BSB51918 Leadership and Management : Analysis and Problem Diagnosis
Enron failed when the market lost confidence in it following major profit and asset writedowns in the third quarter of 2001. This caused loans to become due as stock market collateral collapsed making new borrowings impossible. Enron suffered the usual fate of a failed business; it simply ran out of cash. However, the lost confidence was not the cause of the collapse but merely its latest symptom. Enron failed because in the words of one commentator it was the proverbial `Emperor's New Clothes'. The assets and expected earnings which underpinned its meteoric rise into the Fortune top ten were largely illusory, while the tangled web of related companies and financial deals hid a huge burden of debt. Its
aggressive accounting practice and market power ensured that the secret was safe, at least in the short term.
In 1997 the company reported operating results of $515m and profits of $105m as a result of non-recurring charges of $410m that `allow us to clear the decks for future growth' [Enron press release 20 January 1998]. From this point to summer 2001 the published financial results were spectacular, with the company meeting or exceeding rising earnings targets in 20 successive quarters. Operating results were $698m in 1998, $957m in 1999 and $1.266bn in 2000, the last full year reported. With the help of their accountants and lawyers, top executives created subsidiaries that looked like partnerships and made it possible to sell assets and create false earnings. Offshore entities were used to avoid taxes, inflate assets and profits and hide losses. Conflict of interest rules were relaxed to allow executives to benefit personally from questionable ventures that in most cases were a drain on company funds.
One example of unethical practices was the transfer of energy out of California to create blackouts thus raising the price of electricity. Then the energy was transferred back to California and sold at higher prices, generating billions of dollars in extra profits. Key Individuals Jeff Skilling, Enron’s Chief Executive is quoted as saying that his priority as Chief Executive Officer (CEO) was `to keep the stock price up'. In an interview on 28 March 2001 with FRONTLINE about the California power crisis Jeff Skilling said, `We are the good guys. We are on the side of the angels'. His interviewer asked him, `A general comment that I've heard about Enron, and to a certain extent about you [is] that you're very, very smart, very, You'll lay out your argument, ``The rules in California are terrible'', but then once you see what the rules are, you guys push those rules to the edge in an effort to make a buck'. Skilling replied, `That's probably fair, yes. Once you set the rules to a marketplace, we adhere to the rules. If that's what you're saying, that's what we do.' Interviewer, `But you know what I mean you play the game hard. You take it right down to the . . .'. Skilling, `We adhere to the rules. If they set up the rules, we adhere to them. It's like the tax code. No one expects you to pay more taxes than you owe. And so you're expected to interpret the rules and conduct your business in that fashion . . .'.
Jeff Skilling resigned in August 2001 for ‘personal reasons’ and was allowed to sell significant amounts of his own stock at a premium price. When Ken Lay took over as CEO he repeatedly emphasised the need to reinforce the message about the value of the company's shares. He made appearances to investors and the public telling them that Enron was heading in the right direction, at the same time as top executives were rapidly selling their own shares. By August 15 the stock price was down to $15 but many trusted Ken Lay and continued to hold their stock and buy more of it. Four months later Enron filed for bankruptcy
The Board of Directors is responsible to the shareholders for the company's business. They should be the guardians of the ethical code and sufficiently in touch with the business to be effective. Enron's board appear to have fallen short in many respects. They were not fully briefed on the extent of the partnerships, allegedly taking only fifteen minutes to review some of the more dubious transactions underlying the surge in earnings.
Subsequently of the 17 Directors, 7 were sued for insider trading and 6 had a trading or sponsorship relationship with Enron thus raising questions of conflicts of interest.
Executives and senior management It is generally considered that the key determinant of the ethical culture of an organisation is the example set by senior management. Enron is no exception. In principle Enron claimed to subscribe to a morally worthy set of values insofar as Respect, Integrity, Communication and Excellence are at the core of its Mission Statement. Respect is defined as `We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment.
Ruthlessness, callousness and arrogance don't belong here.'
The company culture of individualism, innovation and unrestrained pursuit of profits eroded the ethical behaviour of many Enron employees. The risk-taking culture of Enron and bonus incentives encouraged staff to manipulate profits estimates. Unethical practices were encouraged and were rife throughout much of the organisation. An employee's appraisal scheme, the Performance Review Committee (known locally as `rank and yank') resulted in promotions and bonuses for the top employees and dismissal for the bottom ones. Each year 15-20% of the employees with the lowest performance were fired and replaced by new employees. One commentator says, `the main factor that discouraged questioning of Enron's business practices was a ruthless and reckless culture that lavished rewards on those who played the game, while persecuting those who raised objections'.
Appraisal was supposed to be based upon how well employees had delivered the core values; in reality appraisal was based upon how much paper profit the employee had generated. By all accounts Enron was an exciting place to work and it undermines those who argue that the macho `greed is good' culture did not survive the late 1980s and early 1990s.
The end
It was the biggest and most complex bankruptcy case in US history and had a devastating effect on thousands of employees and investors. It also led to the dissolution of accountancy firm Arthur Andersen, one of the largest in the world, after employees were found to have destroyed documents relating to the auditing of Enron finances. Anderson was serving as the independent auditor whilst at the same time charging Enron millions of dollars in consultancy fees.
1. How can what happened at Enron be explained by some of the theories of leadershipthat 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?
Answer:
Comprehension:
After going through the case study of the organization – Enron, it has been understood that one of the chief reasons for the organization’s bankruptcy is the inappropriate management style and unethical persuasion of the authority. Apparently, it may looks as if the organization has faced the unfortunate consequence of bankruptcy due to false earnings and the collateral collapse of the stock market. However, a closer look at the case study has pointed out that the financial failure is a mere reflection of the organization’s malfunctioning management. More precisely, the organization’s management and higher authority should be blamed for the devastating consequence. It is required to note down here that the management of the organization as well as the higher authority has repeatedly pursued unethical behavior and terminated all those who have shown objection against such persuasion.
Understandably, for a long time, the organization has been suffering from a mal-functioning organization culture, which has been highly manipulated by the unethical management practices. The case study is indicative of the fact that the organization has treated employees as a weapon for accomplishing the unethical financial greed. In that way, the organization does not only lose talented and honest employees but also have ended up with a devastating result.
It has been understood that the organization has compromised on its customer service also for a long time the organization used to transfer energy out of the territory of California for creating black outs and subsequently raising the fare of electricity. Therefore, it can be said that the organization does not only deprived its talented and honest employees but also have deprived its customers. The financial failure of the organization is due to the reluctant attitude of the board of directors who ignored the dubious transactions and has failed to design moral and appropriate organizational aims and priorities. The following paper will focus on the aforementioned situation of Enron and will discuss the situation from the point of view of varied leadership theories, and thereafter will recommend fruitful suggestions.
Analysis and problem diagnosis (Q.1)
From the above-discussed comprehension, it has been understood that the considered organization has suffered from unethical and reluctant leadership. It has been also identified that the leadership has been autocratic several times. In the contemporary era of business where business market has become an aspect of fluctuation, business organizations are supposed to follow the contingency theory as theory says that there is no better way to organize an organization but to operate it according to the internal and external situation (Avolio & Yammarino, 2013). The situation of Enron is indicative of the fact that neither the managers have considered the internal situation nor they have taken concern about the external situation. However, the consequences of Enron is mainly indicative of the fact that the organization never consider pursuing transformational and transactional leadership styles. According to the transformational leadership, motivation from the peers or from the leaders is essential for making employees dedicated and productive to an impressive level (Dansereau et al., 2013).
On the other hand, according to the transactional leadership style, managers should use reward or punishment for controlling the behavior of the employees (Foti et al., 2014). The case of Enron is indicative of the fact that the organization may have used the transactional leadership theory though in a negative way. It is because; the case study has indicated that the organization has given priority to those employees, who had not shown objections against the unethical approach and had encouraged them to behave unethically by promotion and other benefits. On the opposite side, in terms of punishment, the organization has terminated those who had shown objection against the activities. Most significantly, the case study is indicative of the fact that an autocratic view had been pursued by most of the leaders, as they had not considered listening to the words of those employees who had tried to point out that the organization was going in a wrong way. According to the trait theory of leadership, those should be chosen as leaders who possess appropriate qualities of a leader (Jansen, 2015). The consequence of Enron is indicative of the fact that the organization has not chosen appropriate leaders who possessed ethical and dedicated attributes for the organization. Moreover, the case of Enron can be justified by the Behavioral theory of leadership. The behavioral leadership does not consider the in-born traits of a leader but believes that leaders can be made as the capabilities of leadership can be made (Latham, 2014). The consequence of the organization is indicative of the fact that instead of facing continuous financial issues, the organization did not consider modifying the behaviors of the leaders.
Therefore, it can be said that the organization’s consequence is a result of the organization’s incapability of employing a proper leadership style.
Theory and practice (Q.2)
In this context, it is essential to evaluate the relationship between leadership and organizational culture as well as will to identify in what ways leadership influences organizational culture. The case study is indicative of two significant facts, one is, the organization had pursued an unethical corporate culture and the second one is the organization’s management or leadership style had highly influenced the organizational culture and helped to continue its immoral approach. Prior to understand the relationship between the leadership and corporate culture and the influence of leadership on organizational culture, it is essential to mention that organizational culture refers to a set of prevalent values, attitudes as well as organizational beliefs. Organization culture or the set of prevalent values characterize an organization’s aim and approach to the external and internal stakeholders (Levine, 2005). In other words, organization culture can be considered as a set of norms or rules that shapes organizational behavior and guide its practices (Lussier & Achua, 2015).
On the other hand, the aspect of leadership is considered to have the responsibility to fruitfully accomplish individual organizational culture. According to Nahavandi (2016), organizational culture and corporate leadership are interrelated aspects and the difference in leadership pattern is determined by the observation of organizational culture by the subordinates. It should be considered that success of an organization’s culture is determined by organizational performance. Organizational performance on the other hand is dependent upon organizational management and leadership. As per Odumeru and Ogbonna (2013), organizational performance strongly depends upon the values and norms set by organizational culture that is required to be shared among the internal stakeholders. However, it should be kept in mind that leadership and management are parts of an organizational culture, which support the corporate culture to meet organizational objectives by enhancing the organizational performance (Prakash et al., 2015).
Nevertheless, as per Schyns and Riggio (2016), leadership approaches influence organizational culture in five major ways, which are model behaviors, communicating organizational mission, setting expectation, reinforcing a culture of accountability and constructing appropriate teams. In order to employ appropriate employee behavior, which is essential for organizational production, it is necessary to set a role model in front of the employees (Shanafel et al., 2015). The ideal behavior of the team leaders works as a fair example for the employees, which inspires them to work in a proper way and accomplish organizational goal. Therefore, it should be contemplated that leadership behavior determines organizational goal, which is the ultimate goal of an organization’s culture (Tourish & Vatcha, 2005). On the other hand, for obtaining expected performance outcome from the employees, it is essential at the very first to communicate all the organizational objectives and long term vision to the employees. The management of an organization or the leaders is responsible for communicating the mission, vision and objective of an organization (Van Wart, 2013).
At the same time, without an appropriate leadership, it is not possible to improvise the performance of the employees according to organizational expectation. According to Zandstra (2002), a leader can increase productivity of the subordinates by the setting examples and through a persuasive behavior. If the leaders would not show a proper sense of accountability, a culture of accountability is not possible to reinforce. Reinforcement of a culture of accountability is an essential part of an organizational culture and it is required to be implemented at the time of employing candidates for the first time. Employees should stay transparent about detail of their job description along with key responsibilities according to their organization’s objectives. Without a responsible leadership, it is not possible to establish attainable and appropriate measures for the employees (Van Wart, 2013). An organization’s culture, which is designed so that the organization can systematically and ethically meets its goal, is therefore dependent upon employee behaviors and their productivity, which on the other hand is determined by leadership. Hence, it can be said that leadership shapes culture and so does organizational culture does on leadership.
From the considered situation of Enron, it can be assumed that from the very first, Enron lacked an ethical and appropriate corporate culture and due to that, the leaders got the opportunity to continue with their unethical and autocratic leadership. Further, with the continuation of the unethical and reluctant leadership, the corporate culture of Enron, which has been already weak and flawed degraded and finally result in disaster. Here it should be kept in mind that it is not easy to shift a culture easily if an organization’s leadership would not accept the change. If the leadership would have acted in an ethical and systematic way, the organization’s objective could have met in a proper way and so the authority could possibly avoid the bankruptcy (Nahavandi 2016). Therefore, it is proved that the leadership does have a strong influence on organizational culture.
Conclusion:
The above discourse about the relationship between leadership and organizational culture and the situation of Enron from the point of view of varied leadership theories have indicated the fact that Enron’s financial mishap and their subsequent fall is due to ill-maintained corporate culture and unethical leadership. The organization repeatedly deprived the employees as well as their customers and it has been understood that the organization has pursued an autocratic management also that lacked proper judgment and observation.
Recommendation (Q.3)
If an organization is having a same situation like the Enron, it can be therefore suggested that to reduce unethical leadership approach, it would be essential first to modify the organizational culture. Reinforcement of the consequences would be a convenient measure for reducing the unethical approaches of an organization. According to Levine (2005), the best medicine to end unethical behaviors is prompt actions from the higher authority. It means if employees as well as the management would try to pursue unethical and unjustified activities, they should be penalized with strong punishments.
However, it should be considered here that prior to penalize unethical activities, it would essential to form a separate team whose responsibility would be monitor and make report about the actions of the workers in an organization. In order to build a team as such, an organization needs honest and dedicated employees (Latham, 2014). The case of Enron is evident of the fact that the management, which is responsible for managing behaviors of the subordinates, was dishonest, manipulative and immoral. Therefore, at the very first an organization requires recruiting experienced and honest candidates with the help of a thorough background check. In order to do that every organization should contact with the organizations, where the candidate has previously worked and should compulsorily conduct a personality test on the candidate.
Most importantly, if an organization is facing unethical behavior in the workplace and realizing that the management is to be blamed for that, the organization should immediately change the managerial individuals and should start showing appreciation to the loyal employees. Moreover, the board of directors should not show reluctance to any organizational matter and must take actions against any unjustifiable act. In case of Enron, if the board of directors would have acted in a more responsible way, the honest employees of Enron would not have been terminated. Moreover, for maintaining an ethical organizational culture, it is necessary to employ transformational and transactional leadership, which are significant for motivating employees and increasing their productivity. Performance appraisals, ideal model of leadership and a responsible board of directors should be integrated in the culture of a business organization for preventing unethical approaches. Moreover, a fraud report policy should be formed through which the board of directors could prepare themselves in taking actions against the blamed individuals prior any major accident takes place.
References:
Avolio, B. J., & Yammarino, F. J. (Eds.). (2013). Introduction to, and overview of, transformational and charismatic leadership. In Transformational and Charismatic Leadership: The Road Ahead 10th Anniversary Edition (pp. xxvii-xxxiii). Emerald Group Publishing Limited.
Dansereau, F., Seitz, S. R., Chiu, C. Y., Shaughnessy, B., & Yammarino, F. J. (2013). What makes leadership, leadership? Using self-expansion theory to integrate traditional and contemporary approaches. The Leadership Quarterly, 24(6), 798-821.
Foti, R., Hansbrough, T. K., Epitropaki, O., & Coyle, P. (2014). Special issue: Dynamic viewpoints on implicit leadership and followership theories. The Leadership Quarterly, 25(2), 411-412.
Jansen, A. (2015). Implicit leadership theories, leader-member exchange and its workplace outcomes: a case of South African call centre agents (Doctoral dissertation).
Latham, J. R. (2014). Leadership for quality and innovation: Challenges, theories, and a framework for future research. Quality Management Journal, 21 (1), 5.
Levine, DP (2005) The corrupt organization, Human Relations 58 (6): 723-740
Lussier, R. N., & Achua, C. F. (2015). Leadership: Theory, application, & skill development. Nelson Education.
Nahavandi, A. (2016). The Art and Science of Leadership -Global Edition. Pearson.
Odumeru, J. A., & Ogbonna, I. G. (2013). Transformational vs. transactional leadership theories: Evidence in literature. International Review of Management and Business Research, 2(2), 355.
Prakash, A., Héritier, A., Koremenos, B., & Brousseau, E. (2015). Organizational Leadership and Collective Action in International Governance: An Introduction. Global Policy, 6(3), 234-236.
Schyns, B., & Riggio, R. E. (2016). Implicit leadership theories. Global Encyclopedia of Public Admnistration, Public Policy, and Governance, 1-7.
Shanafelt, T. D., Gorringe, G., Menaker, R., Storz, K. A., Reeves, D., Buskirk, S. J., ... & Swensen, S. J. (2015, April). Impact of organizational leadership on physician burnout and satisfaction. In Mayo Clinic Proceedings (Vol. 90, No. 4, pp. 432-440). Elsevier.
Sims, RR and Brinkmann, J. (2003) Enron Ethics (Or: Culture Matters More than Codes, Journal of Business Ethics 45; 243-256
Tourish, D and Vatcha, N (2005) Charismatic Leadership and Corporate Cultism at Enron: The Elimination of Dissent, the Promotion of Conformity and Organizational Collapse, Leadership 1 (4): 455-480
Van Wart, M. (2013). Lessons from leadership theory and the contemporary challenges of leaders. Public Administration Review, 73(4), 553-565.
Zandstra, G (2002) Enron, board governance and moral failings, Corporate Governance: The International Journal of business in society 2 (2): 16-19
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