Alexander (2007) tells us that duty ethics, or deontology, is a normative theory regarding what people should do, rather than what they should be. Hence, duty ethics is chiefly concerned with actions people take, rather than the consequences stemming from those actions. Deontology, in broad strokes, posits that if an action is right in principle, then there is no moral obligation forbidding that action – it need not be avoided, regardless of consequences.
Deontological theories are best understood in contrast to their consequentialist counterparts (Alexander, 2007). Consequentialism dictates that actions or intentions ought to be judged by the state of affairs they bring about (Alexander, 2007). In other words, an action can only be ‘good’ if it brings about ‘good’ consequences. Duty ethics does not concern itself with the effects of someone’s activities. If a person performs actions that are not illegal and within their rights, duty ethics suggests that those actions are ‘fair game.’ This has obvious implications for the Enron case, as the activities of executives were formally legal but led to fraudulent outcomes, which should have been avoided.
On a side note, it is interesting to bring up the results of Gupta, Cunningham, & Arya, (2009) where “students' grades were inflated or deflated, and an opportunity was given them to report the error.” Students claimed to be “acutely aware of their ethical responsibilities” after the Arthur Andersen failure in the Enron case (Gupta, Cunningham, & Arya, 2009). The authors report most students with deflated grades reported the error, but those with inflated grades did not. In other words, the ethical behavior of students changed with regards to the outcome: were they benefited, students ‘did their duty’ and reported the error (Gupta, Cunningham, & Arya, 2009). If the outcome was not favorable, they abstained from ‘exercising their right’ and did not report anything, according to the authors. This is a simple but effective exercise that shows the flaws of duty ethics in an environment that rewards outcomes, and not actions.
Enron had a reward system that also favored results over activities. Madsen & Vance (2009) report the interview of a former vice president of Enron, who indicates that “the reward system became even more liberal as time went on. From a reward standpoint, they decided to remove all caps on compensation.” This situation led to a “cut-throat competitive environment,” in which Enron traders had a turnover of 18 months, and used their current job position to leverage another (Madsen & Vance, 2009, p. 220). In short, there was no accountability system for long-term performance, with huge rewards being paid based on short-term performance. The message to employees was evident: long-term consequences of your actions do not matter. It was a standard application of duty ethics: as long as the ongoing actions were right (either legally permitted or approved by regulators), they were ‘good’, and handsomely rewarded; ultimate consequences were irrelevant.
Another dramatic example of the ethical clash of Enron’s twisted reward system against the ‘greater good’ was the behavior of the executives on the last days of the company, as the stock price plummeted. Top management changed the administrator of Enron's pension fund to avoid employees from offering in the stock market their fund’s Enron shares. Hence, the executives artificially inflated prices and sold their own options. In summary, top management took an action within the law (thus abiding by duty ethics) to increase prices and benefit from the rise, an outcome that clearly harmed Enron employees and the market.
Enron’s use of special purpose entities (SPEs) was also fraudulent in a roundabout way, which followed duty ethics. Enron executives used mark-to-market accounting, which immediately recorded the expected profits of long-term deals, and used SPEs to account for ‘contingencies,’ that is, possible losses (Free, Macintosh, & Stein, 2007). Each action by itself is dutiful, even commendable – mark-to-market practices are deemed transparent – but, taken as a whole, they were hiding losses and bringing unrealized profits to the spotlight.
Free, Macintosh, & Stein (2007) report the “audacious use of special purpose entities for off-balance sheet financing purposes have been the focus of attention”, but people tend to forget that Enron had a “comprehensive, state-of-the-art and award-winning management control and governance system.” The key to this apparent contradiction is to use a system that focused on short-term actions, and not their long-term consequences – a software companion to the duty ethics espoused by Enron.
Not surprisingly, the excesses of Enron may find an ethical twin in the 2008 financial crisis, which also displayed little accountability and excessive greed. This comes as a negative surprise to Sloan (2006), which hoped that the convictions of Enron CEOs Lay and Skilling would “write finis to that delusional era” of companies and investments which could “grow to the sky” at little risk. Likewise, Silverstein (2006) hoped that the convictions would mark “mark the symbolic end to an era wrought with greed.” Unfortunately, time proved them wrong. Ethics still needs become a “byword in accounting and governmental circles” (Cavaliere, Mulvaney, & Swerdlow, 2010). Moreover, companies need to adopt a code of ethics that encompasses accountability and behold the peril of adopting short-sighted duty ethics.
References
Alexander, L. (2007, November 21). Deontological Ethics. Retrieved June 09, 2016, from
http://plato.stanford.edu/entries/ethics-deontological/
Cavaliere, F. J., Mulvaney, T. P., & Swerdlow, M. R. (2010). Teaching Business Ethics after
the Financial Meltdown: Is It Time for Ethics with a Sermon? Education, 131(1), 3.
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Free, C., Macintosh, N., & Stein, M. (2007, July/August). Management Controls: The
Organizational Fraud Triangle of Leadership, Culture and Control in Enron. Ivey
Business Journal Online. Retrieved from Questia.
Gupta, S., Cunningham, D. J., & Arya, A. (2009). A Comparison of the Ethics of Business
Regulatory Issues, 12(2), 103. Retrieved from Questia.
Madsen, S., & Vance, C. (2009). Unlearned lessons from the past: an insider's view of
Enron's downfall. Corporate Governance: The international journal of business in
society, 9(2), 216-227.
Silverstein, K. (2006). End of Enron Era Sparks New Hope. Management Quarterly, 47(2), 2.
Retrieved from Questia.
Sloan, A. (2006, June 5). Laying Enron to Rest; Convicted Felons Ken Lay and Jeff Skilling
May Be Trading Pinstripes for Prison Stripes. These Were 'The Smartest Guys in the
Room'? Newsweek. Retrieved from Questia.
