Enron – Ask Why?
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Enron – Ask Why?
How Unethical and Illegal Behavior Ruined Lives
Brief History of Enron
Enron was an energy company based in Houston, Texas that dealt with the energy trade on an international and domestic basis. Enron formed in 1985 when Houston Natural Gas merged with InterNorth. After several years of international and domestic expansion involving complicated deals and contracts, Enron became billions of dollars in debt. All of this debt was concealed from shareholders through partnerships with other companies, fraudulent accounting, and illegal loans. By 1989 Enron diversified into trading energy-related commodities. In a few years, Enron had become the largest merchant of energy in the United States. By 1994 Enron had grown itself into the largest seller of electricity in the United States. During 1997 Enron went ahead with a program to reshape its corporate image to a new more modern, environmentally-aware company. They released a new corporate logo and acquired Zond Corporation, one of leading developers of wind energy power.
Kenneth Lay CEO Lets Jeffrey Skilling Take the “Balll”
Ken Lay the CEO of Enron had come from humble roots. As Enrons supposed faithful leader he was anything but. He had hired a man by the name of Jeffrey Skilling and Lay thought Skilling was a guy with big ideas. Jeff Skillings idea was a new way to deliver energy. He wanted to revolutionize the energy industry. Enron would become a stock market for natural gas. Skilling would transform energy into a way that it could be traded on the stock market. The sticking point for Jeff Skilling to join forces with Enron was going to be if Enron would be allowed to use a method of accounting called mark to market accounting. Mark to market enabled traders to change the tax status of their earnings from capital gains/losses to ordinary income/losses. This occurs on the last day of the year, at which time you tally all of your open holdings as if you were selling them at the market price that day. The day Skilling joined and decided to use this system was the beginning of the downfall to Enron. Mark to mark accounting allowed Enron to book potential future profits no matter where or how cash came into the door. It was a subjective system which Enron could say whatever its profits were. It was open to no regulation and they couldnt prove whether or whether not the profits actually existed. Skilling set-up Performance review committee PRC 1-5 grading system 10% of people had to be a 5 and they had to be fired. It was known as the “rank and yank” system. In my opinion after the research I completed and the documentary I watched these people were doing anything and everything to make profits. The culture was brutal and aggressive. Illegal activity or having unethical behavior did not matter. In this new world there were no rules and foul play was essentially encouraged. The traders were the most aggressive and the more aggressive the more reward. There was no regard for peers.
The Stock Markets Role for Enron
The bull market of the late 90s was a time in the history of the stock market where there was the biggest bull market (increase in stock prices) in the history of the world. As long as a company met or exceeded the quarterly earnings the stock price would continue to go up. Everywhere in the Enron building the stock price was posted and it was in everyones face. This started the new phase of “pump and dump” where pushing the stock price up through good numbers and earnings and then these executives would cash in their options.
Enron Violated the Ethical Trust
Business ethics is based upon the golden rule that we treat others as we ourselves would like to be treated. Right desire consists in desiring whatever is really good for human beings (i.e. that which meets a human need) and not desiring that which is bad for us. Enron clearly did not fit that mold. There are two specific principles of ethical behavior which are relevant to the Enron case. First, is the principle to do no harm. Since we ourselves whether employees or investors do not desire to be harmed, we should not harm others. Second, is the principle to desire the truth. Since we desire truth and knowledge, we should not speak that which is not true to others. Did Enron follow the golden rule? Enron traders clearly violated this and in fact spoke some of the time that what they were doing could possibly make some of these traders retire by 30-40 years of age. Enrons trading strategies during the California were instrumental in the crisis that resulted in harm to many people. Although it is impossible to know the full extent of the harm caused by the crisis, some general categories include financial duress due to extraordinarily large electricity bills, the closure of some small businesses because they couldnt pay their electricity bills, and students sent home from school because their electricity was shut off. It is clear that Enrons behavior in the California energy crisis was unethical. In 1996 a bill was passed to deregulate electricity. This deregulated system was an odd compromise. Enron made sure this compromise would be put all on California. Enron would create these arbitrage opportunities in which they would create profits above and beyond the norm. The Enron traders would create these opportunities and make energy shortages. The company also published financial statements intentionally misrepresented the financial condition of the company. This misled analysts for major stock companies like Merrill Lynch, Morgan Stanley and many others. From there these investors could tell their clients based on this information that Enron was a strong buy. Think of the chain reaction this caused. It hurt so many while only helping very few at the Enron corporation.
Power Given Now Delegated to Andrew Fastow the CFO
Skilling delegated Andrew Fastow an up and coming MBA graduate from Northwestern University power to make decisions. His role was to keep the perception of high stock prices a reality. He had to go to great lengths to accomplish this. After very little time with Fastows newly acquired power Enron was soaring. In reality profits were not going up but tanking. Enron had huge natural gas operations across the world which cost billions to build and were not performing well. Enron loved analysts strong buy ratings. This was Fastows job to get the high powered investment firms to buy into Enrons false market. Merrill Lynch recommended that they get their own in house analysts