Discuss the management practices at Enron with regard to three ethical principles of the Global Business Standards Codex.

A corporate life has always been defined by a business code of conduct as they are a legal necessity, especially for public corporations. Defined corporate standards are called for due to the increase in corruption and deception, especially by the top management. The business standards do not have a force in law, but over time they are defining legitimacy and license issuing of companies. The business standards assure responsible operation to the general public and also the stake holders. The most common ethical principles that govern businesses include; property principle, fiduciary principle, transparency principle, reliability principle, the dignity principle, the citizenship principle, fairness principle, and the responsiveness principle. In line with the Global business standards codes, Enron was an energy company in the United States which had procured the fifth largest auditing in the world. The company’s audit was the largest audit failure and it filed the highest bankruptcy in American history. The woes of Enron started in the year 2000 when the company stakeholders filed a lawsuit because the stock price had plummeted from $90 per share in June 2000 to an all time low of $1 per share in November 2000. This paper will discuss the management practices at Enron with regard to fiduciary, transparency and property principles.

Argument 1: Fiduciary principle

The fiduciary duty is an agent relationship, where there is trust between parties involved in the relationship. A fiduciary duty calls for putting one owns interest aside and being loyal to the relationship’s interests. Black’s law dictionary defines a fiduciary as an individual acting as a trustee, in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires. In Enron’s case, the fiduciary duty was breached by the management who deceived the board of directors, shareholders and the public at large by presenting faulty reports. Some of the fiduciary duties breached include; the management failed to monitor the genuine investments in the company’s stock and adequately investigate in order to take remedial action, the management invested a large sum of the retirement’s plan assets in the company’s stock, the management did not provide adequate and accurate information about the company’s portfolio plans (consequently, the management failed to institute lockdown of the plan), the management did not have any mechanism in place to monitor the appropriateness of the company investment and stock. The management failed to institute an administrative lockdown of the plan so that they can avoid the conflicts of interest. Enron used mark to market accounting, which entails an income being estimated once a long-term contract was signed, as the present value of the future cash flows. The viability of these contracts is usually difficult to depict. This made the management to make false and misleading reports. Incomes might have never been received, but in the books, they recorded them to appease the investors. Enron continued to record future profits on deals that had resulted to a loss. Skilling, President, and COO had to move employees to certain departments to pretend to be working so as to fool analysts that the division was larger so that the stock price can improve. The institution managers have a role to play to ensure that fiduciary duties are upheld, and their failure to exercise the responsibilities to the owners is a problem. In order to avert this storm, organizations should build a fiduciary culture where the agent acts independently to the principal but puts the interest of the relationship first. The agent should exercise professionalism and act in due diligence while carrying out their duties. The managers have the right to demand discipline in the financial products and mutual funds they offer. The agents should act responsibly to eliminate any conflicts of interest that may hurdle the achievement of the corporate goals. The government action is necessary to enforce the fiduciary society.

Argument 2: Transparency Principle

Transparency can be defined as being honest, open and candid in ones actions. In the corporate world and also in a principal-agent relationship, each party should be aware of what’s at stake in the relationship. In 2001, Skilling, President and CEO of Enron, was quoted saying that the stock would trade at $126 while the truth was it was valued at $80. The most notable transparency issues in Enron include; material information was not on a real time basis, thus the information was not current and lacked updating. The top management did not identify the critical accounting principles, which led to a lack of company public disclosure of current data in relation to historical data. In Enron, the accounting standard-setting was less timely and responsive. Andrew Fastow, Chief financial officer at Enron, was at the helm of hiding the truth from the directors and the public at large. Andrew Fastow was engaged in insider trading, money laundering, fraud and crime. Lay and Skilling were majorly involved in making false statements to banks and auditors. Enron’s auditor, Arthur Andersen, were responsible for shredding thousands of documents and getting rid of emails that tied the firm to Enron’s audit. In Enron there was aggressive earning targets and compensation bonus based on those targets. Enron used aggressive accounting practices and were able to have exorbitant interests in maintaining stock earnings. The company reported earnings growth while they were unable to generate enough cash flows from operations. Companies should provide all relevant market information, and there should be minimal differences between the external reports to the stakeholders and internal performance measures.

Improving the transparency of a company increases the investors’ confidence and consequently may lead to a rise in the stock price of a company. This will become a less risky venture for investors who will opt for a long-term contractual relationship. Miller (2001) says:

Initially, the absence of helpful data in an organization’s budgetary explanations may bring about the businesses to seek after other venture opportunities. Provided that this is true, the subsequent reduced interest for its securities makes lower costs and higher capital expenses… Second, the businesses may choose that the organization’s venture potential is extraordinary, despite the fact that the reported data is insufficient. Provided that this is true, they may contribute, when mulling over the subsequent higher level of vulnerability and demanding a higher expected rate of return which will discourage the securities’ costs and build the expense of capital. Once more, this run minimum reporting procedure does not propel the partners’ advantage. Third, modern financial specialists and leasers will turn somewhere else for private data that is more valuable than General accepted accounting principles (GAAP) financial related documents.

Companies should be geared towards closing of the Value Gap, this company’s value in the capital markets compared to the management’s perception of its value. The Value gap can be reduced by reducing the quality gap, information gap and the reporting gap. Quality disclosure assists investors to make sound decisions and have fewer risks. A transparent disclosure ensures the company has a low cost of capital and higher share values.

Argument 3: Property principle

Any top management of an organization has the obligation of protecting its property, especially from theft. Mr. Fastow used partnerships to defraud Enron millions of shillings for his own benefit; he did this together with Mr. Glisan, the corporate treasurer. Mr. Rice, the consummate salesman, contributed to the inflation of the stock price and then sold them at that high price. The compensation and performance management system in Enron was meant to reward and retain its valuable employees, but instead, the workers strived to start deals in order to get performance ratings and bonuses with disregard to cash flow. This made the executives and employees to have large cash bonuses; this was a mismanagement of the company’s property. It is reported that the company had extravagant spending, and its top executives were paid even more than twice their counterparts in competing firms. Enron is claimed to have been giving Arthur Andersen huge consulting and audit fees so that they can cover up for them. Mr. Lay, the founder and chairman of Enron, was involved and had direct or indirect knowledge of what was going on in his company, even though he claims that he was misled by those who were working around him. Mr. Lay, according to investigations, he had committed crimes of securities and wire fraud. The property principle is based on the fact that all workers/employees should safeguard as well as respect property and the ownership of the property; this includes intangible property and information. Employees should be stewards of capital investments made by investors by ensuring the stock prices are stable and providing current and relevant information to all relevant stakeholders so that they can make informed decisions. 

The Enron governing body neglected to defend Enron shareholders and added to the collapse of the seventh biggest organization in the United States, by permitting Enron to participate in, high hazard bookkeeping, and wrong irreconcilable circumstance exchanges, broad undisclosed off-the-books exercises, and exorbitant official remuneration. The Board saw various signs of flawed practices by Enron .administration more than quite a while, yet decided to disregard them to the disadvantage of the shareholders, workers, and business partners. 

An organization ought to practice satisfactory oversight on exercises, for example, workers pay, organization use, partner’s intrigues, and representative’s welfare to avert mismanagement of property.

Conclusion

The Government should be the leader in ensuring that the global business standards codex is enforced. In the wake of Enron’s the government of the United States was got flat-footed as they didn’t see the storm coming, neither could they calm it. Enron’s financial engineering was so complex that most of the legislators backed down because they could not understand what was going on. The government should employ expertise and professionalism so that institutions like this cannot evade oversight. Private Auditors are appointed by top company executives to work independently but to report back to them (executives), this creates a loophole, and thus this should be a mandate of the government. This opinion is not water tight to the fact that government urgency would not provide a conflict of interest. The job of also choosing company auditors should be taken away from the top executives and be given to another independent body. The government and all stakeholders involved should work towards ensuring current corporate financial reports, and companies should have more powerful non-executive directors, well remunerated, to ensure they put the interests of stakeholders first.

 

Leave a Reply