Enron Ethics (Or: Culture Ronald R.

Sims
Matters More than Codes) Johannes Brinkmann

ABSTRACT. This paper describes and discusses the Enron Ethics (an ironic expression which is
Enron Corporation debacle. The paper presents the used now and then, see e.g. the headings of
business ethics background and leadership mechanisms Tracinski, 2002 or Berenbeim in Executive action
affecting Enron’s collapse and eventual bankruptcy. no. 15, Feb. 2002) reads like the new catchword
Through a systematic analysis of the organizational for the ultimate contradiction between words and
culture at Enron (following Schein’s frame of refer-
deeds, between a deceiving glossy facade and a
ence) the paper demonstrates how the company’s
culture had profound effects on the ethics of its
rotten structure behind, like a definite good-bye
employees. to naive business ethics. Enron ethics means (still
ironically) that business ethics is a question of
organizational “deep” culture rather than of
Now, when most people hear the word “Enron” cultural artifacts like ethics codes, ethics officers
they think of corruption on a colossal scale – a and the like. With this as a backdrop, the paper
company where a handful of highly paid execu- will describe and discuss how executives at Enron
tives were able to pocket millions of dollars while in practice created an organizational culture that
carelessly eroding the life-savings of thousands put the bottom line ahead of ethical behavior and
of unwitting employees. Not long ago, the same doing what’s right. More specifically, the paper
company had been heralded as a paragon of cor- first provides a brief background on Enron and
porate responsibility and ethics – successful, its rise and fall. Next, the paper systematically
driven, focused, philanthropic and environmen- uses Schein’s (1985) five primary mechanisms
tally responsible. Enron appeared to represent available to leaders to create and reinforce aspects
the best a 21st century organization had to of culture (i.e., attention focusing, reaction to
offer, economically and ethically. The questions crises, role modeling, rewards allocation and
become, how did Enron lose both its econom- criteria for hiring and firing) to analyze the
ical and ethical status? Is it because of its very size company’s culture and leadership that con-
and effects? Is it the direct harm to primary and tributed to it’s ethical demise and filing for bank-
secondary stakeholders? Or, is it the worldwide ruptcy. It is our contention, that with such a
media coverage that the Enron demise has point of departure one will be better prepared
drawn? These questions make the Enron case for a necessary discussion in our field of how to
interesting to us as business ethicists. prevent an “instrumentalization” of ethics and
At first sight, Enron looks like a mega-size CSR for mere facade purposes (this theme
illustration of the bad apple and/or the bad barrel deserves and requires a paper on its own, at least).
disease and, hence, looks like good marketing for
the business ethics business (which almost has a
vested interest in such scandals and other bad The culture history of Enron
examples). The problem is, however, that Enron
looked like an excellent corporate citizen, with The Enron case is not least a good illustration
all the corporate social responsibility (CSR) and of continuously updated case presentation and
business ethics tools and status symbols in place. case discussion in the Internet age (which could

Journal of Business Ethics 45: 243–256, 2003.

© 2003 Kluwer Academic Publishers. Printed in the Netherlands.
244 Ronald R. Sims and Johannes Brinkmann

deserve a paper on its own, too). Business test limits. Over time, Enron’s contracts became
school researchers, teachers and students alike can increasingly diverse and significantly more
easily keep themselves busy for days just with complex. As Enron’s products and services
sorting, structuring, checking and summarizing evolved, so did the company’s culture.
all the ingredients and pieces of the Enron story In this newly deregulated and innovative
found on the Internet. One possible way of forum, Enron embraced a culture that rewarded
organizing and limiting such a task is departing “cleverness”. Deregulation opened the industry
from or even staying with the websites of up to experimentation and the culture at Enron
traditional mass media such as CNN (see e.g. was one that expected employees to explore this
cnn.com/SPECIALS/2002/enron/), the Wall new playing field to the utmost. Pushing the
Street Journal, Financial Times, or of the main stake- limits was considered a survival skill.
holders such as the victims’ enrongate.com or Enron’s former President and Chief Executive
the remainders’ enron.com. Most tempting for Officer (CEO) Jeffry Skilling actively cultivated
business ethicists is of course a closer look a culture that would push limits – “Do it right,
at the websites of the business ethics business (see do it now and do it better” was his motto. He
e.g. http://www.msnbc.com/modules/enron/, encouraged employees to be independent, inno-
businessethics.ca/enron/, caseplace.org, enron- vative and aggressive. The Harvard Business
guide.com, all with lots of further links) and as Review Case Study: Enron’s Transformation
the up-dated and earliest of all the academic (Bartlett and Glinska, 2001) contains employee
articles and papers we can expect in the future quotations such as “. . . you were expected to
Tonge et al., 2003; Petrick and Quinn, 2002; perform to a standard that was continually being
Cohan, 2002). In spite of (or because of ) such raised . . .”, “the only thing that mattered was
an abundance of available information1 we adding value”, or “. . . it was all about an atmos-
choose to tell the story once more, as a culture phere of deliberately breaking the rules . . .”
history in our own prose, as a background for the (Bartlett and Glinska, 2001). A culture that
following illustration of how Schein’s organiza- admires innovation and unchecked ambition and
tion culture approach can lead to a better under- publicly punishes poor performance can produce
standing of the Enron case. tremendous returns in the short run. However,
in the long run, achieving additional value by
constantly “upping the ante” becomes harder and
Background harder. Employees are forced to stretch the rules
further and further until the limits of ethical
A company with humble beginnings, Enron conduct are easily overlooked in the pursuit of
began as a merger of two Houston pipeline the next big success (Josephson, 1999; cf. also
companies in 1985. Although Enron faced a similarities found in the culture at Salomon
number of financially difficult years, the company Brothers in the early 1990s, see Sims, 2000; Sims
managed to survive. In 1988, the deregulation and Brinkmann, 2002).
of the electrical power markets took effect, and
the company redefined its business from “energy
delivery” to “energy broker” and Enron quickly A lot of smoke and mirrors
changed from a surviving company to a thriving
one. Deregulation allowed Enron to become a Enron’s spectacular success, and the positive
“matchmaker” in the power industry, bringing scrutiny the company was receiving from the
buyers and sellers together. Enron profited from business press and the financial analysts, only
the exchanges, generating revenue from the dif- added fuel to the company’s competitive culture.
ferences between the buying and selling prices. The business community rewarded Enron for its
Deregulation allowed Enron to be creative – for cleverness (and even its ethicalness) and Enron’s
the first time, a company that had been required executives felt driven by this reputation to sustain
to “operate within the lines” could innovate and the explosive growth of the late 1990s, even
 Enron Ethics (Or: Culture Matters More than Codes) 245

when they logically knew that it was not possible. Keeping debt off the balance sheet
A negative earnings outlook would have been a
red flag to investors, indicating Enron was not The SPVs not only allowed Enron to boost
as successful as it appeared. If investors’ concerns earnings, but the SPV’s also allowed the company
drove down the stock price due to excessive to keep debt off its balance sheet. A highly lever-
selling, credit agencies would be forced to down- aged balance sheet would jeopardize its credit
grade Enron’s credit rating. Trading partners rating as its debt-equity ratio would rise and
would lose faith in the company, trade elsewhere, increase its cost of capital. To avoid this, Enron
and Enron’s ability to generate quality earnings parked some of its debt on the balance sheet of
and cash flows would suffer. In order to avoid its SPVs and kept it hidden from analysts and
such a scenario at all costs, Enron entered into a investors. When the extent of its debt burden
deceiving web of partnerships and employed came to light, Enron’s credit rating fell and
increasingly questionable accounting methods lenders demanded immediate payment in the
to maintain its investment-grade status. Enron sum of hundreds of millions of dollars in debt.
executives probably felt that they were doing the This can be read as another example of ethical
right thing for their organization. erosion. Enron’s decision makers saw the shuf-
fling of debt rather as a timing issue and not as
an ethical one. Clever people would eventually
Partnerships make everything right, because the deals would
all be successful in the long run. Moving debt
Partnerships can be an easy and efficient way to was as easy as pre-dating a check, and would
raise money. However, in an effort to continue harm no one, and therefore was not an ethical
to push the value envelope Enron took partner- issue.
ships to a new level by creating “special purpose
vehicles” (SPVs), pseudo-partnerships that
allowed the company to sell assets and “create” Partnerships at “arm’s length”
earnings that artificially enhanced its bottom line.
Enron exaggerated earnings by recognizing Each questionable partnership decision carried
gains on the sale of assets to SPVs. In some cases, additional cleverness burdens. In order to keep
the company booked revenues prior to a part- information from the public, Enron had to guar-
nership generating significant revenues. Project antee that the Securities Exchange Commission
Braveheart, a partnership Enron developed with (SEC) did not consider its partnerships as Enron
Blockbuster was intended to provide movies to subsidiaries. If the partnerships had been classi-
homes directly over phone lines. Just months fied as such, in-depth disclosure and stricter
after the partnership was formed, Enron recorded accounting methods would have been required.
$110.9 million in profits prematurely, these In order to prevent potential SEC skepticism,
profits were never realized as the partnership Enron enlisted help from its outside accountants
failed after only a 1,000-home pilot. and its attorneys (Arthur Andersen, and Vinson
In a success culture like Enron’s such behavior & Elkins). The accountants and attorneys all
represented a way of least resistance. Enron referenced the Financial Accounting Standards
employees with a self-image of being the best and Board (FASB) rule that holds that partnerships
the brightest and being extremely clever do not are not considered subsidiaries as long as 3%
make business deals that fail. Therefore booking of their equity comes from outside investors
earnings before they are realized were rather and they are managed independently of their
“early” than wrong. The culture at Enron was sponsors. This is commonly known as being at
quickly eroding the ethical boundaries of its “arm’s length”. Enron crafted relationships that
employees. looked (legally) like partnerships, although they
were (in practice) subsidiaries. A closer look at
the partnerships would have revealed that the
246 Ronald R. Sims and Johannes Brinkmann

outside investments came from companies (like losing. Promises began to come due and Enron
SE Thunderbird LLC) that were owned by did not have the ability to follow through on its
Enron. financial obligations.2

Conflicts of interest The financial implosion

Although the partnerships were classified as part- The partnerships that once boosted earnings and
nerships according to the FASB rules, Enron offi- allowed Enron to prosper became the misplaced
cials obviously had close ties with them. This card that caused the Enron house to collapse. The
raised the question about conflicts of interest. stability of Enron’s house of cards had been
Andrew Fastow, Enron’s former Chief Financial eroded by the very culture that had allowed it
Officer (CFO), ran or was partial owner of to be built. Enron was forced to renounce over
two of the most important partnerships: LJM $390 million in earnings from dealings with
Cayman LP and LJM2 Co-Investment LP. Chewco Investments and JEDI, another partner-
Michael Kopper, a former managing director at ship. The company was also forced to restate
Enron, managed a third partnership, Chewco earnings back to 1997, and the restated earnings
Investments LP. totaled only $586 million, a mere 20% of the ini-
The culture of cleverness at Enron started as tially reported figures. The very results Enron had
a pursuit of excellence that devolved into the sought to prevent – falling stock prices, lack of
appearance of excellence as executives worked to consumer and financial market confidence –
develop clever ways of preserving Enron’s infal- came about as a direct result of decisions that had
lible facade of success. Although Enron main- been driven by Enron’s culture.
tained that top officials in the company reviewed The Enron case of ethical failure consists of
the dealings with potential conflicts of interest, more than a series of questionable business
Enron later claimed that Fastow earned over $30 dealings. When strong company leadership would
million from Enron with his companies. At some have been needed the most, Enron’s leader left
point in the bending of ethical guidelines for the company. In August of 2001, Jeffery Skilling
the good of the company, Enron’s executives resigned as President and CEO of Enron and sold
also began to bend the rules for personal gain. shares of his company stock totaling $66 million
Once a culture’s ethical boundaries are breached dollars. Only two months later, Enron restated
thresholds of more extreme ethical compromises earnings, stock prices dropped and the company
become lower. froze shares in an attempt to help stabilize the
company. Enron employees, who had been
encouraged to invest heavily in the company,
The self-reinforcing decline of Enron found themselves unable to remove and salvage
their investments. The company culture of indi-
In the long run, Enron’s executives could not vidualism, innovation, and aggressive cleverness
“rob Peter to pay Paul”. Even if the Enron left Enron without compassionate, responsible
culture permitted acts of insignificant rule leadership. Enron’s Board of Directors was slow
bending, it was the sum of incremental ethical to step in to fill the void and individual Enron
transgressions that produced the business cata- employees for the first time realized all of the
strophe. Although Enron’s executives had ramifications of a culture with leaders that
believed that everything would work successfully eschew the boundaries of ethical behavior.
in the long run, the questionable partnerships left What did the Enron executives do to mold a
the company extremely vulnerable when finan- corporate culture that resulted in unethical
cial troubles came to light. As partnerships began behavior and the collapse of the company? The
to fail with increasing regularity, Enron was liable remainder of this paper drafts some answers to
for millions of dollars it had not anticipated this question.
 Enron Ethics (Or: Culture Matters More than Codes) 247

Leadership mechanisms and money. You buy loyalty with money” (Zellner,
organizational culture at Enron 2002). Enron executives’ attention was clearly
focused on profits, power, greed and influence.
If corporate leaders encourage rule-breaking and They wanted their employees to focus on today’s
foster an intimidating, aggressive environment, bottom line. Skilling communicated his priori-
it is not surprising that the ethical boundaries at ties to his employees overtly, both in word and
Enron eroded away to nothing. Schein (1985) has deed. Consistently clear signals told employees
focused on leadership as the critical component what was important to leadership – “Profits at all
of the organization’s culture because leaders can costs” (Tracinski, 2002). Or with another quote
create, reinforce, or change the organization’s from a former Enron employee: “. . . there were
culture. This applies not the least to an organi- no rules for people, even in our personal lives.
zation’s ethical climate (Sims, 2000; Trevino Everything was about the company and every-
et al., 2000; Sims and Brinkmann, 2002). thing was supposed to be on the edge – sex,
According to Schein (1985) there are five money, all of it . . .” (Broughton, 2002). In her
primary mechanisms that a leader can use to testimony before the House Subcommittee,
influence an organization’s culture: attention, Sherron Watkins described Enron as a “. . . very
reaction to crises, role modeling, allocation of arrogant place, with a feeling of invincibility”.
rewards, and criteria for selection and dismissal. Still another Enron employee noted about the
Schein’s assumption is that these five criteria rein- company’s environment that “. . . it was all about
force and encourage behavioral and cultural creating an atmosphere of deliberately breaking
norms within an organization. Our paper can be the rules. For example, our official vacation
read as an illustration of Schein’s assumptions. policy was that you could take as much as you
The Enron executives used the five mechanisms wanted whenever you wanted as long as you
to reinforce a culture that was morally flexible delivered your results. It drove the human
opening the door to ethics degeneration, lying, resource department crazy” (Bartlett and Glinska,
cheating, and stealing. 2001).
Another example of today’s bottom line gain
mentality is Andrew Fastow’s, former Enron
Attention CFO, network of questionable partnerships.
These partnerships provided profit for Fastow
The first of the mechanisms mentioned by personally, as well as for some of his more favored
Schein (1985) is attention. The issues that capture employees, who were aware of his actions.
the attention of the leader (i.e. what is criticized, Fastow demanded that Enron permit him to
praised or asked about) will also capture the invest in and to personally profit from the part-
attention of the greater organization and will nerships (some of his earnings were passed to
become the focus of the employees. If the associates who aided him). Such actions sent a
leaders of the organization focus on the bottom clear message that management’s attention was
line, employees believe that financial success is focused on the bottom line for the company as
the leading value to consider. D. M. Wolfe, well as personal gain, regardless of the means to
author of “Executive Integrity” even suggests get there. When it came to Fastow’s special
that a focus on profit, “promotes an unrealistic interest dealings the Board of Directors sus-
belief that everything boils down to a monetary pended the company’s Code of Ethics at least
game” (1988). In such a context, rules or twice. This made Fastow a wealthy man at the
morality are merely obstacles, impediments along expense of Enron (Landers, 2002).
the way to bottom-line financial success (Sims, As Stern (1992) has suggested, if the organi-
2000). zation’s leaders seem to care only about the
One former executive of Enron has described short-term bottom line, employees quickly get
Jeffrey Skilling as a leader driven by the almighty the message too. How else could employees
dollar. “. . . Skilling would say all that matters is read the Enron culture than being focused on
248 Ronald R. Sims and Johannes Brinkmann

short-term when their CEO (Ken Lay) both evidenced by his mysterious resignation in
blessed the relaxation of conflict-of-interest rules August 2001 and giving only the “personal
designed to protect Enron from the very self- reasons” explanation for his sudden departure
dealings that brought the company down and (and he still sold significant amounts of company
participated in board meetings allowing the stock at a premium). Both Kenneth Lay and
creation of the off-balance sheet partnerships that Sherron Watkins also sold stock before prices
were part of those transactions. By late summer began to dramatically plummet (Kenneth Lay
2001 he was reassuring investors and employees claiming that he had some personal debts to pay
that all was well (when he already had been off, Sherron Watkins referring to the September
informed that the company had problems with 11th terrorist attacks. Watkins also sold stock at
some investment vehicles that could cost it the same time when she was making allegations
hundreds of millions of dollars, see Gruley and of deceptive accounting practices).
Smith, 2002). Enron began systematically firing those it
could lay blame on before it declared bankruptcy
(Brown and Sender, 2002). A self-serving exon-
Reaction to crises eration committee was employed to explain (or
excuse?) the current situation (Eichenwald,
The second leadership method mentioned by 2002). After Skilling resigned from his post,
Schein (1985) refers to a leader’s reaction to a Kenneth Lay returned as CEO, promising that
crisis situation. Schein asserts, that a crisis tests there were no “accounting issues, trading issues,
what the leader values and brings these values or reserve issues” at Enron (McClean, 2001).
to the surface. With each impending crisis, Congressional testimony, news accounts and
leaders have an opportunity to communicate federal investigations have told us otherwise.
throughout the organization what the company’s Throughout October 2001, Lay insisted that
values are. Enron was facing a crisis of how to Enron had access to cash and that the company
sustain a phenomenal growth rate. Leaders was “performing very well,” while he failed to
reacted by defending a culture that valued prof- disclose that Enron had written down share-
itability, even when it was at the expense of holders’ equity by $1.2 billion, or that Moody’s
everything else. The off-balance sheet partner- was considering downgrading Enron’s debt
ships were tremendously risky. However, since (“Explaining the Enron Bankruptcy”, 2002).
normal growth of the stock price would have Company insiders also referred to Loretta Lynch
fallen short of expectations anyway, the only as “an idiot” (the Yale-educated litigator who
thing to do was to try to meet the unrealistic was among the first to question Enron’s prac-
target profitability expectations. In such a case, tices), Bethany McLean, the Fortune Magazine
an accident was waiting to happen. journalist who first broke the story, was called
Once the Enron situation came to light, the “a looker who doesn’t know anything” (Dowd,
reaction from the Enron executives was telling. 2002).
The executives were busy shifting the blame and Another crisis consists in having to admit
pointing fingers. Jeffery Skilling even went as far accounting irregularities. At first, the leaders of
as telling an incredulous Congress that despite his the company tried to deny there was a problem.
Harvard Business School degree and business They next tried to cover up any evidence of a
experience he neither knew of, nor would problem or any wrongdoing. They even tried to
understand the intricacies of the Enron seize computers of anyone they thought was
accounting deals. (On the other hand, Skilling trying to expose them as well as to destroy many
also was quoted on CNN saying “. . . if he knew files thought to be guilt-inducing (Daily Press,
then what he knows now – he STILL would not 2002). It transitioned into a blame game as many
do anything differently.”) Even before the issues executives tried blaming each other, saying they
came to light it appears that Skilling was willing didn’t know what was going on, or it was
to abandon the company to save his own skin as someone else’s responsibility to know about the
 Enron Ethics (Or: Culture Matters More than Codes) 249

problems and do something about it. Both neurial – that is, to take more initiative and be
Kenneth Lay and his wife proclaimed his inno- more innovative in their jobs. The Scientific
cence. Lay claimed to have been unaware of the Foundation reports a study that showed that
sweetheart deals, which were entirely the brain- managers who want to change the organization’s
child of Skilling and Fastow. Watkins also blamed culture to a more entrepreneurial one must “walk
them for the debacle, while shifting any blame the talk”. In other words, they must demonstrate
from herself. the entrepreneurial behaviors themselves (Pearce
“I take the Fifth” (U.S. Congressional et al., 1997). This is the case with any cultural
Hearing, 2002 – this was the response Kenneth value. Employees observe the behavior of leaders
Lay gave to the Senate Commerce Committee to find out what is valued in the organization.
when asked to explain Enron’s failure. Although Perhaps, this was the most significant short-
all but one of Enron’s officers (curiously Skilling) coming of Enron executives.
invoked the 5th Amendment right to not self- According to the values statement in Enron’s
incriminate, the story has played out much like Code of Ethics and its annual report, the
that of the Salomon Brothers and John Gutfreund company maintains strong commitments to com-
fiasco in the early 1990s. Document shredding munication, respect, integrity, and excellence.
and lies, both overt and those of omission, have However, there is little evidence that supports
become the preferred strategy for Enron’s man- management modeling of these values. For
agement (Brown and Sender, 2002). These bold instance, while the first pillar of the values state-
acts from Enron leadership show a poor reaction ment addresses an obligation to communicate,
to crisis. Sherron Watkins claims (quoted from the
From anonymous whistleblowing to bank- Hearing transcripts):
ruptcy to document shredding, to suicide (Cliff
Baxter) to hiding behind the 5th Amendment, I continued to ask questions and seek answers,
the leaders at Enron have run the gamut of primarily from former coworkers in the Global
extremes in their reaction to the company’s crisis. Finance Group or in the business units that had
hedged assets with Raptor. I never heard reassuring
Willet and Always (2002) noted that “the mantra
explanations. I was not comfortable confronting
at Enron seems to be that ethical wrongdoing is either Mr. Skilling or Mr. Fastow with my
to be hidden at any cost; deny, play the dupe, concerns. To do so, I believe, would have been
claim ignorance (“the ostrich instruction”) lie, a job-terminating move (U.S. Congressional
quit.” It appears that the truth and its conse- Hearings, 2002).
quences have never been a part of the Enron
culture. Enron’s leaders’ primary message about their
values was sent through their own actions. They
broke the law as they concentrated on financial
Role modeling (how leaders behave) measures and used of the creative partnerships
described earlier in this paper. For example,
Schein’s third mechanism is the example leaders Kenneth Lay announced to analysts on October
set for the acceptability of unethical behavior 16, 2001 that Enron had eliminated $1.2 billion
within an organization. Actions speak louder in shareholder equity by terminating a partner-
than words – therefore role-modeling behavior is ship created by former CFO Andrew Fastow.
a very powerful tool that leaders have to develop This arrangement allowed Enron to buy and sell
and influence corporate culture. Through role assets without carrying the debt on its books, i.e.
modeling, teaching, and coaching, leaders rein- keeping Enron’s credit clean and the stock price
force the values that support the organizational high. Such actions clearly show a self-serving
culture. Employees often emulate leaders’ attitude of Enron leadership. The executives not
behavior and look to the leaders for cues to only condoned such unethical behavior, they ini-
appropriate behavior. Many companies are tiated it and were rewarded for it. The partner-
encouraging employees to be more entrepre- ships were used to deceive investors about the
250 Ronald R. Sims and Johannes Brinkmann

enormous debt Enron was incurring. It also sent what Schein calls the “allocation of rewards”-
a message to employees that full and complete mechanism. To ensure that values are accepted,
disclosure is not a requirement, or even recom- leaders should reward behavior that is consistent
mended. If the company achieved short-term with the values (and actual rewards count obvi-
benefits by hiding information, it was acceptable. ously more than promised rewards, cf. Sims and
Enron’s leaders also ignored, then denied Brinkmann, 2002).
serious problems with their business transactions The reward system created by a leader indi-
and were more concerned about their personal cates what is prized and expected in the organi-
financial rewards than those of the company. For zation. This view is in line with a basic
example, when the company’s stock price began management doctrine. When an instance of
to drop as the problems were becoming public, ethical achievement occurs – for instance, when
the company was transitioning from one invest- someone acts with integrity and honor – the
ment program to another. While the employees organization’s leaders must reward it. Such an
were unable to sell their stock, the executives effort sends as clear a message to the rest of the
were quickly selling off many of their shares. organization as when an organization rewards an
Another example is the executives’ lack of employee who acts unethically (see e.g. Larimer,
integrity in communicating to the employees and 1997). Enron’s reward system established a “win-
investors. They maintained that the company was at-all-costs” focus. The company’s leadership
financially stable and that many of their emerging promoted and retained only those employees that
problems really were not too serious, even produced consistently, with little regard to ethics.
though they knew the truth and were making Skilling singled out one of his vice presidents,
financial decisions to protect their personal Louise Kitchen, for her results-oriented approach
gains. to Enron’s online business. Kitchen had started
In retrospect, the leadership of Enron almost the company’s Internet-based trading business
certainly dictated the company’s outcome even though Skilling repeatedly turned down her
through their own actions by providing perfect requests to begin such a program. Kitchen
conditions for unethical behavior. Michael ignored the former CEO’s decision and instead
Josephson, President of the Josephson Institute of used already-allocated funds to pull the new
Ethics, aptly described these conditions as they network together. Or, as a former Enron vice
relate to the character of leadership: “People may president who attended the meeting described
produce spectacular results for a while, but it is it best. “The moral of this story is break the
inevitable that techniques depending so heavily rules, you can cheat, you can lie, but as long as
on fear as a motivator generate survival strate- you make money, it’s all right” (quoted after
gies that include cheating, distortion, and an Schwartz, 2002).
internal competitive ethos characterized by a The company’s compensation structure con-
look-out-for-number-one attitude. . . . Just as tributed to an unethical work culture, too – by
the destiny of individuals is determined by promoting self-interest above any other interest.
personal character, the destiny of an organization As a consequence, the team approach once used
is determined by the character of its leadership. by Enron associates deteriorated. Performance
And when individuals are derailed because of a reviews were public events and poor performance
lack of character, the organization will also be was ridiculed (or employees were fired through
harmed” (Josephson, 1999). a “rank and yank” process). The strongest per-
forming units even went as far as to “ignore”
company policy – granting unlimited vacation
Allocation of rewards time as noted earlier as long as the work got
done, ignoring Human Resources’ complaints
The behavior of people rewarded with pay (Bartlett and Glinska, 2001).
increases or promotions signals to others what is Extremely high bonuses were doled out to
necessary to succeed in an organization – this is executives who behaved in desirable ways, e.g. in
 Enron Ethics (Or: Culture Matters More than Codes) 251

the form of stock options) which in turn incited the best and smartest people, those who would
executives to keep the stock price up at any cost thrive in a competitive environment. Skilling
(Lardner, 2002). Annual bonuses were as high as shared Lay’s philosophy. Skilling hired only Ivy-
$1 million for traders, and for executives they league graduates with a hunger for money that
were even higher). Enron developed a reputation matched his. He hired people who considered
for both internal and external ruthlessness where themselves the best and the brightest and were
employees attempted to crush any competition out to forward their own causes. Stanford and
and was considered extremely aggressive for a Harvard graduates, who would have otherwise
non-investment bank (McClean et al., 2001). worked on Wall Street, these people were paid
Additionally, the executives at Enron played well to work in Texas and to build the Enron
favorites, inviting top performers to spend culture. Their reward for giving up the allure of
weekend vacations with the executive staff. The Silicon Valley and Wall Street was a high salary
best workers (determined through day-to-day and a large bonus opportunity.
bottom line results) received staggering incentives Skilling perpetuated a focus on short-term
and exorbitant bonuses. One example of this was transactional endeavors from the very beginning
Car Day. On this day, an array of lavish sports by hiring employees that embodied the beliefs
cars arrived for the most successful employees that he was trying to instill: aggressiveness, greed,
(Broughton, 2002). a will to win at all costs, and an appreciation
Retention bonuses that were paid shortly for circumventing the rules. This was the same
before the company declared bankruptcy to culture of greed that brought turmoil to Salomon
about 500 executives ranged in value from $1,000 Brothers on Wall Street in the early 1990s.
to $5 million (possibly as a reward for help with Divorce rates among senior executives were sky-
setting up the problematic financial partnerships rocketing as well. Instant gratification, both per-
that led to the company’s downfall). Overall, sonally and professionally, was part of the Enron
Enron’s reward system rewarded individuals who culture and Skilling did everything he could to
embraced Enron’s aggressive, individualistic surround himself with individuals who had
culture and were based on short-term profits and similar values and assumptions and fitted into the
financial measures. Enron culture.
The way a company fires an employee and the
rationale behind the firing also communicates the
Criteria of selection and dismissal (how leaders hire culture. Some companies deal with poor per-
and fire employees) formers by trying to find them a place within
the organization where they can perform better
Schein’s (1985) last mechanism by which a leader and make a contribution. Other companies
shapes a corporate culture, describes how a seem to operate under the philosophy that those
leader’s decisions about whom to recruit or who cannot perform are out quickly (Sims and
dismiss signals a leader’s values to all of his Brinkmann, 2002).
employees. The selection of newcomers to an Enron carried out an annual “rank and yank”
organization is a powerful way of how a leader policy where the bottom fifteen to twenty
reinforces culture. Leaders often unconsciously percent of producers were let go or fired after a
look for individuals who are similar to current formal evaluation process each year. Associates
organizational members in terms of values and graded their peers, which caused a great amount
assumptions. Some companies hire individuals on of distrust and paranoia among employees.
the recommendation of a current employee. This Enron’s employee reviews added to the compe-
tends to perpetuate the culture because the tition by reviewing job performance in a public
new employees typically hold similar values. forum and sending the bottom 5% to the rede-
Promotion-from-within policies also serve to ployment office – dubbed the “office of shame”
reinforce organizational culture. (Frey and Rosin, 2002). What better way to
Ken Lay placed an immediate focus on hiring develop a distrustful work environment than to
252 Ronald R. Sims and Johannes Brinkmann

pit employees against one another and as Larry Final comments and suggestions for
Bossidy, former CEO of Allied Signal recently future work
noted “forced ranking promotes bad employee
morale” (2002), a win-at-all costs mentality, and The story of Enron sounds smart and stupid at
a willingness to cross the ethical line (Wolfe, the same time. Deeply defective leadership from
1988; Sims and Brinkman, 2002). Lay and Skilling played a significant role in
The occurrence and handling of internal creating the company’s culture that led to it’s
whistle-blowing also tells a lot about a corpo- undoing, and we may never know whether it was
rate culture. At Enron, employees who tried to hubris, greed, psychological shock or just plain
blow the whistle were punished, e.g. by career stupidity that led them to behave in the way they
setbacks and hostility (cf. e.g. not least the enron- did (Eavis, 2001). “Consequences of unethical or
gate website). The most well-known whistle- illegal actions are not usually realized until much
blower, Sherron Watkins, recounted how her later than when the act is committed” (Sims,
fears about being fired for speaking out led her 2000).
to reach out to Ken Lay through anonymous Enron’s house of cards collapsed as a result of
warnings. She even publicly stated that Andrew interacting decision processes. The culture at
Fastow tried to have her fired once he found out Enron eroded little by little, by the trespassing
that she was the author of the anonymous memo of ethical boundaries, allowing more and more
to Lay (Hamburger, 2002). Watkins reported questionable behavior to slip through the cracks.
that her computer was confiscated and she was This deterioration did not go entirely unnoticed.
moved to another office after she submitted her Individual employees at Enron, auditors at
letter to Kenneth Lay. Another employee, Jeff Anderson and even some analysts who watch the
McMahon, also spoke up against the conflicts of financial markets, noticed aspects about the
interest seen in the off book partnerships. As a Enron situation that did not seem right, long
reward for his actions, he was reassigned to a new before the public became aware of Enron’s trans-
job. gressions. There were whistle-blowers but the
On the other hand, those who closed their Enron leaders did not listen.
eyes to the wrong doings were rewarded. Or with What existed in Enron’s culture that kept indi-
the words of a former Enron employee: “It was vidual employees from exposing the executive
very clear what the measures were and how you wrongdoers? And what about the Enron way
got promoted at Enron. That absolutely drives permitted the executives to behave the way that
behavior . . . getting the deal was paramount at they did? Enron’s culture is a good example of
Enron” (Hansell, 2002). A Houston headhunter groupthink (cf. eg. Janis, 1989; Moorehead,
described the freedom given by Skilling when he 1986) where individuals feel extreme pressure not
was Enron’s CEO to loyal employees metaphor- to express any real strong arguments against any
ically: “Once you gained Jeff ’s trust, the leash co-workers’ actions. Although very individual-
became really long” (Zellner, 2002). istic, the culture at Enron was at the same time
The selection and rewards system was consis- conformist, or quoting Glenn Dickson, a former
tent with the culture at Enron. It promoted Enron Risk Manager: “The pressure was – you
greed, selfishness, and jealousy within the just didn’t have a choice but to approve the deals
organization. Enron’s executives selected those once everybody had their heart set on that deal
employees who shared their aggressive, win-at- closing” (ABC News, 2002). Employees were
all-costs mentality. Their short-term view may loyal in an ambiguous sense of the term, i.e.,
have prevented them from seeing what the long- they wanted to be seen as part of the star team
term costs of this kind of personality could be and to partake in the benefits that that honor
on the organization as a whole. entailed. Some former Enron employees com-
mented that: “loyalty required a sort of group-
think. You had to ‘keep drinking the Enron
Water’ . . .” (Stephens and Behr, 2002). John
 Enron Ethics (Or: Culture Matters More than Codes) 253

Alarial, a former midlevel manager at Enron way for Cooper to send signals about desirable
noted that: “Enron’s aggressive business tactics and undesirable conduct. That means rewarding
were embraced by the rank and file, . . . even if those who accomplish their goals by behaving
(authors addition) . . . many suspected it was a in ways that are consistent with stated values and
house of cards” (ABC News, 2002). Employees it must be assumed that a lack of commitment
were focused on the bottom line and “promoted to ethical principles will ensure that employees
short term solutions that were immediately finan- will not be promoted.
cially sound despite the fact that they would Criteria for Selection and Dismissal – Cooper
cause problems for the organization as a whole must bring employees into Enron who are com-
. . . rules of ethical conduct were merely barriers mitted to ethical principles and usher out all old
to success” (Sims, 1992). employees connected to ethical misconduct. The
Enron’s top executives set the tone for this company must have clear policies on the criteria
culture. Personal ambition and greed seemed to for selection and dismissal that employees under-
overshadow much of their corporate and indi- stand.
vidual lives. They strove to maximize their indi- In other words, Enron’s new CEO, Stephen
vidual wealth by initiating and participating in Cooper, must take a proactive stance to promote
scandalous behaviors. Enron’s culture created an an ethical climate and must be the Chief
atmosphere ripe for the unethical and illegal Ethics Officer of the organization (Trevino et al.,
behavior that occurred. 2000), creating a strong ethics message that
Two of the most important lessons to learn gets employees’ attention and influences their
from the Enron culture history is that bad top thoughts and behaviors. Executive commitment
management morality can be a sufficient condi- to ethical behavior is an important way of sus-
tion for creating a self-destructive ethical climate taining an ethical organizational culture (Weaver
and that a well-filled CSR and business ethics et al., 1999). Cooper must find ways to focus the
toolbox can neither stop nor compensate for such organization’s attention on ethics and values and
processes.3 to infuse the organization with principles that
Enron’s new CEO, turnaround-specialist will guide the actions of all employees. New (and
Stephen Cooper could use (or should one rather first of all credible) values could be the glue that
say needs to use) the same five leader’ influence holds things together at Enron, and these values
mechanisms (Schein, 1985) used above for a must be communicated (by deeds) from the top
turnaround of Enron’s culture and ethical climate: of the organization. Employees must understand
Attention – Cooper needs to focus attention that any single employee who operates outside of
on improving the moral climate of the organi- the organizational value system can cost the orga-
zation by looking at the long-term implications nization dearly in legal fees and can have a
of employee’s actions instead of only the most tremendous, sometimes irreversible impact on the
recent bottom line profits. organization’s image and culture. Employees must
Reaction to Crises – Cooper should swiftly trust that whistleblowers will be protected, that
react to the crisis facing the company by com- procedures used to investigate ethical problems
plying with authorities and firing ethical wrong- will be fair, and that management will take action
doers. The company must stop the lying, to solve problems that are uncovered.
covering up ethical and legal transgressions, and Our skeptical view regarding any compen-
trying to preserve those ethical wrongdoers at satory use of the CSR and business ethics
any cost. toolbox (i.e. as long as morally disputable lead-
Role Modeling – Cooper must convey the ership creates a bad moral climate) does not
image of the moral manager (Trevino et al., imply any radical rejection of CSR and ethics
2002). He must set the example of honesty and tools as such (Schein would have called such tools
integrity for the rest of the organization. “secondary articulation and reinforcement mech-
Allocation of Rewards – Using rewards and anisms”, such as “organizational systems and pro-
discipline effectively may be the most powerful cedures” and “formal statements of organizational
254 Ronald R. Sims and Johannes Brinkmann

philosophy, creeds and charters”, see Schein, ments and the like. If one for practical purposes
1985, pp. 237–242). Once tools are understood distinguishes dichotomously between low and
as (“secondary”) catalysts for (“primary”) lead- high one ends up with a four-fold table as shown
ership influence, it is more fruitful to ask for con- in Table I.4
ditions under which ethical tools such as codes As mentioned above, Enron looks at first sight
could further and reinforce a given organization’s like “type I”, similar to what Kohlberg might
ethical climate (cf. Brinkmann and Ims, 2003, have called moral “pre-conventionalism”, like a
esp. table #3) and how Schein’s five mechanisms classical business ethics case, with a typical
could be operationalized in terms of available mix of “amorality” and “immorality” (cf. for
tools. the distinction Carroll and Meeks, 1999). For
In our introduction we mentioned briefly headline-journalism and public opinion Enron
Enron’s image of being an excellent corporate and World.com are simply bad and rotten, one
citizen, with all the corporate social responsibility just didn’t know before it was too late, and this
(CSR) and business ethics tools and status shows once more an urgent need for more leg-
symbols in place. It was suggested that this was islation and ethics. Our thesis is that Enron (and
a key aspect or dimension of the Enron case, as probably quite a number of other companies
a case of deceiving corporate citizenship and of waiting to be discovered) is an at least as good
surface or facade ethics (which also has con- illustration of “type II”, of window-dressing
tributed to the creation of a new word, Enron ethics, with talking instead of walking, ethics as
Ethics). As an academic field we owe the general rhetoric. While “type II” looks modern or at
public and the business public a thorough doc- least fashionable, “type III” looks like the old-
umentation, analysis and discussion of how Enron fashioned type of moral business, from the days
and other companies with a similar record and before the disciplines of business ethics, CSR,
reputation could “instrumentalize” (and thus dis- marketing and public relations were invented,
credit) ethics and CSR for mere facade purposes. with collective moral conscience (borrowing E.
It has also been mentioned that such a focus Durkheim’s term) as consistent label and content,
deserves and requires a paper on its own, at least. perhaps additionally communicating moral hum-
As an open end to this paper we should like to bleness, with a touch of British understatement.
draft briefly a typology with moral culture types The final “type IV” refers to a moral role-model
and transitions which such a paper could address, business culture in the age of marketing and
as a prolongation of the present paper and as a public relations, with walking the talk, with
bridge-building towards a more self-critical showing and confessing openly its collective
business ethics business and business ethics disci- moral conscience (call it self-reassurance, or more
pline. The typology is made up of two dimen- U.S.-style self-marketing, to put it stereotypi-
sions, ethicalness of an organization culture or cally). In other words, a future paper should pri-
what has been called ethical or moral climate, marily deal with a documentation and criticism
and presence of business ethical tools or artifacts, of “window-dressing ethics”, of how to further
such as ethics officers, codes of ethics, value state- processes towards collective moral conscience,

TABLE I
Typology of moral culture types and transitions

Presence and marketing 0000000000000Ethicalness of a given organization culture

of business ethical tools
0000000000Low 00000000000High

High II: Window-Dressing Ethics IV: Moral Role-Modeling

Low I:I Moral Preconventionalism III: Collective Moral Conscience
II: (Without Disguise)
 Enron Ethics (Or: Culture Matters More than Codes) 255

with more or less marketing of the good line]. Available: http://wsjclassroomedition.com/tj

examples, and of how to prevent degeneration 011802 enron.htm.
towards “window-dressing ethics”. We often Carroll, A. B. and M. D. Meeks: 1999, ‘Models of
wonder if we would prefer honest amorality and Management Morality: European Applications and
immorality to dishonest morality. But still, we Implications’, Business Ethics: A European Review 8,
108–116.
choose to read the paper title of Tonge et al.
Cohan, J. A.: 2002, ‘I Didn’t Know and I was Only
(2003) optimistically: “The Enron story: you Doing My Job. Has Corporate Governance
can fool some of the people some of the Careened Out of Control? A Case Study of Enron’s
time . . .”. Information Myopia’, Journal of Business Ethics 40,
275–299.
Daily Press: 2002, ‘Troubles Widely Known, Exec
Notes Says’ (February 15), p. A1.
Dowd, M.: 2002, ‘Enron, Hollywood Version’, The
1
Cf. in addition the Enron-story books for sale Roanoke Times (February 10), 1.
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20/002-3887103-5927230. Available: http://www.thestreet.com/markets/
2
For example, Enron had promised CIBC World detox/10004675.html.
Markets the majority of the profits from Project Eichenwald, K.: 2002, ‘Report Lays Out Troubles
Braveheart for ten years, or in the event of failure At Enron: Internal Investigation Finds Profits
Enron would be obligated to repay CIBC its entire Overstated To Executive’s Enrichment’, The New
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3
For a draft of possible “latent, negative functions” (January 12). Available: http://www.cnn.com.html.
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table #2. The Washington Post (February 25), 1.
4
Thanks to colleague Knut Ims from the Norwegian Gruley, B. and R. Smith: 2002, ‘Anatomy of a Fall:
School of Business Administration for a discussion Keys to Success Left Kenneth Lay Open to
about this typology. Disaster’, The Wall Street Journal (April 26), pp. A1,
A5.
Hamburger, T.: 2002, ‘Watkins Tells of ‘Arrogant’
Culture; Enron Stifled Staff Whistle-Blowing’, The
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