The Enron Collapse and the Theory of Moral Muteness

 MEMORANDUM


TO:

FROM: Mridul Kapoor

DATE: 11th February 2019

SUBJECT: The Enron Collapse and the Theory of Moral Muteness

The theory of Moral Muteness played a significant role in the rapid fall of the Enron Corporation. There are many people whose actions are to be blamed for and have resulted in the disastrous corporate collapse. Based on the theory of moral muteness the members of the board of directors, the executives, and the traders can be held majorly responsible for leading Enron to bankruptcy.

Threat to Harmony

Increased earnings and profits fueled the Enron culture. The managers implemented an assessment process known as rank and yank where traders were evaluated based on the deals done and profits booked in the previous quarter, with the lowest 10% of the evaluated “shown the door.” In order to meet such strict targets and stay employed, the traders started using questionable practices which were promoted by the executives as long as they were favorable to the books and share price.

On the other hand, confronting anyone in the company about something the employees did not understand was looked down upon, showed a lack of knowledge and a threat to harmony. Not being able to voice concerns or being denied the opportunity to ask legitimate questions about the business’s practices gives rise to a “go with the flow” culture. Due to this culture employees know in their gut what is immoral but somehow find a way to rationalize it.

Such an oversight can also be seen in the case of Enron’s auditor Arthur Andersen. Internal memos from the firm show how Andersen experts expressed their concerns about Enron’s accounting practices to David Duncan. Instead of taking the expert’s concerns seriously, Mr. Duncan tried to rationalize it by saying they were a high-risk profile and people have different views about their practices. By ignoring and rationalizing such immoral practices, the management can only encourage its employees to keep pursuing such activities without realizing the long-term repercussions.

Threat to Efficiency

With the pressure of maintaining and increasing its share price, Enron had a singular focus on transactions that brought in massive earnings and had a positive effect on their books. Talking about morals and ethics can often lead to disagreements and make the deal-making process more time-consuming. Since the traders were evaluated based on their quarterly earnings, none of them analyzed options keeping the long-term goals in mind. As long as the transaction got them closer to their quarterly targets, the traders went ahead with the deal, the share price moved up, and the executives were happy. Due to the threat to efficiency, managers saw discussing morals as a waste of time, and instead of stopping unethical practices, most managers chose to turn a blind eye. A former Enron employee recalled that with such a high level of activity and limited time there was hardly any moment left to discuss underlying assumptions or problems before going ahead with any deal.

Threat to Power and Effectiveness

Enron was recognized as the most admired company in the United States at the time. Accepting to all the wrongdoings was seen as a threat to power and effectiveness, primarily when the only aim was to try and keep the share prices on an upward trend. For example, a few months before Enron filed for bankruptcy, its CEO Mr. Kenneth Lay in an interview claimed that everything within the company was normal and that it was in the strongest shape possible. In reality, it was quite the contrary. Instead of informing the employees, shareholders, and the public about the true state of the company operations, the executives continued to talk up Enron stock. By doing so, the executives were successfully able to ignore and hide the facts in the short term to maintain the power and effectiveness of their word. However, in the long-term, such an attitude and culture led them to bankruptcy.

A similar ignorant attitude towards moral concerns is shown when the Andersen expert was removed from Enron projects because he raised concerns about accounting practices. Instead of addressing the experts concerns, Enron got him removed from the team and moved forward. All the activities Enron involved itself in were analyzed only by economic cost and benefit; the code of ethics was secondary and sometimes not considered.

Another example of the board of directors violating the company code of ethics was allowing Enron to do deals with LJM1 and LJM2. Fastow, who was an executive at Enron; he was also the only managing member of both LJM1 and LJM2. Enron’s code of ethics clearly states that the company cannot make dealings with “an officer of the company” due to “potential conflict of interest.” However, the board members and executives seem to have forgotten the company’s code of ethics.

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