Failure of Enron
Abstract
Having a strong relationship with all the stakeholders is a vital process or activity inside an organization. Thus, it is important to practice transparency, equality and lawfulness of all the actions that will be implemented, ensuring that the rights of each and every stakeholder are protected. This paper will focus on the different causes of failure of Enron that are connected to the issue of corporate governance.
Introduction
The story of Enron is considered as one that will reverberate in the global financial, energy markets, criminal and civil courts for years to come (Fox, 2004). The failure of the company can be considered as typical that shows one of the most thrilling rise-and-fall sagas of business. Starting 1985, the company grew in a decade and a half from a large natural-gas pipeline company to an energy-trading firm that bought and sold gas as well as electricity. During 1990s, the company focuses beyond energy trading, trafficking in metals, paper, financial contracts and other commodities. During that time, so much of its business came from trading that Enron had essentially stopped being a company that focuses on energy, but functioned as a kind of bank. In 2000, Enron had become the 7th largest company in the US, and it was hailed as a model for innovation. In order to sustain the company’s rapid growth, it played fast and loose with is accounting, hiding debts and inflating profits. The said situation lead to another problem that causes lost of confidence of the market to the company, and on December 2, 2001, it filed its bankruptcy (Fox, 2003, pp. 1 – 2).
Corporate Governance Failure in Enron
Chairman and CEO
As part of the good governance, it is a good practice to separate the roles and responsibilities of the Chairman of the Board and the CEO (Knowledge@Wharton, 2004). This is due to the fact that the Chairman is considered as the head of the Board, while the CEO is in charge of the entire management. If the same individual holds both the position, there will be too much concentration of power that will result to the dilution of the board. In Enron, after the resignation of Jeff Skilling as a CEO, Kenneth Lay holds both the Chairman and CEO positions (Gopinath, 2002).
Audit Committee
Boards work through sub-committees and the audit committee is considered as one of the most important aspects. They overseas the work of the auditor and independently inquires into the different workings of the organization. Furthermore, it also brings lapses to the attention of the full board (Fox, 2003, p. 25).
The said situation is one of the important mistakes of Enron. The audit committee failed to focus in the said roles and responsibilities. The Board assigned the Audit as well as the Compliance Committee the additional duty in reviewing the transactions, however, the Committee carried out the entire reviews only in a cursory manner (Gopinath, 2002).
Independence and Conflicts of Interest
Good governance plays an important role in any company and organization, because it can help organizations to be more open and transparent their respective stakeholders. In connection to that, good governance entails that the outside directors must maintain their independence and must not be benefited from their membership in the board, other than the remuneration, or else, create conflict of interest (Fox, 2004, p. 39).
In the case of Enron, the company created a good practice, however, the board compromised their independence in the way that they behaved.
Six out of 14 outside director suffered from serious conflicts of interests. They were: Robert Belfer, Wendy Gramm, John Mendelsohn, William Power, Lord John Wakeham and Herbet Winokur (Gopinath, 2002).
Flow of Information
As of now, information is considered as one of the most important resources in organizations, thus, its flow is one of the most vital aspects in good governance. The board needs to be provided and showed, with different important information and data in timely manner, in order for them to perform their roles and responsibilities (Australian Government’s Overseas Aid Program, 2000).
In the case of Enron, the directors are pleading ignorance of the murky deals, as a way of excusing themselves of the liability. The board denied the important information that will serve as a key to the reason of the action, but did not fully understand and appreciate the vitality of some of the information that have came before it (Gopinath, 2002).
Too Many Directorships
Director plays a vital role in overall management of the organization. He or she must exert great time and effort. Even though a board only needs to meet for 4 to 5 times in a year, the directors must make time to read and reflect over all of the materials that have been provided, that can help to make final decisions.
Good governance suggests that an individual sitting on too many boards looks upon it only as a sinecure because he or she will not have that much time to do a good job (The Australian Government’s Overseas Aid Program, 2000).
In the case of Enron, one of its Directors, Raymond Troubh, is a Director of 11 other public companies (Gopinath, 2002). It shows that the time, effort and ability of the Director will be divided to different other companies.
References
Fox, L. (2003). Enron: The Rise and Fall. Hoboken, NJ: Wiley
Fox, L. (2004). Enron: The Rise and Fall. John Wiley and Sons
Good Governance (2000). The Australian Government’s Overseas Aid Program. Retrieved October 28, 2008, from http://www.ausaid.gov.au/publication ns/pdf/good_governance.pdf.
Gopinath, C. (2002). Corporate Governance Failure at Enron. Business Life. Retrieved October 28, 2008, from http://www.thehindubusinessline.com/2 002/03/04/stories/2002030400110900.htm
Splitting Up the Roles of CEO and Chairman: Reform or Red Herring (2004, June 2). Knowledge@Wharton, Retrieved November 14, 2008, from http://knowledge.wharton.upenn.edu/article.cfm?articleid=987
Credit:ivythesis.typepad.com
0 comments:
Post a Comment