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“Enron: The Smartest Guys in the Room” Organisational Culture Analysis

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INTRODUCTION

In 2001 one of the most established corporations worldwide, Enron, recorded an astonishing negative return of $618 million. Immediately after, CFO Andrew Fastow was dismissed, and Enron went bankrupt following information of overestimated revenues and off-balance sheet deception. Employees did lose not only their work but also their savings and pension funds, that have been invested in Enron’s stocks. Shareholders, merchants, innocent employees and communities suffered shattering damage (Ide, 2002). When Kenneth Lay- the chair and CEO retired from Enron, he was succeeded by Jeffrey Skilling. Skilling was a highly acclaimed manager in the company and Lay’s natural heir (Knottnerus et al., 2006). Due to the fact that under his management the Enron’s corporate culture was altered to a degree which resulted in demise, this paper will focus on examining the Era of Skilling administration. In the Enron’s case, the scrutiny of the company’s decline went beyond economic and financial discussion, since the organisational culture proved to be one of the leading causes (Kulik, 2005). In the contemporary business world, a corporate culture defined as an unspoken code of communication between company’s members (Cremer, 1993) or set of value and norms commonly shared in the organisation (O’Reilly and Chatman, 1996) has a significant influence on the organisation’s performance. This report will analyse Enron’s organisational culture by applying the Cultural Web Theory, founded in 1992 by Kevan Scholes and Gerry Johnson. The Cultural Web is a useful method to examine the assumption concerning the culture of an organisation. Johnson and Scholes indicated six different but interlinked segments, which constitute the ‘paradigm’ that is the values of the organisation or scheme of the organisational environment (McGrath and Bates, 2013). The six contributing components symbols, such as stories and myths, rituals and routines, control systems, organisation structures and power structures will be sequentially evaluated. The conclusions will follow. SYMBOLS Symbols are the visual representation of the organisation, how it appears to both employees and outsiders. It consists of logos, dress codes, office spaces and sometimes advertisements (Johnson et al., 2017). Several studies of high-performing organisations have for the umpteenth time emphasised cultural cohesion as a crucial variable in financial performance (Gordon and DiTomaso, 1992). Nevertheless, Enron did not particularly acknowledge what the organisation stood for or was aimed at. Revenue and the price of stock were practically the mere cultural focal point. Due to the lack of focus on organisational culture, even prospectively rich symbolic events were indifferent and feckless. Enron's logo, the slanted E, was presented to employees and executives in a dramatic, opulent corporative ceremony. It was said that the logo represents a successful, worldwide known company that leads the energy industry into the next millennium. However, when the logo was faxed abroad, the middle, prong of E vanished, resembling thereby an electric plug. For the worse, in some cultures, it symbolised an indecent gesture — failure to maintain essential features resulted in rendered the logo into a meaningless sign and cost the enterprise several million dollars. A substantial corporate symbol turned into commonly known cultural defeature (Bolman and Deal, 2006).

Another aspect of symbolism was the Enron's office decor. The communal spaces in the Enron's headquarters had a grey granite flooring, highlighted with elements of black granite. The lifts were rimmed with etched glass and stainless steel. Already in the concept phase, the Enron's Tower was supposed to make a prominent statement. At the very beginning of the movie, there is a striking depiction of the vast, empty space with ranks of stranded tables. Subsequently, we see the major trading floor, with a multitude of computers and hundreds of traders hanging on the phones. In the centre, there are two broad, private staircases leading directly to the offices of Skilling and Lay- 'the two smartest guys in the room'. Their offices, equipped with pearl granite floors, expensive wood from western Africa and private lavatories were drawing the line between the executives and ordinary employees. The design and amenities of the Enron's headquarters were giving the confidence of strength and indestructibility. RITUALS AND ROUTINES It concerns daily behaviours and operations of individuals within the company. Routines implicate what is expected of employees on a regular basis, and what has been approved either directly or indirectly by superiors (Johnson et al., 2017). In terms of Enron’s rituals, it could be stated that recruitment and orientations were particularly noteworthy. Due to the fact that Enron had established a position as a dynamic and vibrant workplace, different from other giants, outmoded companies mired in bureaucracy, it was able to recruit the most talented candidates (Bauder, 2002). It was clear from the very beginning that selected applicants will be demanded to forfeit their private life in favour of their new, corporate life at Enron. After the first interview, candidates attended the second part, where they were assessed by eight different interviewers, for 50 minutes in succession with one short break, which posed an extremely intense and emotionally draining experience even for the most resilient aspirants. The dramaturgically focalised selection process and consecutive induction into a highly challenging work environment started a process analogical to cultic transition, in which potential staff member needed enormous levels of motivation to prevail and were exposed to a high-performance environment that required to demonstrate succedent levels of excessive commitment. Candidates were also acknowledged with the notion that working for Enron constituted an eminent privilege and expected to manifoldly display their solidarity with a predominant and centrally imposed corporate philosophy. All of that was reinforced by different forms of 'love bombing'- Enron's employees were regularly called the best and the brightest professionals in the world (Fusaro and Miller, 2002). Kunda (1992) introduced a study on how rituals developed by corporate leaders instil the set of 'right beliefs'. Employees even if incipiently resist them, after a while they just play along in order to reveal what it might be considered as a wrong attitude. In Enron, there was a tremendous pressure to take part in various rituals, primarily those attributable to ostentatious consumption. ORGANISATIONAL STRUCTURE It refers to the structure and the hierarchy designated by the organisation as well as power and influence that some individuals may exert (Johnson et al., 2017).

The Enron's downfall is a classic example of the debacle of corporate governance that eventuated from issues with the organisational structure. The study of Brickley, Smith and Zimmerman (2003) stated that all three elements of regulatory architecture (stakeholders, monitors and controllers) were in the wrong. Essentially, the devolution of the decision-making authority ought to ascertain those decision makers possess an adequate level of experience, expertise and information required to make strategic decisions. Nonetheless, the delegation of decision-making in Enron was explicitly dysfunctional. As an example, the top management due to lack of experience consequent on quick promotion procedures did not obtain enough competences to shift Enron to the highly risk-taking business environment. The management did not have a full understanding of the nonconventional and creative practice and products as well as its volatility in managing the risk. In Enron, even one of the most significant figures- the chief financial officer did not have an accounting qualification, which resulted in designing inordinately risk-taking financial systems, that engineered the company's downfall. Enron also gave too much latitude to young, inexperienced professionals without an adequate level of control. In terms of monitoring, the Board of Directors is expected to oversee the senior management's decision and actions. When it is not able to forecast the prospective consequences of strategic decisions, then the moral hazards arise (Sridharan, Dickes and Royce Caines, 2002). Enron's Board proved to be generally non-effective in this regard. For instance, by overruling the code of conduct stipulation, board members enabled the CFO to open a private offshore company, which had business relations with Enron. Consequently, the CFO was controlling both sides of a deal and make money at the cost of Enron. It led to the situation when anonymous employees were sending messages regarding conflict of interest and fraudulent transactions, but the Board did not countervail the situation (Maniam, Subramaniam and Johnson, 2006).

POWER STRUCTURE It refers to authentic power structures and responsible members within the company. These individuals have the utmost influence over decisions, and usually have the last word on main operations (Johnson et al., 2017). The Enron's organisational structure resembled a cell and a planetary system. The overall frame is a cytoplasmic fluid of movement since the enterprise continuously altered its course and restructured its units. In the centre was Jeff Skilling, the charismatic leader who influenced the corporate culture to the highest degree. He was surrounded by top senior managers in a form a hub. These executives- Ken Lay, Andy Fastow, Lou Pai, John Wing and Ken Rice had centralised power and impact on the operation of the whole company (Stein & Pinto, 2011). Enron was managed in a hierarchical manner, and the structure was meant to represent to render a traditional organisational chart arranged in a cell form in a simplified way. When the organisation leaders incited rule-breaking and conducted to an aggressive, intimidating environment, it caused erosion of the ethical boundaries. Both Ken Lay and Jeff Skilling were able to exert power relentlessly. The position of the vice chair was called the 'ejector seat' since many employees were downgraded when they dare to have different standpoint than Lay or simply impend his power. Skilling, in turn, intimidated his inferiors and purged corporate rivals. Abdication of power was also in major issue in

Enron. On numerous occasions, executives did not comprehend how the business was operating or what their subordinates were doing (Sims and Brinkmann, 2003). It is impossible to analyse the power structure without evoking the group of Enron's traders, who have absolute freedom of action even at the fringes of legality, as long as it proved to be profitable. Traders were known as a 'super powerful high school clique that even the principal doesn't dare to rein in' due to the fact that they were earning most profits for the company. STORIES The previous situations – either authentic and not – which are debated within and outside the organisation. What kind of events are noted by the company determines the organisation’s values (Johnson et al., 2017). Due to the fact that Enron firmly believed it was creating the revolution in the contemporary business world, it justified bending the rules. It was commonly known that this rule-breaking involved executives' private lives- gossips about promiscuity during office hours or use the services of strippers and prostitutes at company expense. Enron acquired a reputation for callousness, both in an internal and external environment. Jeff Skilling is generally credited with constructing a ranking method for employees, where the bottom 20 % would be forced to leave the company. Therefore, employees were no longer only contending with outside competitors, but essentially with each other. Some of the traders were even nervous about going to the bathroom since their colleagues might make use of confidential information and deal against them. Because of the conviction that mistakes are not acceptable and have career-wrecking potential, employees would do anything not to convey any bad news. In consequence, all problems and errors were dissimulated, restricting the opportunity to retrieve the situation (McLean, 2001). CONTROL SYSTEMS It refers to the systems by which the company is monitored and controlled. It can regard financial management, quality-control structures or performance-based rewards (Johnson et al., 2017). According to Conrad (2003), it was attempted on numerous occasions to assert Enron’s downfall as a fault of several individuals operating in the absence of control systems. Nevertheless, it should be stated that Enron had numerous formal control measures. Main components of a control system incorporated an official code of ethics, bonus and performance regime and Risk assessment and Control group (RAC). RAC Group was responsible for risk management and trading deals' approval. All transactions had to be extensively delineated in a Deal Approval Sheet. Analysts were constrained to operationalise independently each contract, which required several levels of legitimisation from many divisions. Some of the trading deals were so critical that they necessitate endorsement even from the executive board (Cruver, 2003). Repeatedly, however, approvals came when the deal has already been made. It was caused by the enormous pressure to push the transactions in any capacity in order to maximise the revenue and proved that a variety of control systems were in place only in theory, but not necessarily obeyed. The Reward Allocation was also a significant component of Enron’s management control. The attitude of employees awarded with bonuses and promotions send others a message what type of behaviour is required to achieve success in the company. The reward scheme promotes a “win-at-all-costs” approach. Top

management retained only those providing continuous profit, irrespective of ethic matters. Enron’s remuneration structure resulted in unethical corporate culture, by forfeiting self-interest above any other concerns. Most profitable departments were able to ignore corporate policy, taking unlimited time off regardless of Human Resources’ complaints (Bartlett and Glinska, 2001). Generally, organisational reward scheme promoted people who hold to violent, individualistic culture, grounded on short-term gains. CONCLUSION The fall of Enron did not stem from just several individual’s operations motivated by profit gains. It primarily resulted from toxic corporate culture and ritualised organisational paradigms of interaction. Lack of frankness and reliance between top management and its inferiors filled the company with secrecy and surmised, what caused negativity and fierce rivalry. By way of promoting autocracy and competition leaders caused the erosion of the prosperous company. They admonished creativity and employees’ voice, which is necessary for any organisation to thrive, by terminating everyone who dares to dispute their decisions. Top management with its arrogance redirects the corporate culture to centre on rewards and financial benefits. Competition, although might have a positive impact on organisational performance, applied in unjustified proportion induced decline of corporate culture and made the company rot from inside, as it occurred in Enron’s case. An emphasis on an exaggerated sense of pride and unreasonable risk occasioned in deterioration of morale, partly responsible for the economic debacle. Despite the fact that Enron operated in the industry of risk management and assessment, the work routine encouraged nonrational, precarious behaviour. It is astonishing that employees were allowed not only to make questionable transactions but also to joke entirely open about disreputable aspects of their operation. Furthermore, it was of daily occurrence to be rewarded for ruthlessness and operation on the edge of the law, which had an impact on the company’s culture. To conclude, negative corporate culture has an influence on many aspects and has the ability to contributes even to the company’s downfall. Enron’s case made evident how substantial in reality the corporate culture is and just how crucial it is in order for the organisation to thrive.

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Appendix: “Enron scandal, series of events that resulted in the bankruptcy of the U.S. energy, commodities,

and services company Enron Corporation and the dissolution of Arthur Andersen LLP, which had been one of the largest auditing and accounting companies in the world. The collapse of Enron, which held more than $60 billion in assets, involved one of the biggest bankruptcy filings in the history of the United States, and it generated much debate as well as legislation designed to improve accounting standards and practices, with long-lasting repercussions in the financial world. Enron was founded in 1985 by Kenneth Lay in the merger of two natural-gas-transmission companies, Houston Natural Gas Corporation and InterNorth, Inc.; the merged company, HNG InterNorth, was renamed Enron in 1986. After the U.S. Congress adopted a series of laws to deregulate the sale of natural gas in the early 1990s, the company lost its exclusive right to operate its pipelines. With the help of Jeffrey Skilling, who was initially a consultant and later became the company’s chief operating officer, Enron transformed itself into a trader of energy derivative contracts, acting as an intermediary between natural-gas producers and their customers. The trades allowed the producers to mitigate the risk of energy-price fluctuations by fixing the selling price of their products through a contract negotiated by Enron for a fee. Under Skilling’s leadership, Enron soon dominated the market for natural-gas contracts, and the company started to generate huge profits on its trades. Skilling also gradually changed the culture of the company to emphasize aggressive trading. He hired top candidates from MBA programs around the country and created an intensely competitive environment within the company, in which the focus was increasingly on closing as many cash-generating trades as possible in the shortest amount of time. On December 2, 2001, Enron filed for Chapter 11 bankruptcy protection. Many Enron executives were indicted on a variety of charges and were later sentenced to prison. Arthur Andersen came under intense scrutiny and eventually lost a majority of its clients. The damage to its reputation was so severe that it was forced to dissolve itself. In addition to federal lawsuits, hundreds of civil suits were filed by shareholders against both Enron and Andersen. The scandal resulted in a wave of new regulations and legislation designed to increase the accuracy of financial reporting for publicly traded companies. The most important of those measures, the Sarbanes-Oxley Act (2002), imposed harsh penalties for destroying, altering, or fabricating financial records. The act also prohibited auditing firms from doing any concurrent consulting business for the same clients.”

Encyclopedia Britannica. (2019). Enron scandal | United States history. [online] Available at: https://www.britannica.com/event/Enron-scandal [Accessed 8 Jan. 2019].