Failure of Enron
Introduction
The story of Enron is considered as one that will reverberate in the global financial as well as the energy markets. It will also reverberate in the criminal and civil courts for years to come ( 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 (2003).
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. 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 as a CEO, Kenneth Lay holds both the Chairman and CEO positions ( 2002).
Audit Committee
Boards work through sub-committees and the audit committee is considered as one of the most important aspects. It overseas the work of the auditor as well as independently inquires into the different workings of the organization. Furthermore, it also brings lapses to the attention of the full board. This is considered as one of the fault 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 ( 2002).
Independence and Conflicts of Interest
It is important to consider that good governance plays an important role in any company and organization, due to the fact that it can help the organization to become open to all the stakeholders. In connection to that, good governance entails that the outside directors must maintain their independence and must not benefit from their membership in the board, other than the remuneration, or else, it can lead to the presence of the conflict of interest. If we are going to analyze the condition of Enron, it can be said that the company had created a good practice, but in the way that the board had behaved, they compromised their independence. This can be seen in the situation and behavior of six out of 14 outside directors, where in they have suffered from serious conflicts of interests namely: (2002).
Flow of Information
The flow of information is very important aspect of the organization, and it is considered as one of the most important factors in terms of 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. In the situation of Enron, the directors are pleading ignorance of the murky deals as a way of excusing themselves of the liability. The board had been denied the important information that will serve as a key to the reason of the action, but the Board did not fully understand and appreciate the vitality of some of the information that have came before it (, 2002).
Too Many Directorships
There is a great need for time and effort in order to become the director of a given company. 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 and make final decisions. In terms of good governance, it suggests that an individual sitting on too many boards looks upon it only as a sinecure for he or she will not have the time to do a good. In the case of Enron, one of its Directors, , is a Director of 11 other public companies ( 2002). It shows that the time, effort and ability of the Director will be divided to different other companies.
Credit:ivythesis.typepad.com
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