Organizational culture incorporates behaviors and values which aim at contributing towards a unique psychological and social business environment. Most of the organizations have articulated to the set rules and regulations that govern the conduct of its employees. The values should express a positive image of the organization, demonstrate interactions between the employees and the outside world, and also express the inner workings of the management. Interest groups, including investors, normally analyze the company’s code of ethics in order to decide on their investment strategies (Singh, 009).
Enron’s Case: Influence of Organization Culture
In the case of Enron, organization culture played a key role in its demise. The management neglected the effects of leadership change and its cultural diversity on the performance and success of the organization. Enron’s management believed that it had instigated a state-of-the-art management control system, but the fraudulent activities and embezzlement of funds in the company was rampant (Thomas, 2002). Its earlier executive management performed immensely as the performance was recognized across the globe. Richard Kinder, one of its founding executive members, doctored discipline across the organization and maintained cultural beliefs that purported success in the society.
Following the incorporation of younger executives, including Skilling, the new managerial controls executed in the organization demonstrated adverse effects to the overall performance of Enron. Some of the specific issues that demonstrated changes in organization culture included short-term and long-term decisions that aimed to achieve the company’s success.
First, Stock options plan undertaken by Skilling aimed at realizing short term business growth. The CEO handed large checks to the executive, stock options and bonuses to its clients and traders. For instance, in 1999, the stock option rose from 25.4 million in 1996 to 93.5 million with John Arnold, who was a gas trader, awarded $15 million bonuses after booking a stock option of $700million (Thomas, 2002). Secondly, the executive manipulated stock price in order to attract new clients. The focus was on short-term growth rather than long-term success of the company.
Employee turnover was high, and the workforce was not guaranteed of permanent employment. As such, they were not performance-oriented like other rival companies. However, Enron controlled the global market, and the company was the main focus during that period; therefore, they prevented the management from scrutiny and critics. Investors were reluctant to question the accounting procedures of the company as they were compensated with luxurious capital gain.
Role of Board of Directors in Enron’s Demise
With the current trend in the business economy, there is need to have a coherent management that focuses on long-term strategic goals rather than the short term goals. The board of directors of Enron Company articulated to short-term management (Sims and Brinkmann, 2003). The leadership of the company should be independent and third-parties should not influence the decision of the managerial team. In order to achieve success in the economy, leaders should formulate policies that meet the demands of shareholders, customers, employees, and financiers. It should be invested in meeting the demands of a single group, for instance, the management and stakeholders as was the case with Enron.
According to Fusaro and Miller (2002), the Board of directors for Enron was not independent. The management manipulated the financial reports in order to suit the needs of the investors. After replacing Richard Kinder as Enron CEO, Skilling focused on short-term initiatives. He convinced both Lay and Fastow to implement the proposed ‘Gas Bank’ with an aim of realizing remarkable profit in the short run. At that time, the short-term demand for gas and its supply was out-of-balance. Later on, Enron’s management control system underwent a drastic transformation with the organization’s culture focusing on short-term goals; the reason for high employee turnover during Skilling tenure.
Fraudulent activities were noticeable as the stock value was increased to show that the business operations are healthy. With the increase in the value of stock, which was against the reality, the company’s earnings decreased. The management had immediate interest on the earnings of the company, and the top executive management redistributed the earnings among its board of directors (Fusaro and Miller, 2002).
Skilling also control Enron’s culture through overseeing the company’s accounting procedures, reporting procedures, and disclosure of the financial statements to the third parties. In accounting procedures, he articulated to the techniques that realized positive reported earnings with an aim of meeting analysts’ expectations. Finally, earnings management ensured that they use special purpose entities (SPEs), contingencies and reserves, mark-to-market accounting in which it recorded the company’s profits realized from long-term operations immediately. All these issues culminated to the demise of the organization.
Role of Human Resource Management in harnessing Ethical behavior: Enron’s Case
The Human Resource management was focused on recruitment and training rather than employee development as the workforce of Enron Company was fluid. Employees knew that their employment terms were short-term and, therefore, they had little or no interest in the operations of the company. Apart from employees being reluctant to access the company’s performance, the HR also focused in payment and clearing of employees’ checks and salaries. As such, in order to minimize and prevent Enron’s debacle, the HRM should have advised the executive to harness employee development and retain them rather than laying-off the workforce (Sims and Brinkmann, 2003).
In addition, constant rotation of employees within the organization did not provide the HRM with enough time to ascertain whether fraudulent activities were being undertaken by the executive. HR should have prevented rotation of employees, or where the company policies provide so, it should have ascertained that the work done by the employees was scrutinized before being rotated.
There was no subordination of duties, as HR was not independent in making short-term decisions. The management control system was situated at the top-level of the managerial team and the HR had no power of initiating operations that would have, otherwise, contradicted the executive management’s decision. Therefore, incase where fraudulent activities were detected by the HR, either attributed to workforce rotation or increased employee turnover, the executive was to initiate strategies that will mitigate such activities. As such, it was crucial for HR to be independent especially when making short-term decisions.
The complexity of the Enron structure proved challenging for HR to determine fraudulent activities in the system. During that period, the economic conditions across the globe were good, and interest groups would have not detected any anomalies in the company’s operations. Although the HR should have realized the extent in which stock was increasing and there was a clear difference between the stock price of the company and its actual performance.
The code of ethics of Enron was highly developed. However, the executive manipulated did not follow it, and the short-term profit reported in early 2000s proved to be against the code of ethics. It was clear that the HR had little to do with the operations of the company, and the executive took the responsibility of managing Enron’s operations. They concentrated on earnings and power, and distributed among themselves. As such, HR was not in a position to control or report the fraudulent activities as they were instigated at the top executive level.
Fusaro, P. & Miller, R. (2002). What went wrong at Enron: Everyone’s guide to the largest bankruptcy in U.S., London: John Wiley & Sons.
Sims, R. & Brinkmann. J. (2003). Enron ethics (or: Culture matters more than codes). Journal of Business Ethics, 45(3), 243-256. Retrieved August 27, 2011, from: http://proquest.umi.com/pqdweb?index=6&did=405520461&SrchMode=1&sid=2&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1314458740&clientId=29440
Singh, K. (2009). Organizational behavior: Text and Cases, New Delhi: Pearson Education India.
Thomas, W. C. (2002). The Rise and fall of Enron. Journal of Accountancy, Retrieved January 27, 2013, from: http://www.journalofaccountancy.com/Issues/2002/Apr/TheRiseAndFallOfEnron.htm
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