzed. It was analyzed that the CEO, Mr. Skilling had a negative approach towards the business. He only attempted to enhance the organizational profit in spite of empowering or concerning about the employees or his subordinates. It dissatisfied the employees along with their commitments to get their target. In this assignment, leadership theories were explored and analyzed for understanding and explaining the incident in the company. Then in that theoretical context, the influence of the leadership skills upon the organizational culture were discussed and finally suitable recommendations were provided for coping with the situation which might be undertaken for the organizational benefit.

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