organizational culture and ethics, enron case study

ETHICS AND ORGANIZATIONAL

CULTURE

PA 6620Brynne VanHettinga

National Business Ethics Survey2003-2005

• Ethics Training—Up 14%• Formal Ethics and Compliance

Programs—Up 19%

• > 50% report misconduct• Only 55% willing to report

misconduct

Need both Programs and Culture

• Compliance orientation—formal rules, policies, monitoring and enforcement

• Values orientation—education, shared values and symbolic management

Organizational Self-Interest• Offenses against the organization

• Interpersonal offenses

• Offenses against the community

• Altruistic Deviance

Ethics from the Top Down• Managers and Executives must be seen

as moral persons

• Do moral persons naturally rise to positions of power?

• Controlling leaders may be productive, but ethical issues unlikely to be examined

Ethics from the Top DownSocial Identity Theory

• Creates a highly cohesive, uniform and consensual group

• Aggravates hierarchical imbalance of power

• Executives personally identify more with the organization and have more optimistic opinion of ethical culture

Ethics from the Top DownCommunication

• Information, especially negative information, is deliberately withheld or distorted as it moves up the hierarchy

• Disciplinary issues are handled as private personnel matters and not published to rank-and-file

Ethics from the Bottom Up• Employee screening has limited

effectiveness• Organizational dynamics have more

impacts on unethical behavior than individual antisocial personality traits

• Study by Verkerk et al. showed some promise for participative democracy systems

WHISTLEBLOWERS

• Patchwork of legal protections frequently ineffective

• Whistleblower is required to first give employer notice of problem and opportunity to correct

• Whistleblowers pay high price financially, personally and emotionally

Organization and SocietyPublic Affairs Function

• Proactive → Legislative lobbying and campaign contributions → Media press releases

• Reactive→Adjusting internal processes to accommodate new regulations→ Media damage control

Organization and SocietyThe Cheating Culture

• “Winner-take-all” rewards• Decreasing social cohesiveness • Glorification of rich & famous lifestyles• Dismantling of regulatory safeguards• Emphasis on bottom line• Competitiveness and social Darwinism• “Trickle-down” corruption

The Cheating Culture, David Callahan, 2004

CASE STUDYCASE STUDY

KENNETH LAY• ENRON Chairman and

CEO, from 1986 until his resignation on January 23, 2002

• Ph.D. in Economics, Univ. of Houston

• Active in Republican politics--Bush Pioneer

• Many of Houston elites still consider him honorable

JEFFREY SKILLING• Was chief production

director of WLXT Ch. 60 at age 16.

• Harvard MBA• Hired by Ken Lay in

1990 and was briefly CEO Feb-Aug 2001

• Suffered nervous breakdown in NY in April 2004

ANDREW FASTOW• MBA Northwestern Univ.• Developed “creative”

financing practices while at Continental Illinois, which failed during S&L crisis

• Hired by Skilling in 1990• Complex network of

offshore limited partnerships allowed assets and debts to be maintained “off balance sheet”

Andrew Fastow’s motto was, “I’ll fund all your deals.” These were distributed at an internal Enron

meeting. Employees who closed big deals were generously rewarded. Employees who did not close

deals were gone.

SHERRON WATKINS• Master of Accounting and

CPA; former auditor at Arthur Anderson

• Joined Enron in 1993 and left in Nov. 2002 as Vice President of Corporate Development

• Author of series of memos in Oct/Nov 2001 which formed basis for indictments and convictions

ENRONThe good, the bad, the ambiguous

• Hired “the best and the brightest” Hubris?• Employees who produced were rewarded • Had aspects of a formal ethics program• Contributed to local community• Fun and exciting place to work, with lavish

facilities and employee functions• Culture of innovation—did not want to hear

“no” or “it can’t be done” • Incestuous relationships with regulators,

auditors and Wall street

ENRON STOCK PRICE 1993-2002P

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Practical Ethics

• Critical examination of reward systems

• Effective communication both from top down and from bottom up

• “Safe” channels for whistleblowers

Limitations of Ethics Programs

• Need for outside accountability• Impact of cultural values on

organization• Impact of corporate values on popular

culture• Impact of corporate influence on

legislation/deregulation• Can an organization be “moral?”