Management Strategies And Social Responsiveness: A Case Study On Enron

Description of the Event

Discuss about the Management Strategies and Social Responsiveness.

The aim of the assignment is to analyse the energy company called Enron established in Houston Texas. The key components of the report include discussion of the company’s failure towards its stakeholders with a brief discussion on the infamous Enron’s scandal. Further report identifies and analyses the organisational behaviour factors that contributed to the failure followed by the SWOT analysis of the company. The report highlights the strength and he weakness of the company and analyses the opportunities and threats.  The remedial response taken by the company to address the failure is discussed briefly and strategies to overcome such failure is recommended.

Ken Lay created Enron in 1986, an energy company established in Houston Texas. Within ten years of span, it was recognised as seventh largest company in Texas. The company was involved in transmission and distribution of the power. The crucial factor that led to the failure of the company towards its stakeholders is the unethical leadership. The leadership issues for the purpose of gaining prosperity made the company bankrupt. It effected all the stakeholders of the company including the investors, creditors, thousands of employees, senior executives, suppliers, clients, shareholders, community and the government (Prebble 2016).

The company failed to cope up with the internal and external situation due to lack of competency and ethical leadership. The managing directors of the company were driven by the goal of profit maximisation and Jeffrey Skilling employed the narcissistic leadership. It is the destructive leadership where the subordinates and the employees were dominated for selfish motto of the organisation. The top executives of the company breached the code of conduct (Broni et al. 2017).

The company started with the innovative idea of buying electricity from different companies and selling it to individual customers while charging everyone along the way. This ground breaking idea generated enormous profit and led to competitive environment. The company focused on share price tactics obsessively. It purchased the electricity and deliberately shut down the power plant in California due to increase in value of the power outages.  Major cash drain occurred due to excessive compensation plan. The company misled the investors and the creditors with false financial information. Enron manipulated the energy market, and earned money at the immense cost of others. The firm projected itself as “highly profitable, growing company”. This later turned out to be a negative popularity as analysing the company’s financial statements showed massive debts that were concealed in a manner to show profits.  However, the auditors did not perform their duty well and failed to highlight the red flags. After the performance evaluation, the lowest portion of the employees was fired without consideration (Dibra 2016).

Organisational Behaviour Factors in Enron’s Scandal and Failure Toward Stakeholders

It had impacted the stakeholders of the company financially and emotionally.  Other financial firms, banking, insurances and brokerages were drawn into the legal battles.

Organisational behaviour (OB) refers to the behaviour of leaders and the employees in the work that differs from that in social setting and effects the management in the organization. A company’s success is determined by the organisational behavioural factors such as culture, change management, motivation, and decision making (Hosseini and Mahesh 2016). In this context the OB factors that contributed to the Enron’s scandal and failure towards stakeholders are- unethical leadership, dominating culture, inappropriate decision making-authority and poor management controls that led to faulty corporate governance structure (Stahl et al. 2016).

According to Broni et al. (2017), the employees are likely to act ethically if the managers and the executives of the company lead in ethical direction. Enron did not maintain the ethical standards that resulted in the breakdown of the corporate governance and culture. The autocratic and dominative leadership created a pessimistic culture where the leaders demanded only conformity. The leaders focused on profit-making, obsessed with the bottom line and penalised employees for dissent (Markham 2015). Therefore the employees too accepted the unethical acts in daily duties due to cutthroat competition. Employees did not report the harsh organisational behaviour for fearing of losing jobs and considered the leadership trait of integrity as non-factor (Meymandi et al. 2015).

Employees are motivated with rewards that are fair and equitable. The auditors did not honesty disclose the financial statements of Enron. These employees completely lost the integrity to speak the truth as they were rewarded for obeying dishonest rules in Enron ad focusing on profit. In order to know the massive debts and real financial situation of Enron one of the important group member Andrew Fastow, gave external motivation to the employees (Tan and Yeo 2013). The poor cooperate governance in the Enron was attributed to egoism or self interest of the top executives. These leaders put their own interests above those of their employees, and public. The company failed to shoulder responsibilities for unethical events.

According to Friedman and Gerstein (2017), a company’s culture can be influenced positively if the managers are clear about the vision and values and practicing them on a daily basis. This aspect was lacking in Enron and is evident from the lack of transparency in financial accounting. Innovation and creativity in the organisation is simulated by informed risk taking. This proves requires robust, effective communication between employee and executives.  In any organisation, the decision-makers should have adequate experience and information for delegation of decision-making authority (Shapiro and Stefkovich 2016). In case of inappropriate delegation of decision was observed as the company radically shifted to new risk-taking business areas without having risk managing skills. At higher level the new risk-taking financial schemes lacked a certain degree of control. It was found that the chief financial officer of the company operated without professional accounting qualification. In accounting system the performance evaluation revealed five types of manipulations. There was no information sharing with employees (Breevaart et al. 2014). This internal mechanism that is playing the decisive role indicates poor corporate governance.

Analysis of Identified OB Factors

SWOT analysis is the useful tool to determine the strength and weakness of the company, the opportunities and threats. It can be defined as a systematic model that gives direction to develop the market plan. SWOT indicates what an organisation can do and cannot do, the favourable conditions available for success (Alleyne 2016.). The SWOT of Enron is presented below  

Strength	Weakness	Opportunities	Threats
·       Marketing and value delivery ·       Human capital pool ·       Innovative company	During failure the weaknesses observed are- ·       Failed board of directors ·       Conflicts of interests ·       Unethical practices ·       Corporate culture	The innovative strategies of Enron provided many favourable conditions- ·       Supply of high quality energy ·       Clean energy ·       Business merger and acquisition ·       Market development in Asian countries	Threats due to global environment and the external business are- ·       Increase in competition ·       Regulation ·       Subprime Mortgage crisis ·       Terrorist threats

Enron met the needs of the clients and the customers by robust marketing strategies. It was successful in delivering the customer value at profit which was strength of the company.  According to Khan (2017) human capital is the factor that determines the success of the company. Enron was using experienced skill set that has helped it to manipulate the accountings and the financial statements while manipulating the regulations in the logical way. They recruited pool of workers who intelligently used different accounting standard. This aspect was both positive in terms of profit generation and negative in terms of unethical behaviour. As Enron was involved in five different lines of businesses, the large number of employees was having a big chunk of stocks or shares. Innovative strategies more than following the mundane guidelines make a business successful (Mariani 2017).  Shifting to energy trading company from the energy and natural gas transportation was an innovative idea. With the expansion of the business the Enron was gaining more and more financial support from the top most financial institutes (Prebble 2016).  

According to Markham (2015) it is the role of the board of directors to act through its committee and monitor the business to be ahead of developments both in and out of corporation and address the limitations. In addition to monitoring, the directors should evaluate the decisions of the management, reflect on its influence and actively design an alternate plan.  However, Enron failed to take these steps. Enron’s board of directors failed to delineate the mission of the organisation and specify to management about the strategic methods. When Enron collapsed, the Sarbanes ACT was already enacted. It was also necessary for a company to adhere to the conflict of interest policy (Broni et al. 2017). Unethical practices of Enron led to conflict of interest. Malfunctioning in accounts department ruined the entire business infrastructure. It led to pessimistic corporate culture. The autocratic leadership in Enron shaped a negative behaviour of the employees that helped in the artwork of the fraud accounting.

SWOT Analysis of Enron

In the book of the managerial economy the supply is defined as amount of services and good that people sell in a given time at different prices, where other factors remain constant (Armstrong and Taylor 2014.). Enron was a leading business in terms of supply high quality energy. In North America and all over the Europe there was an increase in demand by the economies in need of energy. This gave new opportunities to Enron such as meeting new demands for clean energy. With the reduction of pollution being the main concern in US, Enron had bright opportunity with its franchise policy, innovative culture, online established market, technology and other assets to be a prime contributor of clean and renewable energy (Prebble 2016). The strengths of the company gave it an opportunity to open to merger or acquisition. Enron could use one or more strategy in this aspect to grow due to its experience of merger. According to Abdel-Khalik (2016), a business can go global by market penetration, development of new markets or capture a large  portion of existing market by market saturation. If Enron would not have collapsed it had a golden opportunity to tap into the market of India and China using its many options such as joint ventures, franchising, acquisition and licensing. These two countries are emerging as big energy consumers and are in need of energy to keep their industries operational (McLean and Elkind 2013).    

Since, Enron failed due to unethical practices it is unable to experience the fierce competition by big companies in US that are ready to engulf a large share of the energy market. It is the treat to the company that the other threat includes the new regulation due to the greenhouse gas emission. The national and international regulation as a response to the global warming would have effected Enron in Europe for instance the Kyoto protocol (Markham 2015).  There would have been decrease in the company’s profit due to recession in economy and foreclosure. It would have also resulted in the decreased consumption of natural gas. The subprime mortgage caused the economic recession and mortgage delinquencies (Hosseini and Mahesh 2016). Terrorist attack on Enron line of business was another major threat that may have affected the initiatives and the investments. 

The remedial option for Enron was innovation in business expansion to different lines. Business merger and acquisition was other remedial option to prevent the profit decline and fraud practice in accounting.  It used its assets for more investment in energy and natural gas transportation, which helped Enron to move towards paper and pulp business, develop energy trading markets and increase is business communications. Further, Enron tried to focus more on the growth strategies such as concentration and diversification. These strategies helped the company to have long term profits in all business lines. As per the literature evidence these strategies were all effective in having successful business (Friedman and Gerstein 2017). However, only due to unethical practice it was unsuccessful.  

Analyzing Enron’s Strengths and Weaknesses

The only strategy for preventing another Enron case is to conduct the business in an ethical manner using the exhaustible human capital and maintaining the innovative character.    The board of directors should closely monitor the internal environment of organisation.  There is a need of reforming the auditing system that will reduce the possibility of the financial disaster (Adams et al. 2017). Further, Auditor’s independence is required. It is the cornerstone of the capital market. There is a need for the auditors to objectively assess the accounting and financial statements of the publically traded company. It should not be hampered by the long term partnership established between auditors and firms. Auditor’s response is effective method and should be under scrutiny by the “Public Companies Accounting Oversight Board”, that was created by Sarbanes-Oxley Act. It will help reduce the conflict of interest. There is a need of government regulations and rules that needs to be updated on timely basis and should not be relaxed and  eliminated (McLean and Elkind 2013).  

Conclusion

It can be concluded from the above discussion that Enron hit the financial world very drastically. The main cause of failure includes unethical leadership, dominating culture, inappropriate decision making-authority and poor management controls that led to faulty corporate governance structure. It was the biggest corporate bankruptcy. In future such scandal can be prevented by increased regulation and oversight. The only strategy for preventing another Enron case is to conduct the business in an ethical manner using the exhaustible human capital and maintaining the innovative character. There is a need of government regulations and rules that needs to be updated on timely basis and should not be relaxed and eliminated.

References

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