Examining a Business Failure
Introduction
Enron was a multibillion energy corporation that suffered a catastrophic collapse due to a financial scandal. The scandal involved the company’s top leadership, and the company’s external auditors and accountants. The accounting firm in this case was Arthur Andersen. The Enron scandal involved fraudulent procedures and practices in the accounting section. These illegal practices took place in the 1990s and overlapped into the next decade. Some of the fraudulent activities included the manipulation of the company’s stock prices. This resulted in the company’s decision to file for bankruptcy at the end of 2001.There are specific organizational behavior, management and leadership problems that have been identified as the main causes of the scandal. However, these failures could have been predicted and even avoided through appropriate organizational behavior by the management and leadership.
Failures of the company and executives
It is evident that Enron, the once undisputed energy giant in America, failed because of unethical procedures and practices. One of the shocking turnaround was when the company’s stock, once sold at $90, being sold at $1. The failures of the company were so evident after the company was declared bankrupt. The company’s management had tried to establish a wealth increasing system. With the stock prices not in the management’s favor, they resorted to unethical accounting practices. The company’s executive decided to make the company’s shares desirable by increasing the amount of capital invested. However, the managers did not reveal this risky step to the company’s investors. The company continued to use inappropriate accounting procedures for subsequent fiscal years.
Some of the mistakes that led to Enron’s decline include top managers rewarding themselves huge bonuses. The company’s decision to allow its external auditors to be its bookkeepers created a conflict of interest. Terminated employees were paid little severance while top managers got huge bonuses. Board members were compensated with company stock to make them not to question the ongoing business practices. The company’s other mistakes were making many contributions to political campaigns and getting public finance for its overseas operations. The company also lobbied legislators for subsidies, tax advantages, contracts and the reduction of regulatory oversights.
Organizational Behavior theories
There are several theories that could have been used to study the organizational behavior of the organization’s management. This would have helped predict the company’s decline. These organizational behavior theories can be used to explain Enron’s failure.
Decision Making Theory
This theory can appropriately be used in the context of Enron to analyze why the company collapsed and how the collapse could have been predicted. The theory focuses on the importance of proper decision making in an organization. Normally, decision making is influenced by impediments in the organizational environment. Therefore, managers are limited to choosing options that help them attain the minimum criteria to succeed rather than focusing on achieving optimal solutions. In Enron’s situation, the managers could have been so focused on raising the shareholders returns that they forgot about other important aspects of the business. It is possible that the shareholders could have pressured the managers to improve on the stock prices. The collapse of the company could have been predicted early by assessing the management’s decisions. The managers invested money hoping that the stock of the company would improve. The company’s expenditure on heavy bonuses for executives, bribing board members not to question unethical behavior and financing political candidates are some of the poor decisions the company made.
These decisions could have been used to predict a future collapse because the company was putting pressure on its resources with only one aim to increase the stock prices. Had these poor decisions by company executives been questioned earlier than the collapse of Enron, the company would have maintained its good reputation and healthy financial status.
Theory of Motivation
The theory of human motivation could be used to predict the collapse of Enron. It could also be used to assess the reasons why the company collapsed and what would have been possible remedies. Employees should be encouraged and provided with favorable working conditions to improve their productivity. Responsibility and recognition are very important for employee motivation. Motivated employees will work effectively and are likely to achieve organizational objectives. A closer look at Enron and one would realize that employee motivation was not there. The executive members did not bother motivating junior employees. In fact, they simply focused on misleading investors while enriching themselves.
Employees received meager salaries in comparison with the executives who paid themselves a lot of bonuses. The company also terminated contracts for some employees whose layoffs were an opportunity for increasing executive payoffs. This problem could have been addressed had investors intervened to make the executives responsible for employee motivation.
Contribution to Enron’s failure
The decline of Enron can be laid on the management, organizational structure and leadership. This is because all the mistakes were done by either management or leadership while the organizational structure had loopholes for irregularities.
Management and leadership
The management was responsible for the poor decisions. Top executives had no proper organizational goals to follow. They solely focused on increasing the stock prices of the company’s shares. The managers were also unethical because they decided to use illegal and wrong approaches to achieve their objectives. Engaging in accounting malpractices led to the organization draining most of its capital while the executives got bumper incomes. The management structure could have been restructured to allow transparency where investors could assess the organization’s operations. This would have stopped secret agendas and accounting malpractices in the company.
The leadership structure should have incorporated investors into the company’s leadership who would ensure the organization is run efficiently. The company’s structure allowed top executives to make important decisions and investors could be kept in the dark over what the organization’s objectives were.
Conclusion
Enron collapsed because of the selfish executives attempt to enrich themselves in the name of trying to raise the company’s stock. The company’s organizational, management and organizational structure provided loopholes for accounting malpractices. Therefore, Enron’s decline was executed and implemented by top individuals in the organization, people who would have saved the company from collapsing.
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Fox, L. (2002). Enron: The Rise and Fall (illustrated ed.). New York: John Wiley & Sons.
Swartz, M., & Watkins, S. (2003). Power failure: the inside story of the collapse of Enron (illustrated ed.). Boston: Doubleday.
