Examining a Business Failure
When approached with the idea of business failure, one might describe this event as an organization??™s inability to make sufficient earnings as a means of covering its expenses; as a result, said organization would be forced to cease its operations. The following paper will examine the business failure of one of the largest energy trading and communications companies in the United States, Enron. This paper will further describe how management and leadership behaviors could have potentially predicted or explained the organization??™s failure, and also compare and contrast contributions of leadership, management, and the organizational structures which led to its failure.
Failure within a large organization
The collapse of Enron in late 2001 was described as one of the largest scandals in American history. Giroux (2008) explained that at its height, Enron had a stock price of over $90, which gave it a market value of almost $70 billion dollars. Before its collapse in 2001, its revenues for 2000 were well over $100 billion, making it the seventh-largest American corporation (p. 1208). A direct result of the company??™s high performances was enormous return payments to Enron??™s chairman and CEO, Kenneth Lay. Along with a base salary of $1.3 million, Kenneth Lay received a $7 million bonus, in addition to 782,000 stock options for the year (Grioux, 2008). The failure of Enron was attributed to a number of different factors; in particular, investigators found that Enron??™s failure was caused by falsified accounting practices, which allowed the company to exaggerate its earnings and conceal its mounting debts. As described by Giroux:
In terms of scandal, Enron had it all: gigantic executive compensation incentive packages; management dedicated to meeting all quarterly earnings forecasts to maintain the compensation??”often by accounting manipulation; a CFO enriching himself through related-party partnerships and hidden side agreements; investment bankers who would structure virtually any financial deal anywhere in the world for large fees; and a political system that often stacked the deck in favor to Enron, particularly because of large campaign contributions and massive lobbying (2008, p. 1209)
Months before the organization??™s fall from grace, Enron was considered to be one of the most advanced and best disciplined businesses in the United States. Essentially, the failure of Enron was attributed to corrupt organizational activities. In addition to internal unethical behavior, external unethical behavior was another factor in the failure of Enron. Enron??™s external auditors, Author Anderson accounting firm failed to fulfill its responsibilities as a reliable accounting entity by continuing to sign off on false financial statements, further misrepresenting Enron??™s financial performance. Overall, the organization was forced into bankruptcy and disgrace because of the poor decisions made by key company executives, as well as other outside influences.
Management failure in leadership
Leadership is defined as a process of social influence, revolving around one person who enlists the help and support of others in order to achieve a common goal. Effective leadership requires having the skill and ability to effectively incorporate and capitalize on means made accessible for successfully accomplishing goals set by an organization or community. Because the executive management team did not possess the ethical values that reflected the values of the organization, the overall performance of Enron was based on false representation. During instances of failures in leadership, ineffective management skills are usually the cause; when focusing on the collapse of Enron, the business management failure was primarily due to the poor business ethics and values exhibited by the executive management team.
It is believed that the failure of Enron was primarily because of the self-indulgence and greed of the executive management team. According to Patra (2010) the failure of Enron ???became synonymous with corporate abuse and accounting fraud??? (p. 169); it was found the Kenneth Lay was involved in fabricating the company??™s publicized financial results in order to make a huge profit for himself. Patra (2010) also reported that in November 2001, Enron revealed that it had exaggerated its overall income by 586 million between the years of 1997 and 2001, due to accounting errors (p. 169). It became evident that not only did the management executives of Enron cunningly manipulate certain rules in order to profit the company, but they were involved in obvious unethical business dealings that ensured highly profitable personal compensations. A business that rose in notoriety by becoming a successful natural gas provider slowly became an organization that deceived and cheated its way to further financial gain. As stated by Epstein (2006) ???Smaller lies led to bigger lies, until Enron became the biggest corporate failure and fraud in American history??? (p. 20).
Contributions of leadership, management, and organizational structures
The failure of Enron was contingent on a number of different factors. The three main factors are leadership, management and the organizational structure itself. First and foremost, leadership and management are two completely different issues. According to Yukl (2006):
Managers are concerned with how things get done and they try to get people to perform better. Leaders on the other hand, are concerned with what things mean to people, and they try to get people to agree about the most important things to be done (p. 5-6).
As previously stated, leadership involves a process of social influence, which revolves around one essential person who enlists the help of others in order to successfully achieve a common goal. The collapse of Enron was due to in part to ineffective leadership and poor ethical judgment. Management on the other hand, is defined as controlling or directing people in a group in accordance to already established principles and/or values. In terms of the Enron failure, management demonstrated poor decision making when consciously choosing to participate in accounting fraud. It is important to remember that organizational structure is an extremely important factor when attempting to run a successful business. With regard to the organizational structure of Enron, it can be concluded that genuine and authentic leadership, effective management and a solid foundation were absent.
This paper examined the collapse of one of the largest companies in the United States, Enron. It can be concluded that Enron lacked true leadership and management capabilities and was driven by greed, rather than a real interest in the people it was meant to serve. The failure of Enron was inevitable considering the egregious mismanagement of massive amounts and blatant financial negligence exhibited by the executive management team.
References
Epstein, A. (2006). The lesson of Enron??”Four Years Later. Business Journal (Central New York), 20(1), p.
20.
Giroux, G. (2008). What went wrong Accounting fraud and lessons from the recent scandals.
Social Research, (75)4, p. 1205-1238.
Patra, B.P. (2010). Moral Weakness: An analysis of self-indulgent CEOs of Enron, WorldCom and Satyam
Computers. Vilakshan: The XIMB Journal of Management, 7(2), p. 167-182.
Yukl, G. (2006). Leadership in organizations. (6th ed). Upper Saddle River, NJ: Pearson Education.
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