Lessons to Be Learned From the Enron Scandal

Several weeks ago, I had the opportunity of hearing Sherron Watkins speak at a special lecture she presented on Leadership Ethics that was sponsored by the Leon Hess Business School at Monmouth University. Ms. Watkins had worked her way up the ranks in the male-dominated natural gas conglomerate to the ranks of one of the top executives in Enron’s Capital & Trade division. She was one of the first to discover the accounting irregularities that eventually brought Enron down.

It was fascinating to hear how successful Enron had been prior to the exposure of accounting problems by whistleblowers like Ms. Watkins. In her lecture and book (Power Failure: The Inside Story of the Collapse of ENRON co-authored with Mimi Swartz), what stands out was how Watkins was vilified within Enron for being the “messenger” who attempted on several occasions to deliver the “bad news” that Enron was in financial trouble.

Since its inception, Enron executives prided themselves on exceeding their quarterly earning goals, which in turn, kept the price of Enron stock high and ever-increasing. Even when gas prices would drop, Enron was adept at making profit goals by either bringing in new customers or expanding into other markets.

Ken Lay, the CEO of Enron, had developed deep political connections to the George H.W. Bush administration and to Texas’s senior senator, Phil Graham at a time when the natural gas industry was being deregulated. The cards were definitely stacked in Enron’s favor. What Swartz and Watkins describe in Power Failure is how the hubris and arrogance of Enron and its COO, Jeff Skilling, essentially pushed their employees to either perform or get out.

Skilling is portrayed as incredibly creative and intelligent but also as ruthless and ambitious. The most notable aspect of his darker side was his ability to bully others into getting his way. When other executives like Watkins had expressed concerns of financial irregularities she was accused of not being an Enron “team player."

This raises important questions regarding instances when employees with a conscience feel compelled to raise questions regarding unethical business practices and how the organization responds to those concerns. What Watkins describes happening at Enron was that the focus on profits (i.e. Enron stock prices) became priority #1 above all other considerations. If your division was not profitable, then it was taken as a personal reflection on that manager or administrator because Enron had a reputation for hiring the “best and brightest." Therefore, when “bad news” was voiced, it was summarily discounted and naysayers were promptly admonished for even voicing such concerns.

Groupthink dynamics

Having studied social psychology for many years, this dynamic is reminiscent of the concept of “groupthink” which was introduced by Irving Janis in the mid-1970s. Basically, the reasoning behind groupthink was that in highly cohesive groups, an esprit de corps dynamic often develops in which everyone adheres to the party line and anything to the contrary is viewed by the group as being derisive and designed to diminish the group’s power.

In Janis’ book, Victims of Groupthink (1972), he provides some interesting examples of how groupthink dynamics resulted in defective decision-making similar to Enron’s financial decisions which eventually led to its demise and incarceration of several of its top executives. Pearl Harbor and the Bay of Pigs invasion are two notable examples where groupthink dynamics seem to take over in the decision-making process.

According to Janis, along with esprit de corps, there is also a sense of invulnerability that occurs. In the example of Pearl Harbor, this sense of invulnerability took the form of “we have the strongest Navy in the world; no one would ever dare attack the U.S. Navy." Yet there were Navy intelligence reports and executive officers who knew the Japanese were capable of mounting a strike against US naval vessels in the Pacific.

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Another dynamic is one of moral superiority that takes the form of, “we are superior and righteous, therefore we will prevail." This was certainly the case in the Bay of Pigs invasion, in which the United States backing of Cubans rebelling against the Communist dictator, Fidel Castro was viewed as morally righteous. It was therefore assumed that once the invasion began, that other anti-Castro Cubans would join in the fight. This is somewhat similar to the mistaken perspective of the Iraqi Freedom invasion, in which US troops were going to win over the “hearts and minds” of the oppressed Iraqis.

Another groupthink dynamic is that dissenting voices or alternative strategies are met with opposition and those who voice such views are often silenced or dismissed, much like Sherron Watkins was at Enron.

Lessons from the Enron scandal

So what are the lessons to be learned from the Enron scandal? The obvious lesson is that absolute power corrupts absolutely, but the Enron scandal goes far beyond just the faults and flaws of a powerful corporation. It extends also into the personalities of those running that corporation, the bullying, the lack of moral compass, the lack of ethical leadership, the emphasis on profits above all else, etc. One might say, however, “well aren’t corporations supposed to be profitable?” Of course, the answer is yes, but at what moral cost?

Watkins commented that if you look at successful corporations, (and the types of places people like to work), there is an emphasis on the product or the service that the corporation delivers. Watkins gave Southwest Airlines as an example where the emphasis is on the customer: From the corporate board room to the flight crew to the baggage handlers, there is an emphasis on service. What Swartz and Watkins describe is how Enron prioritized how profitable it had become and it was probably not surprising that along the way, they lost their moral compass.