Today, as we look around the world, we see an increase in the number of corporations; as capitalism has spiraled to a peak. While corporation’s products and services are needs and wants of the economy, their moral actions, or lack there of, are not, however, directly or indirectly affect us each day. Are corporations people? Can corporations be considered moral? Questions such as these have been raised by Shaw and Barry in the text Moral Issues in Business. While the answers to these questions are debatable, the infamous Enron Corporation shows us that while the people make up the company, the company as a whole receives the reputation of being immoral or unethical. We consider Kenneth L. Lay and Jeffery Skilling, the former president and CEO of Enron, the driving forces behind Enron’s bogus success and responsible for the moral code that should have been set for the organization. These unethical actions Enron took part in even had support by auditor, Arthur Anderson, and attorneys, Vinson & Elkin. The top leaders of Enron had a passion for capitalism, which drove the company to illegal and unethical behaviors, eventually leading to the catastrophic fall of the company. However, in order for Enron to deceive as long as they did without being caught, a lot of their actions were actually legal, but immoral. Enron’s use of mark-to market (MTM) accounting and taking advantage of energy deregulation in California, led to their “profit at all costs” mentality, legal, moral, or otherwise.
Jeff Skilling and top executives failed to make decisions from the standpoint of the longevity of the company. Instead, executives utilized tactics that brought short-term success to the company, which later resulted in the downfall of the company. Skilling was only concerned about maximizing profit at all cost. When he first joined Enron, he incorporated the mark to market accounting method, which brought about short-term happiness.
The decision to use MTM accounting allowed the company to publish inflated profits, thus causing their stock prices to increase because it “appeared” to the public that Enron was growing at such a fast pace; no other energy company could compete. He institutionalized this ideology throughout the company by incorporating methods such as the performance review committee. This accounting approach was the beginning of many bad tactics used by the top Enron executives to cover actual profits and hide from the public its later revealed billion dollar deficits. Mark to Market accounting allows companies to post the current market value of an asset or liability before the gains or losses of the asset or liability have been recognized. It was created with the intention of allowing Futures Brokers to record anticipated assets. Enron used MTM as a way to record expected revenues for projects in an effort to overstate profits. Even though this accounting method is legal, it leaves much room for interpretation because the value of the expected revenues may not have been properly analyzed, for which Arthur Anderson was responsible
The auditors of Arthur Anderson were unethical from the consequentialist viewpoint. The cover up of fraud on the financial statements overstated the wellbeing of the firm by escalating its revenues. Simultaneously, the act harmed a great number of investors and employees who bought Enron stock for pension funds. But, the consequentialist theory is only one framework of many.
The deontological theory views the ethical behavior at Enron from a different perspective. Deontological ethics postulates that devotion to the duty recognized by social relationships as a moral obligation. When applying deontological theories to Enron one needs to assess the general duties of the managers and the auditors arising from their relationships to the firm and its stakeholders. The managers and external auditors of Enron had the general duties to all stakeholders in society to avoid deliberately harming others and to make reparations in the event they caused damage. The managers had an implied fiduciary duty to the shareholders of the organization based on their terms of employment, to carry out operations in a method that does not cause harm to the firm. The auditors also had a general duty to evade harm to the public and an explicit duty to evade harming the shareholders of firms employing the services of the auditors.
From the Utilitarian point of view, “happiness is the only thing that is good in and of itself”. Had this been the viewpoint from which executives of Enron stood, the scandal would have never happened. “For Utilitarians, then, justice is not an independent moral standard, distinct from their general principle. Rather the maximization of happiness ultimately determines what is just and unjust.” According to John Stuart Mills, justice was the name for certain classes of moral rules, and these moral rules included forbidding humans to hurt one another. According to Shaw and Barry: “What utilitarianism identifies as rights are certain moral rules, the observance of which is of the utmost importance for the long-run, overall maximization of happiness” (Shaw and Barry 109).
Enron’s manipulation of California’s energy grids is another example of Enron acting immoral while maintaining the legality of an action. Enron was one of the main leaders of the deregulation movement. Regulation of energy utilities was put in place when the Public Utility Holding Company Act of 1935 was passed as a result of the utility holding companies contributing to the 1929 stock market crash. Keynesian economic theories called for a tightening of the reins on free marketers and saved capitalism. Enron contributed millions of dollars to state and federal politicians to help push their movement. Since then, many private utilities pushed for deregulation. Once the government control was lifted, Enron was able to manipulate the market to earn a high profit. They created artificial power shortages, and raised their prices (Pha, 2002).
Manipulating the market not only increased revenue for Enron, but for the traders as well. The senior leadership of Enron was driven by profits and encouraged traders to do whatever they could to increase stock prices. West Coast Traders made over $2 billion for Enron by betting energy prices; traders had the inside scope because Enron was one of the companies manipulating the energy, creating a win-win situation. (“Enron: The Smartest Guys in the Room”. Dir. Marse Alberti. Magnolia Pictures, 2005. DVD). According to the deregulation policy, while the traders’ actions may have been legal, the resultant rolling blackouts caused accidents and fires, making the actions immoral. Consequentialist theory advocates that an act is ethically immoral if it results in consequences deemed wrong or harmful by the majority of people in a society (Hooker, 2002). The motive behind the power outage was to make more money (capitalism), which led to unethical and immoral engagements by the corporation.
Enron was a company that definitely focused on capitalism. It was not just the goal of the company, but it was also the personal drive of its leaders. As Shaw and Barry stated, “Capitalism can be defined as an economic system that operates on the basis of profit and market exchange and in which the major means of production and distribution are in private hands” (Shaw and Barry 150). Early in his career, Kenneth Lay’s egoism led to him wanting the energy industry deregulated because he knew it would bring profits for the company. Deregulation was initially promoted as a way to increase competition.
If one reviews Enron’s actions from the Libertarian prospective, Enron’s executives in part utilized the Libertarian ideology because both were advocates of an unrestricted free market. However, the Libertarians shunned fraudulent activity. According to Shaw & Barry (2010), “Libertarianism clearly involves a commitment to leaving market relations-buying, selling, and other exchanges- totally unrestricted. Force and fraud are forbidden, of course, but there should be no meddling with the un-coerced exchanges of consenting individuals” (Shaw and Barry 116). As mentioned earlier, Enron used the legal system to their advantage, however, Enron’s executives allowed greed to cloud their moral decision making skills, and the government had to eventually intervene. Public and corporate pressure forced the government to start regulating the industry again. This brought the prices down and caused Enron to fall. We can see now that deregulation resulted in high prices, unreliable services (blackouts), job losses, no obligations to provide universal service, and loss of tax revenue (Pha, 2002). The after effects supported Shaw and Barry’s point that unregulated market transactions can be disastrous (Shaw and Barry 117).
“To explain why pursuit of self-interest necessarily leads to the greatest social benefit, Smith invoked the law of supply and demand” (Shaw and Barry 158). The law of supply and demand was not effective as with other products, because power is a need, not just a want. David Freeman, Chair of the California Power Authority stated, “There is one fundamental lesson we must learn from this experience: electricity is really different from everything else. It cannot be stored, it cannot be seen, and we cannot do without it, which makes opportunities to take advantage of a deregulated market endless. It is a public good that must be protected from private abuse” (http://en.wikipedia.org/wiki/California_electricity_crisis).
Profit at all costs is another great example of Enron acting legally but immorally. The company loved taking risks and they believed there would be a big payoff for taking these risks, which led to creating a power house in India with the emphasis on financial capitalism. “It also is noted that Enron’s operations abroad have earned the opprobrium of human rights activists, in particular in respect of its $3 billion joint venture with the state utility of Maharashtra in India. Human Rights Watch and Amnesty International have documented human rights abuses on the part of local police officers acting as a private security force for Enron. They accused Enron’s cops of beating local opponents of the power plant, and of dragging citizens out of their homes and then beating them for refusing to cooperate with the firm” (Bratton, 2002). Enron used legal matters to increase wealth for the company, while driving people out of their homes and hurting people.
Broadband with Blockbuster was another source for Enron to increase capitalism, as they remained immoral. The focus on making profits or wanting to make personal profits at all costs corrupted the company, which led them to not be truthful with the employees, shareholders, and to the world about their failed strategies and finances. This went against the moral standard of truth telling. As the world was buying more shares of Enron, the top leaders of the company like Kenneth Lay, Jeffery Skilling, and Andrew Fastow were all selling their shares, while continuing to promote the stocks of the company. As a result, many people who had invested money into their 401K and other shares of Enron lost their savings, but when the leaders were asked questions facing their moral actions about people losing their money, their egoism surprised everyone.
Jeff Skilling told the court, “He did not do anything wrong that was not in the interest of the shareholders of the company” (“Enron: The Smartest Guys in the Room”. Dir. Marse Alberti. Magnolia Pictures, 2005. DVD). This illustrates Enron’s narrow point of view regarding corporate responsibility. One of the key features of capitalism is, “the existence of companies or business firm separate from the human beings who work for and within them” (Shaw and Barry 154). It was morally wrong for Jeff Skilling to use capitalism for shareholders as a scapegoat for something which he did, and blame the idea of profit-making as the shareholder’s goal but not his own. He did not meet the moral standard of accountability. When the capitalist’s point of view overtakes the minds of the individuals, people who are left alone without accountability will pursue profit over anything else. Andrew Fastow used this opportunity when he created LGN. He involved big banks such as Merryil Lynch, J P Morgan Chase, Citigroup, etc. to increase more capital for the company through an artificial company. The drive to make profits at all costs blinded the banks and the lawyers who approved the project.
On page 162 of the text, Shaw and Barry state, “Because of their sway over the market and their political clout, the gigantic corporations that we know today have altered the face of capitalism that Adam Smith would have trouble recognizing it”. Profits at all costs have destroyed the idea of capitalism. Everything Enron did supported their egoism and went against the theory of business egoism, which supports capitalism. They paid off government officials, lawyers, bankers, and anyone else who stood in the way of making more money through false profits. Some of the ideas of capitalism were to create free competition and to be free of government interference, but Enron’s use of government officials (lobbyist) to avoid competition in the markets goes against this idea. “Enron spent $10.2 million on influence in Washington between 1997 and 2000. In his gubernatorial campaigns, George W. Bush received $774,100 from Enron managers and $312,500 from the company” (Bratton, 2002).
Karl Marx argued that as the means of production becomes concentrated in the hands of the few, the balance of power between the capitalists (bourgeoisie) and laborers (proletariat) tips further in favor of the bourgeoisie. This is what happens when Enron’s top leaders sold their stocks, while the employees were locked out from selling their stocks. Enron also required everyone to agree with their business practices otherwise, they would refuse to do business with them. When John Olson a skeptical analyst, refused to issue the buy rating Enron demanded, Merrill Lynch fired him (Houston Business Journal).
Even though the top leaders of Enron walked away with millions of dollars, they were not able to enjoy the fruits of their labor – it was enjoyed by someone else. Jeff Skilling ended up having to pay $23 million to the lawyers that represented him at court. “Karl Marx answers the question of what happens to the people that are paid handsomely for their efforts. He says, they ‘remain alienated, for as the fruits of their labor are enjoyed by someone else, their work ultimately proves meaningless to them” (Shaw and Barry 165).
Since the goal of the top managers and the auditors of the company was to increase profits for a small number of people while harming a large group (society), their actions can be considered as unethical, and the consequentialist theory can be thus applied. The managers of Enron recognized private partnerships that were supposed to provide goods and services to the firm, such as purchasing wholesale power and reselling it to Enron. The managers originally steered Enron’s purchasing towards these entities without a bidding process, which resulted in the managers earning higher compensation at the expense of shareholders. The firm may have been able to acquire resources less expensively from firms that did not have a relationship with Enron’s managers. The managers, in due course, expanded the system with the partnerships holding no real assets and were paid from Enron for goods and services that were never given.
This system provided extraordinary revenue to the managers, which can be considered a good consequence from the consequentialist viewpoint under the utilitarian evaluative norms. At the same time, the scheme harmed a great number of stakeholders, employees, and customers, and condensed their well-being and contentment. From the consequentialist perspective, the negative cost of the mangers’ actions far outweighed the positive consequences of escalating their personal wealth. The idea of profits at all costs was morally and ethically wrong.
Deontological theory views acts that are permissible or not permissible based on a relationship giving rise to a duty (Lefkowitz, 2003). In contrast to consequentialist theories, deontological theories do not scrutinize the final outcomes of acts. The managers of Enron violated their general and explicit fiduciary duties by creating firms to benefit their interests at the cost of shareholders and other stakeholders. They violated their fiduciary duties by creating fraudulent financial statements. The auditors also violated their fiduciary duties to the public and the shareholders of Enron by certifying the fraudulent financial statements as accurate. In the implied hierarchy of duties in the corporate setting, any conflict of interest among managers, auditors, and shareholders should be determined in favor of the shareholders. The managers and the auditors subordinated the welfare of shareholders and other stakeholders to their personal financial benefit. This deontological framework for assessing the morals of the actions at Enron, though, differs from the virtue ethics approach.
Virtue ethics postulates the continuation of a permanent set of ethical rules that a human being can use to conclude the rightness of a deed. A virtue is a disposition to react in a good or suitable way to a circumstance or event. When considering virtue ethics in relation to Enron, it seems that not only the managers, but also the auditors were unethical since they did not act in a virtuous manner. An ethical human being, by the principles of modern society, would not engage in fraud for private gain. In addition, the managers and auditors deliberately engaged in actions they knew were unethically and legally improper. Their intent is evidenced by their attempts to cover up their actions by inappropriately manipulating financial statements and hiding the act by attempting to destroy documents and evidence of wrong doing.
Even though consequentialist theory, deontological theory, and virtue ethics have dissimilar approaches to assessing ethical performance at Enron, they land at the same conclusions. The consequentialist theories observe the result of the collapse of the firm and the damage caused to stakeholders as the critical issue determining the principles of the behavior. The deontological theories scrutinize the breach of explicit and implicit duties as the calculating factor determining the ethics of the events at Enron. Virtue ethics suggest that virtuous people would not have performed the acts of the managers and the auditors at Enron. The behavior of the managers and the auditors at Enron was unethical regardless of the ethical framework used for evaluating the events leading to the bankruptcy of the firm. This case study of Enron showed us that capitalism can lead people to do things that are legal and illegal in the pursuit of wealth. They will also twist legal actions in such a way that they are immoral and unethical, such as using the mark to market accounting method to inflate Enron’s financial statements and taking advantage of energy deregulation in California to charge the state large sums of money, basically extortion. To the public, Enron would contend they held a Utilitarian view while in retrospect we can see that they were driven by egoism. Enron also most literally falls under the Libertarian point of view whereby the government will not get involved as long as the actions of a company do not interfere with others. Again this has another side to the equation. The government did get involved with Enron’s activities, but because Enron lobbied for passage of bills that would benefit Enron.
In the end, the bank collapse of 2008 illustrates that companies have not learned from Enron’s mistakes and still have a “profit at all cost” attitude. Even when the banks were offered government bailouts, part of the money went toward executive bonuses. Most recently, Greg Smith’s resignation letter from Goldman Sachs, published in the New York Times, shows us that companies still have a profit above all else attitude. Australia is heading down the same path: Australia has deregulated electricity, natural gas, water, postal services, telecommunications, and many other important public services. They have also experienced blackouts and the prices have skyrocketed. The story of Enron proves that Capitalism needs regulation. Capitalism does work, but only if the government provides safeguards for its citizens.

Work Cited

Cited References
Shaw, William, and Vincent Barry. Moral Issues in Business. 12th. Belmont, CA: Wadsworth Publishing, 2012. Print.
Enron: The Smartest Guys in the Room. Dir. Marse Alberti. Magnolia Pictures, 2005. DVD.
Pha, Anna. ENRON: CAPITALISM IN A NUTSHELL. Surry Hills: New Age Publishers, 2002. eBook.
"California electricity crisis." Wikipedia, the free encyclopedia. N.p., n.d. Web. 29 Jul 2012. <http://en.wikipedia.org/wiki/California_electricity_crisis>.
Bratton, W. Enron and the Dark Side of Shareholder Value, Public Law and Legal Theory Working Paper No. 035, The George Washington University Law School, 2002
Perin, M. "The energy analyst enron couldn't buy." (2002): n. page. 0. <http://www.bizjournals.com/houston/stories/2002/09/30/story2.html?page=all>. Brad, Hooker. Ideal Code, Real World: A Rule-Consequentialist Theory of Morality. New York: Oxford University Press, 2000. Print.
Lefkowitz, J. Ethics and values in industrial-organizational psychology. Psychology Press, 2003. Print.

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