cover page for the project
TRANSCRIPT
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COVER PAGE FOR THE PROJECT
REPORT – 5TH
SEMESTER:
Year: 2016
Semester: 5th
Project title: ENDRON: a case study of Enron’s collapse through the lens of organisational culture
Project supervisor: Jacob Dahl Rendtorff
Group no.: V16-BUSINESS-03A
Total number of characters: 161,431
Group members (full name and student ID No.):
Dominika Hajkova: 55453 Irtaza Zafar: 55011
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ENDRON:
A case-study of Enron’s collapse through
the lens of organisational culture
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Table of Contents
1. Introduction ....................................................................................................................... 5
1.1 Reading guide ............................................................................................................................ 5
1.2 Project motivation ...................................................................................................................... 6
1.3 Literature review ........................................................................................................................ 7
1.4 Problem area .............................................................................................................................. 9
1.5 Research Question.................................................................................................................... 11
1.6 Sub-questions ........................................................................................................................... 11
1.7 Contextualisation ..................................................................................................................... 12
2. Methodology ..................................................................................................................... 14
2.1 Data collection and research strategy....................................................................................... 14
2.2 Theory and research ................................................................................................................. 14
2.3 Epistemology ........................................................................................................................... 15
2.3.1 Positivism, realism and interpretivism ........................................................................................... 15
2.4 Hermeneutics ........................................................................................................................... 17
2.5 Ontology................................................................................................................................... 18
2.5.1 Objectivism and subjectivism ......................................................................................................... 18
2.6 Case study ................................................................................................................................ 19
2.7 Delimitations of research ......................................................................................................... 21
3. Theoretical framework ................................................................................................... 22
3.1 Levels of Cultural Analysis...................................................................................................... 22
3.2 Primary Embedding Mechanisms ............................................................................................ 24
3.3 The Competing Values Framework ......................................................................................... 25
3.4 Stakeholder theory ................................................................................................................... 27
3.5 Utilitarianism and Egoism ....................................................................................................... 30
3.6 Sub-conclusion ......................................................................................................................... 34
4. Analytical Framework .................................................................................................... 35
4.1 Role of the leadership in shaping Enron’s culture ................................................................... 35
4.1.1 Enron Oil Scandal and response of the leadership ......................................................................... 35
4.1.2 Towards a change in culture ........................................................................................................... 37
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4.1.3 The new culture .............................................................................................................................. 40
4.1.4 Enron’s culture and the Competing Values Framework ................................................................ 42
4.1.5 Sub-conclusion ............................................................................................................................... 43
4.2 Stakeholders and the impact of Enron’s culture ...................................................................... 44
4.2.1 Stakeholder salience theory ............................................................................................................ 44
4.2.1 Enron’s culture and the salience model .......................................................................................... 44
4.2.2 Whistle blowers and Enron’s culture.............................................................................................. 46
4.2.3 The board of directors..................................................................................................................... 47
4.3 Unethical actions promoted by the culture .............................................................................. 50
4.3.1 The California Crisis ...................................................................................................................... 50
4.3.2 Enron’s role in the California crisis ................................................................................................ 51
4.3.3 The use of Special Purpose Entities ............................................................................................... 54
4.3.4 The consequences of Special Purpose Entities ............................................................................... 56
4.3.5 Sub-conclusion ............................................................................................................................... 58
5. Discussion ......................................................................................................................... 59
6. Conclusion ........................................................................................................................ 62
7. Bibliography ..................................................................................................................... 64
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1. Introduction
1.1 Reading guide
The following summary intends to provide an overview of the structure of this paper, in order to
make it easier for the reader to navigate throughout. Altogether, this paper consists of six main
chapter, and each chapter will be briefly described.
Firstly, the paper initiates with the motivation behind our chosen topic by explicating the
preliminary thoughts and interests which led to the focus of this research. This is followed by the
literature review which aims to explain the fundamentals of the topic, organisational culture. This
leads to the problem area, which describes the problem to be investigated in this paper.
Subsequently, the research question and sub-questions are presented.
Secondly, the methodology chapter aims to present the reader with the methods applied in this
paper. This includes the research strategy, epistemology and ontology, and interpretative method, as
well as the limitations this paper has encountered. In the subsequent chapter, theoretical framework,
the five theories which have been incorporated are introduced and their relevance is explained. The
chapter aims to provide a theoretical framework through which to conduct the analysis.
Thirdly, the analytical framework of this paper constitutes of three sub-questions and is, therefore,
divided into three chapters. By applying the theories, the three sub-questions are analysed with the
purpose of answering the research question. Thereafter, the arguments put forth in the analysis are
summarised in the discussion chapter. Lastly, the research question is attempted to be answered in
the concluding chapter, in which the arguments presented throughout the paper are also summed up.
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1.2 Project motivation
The chosen topic of this paper is based on an interest in the subject of business studies. The research
area of this paper is inspired by the overall topic of corporate bankruptcies, and has emerged from
cases which have occurred in the last two decades, such as the Lehman Brothers, WorldCom and
Enron. What all these cases have in common is their use, or rather misuse, of certain accounting
principles and methods; unethical and illegal activities, which ultimately led to committing fraud.
However, what brought us to question is the factor(s) leading to such behaviour.
It seemed significant to explore how values and beliefs are formed in an organisation, which result
in disastrous consequences. This brought us to the topic of organisational culture. After further
research on the topic, we came to the assumption that the culture of an organisation has a
considerable impact on its operations and performance, and that the leadership plays an important
role in shaping the culture. It seems that culture and leadership are intertwined. Furthermore, there
appears to be a connection between culture and the collapse of an organisation. Accordingly, we
developed a hypothesis that the downfall of an organisation can be explained, to a very large extent,
by analysing its culture, which is ultimately shaped by the values and beliefs of the leadership. In
this regard, and to test the hypothesis, we have opted for Enron as a case study.
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1.3 Literature review
In order to support our hypothesis, this section intends to review the literature on the topic of
organisational culture. Additionally, reviewing the literature will also explain what organisational
culture is, and its importance in an organisation.
The word “culture” originates from social anthropology. It represents the qualities of any particular
group which are passed on to the next generation (Hasnan et. al. 2015: 367). Culture indicates the
values shared by the members of a group which persist even when the existing members leave and
new members join the group (Hasnan et. al. 2015). According to O'Donnell and Boyle (2008),
“...the concept of culture is the climate and practices that organisations develop around their
handling of people, or to the promoted values and statement of beliefs of an organisation.”.
Organisational culture is the behaviour of humans within an organisation and the meaning which
the members associate to those behaviours (Hasnan et. al. 2015). Culture provides an organisation
with a sense of identity and determines, based on various beliefs and values, the manner in which
““things are done...”” (O'Donnell and Boyle 2008).
According to Schein (2004: 1), organisational culture is created, embedded, evolved, and ultimately
manipulated, and provides stability, structure, and meaning to an organisation. Schein (2004: 8)
argues that “culture is to a group what personality or character is to an individual.”. Schein (2004)
also notes that the leadership of an organisation has a huge impact on the formation and
development of its culture; thus, they are two sides of the same coin. By imposing their own values
and assumptions on a group, which ultimately turn out to be successful, the leadership creates a
culture which defines for the next generation the kinds of leadership that are acceptable; thus, the
culture defines leadership (Schein 2004). The leadership is also responsible of bringing a change in
the culture once the organisation faces adaptive difficulties. Thus, Schein (2004: 11) articulates that
“the only things of real importance that leaders do is to create and manage culture; that the unique
talent of leaders is their ability to understand and work with culture; and that it is an ultimate act of
leadership to destroy culture when it is viewed as dysfunctional.”. However, Kotter (2008) argues
that culture can be very difficult to change because the members, of a group or organisation, are
often oblivious to the values which form the core foundations of their culture.
The shape which a culture may take depends to some extent on the organisations’ objectives. What
is important to achieve varies from organisation to organisation. Different companies value
different objectives, such as making money, technological advancements or the well-being of their
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members (Hasnan et. al. 2015: 367). Regardless of their differences in goals, focus, and
terminology, one thing which all organisations have in common is that they have a culture, and
some have a “stronger” culture than others (Hasnan et. al. 2015: 367). Culture can, substantially,
impact individual members and their performance in an organisation, especially when an
organisation has a competitive environment. This impact, Hasnan et. al. argue (2015), may be
greater than factors such as strategy, organisational structure, management systems etc., which are
frequently discussed in the organisational and business literature. Culture can be measured in terms
of its strengths and weaknesses; and efficiency and inefficiency. Dellaportas et. al. (2007) note, that
a strong and efficient culture influences members’ behaviour in order to become compatible with
the organisations’ values and fulfilment of its goals and strategies. Such a culture is more likely to
effectively achieve goals and strategies, whereas an inefficient and weak culture is less likely in
achieving such efficiency. An inefficient and weak culture can lead to “...jeopardising the survival
of the organisation.” (Dellaportas et. al. 2007).
According to Hasnan et. al. (2015), as well as Schein (2004), the culture of an organisation is
increasingly important and the employees are inspired by the top leadership. This is due to the fact
that the character of the leadership is ultimately reflected in the character of the entire organisation
(Hasnan et. al. 2015). Thus, if the leadership is known for its integrity, it will reflect in the
organisation. On the contrary, if the leadership is more keen to generate short-term profits, by all
means, the members of the organisation will also follow that objective (Hasnan et. al. 2005). Hence,
Dellaportas et. al. (2007) argue that exploiting organisational culture can have destructive effects on
the organisation as a whole, such as unethical and illegal behaviour and fraud.
Based on the reviewed literature, it can be argued that the culture and leadership of an organisation
are certainly interconnected. It is the leadership which shapes and maintains the culture; hence, it is
also their responsibility to ensure that the culture of the organisation is not one which promotes
unethical behaviour, illegal activities and fraud. The literature on Enron (Cohan 2002; Cornford
2006; Cruver 2003; Dembinski et. al. 2006; Gibney 2005; Moncarz et. al. 2006; Murthy and Gore
2011; Thomas 2002) indicates that the leadership formed a certain culture in which ethics was
disregarded, and it was ultimately the culture which led to Enron’s collapse.
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1.4 Problem area
Enron as a case of organisational culture paints a holistic picture of the importance of organisational
culture and how its misuse can lead to terrible consequences. Having been selected for six
following years as the “America’s most innovative company” (Fortune.com 2001), the post-scandal
Enron fell into a rapid bankruptcy, that came to be known as one of the largest corporate
bankruptcy in the history of the United States (Dobson 2006). As the investigations on Enron’s
financial conditions proceeded, it was demonstrated that Enron was systematically cheating their
financial reports and accounting in order to meet their planned revenues and increase their stock
prices (Cornford 2006). Corporate bankruptcy, however, is not what sets Enron apart from other
cases; Enron’s total assets were valued at $61 billion (Haberly 2002: 4), whereas the largest
bankruptcy, the Lehman Brothers Holdings in 2008, peaked at around $639 billion USD in total
assets (Adu-Gyamfri 2016: 133). What sets Enron apart from other corporate bankruptcies of this
extent is its particular organisational culture, which is described as being arrogant, extremely
decentralised and risk-taking, while still being very innovative and progressive (Gore and Murthy
2011).
Enron had a difficult start after it was formed in 1985 as a “bricks-and-mortar energy business”
(Partnoy 2006: 64). However, due to the deregulation of energy markets, which came into effect in
1980s in the US, Enron shifted their specialisation to become an energy supplier and, more
importantly, started trading natural gas as a commodity on their platform called the Gas Bank,
which proved to be very successful (Cornford 2006). In the years following 1991, Enron shifted
their business plan, as the market trends were changing, with the idea that innovation will help
increase their stock price. Therefore, when the Internet started gaining more importance during the
Internet boom in the late 1990’s, Enron decided to create an online trading platform, called Enron
Online (Partnoy 2006). Moreover, Enron still invested in several countries around the world, where
it was primarily building and operating energy sites (Cornford 2006).
The stock market was on a rise during the 2000’s and everyone, including the working-class, started
investing into various stocks, as they kept growing and increasing in price, and no one expected
them to fail. Enron’s stock price was on a steady rise in the 1990’s; however, the most interesting
increase happened in the last six years before their bankruptcy (Blommestein 2006). The dot-com
bubble, or the Internet bubble, crashed soon after NASDAQ index hit their famous 5000 in the early
2000’s. Even though the dot-com bubble uncovered mainly overpriced technological stocks, it
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showed the possibility of overvaluation and general lower interest in investing, which moved Enron
one step closer to their bankruptcy (ibid).
Prior to their bankruptcy, from 1996 to 2001, Enron was not only consecutively selected the most
innovative company by Fortune500 but, together with its board members, was considered as the
hero of Wall Street and a shining example of a perfect American corporation (Dobson 2006). Enron
was flourishing, everyone wanted to work for it, not just because of its good salaries, promised
retirement funds and other rewards, but also because of its competitive organisational culture which
appealed to a lot of people (ibid).
Enron’s organisational culture, mainly described as a sick culture, extremely risk-taking,
competitive, and inconsiderate, also helped form a certain attitude, convincing its members that
Enron was capable of anything. In this culture, the code of ethics was merely a facade and profit
became the only benchmark (Gore and Murthy 2011).
Enron’s employees were one of the best from the country, especially after Enron established one of
the toughest employee-ranking system in the country, known as the Performance Review
Committee (PRC). As a consequence of the PRC, Enron fired some 15% of its workers annually,
with the worst performance rating (ibid). This made Enron’s organisational structure and culture
very unusual, and interesting, as according to Schein (2004) and other researchers, organisational
culture is one of the most influential factor in an organisation. Another striking aspect of Enron’s
culture was its ethical considerations towards their stakeholders. The fact that Enron’s shareholders
lost close to $11 billion due to its bankruptcy, without being aware that Enron was internally
collapsing, is neither ethical nor legal (Benston 2003).
As such it becomes relevant to examine the organisational culture of Enron in relation to their
apparent strong growth and increasing power over the years, before their corporate fraud became
public knowledge. The literature on organisational culture indicates that perhaps Enron’s culture is
to blame, to a large extent, for their bankruptcy as it led to taking specific actions, ethical or
unethical, and therefore it becomes relevant to examine the reasons behind these actions. However,
as the culture is formed and changed by the leadership of an organisation, it becomes significant to
examine the Enron’s leadership and their impact on the culture. Moreover, the project will examine
different stakeholders, their importance for the management in relation to the organisational culture,
and the impact the culture had on them.
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To verify or denounce the hypothesis: “the collapse of Enron was caused by its culture as it,
among other things, promoted unethical and illegal actions”, the paper attempts to answer the
following research question, assisted by three sub-questions.
1.5 Research Question
With a focus on the role of its leadership, how can Enron’s organisational culture explain its
collapse?
1.6 Sub-questions
1. What role did Enron’s leadership play in shaping its organisational culture and how can it be
characterised?
2. With a focus on the stakeholders, what impact did Enron’s culture have?
3. How did this culture promote unethical actions and what consequences did they have?
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1.7 Contextualisation
Enron was founded in 1985 by Kenneth Lay with the purpose of producing and supplying natural
gas. It was founded as a result of a merger between InterNorth Inc. and the Houston Gas Company
(Gore and Murthy 2011: 8). The foundation of Enron was that of an ordinary natural gas firm,
relying on traditional methods of drilling, which made it unappealing to the stock market (Gore and
Murthy 2011: 8). In pursuance of survival and becoming more attractive, Kenneth Lay developed a
new business strategy with the help of an external consulting firm, Mckinsey and Company. In
1990, Jeffrey Skilling, a young consultant with a background in asset and liability management and
banking, was hired by Kenneth Lay in order to implement the new strategy (Thomas 2002: 42).
Skilling premeditated an innovative solution to increase Enron’s profits which was to create a
“bank” through which it would buy and sell gas. Skilling’s solution appealed to Kenneth Lay who
created a new division within Enron, run by Skilling, named Enron Finance Corporation. Within a
short period of time, the new division subjugated the natural gas market and as a result generated
immense profits (Thomas 2002). Due to the immense success of Enron Finance Corporation,
Jeffrey Skilling was appointed President and Chief Operating Officer of the entire Enron
corporation (US District Court 2004: 3).
Subsequently, establishing a compact base in natural gas led Enron to expand its business by
becoming a financial trader and market maker in broadband fibre optic cable capacity, water, paper
and pulp, steel, coal and electric power (Moncarz et. al. 2006: 19). These trading activities made
Enron very innovative and the results were positive as Enron became the seventh largest
corporation in the US (Moncarz et. al. 2006: 19).
What started out as an energy-producing company now became an energy trading company. The
transformed image of Enron as a trading corporation led Jeffrey Skilling to amend the
organisational culture of Enron (Thomas 2002: 42). According to an official document of US
District Court of Texas Houston Division:
“SKILLING closely supervised on a day-to-day basis the activities of each of Enron’s business units
and the heads of those business units, as well as the activities of the senior Enron managers who
conducted the company’s financial and accounting activities.”
(US District Court 2004: 3)
The organisational culture of the company endured some dramatic changes. According to Skilling,
“Our culture is a tough culture. It is a very aggressive, very urgent organisation.” (Gore and Murthy
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2011: 19). Skilling started hiring top traders from MBA schools throughout the country and
competed with respected investment banks for talented recruits. The employees faced exhausting
work hours; however, this came with its advantages. Skilling indulged in various services and
rewarded the members with merit-based bonuses with no limits, allowing them to “… “eat what
they killed”” (Thomas 2002: 42).
Additionally, Skilling established one of the toughest employee-ranking system in the
country, known as the Performance Review Committee (PRC), which was based on four core
values of Enron – respect, integrity, communication and excellence (known as RICE) (Thomas
2002: 42). The employees were rated on a scale from 1-5, with 5 being the worst performance. The
higher the PRC score, the closer the employee got to being fired, whereas a lower score was
favoured by Skilling. Despite the measure of the PRC score being based the above-mentioned
values, employees were only really measured on the profits they were able to produce for the
company. The introduction of the PRC led Enron to replace the lowest 15% of its employees
(Thomas 2002: 42). Furthermore, as a result of the PRC, there was aggressive competition and
paranoia and secrecy became order of business for the majority of the employees (Thomas 2002:
42). Moreover, employees were reluctant in expressing their opinions or question potential illegal
practices as it could lead to severe consequences from the leadership (Gore and Murthy 2011: 21).
Skilling transformed Enron’s organisational culture into one that was arrogant, extremely
decentralised and created an attitude that Enron was capable of anything.
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2. Methodology
The purpose of this chapter is to explain the methodological approaches incorporated in this paper.
The chapter initiates by explaining the method used to collect and analyse data. It then describes the
different epistemological and ontological assumptions and identifies the assumptions applied in this
paper. It also discusses the use of hermeneutics and case study, both approaches which are applied
in this paper.
2.1 Data collection and research strategy
Data collection is a key aspect of any research paper and can be collected through two different
research strategies; intensive and extensive. These research strategies are related with the terms
qualitative and quantitative research, where intensive research can be described as qualitative and
extensive research can be described as quantitative (Bahari 2010: 18). There are some key
differences in qualitative and quantitative research such as: research questions, methods of data
collection, limitations of the research and how the objects are defined (Bahari 2010: 19). According
to Bryman (2004: 266), qualitative research has an emphasis on words whereas quantitative
research emphasises quantification in the collection and analysis of data. In contrast to quantitative
research, where the researcher makes knowledge claims based on post-positivist claims, qualitative
researchers use constructivist perspectives in order to develop knowledge (Bahari 2010: 18).
Furthermore, different strategies are applied in qualitative and quantitative research. A qualitative
research design involves strategies such as phenomenologies, ethnographies, grounded theory
studies or case studies. On the contrary, a quantitative research design uses predetermined
instruments in data collection in order to produce statistical data, experiments and surveys (Bahari
2010: 18-19).
This paper can be described as qualitative in nature. The paper does not use quantitative research
strategies, such as experiments, but uses a qualitative strategy; a case study.
Qualitative and quantitative research differs in other aspects as well than just data collection.
Bryman (2004: 19) distinguishes qualitative and quantitative research through three main aspects;
the connection between theory and research, epistemology and ontology.
2.2 Theory and research
There are two primary approaches through which theory and research can be connected; deductive
and inductive. A deductive approach is applied in a quantitative research whereas an inductive
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approach is applied in a qualitative research approach (Bahari 2010: 19-20). Bryman (2004: 8)
defines a deductive approach as “…an approach to the relationship between theory and research in
which the latter is conducted with reference to hypotheses and ideas inferred from the former.”
According to this definition, the research initiates with the theory which becomes a framework for
the entire study (Bahari 2010: 21). On the contrary, an inductive approach initiates with collecting
data to explore a problem which in turn leads to the development of a theory (Saunders et. al. 2012:
145). When applying an inductive approach, the researcher collects data in order to develop themes
which are, in turn, developed into broad patterns, theories, or generalisations (Bahari 2010: 19-20).
This paper applies the collected data through an inductive approach. It initiates with collecting data
on organisational culture which is developed into themes and are in turn developed into broad
patterns, theories and generalisations. Subsequently, data is collected on the case of Enron to
analyse the developed broad patterns, theories and generalisations.
2.3 Epistemology
There are a variety of epistemological assumptions. According to Saunders et. al. (2012: 132)
epistemology is a theory of knowledge, and is concerned with what creates acceptable knowledge in
a field of study. Epistemological assumptions can be considered to be associated with the nature of
knowledge and the methods by which that knowledge can be attained. Epistemology can also be
considered a question of what is or should be viewed as acceptable knowledge in a field of study
(Bahari 2010: 22). There are three main epistemological assumptions; positivism, realism and
interpretivism.
2.3.1 Positivism, realism and interpretivism
Positivism assumes that there are social facts with an objective reality apart from an individuals’
beliefs (Bahari 2010:22). The philosophy of positivism reflects the philosophical posture of the
natural science in the sense that data is collected about an observable reality to search for
regularities and causal relationships in the data to create law-like generalisations (Saunders et. al.
2012:134). Positivists argue that the social world exists externally and research should be
undertaken, as much as possible, in a value-free way, i.e. the researcher must be independent and
the research conducted with objective methods (Bahari 2010: 23). The research methodologies of
positivism are similar to those of natural science, such as, use of statistics, surveys and
questionnaires (Bahari 2010: 23).
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Realism is another philosophical stance which is similar to positivism as both take a scientific
approach in order to develop knowledge. There are two forms of realism; direct and critical realism
(Saunders et. al. 2012: 136). According to direct realism, what one sees is what one get. This means
what we experience through our senses depicts the world accurately. On the contrary, critical
realism argues that one does not see things directly, rather what one sees are sensations or images of
the real world (Saunders et. al. 2012: 136).
According to Saunders et. al. (2012: 136), direct and critical realism are important in
relation to the pursuit of business and management research. Direct realism would argue that the
world is relatively unchanging and operates, in the business context, at only one level (the
individual, the group or the organisation). In contrast to direct realism, critical realism argues the
importance of multilevel study (at the level of the individual, the group and the organisation), which
is relevant in terms of business (Saunders et. al. 2012: 136-37). The multilevel study is capable of
changing the researchers’ understanding of that which is being studied. On this basis, Saunders et.
al. (2012: 137) argue that critical realism’s position, that the social world is in a constant state of
change, is much more in line with business and management research. Nevertheless, Saunders et. al.
(2012: 137) note that the social world of business and management is too complex to be theorised
by definite laws and law-like generalisations, as the natural sciences.
Unlike positivism and realism, interpretivism promotes the necessity for the researcher to
understand differences between humans in our role as social actors (Saunders et. al. 2012: 137).
Bryman (2008) notes that interpretivism allows the researcher to perceive social actions through a
subjective meaning. Interpretivists consider facts and values to be similar and the researchers’
values and perspective influence the results and conclusions (Bahari 2010: 22). Interpretivist
researchers are considered “feeling” researchers due to their role as “social actors”, where they
could interpret their social roles in line with the meaning given to these roles and interpret the social
roles of others in accordance with their own set of meanings (Bahari 2010: 22).
Interpretivism is related to the intellectual tradition of phenomenology. Phenomenology
refers to the question of how humans make sense of the world around them (Saunders et. al. 2012:
137). According to Bahari (2010: 22), “the concept of phenomenology concerns on how researchers
view social phenomena as socially constructed, and is mainly related with creating meanings and
obtaining insights into those phenomena.” Interpretivist philosophy argues that adopting an
empathetic stance as a researcher is crucial. This is because the researcher must enter the social
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world of the research topic and try to understand their world from their perspective (Saunders et. al.
2012: 137).
As business and management research is a set of circumstances and individuals, an
interpretivist approach is highly suitable, predominantly in business topics such as organisational
behaviour, marketing and human resource management (Saunders et. al. 2012: 137).
Consequently, the epistemology of this paper is interpretivism. This is due to a number of factors.
Firstly, the paper is based on a qualitative approach and excludes surveys, questionnaires and
interviews. Secondly, the research topic of this paper, being organisational culture, can to a very
large extent be characterised within the epistemology of interpretivism. An organisational culture is
comprised of and affected by the social actors involved in the culture. Lastly, it can be argued that
applying positivism or realism to this research topic is not preferable due to their association with
the philosophical stance of the natural sciences.
2.4 Hermeneutics
Since the epistemology of this paper is interpretivism, it becomes relevant to use the hermeneutic
approach, which is defined as ““the science of interpretation”” (Cole et. al. 2011: 145). The use of
hermeneutics approach is acknowledged as a research methodology by marketing academics and is
used for qualitative studies (Wright and Losekoot 2012: 419-420). Hermeneutics has its origins in
the interpretation of ancient texts, particularly Biblical texts (Noorderhaven 2000: 8), in order to
understand them (Cole et. al. 2011: 145). However, the scope of hermeneutics has extended to
include all human behaviour/action and its consequences (Cole et. al. 2011: 145). The
understanding of these consequences arises from interpretation which is instilled with the
experience of the interpreter as they commemorate the past through the information available to
them (Cole et. al. 2011: 145). The hermeneutics approach attempts to relate text to context and
seeks to answer what happened rather than why it happened (Wright and Losekoot 2012: 420).
However, answering what happened is limited to the bounded rationality of the interpreter, their
ability to understand the experiences of the ones being observed, and their inability of not letting
own prejudices and experiences result in a subconscious bias when interpreting (Wright and
Losekoot 2012: 420).
Hermeneutics approach is relevant to apply in this project because the majority of data collected
on the chosen case-study is qualitative and historical, in that the event occurred almost two decades
ago. When analysing, we will ultimately understand the data as we interpret it. Therefore, we will
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understand as to what happened with Enron’s culture from within the organisation. This
interpretation of the data, together with the analysis, will enable us to draw final conclusions.
2.5 Ontology
Where epistemology is concerned with what constitutes acceptable knowledge, ontology is
concerned with the nature of reality and raises questions of the assumptions the researcher has about
how the world operates (Saunders et. al. 2012: 130). According to Bryman (2004: 16), ontology is a
theory of the nature of social entities. In other words, ontology is about the nature of the world;
what entities it consists of and how they correlate to each other (Bahari 2010: 23). When conducting
a qualitative research, the researchers are aware and accept the notion of numerous realities rather
than a single reality. There are two main ontological assumptions: objectivism and subjectivism.
2.5.1 Objectivism and subjectivism
Objectivism assumes that social entities exist external to and independent of social actors (Saunders
et. al. 2012: 131). Some researchers emphasise that the goal of social science is to determine
probable reality as objectively as possible, and, thus, promote the notion that social science research
may adopt natural sciences methods, especially the use of statistics and numbers to measure the
relationship between categories (Bahari 2010: 25). Subsequently, it can be said that research based
on a quantitative strategy may use objectivism as the ontology.
The other ontological assumption is subjectivism. Subjectivism emphasises the notion that social
phenomena are created from the perceptions and subsequent actions of the social actors involved; a
continual process which is in a constant state of improving and revising (Saunders et. al. 2012:
132). Objectivism is often associated with constructionism – a view that reality is socially
constructed by the actors involved.
Organisational culture can be viewed through the ontological assumptions of subjectivism and
objectivism. Objectivists would argue that the culture of an organisation is given or something it
“has” (Saunders et. al. 2012: 132). On the contrary, subjectivists would argue that an organisations’
culture is what the organisation “is” due to the process of continuing social enactment. Some
organisational theories, such as management theory, consider organisational culture as objective; a
variable which can be manipulated to fit with the manager’s desires. Subjectivists would argue
otherwise, as they view culture which is created and recreated through social interaction between
the actors and the impact of physical elements to which individuals ascribe certain meanings, myths
and rituals (Saunders et. al. 2012: 132). Therefore, according to subjectivism, it is important to
19
understand these ascribed meanings in order to understand the culture of an organisation. Saunders
et. al. (2012: 132) argue that it is possible to incorporate both ontological assumptions in order to
understand the culture of an organisation.
The ontology of this paper can therefore be described as both objective and subjective, seeing that
the culture of Enron was something it “had” as well as something which was created as desired by
the leadership.
2.6 Case study
Case study is one of the research methods which is primarily used when conducting a qualitative
research. It can be considered a practical demonstration of theory; an approach of practical studies
of particular cases which makes knowledge more accurate (Rendtorff 2015: 37). A quantitative
research, on the contrary, lacks in providing complete and in-depth explanations of the social and
behavioural problems, emphasising the use of a case study as even more useful. The use of a case
study enables the researcher to transcend quantitative results and explain social actions through the
perspective of actors involved (Zainal 2007: 1). Case studies provide a holistic and in-depth
investigation of a specific topic (Zainal 2007: 1). Not only do case studies make theory useful and
meaningful but also provide the capability of operating in real life (Rendtorff 2015: 40). In business
terms, case studies contribute to an understanding of organisations as practical fields of actions that
reflect and exemplify theoretical problems (Rendtorff 2015: 41). Rendtorff (2015: 41) notes that
“...case analysis is concerned with the practical aspects of management, leadership, administration,
and ethics in organisations and business firms.”. Case analysis is hermeneutic - an approach applied
in this paper - as it contemplates meaning and action in practice (Rendtorff 2015). Case study and
hermeneutics are interconnected in the sense that a case study is concerned with dialogue,
understanding and communication (Rendtorff 2015: 42). In hermeneutics approach, text is
considered a model for action and to obtain an understanding of the structures of action, one
analyses the action as a text (Rendtorff 2015: 42). In this sense, a case study of an organisation can
be regarded as a text, which is written into a case, whereafter it is analysed, as a text, in order for
the interpreter to obtain a better understanding of alternative actions (Rendtorff 2015). According to
Max Weber (Rendtorff 2015: 45), the fundamental hermeneutics of a case study can be considered
the interpretative and understanding sociology, “...where social science first of all is about
understanding social phenomena and afterward about causal explanation from general laws because
20
social science is about understanding the structures of meaning of social phenomena as they
manifest themselves in the human social world.” (Rendtorff 2015: 45).
The scientific validity of case studies as hermeneutic has received a great deal of criticism. For
example, case studies are considered too abstract and unable to provide direct knowledge of reality
(Rendtorff 2015: 45). Additionally, case studies have been criticised as distant from the concept of
generality and universality of experimental natural sciences, i.e. case studies are not suitable for
making generalisation. Case studies are also considered as unscientific due to a lack of prospects of
truth and objective validity (Rendtorff 2015: 45).
Despite its criticism, Rendtorff (2015: 46) notes that a case study can very well be used to give
ideal-typical-knowledge as it describes the core structure of meaning which represents an
organisational phenomenon. Case studies can provide us with knowledge which has a high level of
universal affirmation, and divulge important facets of human life in organisations (Rendtorff 2015:
46). The structure of meaning that is disclosed through a case study demonstrates a horizon of
meaning and “the researcher can be said to enter into the horizon of meaning of the case and
thereby contribute to the description of the phenomenon that shows itself in the case…” (Rendtorff
2015: 47). Thus, according to Rendtorff (2015: 47), a hermeneutic approach case study is concerned
with the exploration of ideal-typical structures in the case which contributes to the profound
understanding of the structures and principles which form human social life in business
organisations.
Case studies can be used for various topics in a business context, such as ethics (Rendtorff 2015:
49). In doing so, the concepts of power and domination can be examined as well as other
management theories, for example knowledge management, project management or theories of
organisational culture (Rendtorff 2015: 49). Other issues which a case study, concerned with ethics,
can include are: the arrogance of businesses in relation to the environment, the importance of a code
of conduct, profit maximisation as a dictum for economic action, responsibility to shareholders
and/or employees, accounting ethics, and personal integrity versus organisational culture (Rendtorff
2015: 51-52).
This paper uses a single-case design as it analyses the culture of a single organisation, Enron. It is
primarily due to a time-constraint that this paper only makes use of a single-case. The use of a case
study in this paper can be considered a case-study in ethics, as it analyses the organisational culture
21
of Enron, which is believed to have led to the collapse of Enron because the culture promoted
unethical and illegal actions.
2.7 Delimitations of research
It is important to acknowledge the limitations of this paper. Firstly, this paper is solely based on a
qualitative research, in which most of the data collected is secondary and is applied through an
inductive approach. Some limitations of secondary data include: (i) the secondary data is most
likely collected for a purpose other than our research problem (thus aggregated in some way), (ii)
the data represents the interpretation of the producer, rather than an objective view, and (iii) the way
the data is presented in a document depends on the purpose of the document, thus it may not be
entirely relevant for other researches (Saunders et. al. 2012: 320). The paper could have made use
of conducting interviews with former Enron employees; however, it can be argued that this rather
exceeded our scope, both in terms of economic resources and due to time-constraint. Nevertheless,
for future research, a quantitative research may be conducted which collects first-hand data, i.e.
surveys, questionnaires, statistics etc., and applies it through a deductive approach. Alternatively, a
future research on this topic may also use abduction as a research approach, which is essentially a
combination of deduction and induction (Saunders et. al. 2012: 147). According to Saunders et. al.
(2012: 147), abduction initiates with the observation of a “surprising fact” and then works out a
conceivable theory of how this could have occurred.
Another limitation can be identified as the interpretative method used in this paper, a case study.
This is not a limitation in itself but rather, it is important to note that the validity of the research
could have been increased by using multiple case studies or by applying a triangulation of methods,
i.e. incorporating other methods.
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3. Theoretical framework
The previous chapter identified the methods which are used to gather and apply data. The purpose
of this chapter is to discuss the theories which are applied to answer the research question.
3.1 Levels of Cultural Analysis
Culture is constantly present in our surroundings. It is endorsed and created by our interactions with
others and shaped by leadership behaviour, and a set of structures, routines, rules and norms that
guide and compel behaviour (Schein 2004: 1). Culture can be viewed as a concept which is present
within individuals but as we join other people, in an organisation or otherwise, new cultures are
created; thus, even on the individual level, culture is in a constant state of evolvement (Schein 2004:
8). On the organisational level, it is evident how culture is created, rooted, evolved and deployed
while constraining, stabilising and providing structure and meaning to the organisation’s members.
According to Schein (2004: 1), the creation and management of culture is at the heart of the
leadership and that culture and leadership are in fact interrelated. The leadership creates and
manages culture and can understand and work with the culture; however, once it becomes
dysfunctional, it is the leaderships’ responsibility to terminate the culture (Schein 2004: 1).
Culture provides a sense of group identity and structural stability. Once this is achieved, the
culture acts as a stabilising strength which members will be reluctant in giving up. Therefore,
culture is hard to change as it provides stability and identity (Schein 2004: 14). Culture is deeply
embedded, hence less visible, and covers all aspects of how an organisation handles its main tasks
and its internal actions (Schein 2004: 14). Culture is therefore defined as:
“a pattern of shared basic assumptions that was learned by a group as it solved its problems of
external adaptation and internal integration, that has worked well enough to be considered valid
and, therefore, to be taught to new members as the correct way to perceive, think, and feel in
relation to those problems.” (Schein 2004: 17).
In order to comprehend culture, it can be analysed on three levels; artefacts, espoused beliefs and
values and basic underlying assumptions.
Artefacts can be described as the surface of a culture. They include the observable products
of the organisation, such as the physical environment: language, technology and products, artistic
creations, style (as in clothing, conducts of address, emotional displays, and myths and stories told
about the organisation), its published lists of values, and its rituals and ceremonies (Schein 2004:
23
25-26). Artefacts are easy to observe but very difficult to interpret. The interpretation of artefacts
can differ due to the observer’s own reactions and feelings; thus, culture cannot solely be analysed
based on artefacts. Therefore, to understand the meaning of the artefacts, it is important to analyse
the second level of culture, espoused beliefs and values.
According to Schein (2004: 28), when an organisation is established or an already
established one has to deal with a task or problem, the solution or action proposed to counter the
problem essentially reflects someone’s own assumptions as to what is the most appropriate solution
and whether it will work. If the solution turns out to be effective in dealing with the problem, the
individual who proposed the solution will ultimately be identified as the founder or leader of the
organisation (Schein 2004: 28). However, until then there is not a shared basis for determining
whether what the leader proposed as a solution will have a positive outcome (Schein 2004: 28).
Once the members of the organisation have a shared perception, the value of the leaders’ solution
becomes a shared value or belief and eventually a shared assumption. These shared values or beliefs
are further confirmed by the shared social experience of the organisations members, which Schein
(2004: 29) defines as social validation. Social validation also applies to broader values, which are
not demonstrable, such as aesthetics and ethics (Schein 2004: 29). As the values and beliefs
continue to work, in terms of dealing with ambiguity of the organisations functioning, they are
ultimately transformed into non-discussable assumptions reinforced by expressed sets of norms and
beliefs which are embodied in an ideology or organisational philosophy (Schein 2004: 29).
However, espoused values and beliefs often lack in explaining large fragments of behaviour.
Therefore, to fully understand the culture of an organisation, it is important to analyse the third and
final level of culture, basic underlying assumptions.
Basic underlying assumptions can be defined as values and beliefs which are taken for
granted to such an extent that there is no room for variation (Schein 2004: 31). This is a
consequence of the success of the values and beliefs, and members of the organisation will find any
other solution to be implausible. Basic assumptions are often non-confrontable and non-negotiable;
hence, they are very difficult to change (Schein 2004: 31). This is due to the fact that changing
basic assumptions disrupts the cognitive and personal environment, resulting in anxiety. Hence,
rather than enduring anxiety, the members consider their environment as congruent, based on their
assumptions, even to the extent of altering and denying their environment (Schein 2004: 31-32).
This psychological process demonstrates the power culture has. Culture as basic underlying
assumptions guide what to focus on, the purpose of things, how to emotionally respond, and which
24
actions to take in different situations (Schein 2004: 32). Culture can be thought of as a defence
mechanisms which allows the organisation to operate; hence, the core of a culture can be found in
the pattern of basic underlying assumption (Schein 2004: 36).
3.2 Primary Embedding Mechanisms
According to Schein (2004: 246), there are five primary embedding mechanisms, which the
leadership can use to communicate to their employees, as to how to perceive, think, feel and
behave. These mechanisms create the “climate” of an organisation.
Firstly, what leaders pay attention to, measure, and control on a regular basis is one of the most
influential mechanisms the leadership can use to communicate what they are fond of and what they
believe in. This includes what they comment on and notice to what they reward, and can be
considered as a formal control mechanism and measurement (Schein 2004: 246-247). Essentially,
this mechanism communicates to the employees the leadership’s priorities, aims and expectations.
Secondly, leader reactions to critical incidents and organisational crises is another
mechanism. The way the leadership handles incidents and crises creates new values and norms,
revealing significant basic underlying assumptions, which are then adopted by the members of the
organisation, as mentioned earlier. According to Schein (2004: 256), the reaction to a crisis is an
optimal chance for the leader to communicate their own assumptions about human nature and
relationships.
Deliberate role modelling, teaching, and coaching is the third mechanism available to the
leaders to communicate assumptions and behaviours to members, particularly the newly hired.
Schein (2004: 248), argues that informal messages by leaders are more significant in
communicating than messages delivered on stage or by videos.
The fourth mechanism which is important in communicating beliefs and values of the
leadership is how leaders allocate rewards and status. It is the actual nature of the behaviour
punished or rewarded and the reward itself that is essential for communicating (Schein 2004: 259).
Leaders can achieve the desired behaviour and ensure that members will learn the core values and
assumption by consistently rewarding the members who meet the expectations.
The final mechanism to communicate is how leaders recruit, select, promote, and
excommunicate. This is one of the most powerful mechanisms by which leaderships’ assumptions
25
and values embed and preserve; hence, embedding and preserving the culture of the organisation
(Schein 2004: 261).
3.3 The Competing Values Framework
There are various types of cultures which an organisation can be characterised as. The specific type
of culture varies from organisation to organisation. Thus, this section presents the four major types
of cultures which are based on the Competing Values Framework (CVF), developed by Quinn and
Rohrbaugh (1983). The four types of culture are hierarchy culture, market culture, clan culture, and
adhocracy culture.
The hierarchy culture has its roots in the works of Max Weber about government
organisations in Europe in the early 1900s (Cameron and Quinn 2006: 37). Hierarchy culture is
based on the key characteristics of bureaucracy: rules, specialisation, meritocracy, hierarchy,
separate ownership, impersonality, and accountability (Cameron and Quinn 2006: 37). Thus,
hierarchy culture can be described as a formalised and structured culture where procedures direct
members to what to do; hence, formal rules and guidelines are fundamental. In this culture, good
leaders are effective coordinators and organisers. Also, efficiency, productivity, predictability, and
stability are vital for such a culture (Cameron and Quinn 2006: 38). Examples of a hierarchy culture
include government agencies, restaurants, and large organisations (such as automobile corporations)
(Cameron and Quinn 2006: 38). In order to get rewarded, or promoted, in such a culture, members
have to demonstrate the ability of following rules and procedures of the organisation.
Market culture is another form of culture which many organisations have opted. This culture
relies on different assumptions compared to the hierarchy culture. The most fundamental activity in
such a culture is transaction costs. The concept of a market culture does not refer to the marketing
function but to a form of organisation which operates as a market itself (Cameron and Quinn 2006:
39). The focus is on the external environment, which impacts the organisation rather than internal
activities, and on transactions with external actors such as customers, suppliers, and contractors
with the purpose of creating competitive advantage (Cameron and Quinn 2006: 39). Therefore, the
key aims of market culture can be described as profitability, bottom-line results, strong point in
market positions, and secure client bases. The values and beliefs, imposed by the leadership of the
organisation, can thus be characterised as competitiveness and productivity attained through a
prominence on external standing and control (Cameron and Quinn 2006: 39). Due to this, the
26
leadership tends to be result-oriented, adopts an aggressive strategy with tough procedures and an
emphasis on winning (Cameron and Quinn 2006: 40).
The third type of culture is clan culture. It refers to a family-type organisation due to
common goals and values, unity, participativeness, and uniqueness (Cameron and Quinn 2006: 41).
Unlike a hierarchical and market culture, clan culture is driven by teamwork, member participation
programs, and corporate assurance to members who are rewarded/promoted based on team rather
than individual achievements. In this culture, “…the environment can be best managed through
teamwork and employee development, customers are best thought of as partners, the organization is
in the business of developing a humane work environment, and the major task of management is to
empower employees and facilitate their participation, commitment, and loyalty.” (Cameron and
Quinn 2006: 41). An organisation with a clan culture is a friendly workplace with high level of
commitment, where the leadership is more of a mentor, and the organisation is generally glued
together by loyalty and tradition (Cameron and Quinn 2006: 42-43).
With a shift from industrial to material age came a new culture, known as adhocracy
culture. This type of culture puts emphasis on innovation and pioneering, and developing new
services and products due to a continuous change in the market (Cameron and Quinn 2006: 43).
Essentially, an adhocracy culture is a temporary culture in that it is quick in reconfiguring itself
when there is a change in circumstances. Therefore, this culture values adaptability, creativity, and
flexibility. Adhocracy organisations are challenged in the sense that they must produce new and
innovative products to suit the needs of the market. Power in such an organisation flows from team
to team or individual to individual, unlike market and hierarchies where power is centralised
(Cameron and Quinn 2006: 44). Such organisational culture also puts emphasis on risk-taking and
an individual's’ ability to develop a new and innovative product/service. Adhocracy culture can
exist as a sub-culture in large organisations where there is a different dominant culture type
(Cameron and Quinn 2006: 44). Subsequently, an adhocracy culture can be described as
entrepreneurial, energetic, and creative in which members are encouraged to take risks. Leadership
in such a culture tends to be visionary, innovative, and risk-oriented and emphasises rapid long-
term growth in which success is defined as producing exceptional services/products (Cameron and
Quinn 2006: 45-46).
The Levels of Cultural Analysis model, the Primary Embedding Mechanisms, and the Competing
Values Framework will be applied to answer the first sub-question. The levels of cultural analysis
27
and the primary embedding mechanisms used by the leadership will assist in analysing the role
Enron’s leadership played in shaping its culture. The competing values framework will be applied
to determine which of the four types of cultures can Enron be best characterised as.
3.4 Stakeholder theory
In order to gain a better understanding of the people and entities which Enron was dependent on, in
order to exist, and also the ones dependent on Enron’s existence, we will examine the stakeholder
theory. A stakeholder is anybody that has something to do with a certain company; it can be the
employees, customers, suppliers but also the government, trade unions, or others. Stakeholder
theory was first described by R. Edward Freeman in 1984, where the main reason for theorising
stakeholders was to address “principle of who and what really counts” (Freeman via Mitchell et. al.
1997). Freeman was the first to argue that people such as employees, customers and suppliers are
very important to the company and their needs should be addressed first. This was quite a radical
turn from the traditional view, where shareholders and the owners were the only groups of interest,
as they were the ones actually investing money in the company. Freeman, however, argues that
employees and other stakeholders also invest in the company by working for them, and expecting to
be paid at the end of the month. If stakeholders are not paid, they can refuse to work and strike, in
which case the company cannot continue to operate. On the other hand, stakeholders can also be
dependent on the company, in the sense that customers might be dependent on the product that a
certain company produces (Mitchell et. al. 1997).
There have been some developments in the stakeholder theory since it initiated. One development is
by Mitchell et. al. (1997) who further extended the main theory by Freeman. This is called the
stakeholder salience model. They added one main element in their analysis, which is the
categorisation of the different stakeholders into “(1) the stakeholder's power to influence the firm,
(2) the legitimacy of the stakeholder's relationship with the firm, and (3) the urgency of the
stakeholder's claim on the firm.” (Mitchell et. al. 1997: 854).
Power can be defined as "a relationship among social actors in which one social actor, A, can get
another social actor, B, to do something that B would not otherwise have done" (Mitchell et. al.
1997: 865). As defined by Mitchell et. al. (1997), there are different means that make one powerful;
coercive power works through violence and other physical force, utilitarian power works through
financial incentive and other material resources and normative power which works through
symbolic resources, for instance prestige. (Mitchell et. al. 1997: 865). One significant point, when
28
defining different types of stakeholders, is to remember that one can lose the attribute of power, as
well as gain power (ibid).
Legitimacy refers to “socially accepted and expected structures or behaviours” (Mitchell et. al.
1997: 866). Some researchers argue that legitimacy is closely tied to power, as “In the long run,
those who do not use power in a manner which society considers responsible will tend to lose it"
(Davis 1973: 31 via Mitchell et. al. 1997: 866). This means that power and legitimacy are
interrelated, whether a stakeholder already possesses the attribute of power or legitimacy, they
should aim for the other attribute, otherwise they may lose it. On the other hand, Weber (1947) (via
Mitchell et. al. 1997: 866) argues that the combination of legitimacy and power might create a
stronger attribute, called authority; however, that does not mean that one cannot be only legitimate
or only powerful (ibid).
Urgency, as described by Mitchell et. al. (1997: 867) is “when a relationship or claim is of a time-
sensitive nature and secondly, when that relationship or claim is important or critical to the
stakeholder”. Therefore, urgency is a very important attribute in the stakeholder salience theory, as
when a stakeholder is concerned about potential threat to the company, the management needs to be
able to understand the urgency of the issue (ibid).
The point of categorising stakeholders according to their attributes is to be able to recognise their
importance in order to use them to their full potential. Mitchell et. al. (1997) argue that this allows a
company to achieve better results during their normal state, but also, once a company is in crises,
the management can firstly decide to focus on the important stakeholders in order to stabilise the
company (Mitchell et. al. 1997). However, this categorisation was not enough because, as Mitchell
et. al. (1997) argue, managers and other stakeholder theorists were still limiting their search while
categorising the stakeholders; hence, another categorisation is made. Here, stakeholders are divided
according to how many attributes they hold, into following categories; Latent stakeholders: who
only have one of the attributes; power, legitimacy or urgency, Expectant stakeholders: who have
two attributes, and definitive stakeholders: who have all three attributes. There is also a group for
the stakeholders who do not have any of these attributes; they are considered non-stakeholders or
potential stakeholders (ibid). Here, the salience can be measured: latent stakeholders have low
salience with minimal power, and definitive stakeholders have high level of salience. Definitive
stakeholders are the most important stakeholders for a company, and therefore should be taken
seriously and have the highest priority (Mitchell et. al. 1997: 872-874).
29
From the above figure, constructed by Mitchell et. al. (1997: 874), one can see the core point of the
theory, more lucidly. Number seven - definitive stakeholder as described earlier, shows, that this
type of stakeholder is the first priority of the management, as it is included in all three attributes
(power, legitimacy and urgency). Latent stakeholders, having only one of the attributes, are either
called dormant stakeholder- when having power, discretionary stakeholder when having
legitimacy, or demanding stakeholder when having urgency (ibid). Lastly, expectant stakeholders
always hold combination of two attributes. For instance, dominant stakeholders hold power and
legitimacy, dependent hold legitimacy and urgency and dangerous hold urgency and power (ibid).
The most important and crucial part of the salience model is the ability to give the right attributes to
the right stakeholders, as if one fails to do so, the model cannot work properly, and aid the company
in times of crises (ibid). However, stakeholder’s attributes can also change, as stakeholders can
become more or less important, hence it is important for managers to keep updating their
stakeholders’ attributes (ibid). Consequently, there still needs to be some work done on the
stakeholder salience theory, as managers can perceive power, urgency and legitimacy differently,
according to their stakeholder cultures (Jones et. al. 2007).
The stakeholder salience theoretical approach will be used to analyse some of Enron's stakeholders,
and their importance for the organisation according to the attributes of power, legitimacy and
urgency. It will be also assessed what levels of salience the management gave to the analysed
stakeholders in relation to the attributes, and subsequently, what affect did the stakeholders have on
the culture of Enron and vice versa.
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3.5 Utilitarianism and Egoism
Decision-making is a crucial part of everyday life, whether it is in personal lives, economic,
political or business context, in which morality and ethics should be taken into consideration. What
remains disputed is whether it is the decision’s action or consequence that should be morally and
ethically correct. Thus, decision-making can be contrasted between deontological and
consequentialist perspectives (Tanner et. al. 2007: 1). Deontology is concerned with the concept of
duty, deriving from the Greek word deon, as it is morally directed actions or proscriptions such as
the duty to be truthful (Tanner et. al. 2007: 757). A deontological perspective puts emphasis on the
nature of the action more than the actual consequence of it. On the contrary, consequentialism is
more concerned with the consequence of an action rather than the action itself. Thus,
consequentialism draws inferences of the moral and ethical correctness based on the consequences
of an action (Tanner et. al. 2007: 757). Consequentialist ethical theories include utilitarianism and
egoism.
Utilitarianism is a consequentialist theory as it deals with the rightness or wrongness of an action
based on the consequences of the action. The most fundamental idea of utilitarianism is that actions
should result in best consequences. If an action does not bring about the best consequences, the
action is morally wrong (Snoeyenbos and Humber 2002). Thus, along with consequentialism,
utilitarianism also resonates aspects of ethical hedonism which postulates that a good life is a life
spent in the pursuit of pleasure; defined as avoiding pain (Robertson and Walter 2007: 1).
Utilitarianism can be used in various contexts, such as business. It can be used to make rational
decisions, based on the principles of the theory (Nathan 2014). In a business context, the various
stakeholders involved in the organisation can be defined as the ones affected by the actions of the
organisations. Thus, if an action taken by an organisation results in positive consequences for the
stakeholders, it can be said to be morally correct. There are two main utilitarian philosophers,
Jeremy Bentham and John Stuart Mill, who advocated a different variety of utilitarianism,
hedonistic and idealistic. Even though both varieties aim to maximise human well-being, they differ
in their definition of well-being (Brusseau 2011: 113).
Bentham was the advocate of hedonistic utilitarianism and believed that pleasure and
happiness are ultimately identical. According to him, the aim of ethics is to maximise pleasures –
all forms of pleasures – which are felt by individuals (Brusseau 2011: 114). On the contrary, Mill
agreed with Bentham’s view on ethics seeking to maximise pleasure; however, as his views on
utilitarianism were more idealistic, he differentiated between straightforward and intellectual
31
pleasures (Brusseau 2011: 114). Straightforward pleasures, according to Mill, are the physical
feelings which both humans and animals can enjoy. On the other hand, intellectual pleasures are not
simply physical joys but rather the enjoyments of mind, such as learning and learnedness, which
have more real value (Brusseau 2011: 114).
Whereas hedonistic and idealistic are varieties of utilitarianism the two main versions of
utilitarianism are, act utilitarianism and rule utilitarianism.
Act utilitarianism is the most basic form of utilitarianism. According to act utilitarianism,
the right action is the one which produces the greatest amount of well-being and, hence, each action
should aim to maximise well-being (Mulgan 2014: 115). This version of utilitarianism believes that
one should pursue “the greatest good for the greatest number” (Brusseau 2011: 107). To do this, act
utilitarianism suggests that all available action should be considered, their consequences predicted,
and the action with the best consequences should be chosen (Nathan 2014). Because each individual
action produces a differing amount of well-being, act utilitarianism applies the principles of
utilitarianism to individual acts rather than groups of action (Nathan 2014). Since the key goal of
act utilitarianism is to maximise well-being, the action can be generous or miserable, honest or
dishonest, as long as it meets the goal (Brusseau 2011: 107). One quality of act utilitarianism is that
it can be used to deal with moral questions in an objective way. For example, based on act
utilitarianism, if two people are in need of water and there is only enough water for one, the person
with the most desperate need should be given the water. On the contrary, there are some downsides
of act utilitarianism as well. According to Mulgan (2014: 115), act utilitarianism is “self-defeating”
because constantly calculating does not maximise well-being. He argues that if the target if to
maximise well-being, it is sometimes better not to directly aim at that. For example, if one is about
to be hit by a truck, one should not waste time on calculating precise utilitarian calculations
(Mulgan 2014: 116).
On the contrary, unlike act-utilitarianism which evaluates individual actions, rule-
utilitarianism evaluates codes of moral rules. Rule-utilitarianism asserts that if obeying a rule, such
as not to steal, would benefit everyone and maximise well-being, then everyone should obey the
rule (Brusseau 2011: 116). However, rule-utilitarianism do not obey rules, such as not to steal, if it
brings about maximum well-being. Thus, the ideal code is the set of rules in which the
consequences of everyone following them would be greater compared to the consequences of
everyone following any other set of rules (Mulgan 2014: 120). Therefore, the morally right action
32
depends on the action recommended by the ideal code. In a business context, organisations can be
said to have rule-utilitarianism in the sense that there are certain rules which the organisations’
members must follow in order to maximise profits. However, even though rule-utilitarianism is
intuitively very appealing, better can often be done by individuals breaking moral rules than
following them (Mulgan 2014: 116). Rule-utilitarianism has often been criticised, mostly by other
utilitarians, to be useless, indistinguishable or illogical (Mulgan 2014: 120). The most common
criticism of rule-utilitarianism is the very nature of it; rule worship. It has the commitment of
utilitarianism of maximising well-being; however, with rules to do so, even if the action according
to them will not result in the greatest consequences (Mulgan 2014: 120-121). Another great critique
of rule-utilitarianism is its collapse into act-utilitarianism because, essentially, the ideal code of
rule-utilitarianism consists of one single rule of always maximising well-being (Mulgan 2014: 122).
Consequently, both versions of utilitarianism address crucial problems about how moral actions
should be carried out. Act utilitarianism emphasises on the individual actions’ consequences as to
determine whether the action is morally correct or not based on a single principle; maximise well-
being. On the contrary, rule-utilitarianism is more complex in nature as it seeks to maximise well-
being based on a set of rules. Despite their differences, both versions are concerned with the
consequence of an action as to infer about its moral correctness.
Even though some businesses, such as non-profit or governmental organisations, adopt a utilitarian
approach, it can be argued that other businesses only seek to maximise their own individual well-
being. This can be explained through egoism.
Egoism is another theory of consequentialism. Unlike utilitarianism, egoism asserts that any
action which serves the interest of oneself is the morally right action (Brusseau 2011: 127). Thus,
an egoist will take actions which maximises his/her own well-being, regardless of the well-being of
others. Egoism is considered the opposite of altruism – actions should maximise the well-being of
others and what happens to oneself is insignificant – and often linked to selfishness (Brusseau 2011:
127-128). Selfishness is the denial to see beyond oneself and the incapability or reluctance to
distinguish that other people also exist. Nonetheless, it is argued that egoists are not necessarily
selfish in nature as they are not against other people, but just for themselves; hence, if helping
others is what it takes for an egoist to maximise their well-being, that is what he/she will do
(Brusseau 2011: 128). There are two forms of egoism, psychological and ethical egoism, which are
relevant to analyse in a business context.
33
Psychological egoism is the view that human beings are selfish in nature and will therefore
take necessary actions to survive (Dobrin 2009: 52). Once human beings survive, they will continue
to take actions which are necessary to fulfil their endless desires. According to Dobrin (2009: 52),
every action can be boiled down to self-interest and selfishness. Due to this, moral choice, altruism,
selflessness, and empathy are not a possibility; hence, according to psychological egoism, even if
actions are taken to benefit others, they are ultimately taken to benefit oneself (Dobrin 2009: 52).
Whereas psychological egoism describes the nature and behaviour of human beings, ethical
egoism prescribes how human beings should act (Dobrin 2009: 52). Ethical egoism shares with
psychological egoism the possibility of acting against self-interest; however, it considers it an
unethical action. Thus, according to ethical egoism, the right action, thereby the moral action, is the
one that maximises the self-interest of an individual (Dobrin 2009: 53).
Both psychological and ethical egoism are appealing theories in a business context. Businesses may
choose to adopt a psychological or ethical approach of egoism. However, there are two other, and
more relevant, forms of egoism in a business context: enlightened egoism and cause egoism.
Enlightened egoism is the view that maximising others’ well-being can at the same time
serve an egoist’s self-interest (Brusseau 2011: 129). Thus, an enlightened egoist has a more rational
than a moral approach. In other words, an enlightened egoist helps others because it essentially
serves his self-interest and not because he should (Brusseau 2011: 129). On the other hand, cause
egoism promotes the view that appearing to be helping others is a suitable way to maximise one’s
own self-interest in a business environment (Brusseau 2011: 129). Consequently, an enlightened
egoist respects others while maximising own interest, whereas a cause egoist pretends to help others
in achieving the best for him/herself.
The kind of approach an organisation, or rather its leadership, chooses to adopt, whether it is
utilitarian or egoistic in nature, varies from organisation to organisation. Overall, utilitarianism and
egoism are two useful theory which can be applied to analyse an organisation. These theories will
be used to answer the third question. The fundamental principle of utilitarianism – that the
consequences of an action need to bring the greatest amount of happiness to the greatest number to
be morally correct – will be used to analyse whether Enron’s actions were ethical and moral in the
sense that the greatest amount of happiness to the greatest number of people was delivered. If this is
not the case, Enron’s actions, based on this principle, will be said to be unethical. On the other
hand, egoism argues that an ethical action is an action whose consequences serves the self-interest
34
of an individual. Thus, this theory will be used to assess to what extent Enron, as an individual, was
motivated by egoism.
3.6 Sub-conclusion
The accumulation and application of the five theories presented provides a unique and insightful
combination of theories. The first theory presented will be used to analyse Enron’s culture on three
levels. The second theory is useful to determine how the leadership embedded their values and
beliefs in Enron. Thirdly, the CVF model provides a characterisation of the culture. Lastly, the
stakeholder salience model provides an insight to the impact of stakeholders on the culture as well
as the cultures’ impact on the stakeholders. Lastly, utilitarianism and egoism are useful to examine
the ethical correctness of some of Enron’s actions, which can have said to be influenced by the
culture. The combination of these theories gives a wholesome and in-depth understanding of
Enron’s culture.
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4. Analytical Framework
4.1 Role of the leadership in shaping Enron’s culture
The purpose of this chapter is to analyse the role of Enron’s top leadership in shaping its
organisational culture. The top leadership of Enron in this paper is identified as Kenneth Lay,
founder of Enron, and Jeffrey Skilling, Chief Financial Officer (CFO) and later Chief Executive
Officer (CEO). These two key leaders can be said to have impacted Enron’s organisational culture
the most. Firstly, the chapter discusses Enron Oil Scandal and how the leadership reacted to it.
Also, the impact this had on Enron’s culture and its employees is discussed by incorporating
primary embedding mechanism theory. Additionally, by applying the primary embedding
mechanisms, the chapter analyses Skilling’s role in shaping Enron’s culture. Furthermore, it
discusses how Skilling’s, as well as Lay’s, values, beliefs and personality shaped the culture and
how the PRC, introduced by Skilling, created a ruthless culture in Enron. In doing so, this chapter
analyses Enron’s culture by incorporating the levels of cultural analysis. Lastly, Enron’s culture is
characterised based on the competing values framework.
4.1.1 Enron Oil Scandal and response of the leadership
Lay was the founder of Enron and played an important role in creating benevolence among Enron’s
employees from its early years (Rantanen 2007: 172). He respected others by valuing what they
said and possessed the ability to form network of relationships due to his way of treating other
people (Rantanen 2007: 173). However, Lay was also the type of person who was reluctant in
making difficult decision. Lay’s hesitancy in making difficult decisions and his lack of intervention
shaped Enron’s culture from the very beginning. There were events in Enron’s early years which
can be said to have impacted and, to some extent, shaped Enron’s culture. More specifically, it was
the lack of Lay’s intervention in these events which influenced the general culture of Enron. One
specific event was the Enron Oil scandal in 1987 (Rantanen 2007: 175).
In its early years, Enron suffered severely in terms of debt. It struggled in making any real profits
(Rantanen 2007: 175). Unlike the rest of Enron, Enron Oil department was generating profits
(Mclean and Elkind 2004). The oil traders were betting on oil prices on behalf of Enron Corporation
and were very successful (Gibney 2005). The traders were considered a special tool in the
continuous struggle to improve Enron’s financials (Mclean and Elkind 2004). However, the trading
was conducted in a very suspicious manner as the traders were hiding details from Enron, making
auditing and risk management a very difficult task (Rantanen 2007: 175). According to an ex-Enron
36
executive, Mike Muckleroy, Lay was informed about the suspicious trading activities at a board
meeting; however, rather than acting against the traders he encouraged them to increase their risks
in order to generate more profits for Enron (Gibney 2005). Enron told the traders to “…please keep
making us millions.” (Gibney 2005). All that mattered to Lay and other Enron executives was the
fact that the traders were generating fast and easy profits (Mclean and Elkind 2004). Due to Lay’s
encouragement, the traders increased risk; however, two months later Enron Oil lost almost $1
billion and brought Enron Corporation on the brink of bankruptcy (Rantanen 2007: 175).
Lay’s role in the Enron Oil scandal shows that rather than prioritising his values he favoured profits
earned from Enron Oil and overlooked the fraud committed by the traders. This type of leadership
can be defined as transactional leadership where the leader favours outward motivators, such as
profits, and the inward motivators, such as satisfaction in work, are less prioritised (Rantanen 2007:
175). As the inward motivations were not clearly defined by Lay, they were left to be defined by the
employees and the traders themselves. This resulted in the traders, involved in Enron Oil scandal, to
define their own structures for motivation which they believed Lay and the Enron leadership
supported (Rantanen 2007: 175-176).
The Enron Oil scandal was a critical event in the development of Enron’s culture and was
certainly an organisational crisis. According to the primary embedding mechanism theory, the way
a leader deals with an organisational crisis is important in communicating values and beliefs to the
members of the organisation. Lay’s way of dealing with the oil scandal communicated mixed values
and beliefs to Enron employees. It provided a direction for the Enron employees in regards to their
good and moral values and strengthened the values of the system (Rantanen 2007: 177). On the
contrary, this put Lay in a difficult position because the values of the system were steadied but his
role in the scandal forced him to downplay his involvement in order to uphold the values of the
system (Rantanen 2007: 177). At an employee meeting, Lay stated that he was blindsided by the
traders and denied all responsibility associated to him with the scandal (Mclean and Elkind 2004).
This resulted in the creation of two groups among the employees: one group that considered him
responsible for the scandal and another group that did not (Rantanen 2007: 177). The first group
involved upper level employees, such as the former executive Mike Muckleroy and other board
members, who had first-hand information about the scandal and Lay’s involvement in it. The lower
level employees were the ones in the second group and did not have first-hand information about
the scandal. However, despite considering Lay responsible for the scandal, the first group did not
openly express their knowledge as to save face of the Enron leadership (Rantanen 2007: 177). By
37
giving their allegiance to the executives, especially Lay, the first group employees opposed their
moral motivations and ultimately demoralised motivation for future critique and organisational
learning (Rantanen 2007: 177). Apart from demoralised motivation, the employees also formed
double standards as they on the one hand were aware of the truths and lies of the scandal and on the
other hand were forced to pretend that they did not (Rantanen 2007: 177).
4.1.2 Towards a change in culture
One of the reasons behind the oil scandal was Enron’s unstableness since its initiation. When Enron
was founded in 1985, the employees had imprecise duties and the overall morale in Enron was
appalling. Enron was a paralysed company due to a backstabbing culture, daily power-plays, and
inadequate management decisions (Mclean and Elkind 2004). Thus, the failure of Enron Oil led Lay
to develop a new business strategy. Lay was aware that in order to survive, he had to develop a new
and innovative business strategy (Dobson 2006: 195). Lay developed a new business strategy with
the help of a consulting firm, Mckinsey and Co. (Thomas 2002: 41). Along with the strategy, the
consulting firm also provided Enron with a young consultant, Jeffrey Skilling (Dobson 2006: 195).
Due to his innovative and successful idea of the gas bank, Skilling officially became a part of Enron
in 1990 to direct the Enron Finance Corporation, a new department created by Lay (Dobson 2006:
195).
The gas-bank reflected Skilling’s values and assumptions of what he believed would be an
appropriate solution to Enron’s problems, according to the second level of cultural analysis,
espoused values and beliefs. It can be argued that Skilling’s solution proved to be a successful
solution to Enron’s financial problems. Due to this, Skilling would ultimately be identified as the
leader of the organisation, which was the case as he was to direct Enron Finance Corporation in
1990 and later became the President and CEO of Enron. However, as there was not yet a shared
basis for determining whether Skilling’s solution will continue to have a positive outcome,
following the third level of cultural analysis, it can be argued that Skilling’ values and beliefs were,
therefore, not yet transformed into basic underlying assumptions.
Skilling was intrigued by the way human nature was steered by greed and competition (Gibney
2005). According to Bethany McLean, co-author of the book The Smartest Guys in the Room,
Skilling had a Darwinian view of the world and was famous for saying that money was the only
thing that motivated people (Gibney 2005). When he joined Enron in 1990, it was relatively simple
for Skilling to amend Enron’s culture, due to Enron’s inherent unstable culture. His impact on
38
Enron’s culture can be especially be described through his intelligence. Enron employees described
Skilling as ““incandescently brilliant”” and the ““smartest person I ever met”” (Mclean and Elkind
2004). He used his magnificent intelligence both to persuade as well as to intimidate others.
According to Mclean and Elkind (2004), Skilling’s intimidating intelligence turned Enron from an
ill-functioning into a successful company.
Skilling’s leadership transformed Enron into somewhat of a cult (Tourish and Vatcha 2005). A
cult is defined as “A group or a movement exhibiting great or excessive devotion to some person,
idea or thing, and employing unethical manipulative or coercive techniques of persuasion and
control… designed to advance the goals of the group’s leaders, to the actual or possible detriment of
members, their families or the community’ (Tourish and Vatcha 2005: 6). Enron’s leadership,
particularly Lay and Skilling, created the impression that they were charismatic leaders and
promoted themselves using vivid procedures. For example, according to Cruver (2003: 10), Skilling
came to be known as Darth Vader the “…master of the energy universe who had the ability to
control people’s minds.” and “…he intimidated everyone.”. Lay, on the other hand, was described
as a ““revolutionary”” (Tourish and Vatcha 2005: 10). The purpose behind this extreme self-
portrayal of themselves was not only to create a clear image of who they were but also to persuade
the employees into thinking that they were part of a greater cause than just a business organisation.
This was further confirmed by a vast number of books and case-studies published on Enron which
portrayed it as a successful and innovative organisation (Tourish and Vatcha 2005: 11).
Apart from self-portraying their own image, Skilling and Lay also created a monolithic vision in
Enron which “…promised people heaven on earth.” (Tourish and Vatcha 2005: 13). The vision
helped Skilling and Lay in convincing the employees that it could transform Enron into something
which was otherwise unimaginable. The employees were constantly reminded of their great
abilities, making them the optimal employees for Enron, which created a sense of nobleness among
them. Therefore, employees were expected to fully commit themselves to Enron’s vision, as well as
to develop their careers (Tourish and Vatcha 2005: 14). Fully committing oneself can lead
individuals to “treat all organisational, social and even personal relations as instrumental to career
progress” and thus become unable to distinguish between own priorities and the ones set by the
leader (Tourish and Vatcha 2005: 15). Over the years, this became the case in Enron.
39
4.1.3 Impact of the Performance Reviewing Committee
At Enron, Skilling was motivated by short-term wealth formation and thus had a simple and clear-
cut principle: to increase Enron’s short-term stock price by all means possible (Dobson 2006: 195).
This can be identified, following the primary embedding mechanism theory, as what leaders pay
attention to, measure, and control on a regular basis. By paying attention to money-making and
measuring and controlling the employees’ performance, Skilling communicated his values and
beliefs about what he expected from the employees. Due to the principle, Enron, or rather Skilling,
hired the best MBA graduates from throughout the US and promised them quick advancement and
fortune. The principle also proved to be very familiar among the newly hired graduates due to their
learnings from business schools (Dobson 2006: 195).
In order to propagate the best employees, Skilling introduced the PRC (Dobson 2006: 196). Even
though a performance review of employees is considered ordinary in larger organisations, Enron’s
PRC came to be known as the severest employee-ranking committees in the US (Dobson 2006:
196) and as the “rank and yank” system (Gibney 2005). The PRC can be identified as the fifth
embedding mechanism used by Skilling, to recruit, select, promote and excommunicate. The PRC
shaped and persisted Enron’s organisational culture as it very viciously transmitted the principle of
short-term stock price growth (Dobson 2006: 196). The employees who lived up to this principle
were rewarded accordingly, which furthermore created an emphasis on short-term increase of stock
price among the employees (Dobson 2006: 196) and commitment to Enron and its leadership
(Tourish and Vatcha 2005: 15). Whether the employees were in fact making profitable deals did not
matter to the PRC, as long as it appeared so. The employees who were incapable or reluctant in
making “profitable deals” were immediately let go of and, as a result, 15% of Enron’s Finance
Corporation’s employee were fired annually (Dobson 2006: 196). According to Skilling, ““you eat
(only) what you kill”” (Dobson 2006: 196). Additionally, an experienced Enron employee noted
that in Enron ““Good deal vs. bad deal? Didn’t matter. If it had a positive net present value (NPV) it
could get done. Sometimes positive NPV didn’t even matter in the name of strategic significance
(Thomas 2002: 43). According to Skilling himself, “Our culture is a tough culture. It is a very
aggressive culture.” (Gibney 2005). The PRC created a ruthless culture and employees never
expressed how they truly felt about Enron. Opposing Enron in any way, whether it was the
accounting methods or the leadership behaviour, was not endured (Tourish and Vatcha 2005: 28).
Enron revived and compensated innovation and provided the employees with luxuries and other
facilities (Dobson 2006: 196). These can be considered the positive side of Enron’s culture and can
40
be identified, following the primary embedding mechanism theory, as allocate rewards and status.
By rewarding the employees with bonuses etc., Skilling ensured that the members learned the core
values and assumptions of Enron. On the contrary, the principle of short-term growth was a
negative aspect of Enron’s culture which overshadowed the positive ones. Employees were
encouraged to practise this principle with all necessary means, even if it involved dishonesty and
illegal activities (Dobson 2006: 196). According to Dobson (2006: 196), the leadership of Enron,
specifically Lay and Skilling, shaped the organisational culture of Enron whilst ignoring the
essential problem that organisational culture must overcome, steered by an organisational principle.
The culture failed to maintain Enron because it lacked appropriate methods of prescribed
implementation. Enron’s core principle lacked in providing the employees with a reasonable
account for preferring “honour trust” above “abuse trust” (Dobson 2006: 196). Former Enron vice
president, Sherron S. Watkins, notes in one of her publications, “Enron has a pristine code of ethics,
code of conduct, and corporate governance procedures, but they weren’t following the spirit of their
own procedures…” (Watkins 2003: 16). According to Fusaro and Miller (cited in Tourish and
Vatcha 2005: 26)
‘It is clear that Enron’s management regarded kindness as a show of weakness. The same rigors
that Enron faced in the marketplace were brought into the company in a way that destroyed morale
and internal cohesion. In the process of trying to quickly and efficiently separate from the company
those employees who were not carrying their weight, Enron created an environment where
employees were afraid to express their opinions or to question unethical and potentially illegal
business practices. Because the rank-and-yank system was both arbitrary and subjective, it was
easily used by managers to reward blind loyalty and quash brewing dissent.’
4.1.3 The new culture
Skilling and Lay indoctrinated the employees with prevailing values and beliefs, which ultimately
reflected their own values and beliefs. Their values and beliefs were so strongly embedded in the
culture of Enron that they had now transformed into basic underlying assumptions. What started out
as espoused values and beliefs of Skilling had now deep roots in Enron’s culture. There was no
room for alternative actions due to Skilling’s successful and positive solutions. During the 1990’s,
as a result of Skilling’s solutions and leadership, Enron was prospering and soaring and was at its
peak (Gibney 2005). However, Peter Elkind, co-author of the book The Smartest Guys in the Room,
states that Enron’s prosperity was a result of extreme risks and questionable practices (Gibney
2005).
41
The climate of Enron’s culture was such that anyone who contested Enron’s questionable practices
saw either being reassigned or being neglected a reward (Cohan 2002: 277). Furthermore, because
the culture was based on intimidation, no one at Enron had the confidence to face Skilling or Lay
about the organisation’s practices even though there was a general awareness among the employees
about Enron’s suspicious financial practices (Cohan 2007: 277).
According to Bethany Mclean, the employees, especially the traders, turned Skilling and Lay’s
beliefs into an ideology (Gibney 2005). Following the third level of cultural analysis, it can be
argued that these basic assumptions became non-confrontable and non-negotiable. They were also
reflected in Enron’s artefacts as they defined how employees were supposed to dress, talk to each
other and what they should and should not believe (Tourish and Vatcha 2005: 34).
According to Cruver (2003: 37), ‘The first thing I noticed about Enron traders is that they all
looked very similar: A goatee was fairly common; otherwise they maintained a clean-cut yet
outdoorsy look; and if they didn’t wear some version of a blue shirt every day, then it was like they
weren’t on the team… I recall the first time I showed up to work in a green button-down, only to
realize I was completely surrounded by a dozen guys wearing the same blue shirt. Not just blue
shirts – but the same blue shirt.
Other than the “dress code”, another artefact that reflected Enron’s basic underlying
assumptions was the language used among Enron employees; ‘No one at Enron would ever “build
consensus,” they would “come to shore,” as in “We have to come to shore on this,” or “Are you
ready to come to shore on this?” One week somebody used the word “metrics” to mean the numbers
in a deal, as in “We’ve got to massage the metrics!” Pretty soon, everyone was using the term
“metrics” and anyone who used the term “numbers” or “calculations” was a “loser,” the most
popular Enron label of all.’ (cited in Tourish and Vatcha 2005: 31).
According to Tourish and Vatcha (2005: 32), Enron’s organisational culture was preserved by
tightly controlling information about the organisation. Information about Enron and its actions was
allowed only to privileged employees, such as top executives, in order to strengthen Skilling and
Lay’s dominance over the organisation. As a consequence, the employees, as well as external
parties, expected that the leadership was aware of Enron’s practices and actions and had, at heart,
good faith in regards to Enron’s future (Tourish and Vatcha 2005: 32). Despite this, Cohan (2002:
280) states that in Enron “there was misrepresentation of hard data, that is, concealment of debt,
42
lying about accounting results, as well as about the stream of earnings, and distortion of the
company’s future prospects.”.
As far as ethics was concerned in the culture, there was little or no respect towards being ethical
despite having a lengthy brochure containing Enron’s set of values, known as RICE: respect,
integrity, communication, and excellence (Dobson 2006: 195). These values had no posture on
Enron’s culture. Dobson (2006: 195), argues that RICE more suitably stood for risk-taking,
individualism, contempt and exploitation. It was predominantly due to Enron’s culture that ethics
was disregarded, as Johnson (2003: 50) states “Lack of controls, combined with an intense,
competitive, results-driven culture made it easier to ignore the company’s code of ethics…”.
4.1.4 Enron’s culture and the Competing Values Framework
Following the CVF model, Enron’s culture had the attributes of a market culture. This was due to a
prime focus on the external environment of the energy market. Furthermore, due to the gas-bank
strategy, Enron operated as a market itself. Skilling and Lay emphasised on profitability, bottom-
line results and a strong footing of Enron in the energy business. Another characteristic of the
market culture evident in Enron was that the values and beliefs which were imposed on Enron were
that of competitiveness and productivity, and were predominantly achieved by implementing the
PRC. Due to this, Skilling and Lay were result-oriented, placed an emphasis on winning and
adopted an aggressive strategy with tough procedures, which further resembles Enron as a market
culture.
Along with attributes of a market culture, Enron’s culture can also be characterised as an adhocracy
culture. An adhocracy culture emphasises and values innovation, creativity, and flexibility.
Furthermore, due to a continuous change in the market, an adhocracy culture also emphasises
development of new products and services. Enron’s culture encouraged creativity and risk-taking
which resulted in a variety of new products and services (Johnson 2003: 49). An example of
Enron’s new product is Enron Online (EOL), launched in 1999 (Thomas 2002: 42). However, it can
be argued that Enron’s culture valued creativity and risk-taking not necessarily to meet the demands
of the market but rather to meet the demands of Skilling and Lay; hence, preventing employees
from being disregarded through the PRC. Furthermore, the leadership in an adhocracy culture is
often visionary, risk-oriented, and places an emphasis on long-term growth. Skilling and Lay were
certainly visionary and risk-oriented; however, rather than a focus on long-term growth they
focused on short-term growth, especially in monetary terms.
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4.1.5 Sub-conclusion
It can be concluded that Enron’s culture was shaped and influenced to a very large extent by
Skilling and Lay. In its early stages, Enron was an unstable organisation with a disturbed culture,
which, among other things, led to Enron Oil Scandal. However, this changed once Skilling was
aboard, but rather than taking a turn for the good, Enron’s culture took a turn for the worse. By
implementing the PRC and imposing their values and beliefs on Enron, Skilling and Lay created a
sick culture in Enron in which there was a high degree of internal competition and aggressiveness.
Enron’s employees took extreme risks to satisfy the leadership and not to be eliminated from Enron.
Due to this, Enron’s ethical principles, RICE, were disregarded on a daily-basis, not just by the
employees but even by the leadership.
The theories applied in this analysis have been useful to analyse the culture in different ways and
from different perspectives. Applying the levels of cultural analysis theory has demonstrated the
three levels of culture in Enron. The primary embedding mechanisms theory has been beneficial in
identifying how Skilling and Lay made use of mechanisms to embed their values and beliefs in
Enron’s culture. Thirdly, the CVF model has been used as a descriptive theory to identify the core
aspects of Enron’s culture which have then been identified as two types of cultures.
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4.2 Stakeholders and the impact of Enron’s culture
This chapter seeks to explain the impact Enron’s culture had on the stakeholders, by incorporating
the stakeholder salience theory. The chapter initiates with a general discussion of the salience
model, whereafter it analyses Enron’s stakeholders using the model. Secondly, the chapter discusses
how whistleblowers can impact stakeholders and how whistleblowers in Enron were not paid
attention to, neither by the leadership nor by the stakeholders, primarily due to the culture. Lastly,
the role of Enron’s board of directors is discussed in regards to their impact and commitment
towards the stakeholders.
4.2.1 Stakeholder salience theory
According to the traditional view of corporate governance, shareholders were the important value of
a corporation, as they invested their capital into a certain company and therefore helped the
company to develop, with a prospect of earning profit from their potential value gain. However
nowadays, the stakeholder theory argues, that it is the stakeholders, which are most important for
sustainable development of a company (Friedman and Miles 2009).
Stakeholders are for instance employees, customers, suppliers and others, who do not invest their
capital into a company, per say, however they do invest their time, skills and other capabilities that
make up a company (ibid). Therefore, the relationship between a stakeholder and a company is
simple: they both profit from the relationship and often both are also dependent on it (ibid).
Trinkaus and Giacalone (2005) argue that in order to lead a company into a profitable entity in
today’s world, it is not enough to focus on shareholders and the classical profit maximisation. But
rather, one needs to focus on stakeholders and their needs. The number of stakeholders is constantly
increasing, as the management learns to understand their importance, which can be confusing for
the management (Boesso and Kumar, 2016). Therefore, as Mitchell et. al. (1997) argue in their
stakeholder salience theory, the management needs to be able to divide the stakeholders into
categories with different levels of importance, i.e. levels of salience, which can be constructed by
assigning each stakeholder one or more attributes (power, urgency, legitimacy). The more attributes
one stakeholder possesses, the more salient it is (ibid).
4.2.1 Enron’s culture and the salience model
According to Jones et. al. (2007), different stakeholder cultures have different influence on the
stakeholder salience attributes, as described by Mitchell et. al. (1997). Therefore, power, legitimacy
45
and urgency will have different importance in a business that has an egoistic culture, and in a
business with a moralist or instrumentalist culture.
Seen from an egoist perspective, Lay and Skilling’s personal nature was largely egoistic, as their
main interest was “short-term maximisation of shareholders wealth” (Boesso and Kumar 2016:
817). As powerful stakeholders and leaders of the company, they shaped Enron's culture into one
that was egoistic as well, and Enron’s culture was flourishing after being awarded as one of the
most successful companies, at the time of their apparent incredible growth.
According to the stakeholder salience theory, one could argue, that Lay and Skilling’s nature was
mostly based on the attribute of power, as promoting rapid short-term profit maximisation was the
first priority for both of them. Also, during the time when Enron was peaking, they both kept
introducing new strategies, as if some other company would be stepping at their heels. They both
did not want to slow down, even at the cost of illegal actions (ibid).
For Enron, powerful stakeholders were the ones that the management would accommodate as
first, according to Mitchell et. al. (1997) power has different ways of showing itself. Relevant
utilitarian power can be utilised with material and financial resources (Mitchell et. al. 1997: 865),
therefore, stakeholders possessing material and/or financial resources would have been the most
important stakeholders. For Enron, stakeholders with the most capital invested were the most
powerful, hence most taken care of, and the ones who had the most influence on the corporate
strategy (ibid).
However, in order to increase salience, Enron’s managers would have to focus on at least one
more attribute apart from power. Usually power comes together with time sensitivity, and,
therefore, the attribute of urgency (Mitchell et. al. 1997). For instance, when powerful stakeholders
want to rapidly increase their stock price, they become urgent and therefore also more salient; their
importance among other stakeholders grows (ibid). The combination of power and urgency is the
most salient and also very common in the case of egoistic organisational culture, as Jones et al.
(2007) argue. There is also an option, combining the attributes of power and legitimacy, which
results in a moderate salience. However, as Jones et al. (2007) argue, the attributes of legitimacy
and urgency, or their combination, is irrelevant without the attribute of power in an egoistic
organisational culture (Boesso and Kumar 2016: 151). Boesso and Kumar (2016) also criticise the
egoistic culture for being narrow-minded, as it constantly overlooks issues of stakeholders with
46
different attributes than power. These stakeholders are still important for a company in a normal
mind-set, but in the eyes of egoistic managers, they become irrelevant (ibid).
4.2.2 Whistle blowers and Enron’s culture
The interesting part about Enron and their culture is the fact that prior to the bankruptcy, none of the
stakeholders showed any doubts regarding Enron’s system and its future. It seems that once the
company won Forbes’ prize for being the most innovative company of the time, and kept winning
the prize for six consecutive years, all stakeholders, media, and political actors believed that Enron
will keep developing in the same direction. This notion also helped with the creation of a very
specific culture, which is described by some as egoistic, aggressive and risk-taking. Nevertheless,
this culture led to Enron’s rapid downfall, as none of the stakeholders protested about the
wrongdoings of Enron, throughout its last years (Boesso and Kumar 2016).
Trincaus and Giacalone (2005) argue that loyalty was usually typical in a business setting in the old
days, however today, employees can be unpredictable as the culture and ethics of employees is
more open to whistle blowers. In the case of Enron, the managers were strictly hiring very loyal
employees, who understood the specific culture and were able to act in the best interest of the
organisation, even though it contradicted with the best interests of the society (ibid). This also
worked well with Enron’s competitive employee ranking system, where 15% of employees had
their jobs in jeopardy every year (Trincaus and Giacalone 2005: 240).
Trincaus and Giacalone (2005) argue that in any company, the decision to become a
whistleblower is usually terminal in relation to the job position, as the employees are usually not
protected by anyone. One can argue, that in companies that are smaller, or have culture more
focused on overall societal wealth than their own success, concerned employees have more weight
than in a company like Enron (ibid). The positive approach to concerned stakeholders, then, can
have a good effect not only on the moral of the whole organisation and their culture, but also on the
long-term success. According to stakeholder salience theory, one could argue that concerned
employees have the attribute of urgency, as their concern is probably related to a present time issue
(ibid). Moreover, they can possess the attribute of power, in case the employee does not agree to be
paid off, for his or her silence, the power of leaking the concerns to the media, for example, needs
to be taken care of by the managers. In Enron, stakeholders were able to come forward
anonymously with their concerns, and the concerns were discussed, as Trincaus and Giacalone
(2005) argue; however, they were not necessarily resolved. Nevertheless, one can argue that
47
Enron’s managers did take care of the stakeholders possessing the attributes they found most
important; however, instead of addressing their concerns and trying to resolve them, they looked for
a way to make the concerns disappear (ibid). On the other hand, Trincaus and Giacalone (2005) also
argue, that employees as stakeholders should also follow some rules when whistle blowing, as these
actions could be terminal for the whole company, especially nowadays, when concerned employees
can be taken too seriously by mistake. Therefore, it is important to have a healthy relationship
between the managers and the employees.
One can draw a case of a whistleblowing in Enron, where Sharron Watkins, a very successful
manager in Enron, brought up her concerns to Lay about the wrongdoings in the accounting
strategy, which he decided to ignore (ibid). However, Trincaus and Giacalone (2005) also argue,
that Watkins, beside being the Vice President for corporate development, and therefore part of the
inner circle (ibid, p.242), decided not to come out with the information she had but rather kept it
within the company (ibid). This may contradict with the concept of whistleblowing, however in a
culture as Enron, this action was already considered as extraordinary. As argued before, already
during the hiring process, managers were looking for people with no tendencies of possible
whistleblowing, which only adds to the argument, that Enron's culture was strongly built but also
extremely competitive, so that everyone would be working for the greater good of the company. In
other words, Enron was not only promoting the culture of survival of the fittest among the
employees, but also as a company itself.
4.2.3 The board of directors
The board of directors is responsible for protecting interests of shareholders in a company, therefore
ensuring, that the company is prospering enough to bring interesting returns on investment to the
shareholders (Krasna 2006). Therefore, the board members must be organised, efficient and very
experienced, in order to be able to help steer the company in the right direction. The board of
directors also needs to be able to have an overview over the company's strategy and understand
different forms of risks that could potentially put the company’s survival into jeopardy (ibid). It can
be argued that the board members are supposed to know when a company is in a risk; however,
critics argue, that nowadays it has become a well-payed stamping position (Trincaus and Giacalone
2005). Nevertheless, according to Wheleen and Hunger (2004), there are different levels of board
involvement, ranging from being passive to active. In regards to the Enron's board of directors’
involvement, one could argue that their involvement was closer to the passive line, as they chose to
ignore some indicators of high risk activities which occurred through several years.
48
Enron’s board of directors agreed to changes in the structure of the company, which arguably led to
the collapse of Enron. For instance, they allowed for high-risk accounting and extensive off-the-
books activities (Krasna 2006: 68). However, their relation to the company is also questionable, as
some researches argue, due to conflicts of interest, especially considering the relationships between
the board members and Enron.
The actions of the board members are also reflected in Enron’s culture, as analysed earlier, where
one could find subcultures in each department of Enron, while there was often little or no
communication between the departments. In such culture, it was difficult for the board members to
gather information regarding Enron's present and future plans (ibid). It can be argued that the board
of directors failed to ask questions and do their inspection, as they agreed to changes that were
recommended by Enron's employees/officers, without questioning them. Therefore, the board failed
to guard the interests of the stakeholders and rather sympathised with Enron's egoistic culture,
suggesting that by taking these risky decisions, Enron will only become more rich and successful
(Trincaus and Giacalone 2005). It is also possible, that the board members were simply not willing
to know what was happening behind the curtains, as Trincaus and Giacalone (2005) suggest,
however that only underlines the impact Enron's culture had on everyone involved in the
company.
Similarly, the audit committee, as part of the board of directors in Enron, experienced similar issues
as other stakeholders especially in terms of misleading informations. In order to ensure that the
financial reports are correct, and protect existing and potential investors, the audit committee needs
to have an overview over the finances of the company. However, in the case of Enron, the audit
committee did not take any action about the wrongdoings, similar to the board of directors. Even
though, the chosen ones were one of the best in the country, Morris (via Trincaus and Giacalone
2005) argues, that the audit committee was simply paid to be quiet. This also indicates the culture of
Enron as being self-centred, interested in personal gain, rather than societal growth.
When looking at the board of directors and the audit committee in relation to the stakeholder
salience theory, it becomes apparent, that for Skilling, Lay and the rest of the inner circle, the board
of directors and the audit committee had a low level of salience, as they did not question decisions
made by Enron’s officers, but instead agreed to risky changes. However, according to the theory,
the board of directors and the audit committee should have had a higher level of salience as in an
49
ideal organisational culture setting where the managers have to convince the board to approve risky
changes. It can be argued that this finding only underlines the importance of organisational culture.
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4.3 Unethical actions promoted by the culture
The purpose of this section is to discuss how Enron’s culture promoted unethical actions and their
consequences. Despite Enron engaging itself in various unethical action, this paper has chosen two
actions which it considers the most unethical: The California Energy Crisis and The use of Special
Purpose Entities (SPEs). The section starts by explaining the California crisis, whereafter it
explains how Enron played a role in the crisis and what consequences it had. Secondly, the section
discusses the use of SPEs by Enron. Lastly, the consequences of using SPEs are discussed. In
analysing these two actions, and their consequences, the ethical correctness of the two actions is
determined by applying theory of utilitarianism and egoism.
4.3.1 The California Crisis
In the years 2000 and 2001, California had experienced major problems with their electricity
supply, which led to large scale blackouts that often affected the whole state (Ware 2003). One does
not need to stress the importance of electricity for a country's economy, as it not only affects
businesses dependent on power supply, but it also creates chaos, resulting, for instance, in car
accidents, people being trapped in elevators etc. (Gibney 2005).
California, being situated in rather mild environment, with hot summers, but also warm winters
does not strike as a state that would have problems with electricity supply. Also, the majority of
electricity was created on hydro-energetic plants, which are inexpensive (Ware 2003). On the other
hand, California still has a large number of inhabitants and therefore needs to import large amount
of electricity every year (Love 2014). Nevertheless, researchers argue that California should not
have been running out of power supply as often as it did in those years, and that the demand for
power did not exceed the potential limit of supply, as it was argued by the electricity companies
(Gibney 2005). Due to deregulation of the energy market in 1990s, California became very
interesting to invest in, as one does not have to follow as many regulations as in a regulated market.
Deregulation by itself became very popular in the US during the Reagan administration in 1980s,
following the neoliberal economic ideology and believing in free-market economics (Ware 2003).
On the other hand, some researchers argue, that the California crisis occurred due to several other
reasons than Enron’s exploitation. For instance, Ware (2003) argues that there was a significant
increase in power demand in those years, which California could not manage as there were not
enough power plants due to incorrect assessed market expectations. Another reason being an
51
extremely dry weather, that lead to large decrease of hydropower production not only in California,
but also in neighbouring states from which California often imported electricity (Ware 2003).
4.3.2 Enron’s role in the California crisis
Enron owned natural gas plants around the world, however, most of them did not perform well, and
some not at all. For instance, Enron build an expensive power plant in India, while later discovering
that India could not pay for the energy produced by the power-plant (Gibney 2005). To cover up
this failure and to ensure their stock prices would continue to increase, Enron had to come up with
another big idea. Since the electricity market in California had just been deregulated, Enron saw an
opportunity to enter the electricity market and, in 1997, Enron bought the Portland General Electric
(PGE) company (ibid). The rules of deregulation were complicated and it was, therefore, fairly
possible to find loopholes that would lead to market manipulation and an interesting profit. Enron’s
employees gave these strategies rather provoking names, such as death star, black widow, and fat
boy (Gibney, 2005).
The strategies often included artificial shortages as part of the exploitation. Recorded telephone
calls between Enron traders and the operators of the power plant testifies that the operators made up
stories to cover up the electricity shut downs, such as maintenance of the power plants (Gibney
2005). This resulted in a higher demand than supply; thus, the price of electricity rose dramatically.
Between the years 2000 and 2001, Enron, through their market manipulation, managed to increase
the price of electricity in California, from an average of $20-50 per megawatt per hour, to around
$400 per megawatt per hour (Ware 2003: 1). During the California crisis, Enron’s actions affected
many stakeholders, most importantly the people of California. One can argue that rolling blackouts
and increase of electricity prices was certainly not what California expected from neither the
deregulation nor letting Enron dominate the market. For Enron, on the other hand, California was a
golden mine (Gibney 2005). According to Max Eberts, a former Enron employee, “weeks before
quarterly reports, we [the traders] thought we will not make the numbers, but then miraculously we
always made the numbers”. If the traders wondered how it happened, the answer they got from the
senior executive of Enron was simply, “California” (Gibney 2005: 1:03:00).
From a utilitarian perspective, Enron was supposed to go through all possible options of
maximising the well-being of the greatest number of people, but instead, Skilling and Lay acted in a
way which maximised their and Enron’s well-being, which is inline with an egoistic behaviour, i.e.
one does what is in one’s best interest. However, blackouts, whether artificial or real, were not
52
Enron’s only strategy to exploit California. Tim Beldon, Enron's number one “loophole searcher”,
played a major part in exploiting strategies which Enron was working on. One of the strategies,
Ricochet, was based on exporting power out of the state of California while there was a demand for
power, and then bring it back to the state when prices rose, due to an increased demand (ibid,
1:07:50). These strategies became very popular and were very much like a competition where
employees raced to find the most profitable loopholes in the system.
David Freeman, one of the former policymakers for energy in California, states, “I remember a
conversation I had with Kenneth”, where Lay said, “…let me just tell you, it doesn’t matter what
cookie rules you California put in place, I got a bunch of really smart people that will figure out
how to make money anyhow.” (ibid, 1:06:00).
It becomes rather clear that Lay and Skilling were both fundamentally egoistic in nature as they
sought after their own interests. In the conversation between Lay and Freeman, one can describe
Lay as selfish egoist, as according to the psychological egoist approach. However, an ethical egoist
approach can also be used to argue that in the eyes of Lay and Skilling, their actions were ethical, as
the consequences of Enron's actions maximised their well-being and served to their self-interests.
California is prone to wildfires due to high temperatures, which only played into the hands of
Enron. In 2001, wildfires and high temperatures hit California, leaving the people of California in
constant fear that, should the fire take over the power plant it would not only result in another
blackout, but also an increase in electricity prices (ibid). The wildfires were a delight for Enron’s
traders, as is evident through recorded phone calls between them (Gibney 2005). Some traders were
recorded cheering “burn, baby, burn” (ibid).
This is yet another example of Enron not following ethical considerations. Whether we look at rule-
utilitarianism or act utilitarianism, one can argue that Enron was not acting in accordance to these
versions of utilitarianism, as they were not interested in bringing well-being to the greater amount,
i.e. the people of California. Instead, Enron’s egoistic culture was growing every time the company
made profits.
One could argue that Lay and Skilling could be described from the perspective of cause egoism, as
they were pretending that they were helping others, but were ultimately helping themselves. For
instance, in the case of California crisis, Enron came in to “take care of the market”, after the
deregulation took place. In reality, however, Enron was simply trying to increase their stock price,
53
and due to the unclear rules of deregulation, Enron was able to exploit the system. However, ethical
egoism provides a clearer assessment of Enron’s leaders. As argued before, even an action where
“betting that the price of energy would go up” (ibid, 1:10:40) would be considered ethical from
ethical egoist approach and because the prices did go up, “the West Coast traders made almost two
billion dollars for Enron” (ibid, 1:10:40), which only further indicates, that this action brought the
greatest amount of happiness to the leaders, i.e. individuals.
Another category of stakeholders affected by the California crisis were the employees of Enron,
especially pipeline workers and other “on-the-ground” workers. They invested some of their
retirement savings into Enron. Most of these workers were employed by PGE before the merger,
therefore their investments in PGE transferred to Enron and because Enron’s stock was being
promoted as very stable, with “increasing profits up to 10-15%” (ibid, 35:15), most of these
workers then invested as much as they could of their retirement saving into Enron (ibid). Once
Enron collapsed, this simply resulted with the people having no retirement savings. One can again
see the resemblance with the egoist approach, convincing the public about how great Enron was
doing, while Enron was living off their name, and the stock price which, in reality, was greatly
overpriced (Gibney 2005).
Enron’s culture was so incredibly fearless, that they managed to convince the whole America,
that they knew what they were doing. Moreover, when Fortune500 magazine, as mentioned before,
continuously nominated Enron as the most innovative company in America, Enron’s employees felt
good about themselves (ibid, 45:38).
According to Bethany McLean, “the traders never stepped back and asked, is it what we are doing
ethical, is it in our best long-term interests, does it help us if we totally rape California, does that
advance our goals of nationwide deregulation, instead they used every loophole to profit from
California misery” (ibid, 1:12:00).
The culture of Enron did not teach the traders and employees to be more critical or careful, in
general, to what they were doing and follow moral and ethical guidelines. Rather, the culture taught
them that they were the best of the best traders, and as long as they found ways to generate profits
for Enron and keep the stock price rising, no one would ever question their creative and innovative
ways of exploiting the different loopholes in the system. According to Skilling, “money is the only
thing that motivates people” (ibid, 22:20), and in Enron, money was everything.
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4.3.3 The use of Special Purpose Entities
Apart from the California energy crisis, the use of Special Purpose Entities (SPE) by Enron is also
worth analysing when it comes to ethical and moral actions. To understand how Enron used, or
rather misused, SPEs, it is important to obtain a general understanding of what a SPE is.
Despite being considered very complex entities, SPEs are used by many businesses and are
impeccably legal (Newman 2007: 98). An SPE can take various legal forms, such as a trust,
corporation and partnerships (Powers et. al. 2002: 37). The general concept of an SPE is that it
operates like an entity created for an inconspicuous and secluded purpose and “…narrows the scope
of risk to the assets and liabilities placed in the SPE, such that potential investors’ or equity holders’
fortunes or misfortunes will be based entirely and exclusively on what occurs with respect to the
assets and liabilities placed within the SPE.” (Newman 2007: 99). SPEs can be formed as either: a
joint venture, a synthetic lease or an off-balance sheet financing (Newman 2007: 99).
Enron used SPEs throughout the 1990’s in different businesses within Enron (Powers et. al.
2002: 37). This is, partly, because Enron’s growth during the 1990’s required large amounts of
investments which, in the short-term, did not generate sufficient earnings and profits (Powers et. al.
2002: 36). However, Enron was under tremendous amount of debt. Thus, without further increasing
its debt by investing, and to maintain and potentially increase its ratings on the stock market,
Enron’s leadership initiated joint investments with outside investors who invested capital (Powers
et. a. 2002: 36). The joint investments took the shape of SPEs and the leadership preferred to use
off-balance sheet SPEs because it enabled them to represent Enron more appealingly on the stock
market and among other rating agencies. The SPEs were designed with the purpose of achieving
accounting results rather than real financial results (Newman 2007: 112). In other words, they were
designed to minimise Enron’s instability and losses, increase its profits and keep its debt off its
balance sheet, which would otherwise damage Enron’s rating and reliability (Schwarcz 2002:
1309).
Though the SPEs were approved by Skilling and Lay as well as the rest of Enron’s board of
directors, the person who played the most prominent role in both creating and maintaining the SPEs
was Enron’s Chief Financial Officer (CFO) Andrew Fastow (Gibney 2005). Andrew Fastow was
hired by Skilling in the early 1990’s after Skilling himself joined Enron. Fastow was inspired by
and idolised Skilling to the extent that he would please Skilling by all means, legal or illegal
(Gibney 2005). Thus, in order to please Skilling, and more importantly ensure an increase in
55
Enron’s revenue by keeping its stock price up, Fastow created hundreds of SPEs to hide Enron’s
debt of $30 billion (Gibney 2005). According to Bill Lerach, an attorney, “people pressured by the
lead to keep the stock price up begin to cheat a little bit, but then the next quarter comes along and
you have to cheat a little more to do the new cheating to make up for the old cheating, and before
long you have created a momentum that now you can’t stop” (Gibney 2005). This was the case with
Fastow’s SPEs, which created the illusion that Enron was generating revenue, but in fact Enron’s
debt was being stashed up in the SPEs making it invisible to the investors and general public
(Gibney 2005). Among the many SPEs created by Fastow, LJM was the most protruding and helped
Enron keep billions of dollars worth debt off its financial statements.
Fastow represented both sides of the parties involved in LJM, i.e. Enron and the investors
(Powers et. al. 2002: 18). This was also the case with the other SPEs created by him. Though the
purpose behind creating LJM was to benefit Enron, over time it became a mean for Fastow to
individually enrich himself as well as enabling manipulation of Enron’s financial statements
(Powers et. al. 2002: 18). Furthermore, Fastow used LJM, as well as other entities, in a manner
which placed his self-interest and the interests of the investors involved over of the interests of
Enron and withheld crucial information from Enron’s Board of Directors regarding the entities
(Powers et. al. 2002: 18). According to Sherron Watkins, ex-Vice President of Enron, this created a
conflict of interest as Fastow constantly had to choose whether to look after Enron’s interests or the
investors’ (Gibney 2005). Also, Fastow disregarded Enron’s Code of Conduct by enticing other
Enron employees with astonishing interests in the several SPEs he created.
It is, however, important to note that even though the SPEs were created and maintained by
Fastow, they were first and foremost approved and signed by Skilling, Lay and Enron’s board
members (Gibney 2005). Fastow was given the authorisation to conduct transactions and deals -
ultimately - with himself because Skilling and Lay were aware of the benefits involved. According
to Powers et. al. (2002: 19-20), both Skilling and Lay bear the responsibility for not implementing
controls to avoid the conflict of interest involved in the SPEs. However, Powers et. al. (2002: 20)
also argue that it is difficult to comprehend that Skilling did not ensure control over LJM and other
entities, especially because he was the Chief Operating Officer (COO) and possessed the
knowledge about the wrongdoings of the SPEs. Skilling was certainly aware of the immense risks
involved in the SPEs and the conflict of interest they created and thus, was more responsible for
bringing forward critical issues to Lay and the other board members. As far as the board of
members are concerned, it is argued that because SPEs are such complex entities to keep an
56
overview over and crucial information was kept from them, by both Skilling and Fastow, the board
members cannot be blamed (Powers et. al. 2002: 23). Nevertheless, the approval of creating SPEs is
enough reason in itself for the board members to fully commit themselves to ensure that the SPEs,
despite their complexity, function properly. However, they failed to do so (Powers et. al. 2002: 23).
The lack of control and preventing wrongdoings, by both Lay and Skilling, committed by Fastow
and the SPEs, reflects back to Enron’s culture. It becomes quite clear that Enron’s culture, to a large
extent, promoted engaging in SPEs. Internal secrecy, severe internal competition, high level of
focus on short-term profits rather than long-term potential, and the PRC, which created motives to
generate profits by all means, were all consequences of the culture. These dynamics laid the
foundations for the creative and innovative use of SPEs, which essentially were complete fraud, on
a level that had not been witnessed before (Newman 2007: 114). The immense need to generate
short-term and rapid profits was to such an extent that, according to John Olson, a stock analyst,
Fastow “was using Enron’s stock as collateral” and “they were betting their own company on the
transactions” (Gibney 2005). Fastow convinced 96 individual bankers to invest in LJM and several
top American banks who invested up to $25 million each (Gibney 2005).
4.3.4 The consequences of Special Purpose Entities
Was the use SPEs an ethically correct action? If it is analysed through egoism it would certainly
seem that the SPEs were perfectly ethical as they served to maximise the interests of individuals
involved, such as Fastow, Skilling and Lay. Their interests can be defined as hiding Enron’s debt
and increase their wealth in the process. Fastow and other major Enron employees who were
involved in the SPEs “…took out $35 million dollars a year in the form of management fees plus
interest plus a percentage of the original investment.” (Phillips and Saft 2002: 2). It can also be
argued that SPEs did not only serve the individuals directly related to Enron but also those related
indirectly, such as the advisors, lawyers, accountants, and investors. According to Bill Lerach, “The
lawyers are supposed to say no [to the misuse of SPEs], the accountants are supposed to say no, the
bankers [investors] are supposed say no. But no one who was supposed to say no, said no. They all
took their share of the money from the fraud and put it in their pockets.” (Gibey 2005). Powers et.
al. (2002: 25) estimates that between 1997 and 2001, Enron paid its advisor, Arthur Andersen, $5.7
million just for the work it performed on the SPEs. During 2001, when Enron had started facing
major problems, Arthur Andersen was paid $1 million a week and so did Enron’s lawyers, Vinson
and Elkins (Gibney 2005).
57
It can be argued that the individuals involved had aspects of both psychological and ethical
egoism. Initially, once having survived, i.e. having a footprint in their respective businesses, the
individuals took actions which were necessary to fulfil their endless desires. In this case, the endless
desires were the pursuit of maximisation of wealth. They were also motivated by ethical egoism as
supporting Enron’s abuse of SPEs, ultimately, maximised their own self-interest. But, it can further
be argued that the individuals were not necessarily motivated by enlightened egoism, as their
actions were not aimed at helping others, but rather cause egoism. This is because they, especially
Fastow, Skilling and Lay, pretended to be helping others, such as the investors and other partners,
when ultimately they were seeking to serve their self-interest; keep Enron’s debt off its financial
statement in order to increase revenue.
Consequently, based on the consequences, it can be argued that Enron’s use of SPEs was perfectly
ethical. However, on the contrary, it can be argued, based on the utilitarian theory, that the SPEs
were not entirely ethical. The SPEs widely contributed to Enron’s bankruptcy in 2001;
understandably, as Enron used hundreds of them to hide its debt (Gibney 2005). The Enron stocks,
which were used as collateral, ultimately started to decline during the 2000’s, resulting in a decrease
in the value of the SPEs. Eventually, the SPEs became too vague to hide Enron’s debt and, thus, the
debt was brought onto Enron’s balance sheet which resulted in Enron’s bankruptcy (Schwarcz
2002: 1311).
This had severe consequences, not just for Enron, but for its stakeholders as well. According
to Moncarz et. al. (2006: 29), shareholders lost $60 million in investment, thousands of Enron
employees lost their jobs, and thousands of workers and retirees lost their savings. Additionally,
energy purchasers lost contracts and insurance and financial institutions were left with $11 billion
of unsecured debt (Phillips and Saft 2002: 3). Enron’s collapse disrupted the entire US economy
and its impact was “…felt at the highest levels of government.” (Thomas 2002: 45).
The consequence of Enron’s collapse impacted thousands, if not millions, of people. The action
which led to this collapse, the use of SPEs, is, from a utilitarian perspective, certainly not ethical. It
can be argued that the individuals involved in the SPEs neither acted utilitarian nor were they
motivated by rule-utilitarian. They did not seek to maximise others’ well-being but rather their own.
The consequence of using SPEs was a result of various failures on different levels and of different
people: “…a flawed idea, self-enrichment by employees, inadequately-designed controls, poor
implementation, inattentive oversight, simple (and not-so-simple) accounting mistakes, and
58
overreaching in a culture that appears to have encouraged pushing the limits.” (Powers et. al. 2002:
27-28)
4.3.5 Sub-conclusion
Based on the findings, it can be concluded that Enron’s culture certainly promoted actions which
had disastrous consequences, both for Enron itself and its stakeholders. However, ethically correct
or not depends on the point of view one views the actions from, utilitarian or egoism. The
consequences of California crisis did not maximise the well-being of the greatest amount of people;
hence, the actions were unethical from the utilitarian point of view. On the other hand, as the
consequences did result in maximisation of Enron’s well-being and served to the self-interests of
the individuals involved, the action was ethically correct, from the egoist point of view.
The same can be concluded about Enron’s use of SPEs. This action, to a very large extent, was also
promoted by Enron’s culture. It served the interest of Enron which was to hide its debt in order to
increase the value of its stocks. Additionally, it maximised the well-being of the individuals
involved, such as Fastow, Skilling and Lay, and the well-being of its advisors, lawyers etc. Based
on this, the action can be considered ethical from an egoistic perspective. However, as the use of
SPEs led to Enron’s bankruptcy which, in turn, led to severe consequences for the stakeholders
involved, i.e. the greatest number, as well the general economy, the actions can said to be unethical,
according to utilitarianism.
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5. Discussion
The purpose of this chapter is to discuss the results and detect any patterns which have been
identified in the attempt to answer the three sub-questions. The sub-questions have been analysed
and answered, to the best of our ability, in order to answer the research question. This section will,
thus, comment on each sub-question before making concluding remarks in the next chapter.
The first question, “what role did Enron’s leadership play in shaping its organisational culture and
how can it be characterised?”, is aimed at determining the role Enron’s leadership played in
forming and maintaining its organisational culture. Having discussed the role of the leadership,
there is one key point worth mentioning. Despite stating that Enron’s organisational culture was
influenced both by Skilling and Lay, which ultimately led to corruption and fraud, it can be argued
that Skilling played a greater role in shaping the culture than Lay. According to Ferrell et. al. (2010:
210), “Lay was convicted for not being proactive in preventing the fraud or knowing about what
was going on inside Enron.”. This can be further supported by Sherron Watkins statement that Lay
was quite detached from the fraud and was not involved in creating it (Ferrell et. al. 2010: 210).
However, it is difficult to grasp the fact that the CEO himself was not aware of what was going on.
In an interview with Ferrell et. al. (2010: 211), Lay stated that he was shocked when he learned
about the extent of the corruption which existed without his knowledge. Furthermore, he stated that
he relied on accountants, senior executives and lawyers to keep him informed of concerns such as
corruption and fraud. But he argued that he was deliberately kept in shadow of knowledge that
would have been crucial for him to engage in, and thereby prevent the misconduct (Ferrell et. al.
2010: 211).
Lay’s reluctances and hesitancies in making difficult and confronting decisions due to his
nature, as discussed in the first sub-question, can be argued to have impacted his lack of preventing
the misconduct in Enron. It can further be argued that the misconduct in Enron, under Skilling, is
very similar to what occurred in the Enron Oil Scandal in which Lay was allegedly also “unaware”
of the traders’ activities. This raises the question of to what extent Lay was actually aware of the
entire situation in Enron, but was simply unwilling to take action as Enron was performing so well.
Ferrell et. al. (2010: 213) note that Lay did a brilliant job in founding and building Enron, but failed
to manage the legal and ethical risks, and avoided finding wrongdoing as well as dealing with the
individuals involved in it. Furthermore, Ferrell et. al. (2010: 213), note that even after discovering
that Enron was in difficulties, Lay continued to assert publicly that everything was going well.
60
The second question, “with a focus on the stakeholders, what impact did this culture have”, seeks to
analyse the impact Enron’s culture had on its stakeholders. Arguably, what the examination of
stakeholder salience theory in relation to Enron’s stakeholders has demonstrated, is that
organisational culture has impacted the stakeholders, the management and, thus, the entire
organisation. It is arguable whether the stakeholder salience theory, alone, can explain the extent to
which some stakeholders were more taken care of than others. As the theory argues, the attribute of
legitimacy and power are the most important ones for a sustainable growth of a company. However,
if one discusses why it is that Enron’s management intentionally prioritised stakeholders possessing
the attribute of power and urgency, one can argue that the organisational culture was a factor.
Similarly, when discussing why the stakeholders followed this culture and did not address the
wrongdoings, we arrive once again at Enron’s culture. The question, however, remains is that how
can one use this knowledge highlighting the importance of the stakeholders in relation to the
organisational culture, when trying to avoid future corporate bankruptcies?
Lastly, having analysed Enron leadership’s impact on the culture, and in turn, its impact on the
stakeholders, the third sub-question, “how did this culture promote unethical actions and what
consequences did they have?”, is aimed at analysing how the California Energy Crisis and the use
of SPEs are unethical actions, based on utilitarianism and egoism, and how the actions were
promoted by the culture. As the consequences of the actions are viewed from a utilitarian and
egoistic perspective, it is argued that, based on egoism, that the actions were ethical as they
maximised the individual interests. On the contrary, the actions were strictly unethical, from a
utilitarian point of view, as the consequences minimised, rather than maximise, the well-being of
the greatest number of people.
Based on the analysis, it can be argued that Enron’s culture had transformed into one where no
questions were asked. On top level, i.e. Lay and Skilling, the culture was very egoistic with very
profit-earning mentality. This mentality also became the norm among the employees, especially the
traders, who took extreme measures to generate profits for Enron, but more importantly to secure
tremendous bonuses for themselves. This is evident in the California crisis as well as in the SPEs.
Enron can also be thought in terms of the concept of fraud triangle. Fraud triangle consists of three
components: pressure (from external and internal environment) which motivates fraud, opportunity
(to commit fraud), and rationalisation (justification of the fraud) (Cressey 1973).
61
Enron’s immense success in its sixteen years, especially after six years of consecutively winning
Forbes’ prize, led to it being known as one of the best and most innovative corporations in the US.
It was almost a role model for other corporation, and many corporations did idolise Enron. This also
created a feeling of greatness internally at Enron. Evidently, the expectations of external and
internal actors were high and, thus, the pressure on Enron to maintain its image was extraordinary.
This pressure can be argued to have impacted the leadership the most, as they were pressured to
preserve Enron’s, but equally their own, image to the outside world. The impact of the pressure can
be argued to be reflected in Enron’s culture. The opportunity of committing fraud came in the form
of using certain accounting principles, to predict and book future profits, and the SPEs.
As far as rationalisation is concerned, it is important to note how Lay, Skilling, and Fastow
rationalised committing fraud. Lay, as discussed earlier, was allegedly unaware of all the fraud
committed at Enron. He placed the majority of the blame on other Enron employees, especially
Skilling and Fastow. This can be considered rationalisation by Skilling. Similar to Lay, Skilling
also rationalised his part in committing fraud by blaming others. McLean and Elkind (2003: 414),
note that Skilling used to tell people “Show me one f[**]king transaction that the accountants and
the attorneys didn’t sign off on.”. Fastow also rationalised his role by blaming others at Enron,
especially the board of directors as they approved the use of SPEs.
62
6. Conclusion
The following chapter seeks to summarise the arguments presented throughout this paper in order to
answer the research question: “With a focus on the role of its leadership, how can Enron’s
organisational culture explain its collapse?”
The issue which this paper has attempted to examine is how the culture of Enron contributed to its
collapse. Enron’s organisational culture was vastly affected by Skilling and his assumption that “the
only thing that motivates people is money”. Based on this, Skilling successfully created an
extremely competitive, arrogant, risk-taking, decentralised, and egoistic culture. This culture was
shaped and maintained by the leaders, especially Skilling, and their values and beliefs, as they were
closely related with the culture. Even though it may be considered contradictory, Enron’s culture
can be described as somewhat loyal, not necessarily in its purest form, but rather because the
consequences of being disloyal were severe. Also, the culture had aspects of almost all four types of
cultures, which is unusual according to the CVF. This indicates towards the diversity and
complexity of Enron’s culture
Lack of communication as well as lack of a healthy relationship, based on trust, among the
employees and the leadership was yet another product of Enron’s organisational culture, which
subsequently led to unstable organisation followed by scandals such as the California Crisis and the
misuse of SPEs. In trying to meet Skilling’s principle of short-term wealth formation, the
employees, especially the traders, began to disregard not only Enron’s ethical principles, but also
societal ethics. There was no consideration whatsoever towards the stakeholders, apart from the
most important ones and none of the employees considered their actions. This was especially the
case with the California Crisis, where Enron extorted an entire state and its exemplary people.
However, perhaps the most striking aspect of Enron's culture was the way Enron ignored all
criticism from the stakeholders, regarding the conducts of the organisation. The basic underlying
assumptions had grown to be so strong that the employees, board members, auditors and other
stakeholders were convinced that everything was in order and Enron was on the right path; a
prosperous path which would benefit everyone involved.
Consequently, it can be argued that in such a culture, collapse was inevitable. Thus, it was due to its
culture that Enron collapsed. As the culture derived from and was shaped by the values and beliefs
of the leadership, it can be argued that the leadership is, to a very large extent, also responsible for
Enron’s collapse. It can be concluded that if the key people in an organisation, such as the CEO
63
etc., are corrupt then, ultimately, the culture of an organisation will also form into one which
support and adhere corrupt actions.
Based on the case study of Enron’s organisational culture, it can be said that the culture of an
organisation is of utmost importance, not just to steer the organisation on an ethical and legal path
but also to ensure that its operations and performance are in-line with its code of conduct. The
leadership needs to pay attention to what values and beliefs they impose overall on the organisation,
as they ultimately form the basic underlying assumptions of an organisation.
Generally, there are a few lessons which can be learned from Enron: (1) the board of directors and
the auditing committee should be as objective as possible when dealing with the various conducts of
an organisation, (2) the leadership should have an overview of their employees’ actions, and
unethical actions should be punished, and (3) the stakeholders of a company, whether it is the
employees, shareholders, or the society in general, should be more criticising to a company’s
actions, especially its dubious actions. However, it is noteworthy that as these lessons have derived
from a single case-study, they are not necessarily applicable to every organisation, i.e. they are not
entirely suitable for making vast generalisations.
64
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