Cover Sheet

For all handins

Course Code: FEAD18 Course Name: Leadership & Management
Title of Work: Enron Case Study
The Last Date: 2011-03-10

Name of Student/Students
Family Name Given Name T-Number
Bhatty Usman Tariq 840415-9256 (R238)
Guninita Kelvin 850528-R074
Ilyas Muhammad 831204-T455
Messele Adey 860919-T344
Hussain MD Mosharraf 801230-T415

Name of the Teacher: Markus Fellesson
Name of the Administrator: Britt-Marie Klarstrm

Filled out by the examiner
First Return: _____ Second Return: ______ Fourth Return: _________ Passed: _________
Received Points: _________ Grade: _________ Examiner: __________________









ENRON
Case Study





Abstract
Enron.

Executive Summary
Enron.





Contents
Abstract .......................................................................................................................................... iv
Executive Summary ....................................................................................................................... iv
Introduction ..................................................................................................................................... 1
Conclusion ...................................................................................................................................... 2
References ....................................................................................................................................... 5
Reading Reference ...................................................................................................................... 5
Web Resources Used .................................................................................................................. 5
Appendixes ..................................................................................................................................... 0
Appendix A ()...................................................................................................................... A



C
h
a
p
t
e
r
:

I
n
t
r
o
d
u
c
t
i
o
n

1

I ntroduction
History of Enron
The history of Enron falls into two distinct parts. The first act was the rise of a company that
mastered, for a brief while, the "new economy" of the Information Age; the second act contained
a spectacular fall from wealth and power, a cautionary tale full of accounting scandals and
corporate malfeasance. Understanding the history of Enron gives clues to the complexity of
modern trading markets and underscores the importance of ethical behavior in business.
Origin
Enron was formed in 1985 by Kenneth Lay (Fox, 2005). Lay merged his company, Houston
Natural Gas, with Omaha, Nebraska's InterNorth to form Enron. Lay was Enron's CEO. In
addition to traditional sales and transportation of natural gas, Enron, under Lay's direction,
bought into futures markets. The 1980s had seen considerable deregulation of energy markets
under Ronald Reagan's presidency (Fox, 2005); this allowed Enron and other futures players to
buy and sell energy futures, or contracts for delivery at a future date. The company relocated its
headquarters from Omaha to Houston in 1986. (NPR 2002 & Fox 2005)
Innovations
Kenneth Lay brought former consultant Jeffery Skilling to join Enron in 1990 (NPR 2002 & Fox
2005). Skilling would eventually become Enron's chief operating officer; his focus was on
moving Enron's business from old ways of doing business--the physical building of power
plants, for instance--to a largely information-based business model. Under Skilling's plan,
therefore, Enron became heavily focused on contracts for delivery of energy, as well as selling
pieces of those contracts as "derivatives," matching big suppliers with smaller customers. (Salter,
2008)
Skilling next lead Enron, in conjunction with the company's accounting firm Arthur Andersen, to
request permission to change accounting procedures (NPR 2002 & Salter 2008). Skilling lobbied
the Securities and Exchange Commission to allow Enron to use "mark-to-market" accounting,
which would permit Enron to account for profits from long-term contracts in the first year of the
contract. Enron history author Malcom S. Salter (2008) explains that Enron was thus the first
nonfinancial company to be permitted to use the mark-to-market method. Gas prices would
stabilize, further cementing Enron's appearance as a crucial firm.
Difficulties
Despite its reputation as a corporate juggernaut, Enron had various difficulties that preceded the
scandals to come. Although the biggest natural gas company in the United States by 1992,
Enron's focus on trading obscured the fact that its trading division was not making a profit (NPR
2002).
To compound matters, Chief Financial Officer Andrew Fastow had created separate business
entities that were not reflected in the main company's financial statements. Despite auditing

C
h
a
p
t
e
r
:

R
o
l
e

o
f

M
a
n
a
g
e
m
e
n
t

&

L
e
a
d
e
r
s
h
i
p

i
n

E
n
r
o
n

2

Enron's books, Arthur Andersen did not disclose this fact to investors at the time. The result was
that an extremely successful-looking company was, in reality, going broke.
Scandal
Enron's situation quickly deteriorated at the end of 2001 (NPR 2002 & Fox 2005). Because of a
lack of revenues, the company was forced to access a line of credit of $3 billion. Credit ratings
agencies caught wind of this and downgraded the company's debt ratings; creditors, fearing they
might not get paid in event of an Enron bankruptcy, increased Enron's debt payment schedules.
On Dec. 2, 2001, Enron filed for bankruptcy, laying off thousands of workers in the process
(NPR 2002 & Fox 2005).
In and of itself, the bankruptcy would not have been scandalous. Yet disturbing revelations
began to surface. Andrew Fastow, who had been fired in October 2001, had hidden millions in
debt in Enron's partnership companies (Fox 2005). In March 2002, Arthur Andersen would be
indicted by the U.S. Justice Department for destroying documentation of Enron's malfeasance;
the accounting firm was convicted in June of the same year (NPR 2002 & Fox 2005).
Aftermath
Although the initial scandal at Enron focused on accounting officers, it was soon revealed that
the conspiracy to fool investors went to the very top of the organization. Kenneth Lay and
Jeffrey Skilling were both indicted in 2004 on financial conspiracy charges (Fox, 2005); Enron
accountant Richard Causey agreed to testify against the two Enron chiefs in exchange for
Causey's own reduced sentence for his role in the matter. In 2006, Lay and Skilling were
convicted of conspiracy and fraud charges. Lay passed away from heart disease in July 2006
(NPR 2002 & Fox, 2005). That October, Skilling was sentenced to 24 years, four months in
prison (Fox, 2005).
In 2004, Enron emerged from bankruptcy court as Enron Creditors Recovery Corp., charged with
reorganizing and liquidating assets to help repay Enron's creditors (Fox, 2005).
Role of Management & Leadership in Enron

HRM Policies in Enron

Ethics & Cultural Perspective of Enron Fall
This part will discuss the business ethics background and leadership mechanisms affecting
Enrons collapse and eventual bankruptcy.
Scheins frame of reference is used in this part to go through a systematic analysis of the
organizational culture at Enron; the case study demonstrates how the companys culture had
profound effects on the ethics of its employees.
Schein (1985) has focused on leadership as the critical component of the organizations culture
because leaders can create, reinforce, or change the organizations culture. According to Schein

C
h
a
p
t
e
r
:

E
t
h
i
c
s

&

C
u
l
t
u
r
a
l

P
e
r
s
p
e
c
t
i
v
e

o
f

E
n
r
o
n

F
a
l
l

3

(1985) there are five primary mechanisms that a leader can use to influence an organizations
culture: attention, reaction to crises, role modeling, allocation of rewards, and criteria for
selection and dismissal. We have used those five mechanisms to analyze the companys culture
and leadership that contributed to its ethical demise and filing for bankruptcy.
Attention Focusing
The issues that capture the attention of the leader (i.e. what is criticized, praised or asked about)
will also capture the attention of the greater organization and will become the focus of the
employees.
One former executive of Enron has described Jeffrey Skilling as a leader driven by the almighty
dollar (Zellner, 2002). Enron executives attention was clearly focused on profits, power, greed
and influence. Consistently clear signals told employees what was important to leadership
Profits at all costs (Tracinski, 2002).
Summarizing the actions by the top executive of Enron; we can say that whole attention of them
was always focused on money and the worst part was that, the focus was not for the welfare of
company or its employees but for their own self.
Reaction to crises
This refers to a leaders reaction to a crisis situation; a crisis tests what the leader values and
brings these values to the surface. With each impending crisis, leaders have an opportunity to
communicate throughout the organization what the companys values are.
Enron was facing a crisis of how to sustain a phenomenal growth rate. Leaders reacted by
defending a culture that valued profitability, even when it was at the expense of everything else.
Another crisis consists in having to admit accounting irregularities. At first, the leaders of the
company tried to deny there was a problem. They next tried to cover up any evidence of a
problem or any wrongdoing. They even tried to seize computers of anyone they thought was
trying to expose them as well as to destroy many files thought to be guilt-inducing (Daily Press,
2002).
Willet and Always (2002) noted that the mantra at Enron seems to be that ethical wrongdoing is
to be hidden at any cost; deny, play the dupe, claim ignorance (the ostrich instruction) lie,
quit. It appears that the truth and its consequences have never been a part of the Enron culture.
Role Modeling
It is the example leaders set for the acceptability of unethical behavior within an organization.
Actions speak louder than words therefore role-modeling behavior is a very powerful tool that
leaders have to develop and influence corporate culture. This is the case with any cultural value.
Employees observe the behavior of leaders to find out what is valued in the organization.
Perhaps, this was the most significant short- coming of Enron executives. Enrons leaders
primary message about their values was sent through their own actions. They broke the law as
they concentrated on financial measures and used of the creative partnerships.

C
h
a
p
t
e
r
:

R
e
c
o
m
m
e
n
d
a
t
i
o
n
s

&

C
o
n
c
l
u
s
i
o
n

4

Reward Allocation
It is the behavior of people rewarded with pay increases or promotions signals to others what is
necessary to succeed in an organization.
Enrons reward system established a win- at-all-costs focus. The companys leadership
promoted and retained only those employees that produced consistently, with little regard to
ethics. Skilling singled out one of his vice presidents, Louise Kitchen, for her results-oriented
approach to Enrons online business. The companys compensation structure contributed to an
unethical work culture, too by promoting self-interest above any other interest. The strongest
per- forming units even went as far as to ignore company policy granting unlimited vacation
time as noted earlier as long as the work got done, ignoring Human Resources complaints
(Bartlett and Glinska, 2001).
Overall, Enrons reward system rewarded individuals who embraced Enrons aggressive,
individualistic culture and were based on short-term profits and financial measures.
Criteria for hiring and firing
Scheins (1985) last mechanism by which a leader shapes a corporate culture, describes how a
leaders decisions about whom to recruit or dismiss signals a leaders values to all of his
employees. Ken Lay placed an immediate focus on hiring the best and smartest people, those
who would thrive in a competitive environment. Skilling shared Lays philosophy.
Recommendations & Conclusion
The story of Enron sounds smart and stupid at the same time. Enrons house of cards collapsed
as a result of interacting decision processes. The culture at Enron eroded little by little, by the
trespassing of ethical boundaries, allowing more and more questionable behavior to slip through
the cracks. Enrons top executives set the tone for this culture. Personal ambition and greed
seemed to overshadow much of their corporate and individual lives.
Two of the most important lessons to learn from the Enron culture history is that bad top
management morality can be a sufficient condition for creating a self-destructive ethical climate
and that a well-filled CSR and business ethics toolbox can neither stop nor compensate for such
processes.

C
h
a
p
t
e
r
:

R
e
f
e
r
e
n
c
e
s

5


References
Fox News (2005). Timeline: Enron Corp. [Online] Available at:
http://www.foxnews.com/story/0,2933,39655,00.html. Accessed on: 2011-03-06
NPR (2002). History of Enron. [Online] Available at:
http://www.npr.org/news/specials/enron/history.html. Accessed on: 2011-03-06
Salter, M., (2008). Innovation corrupted : the origins and legacy of Enrons collapse. Harvard
Business Review, 86(10), p.viii, 525 p.
Schein, E., (1985). Organizational Culture and Leadership. As in Sims, R.R. & Brinkmann, J.,
2003. Enron ethics (or: culture matters more than codes). Journal of Business Ethics, 45(3),
p.243-256. Available at: http://www.springerlink.com/index/p712j1555807774r.pdf Accessed
on: 2011-03-07.
Reading Reference

Figures
Figure 1: Kennedy Lay, NPR (2002), History of Enron, Available at:
http://www.npr.org/news/specials/enron/history.html
Figure 2: Jeffery Skilling, NPR (2002), History of Enron, Available at:
http://www.npr.org/news/specials/enron/history.html
Figure 3: Adrew Fastow, NPR (2002), History of Enron, Available at:
http://www.npr.org/news/specials/enron/history.html
Web Resources Used
















Appendixes



A
p
p
e
n
d
i
x
e
s

A

Appendix A ()