HR Management assignment on: Enron Corporation – America

Enron Corporation was one of the leading industries in America. It was situated at Houston in Texas. The organization was a public based company. The organization was involved in providing electricity, commodities and services in America and all over the world. The organization had various electricity companies, paper companies, natural gas companies and communication companies. It was one of the largest organizations and had employee strength of around twenty two thousand. In the year 2000 the entire revenue of the company was estimated to be around one hundred one billion dollar (McLean & Elkind, 2003). One of the leading magazine of the world called Fortune Magazine had felicitated the Enron company as the “world’s most innovative company”, for around six consecutive years. The company in the year 2001 filed its bankruptcy protection and many cases were formed against it in relation to fraud and corruption. The breakdown of Enron is one of the largest high profile collapses.

 Company’s History:

In the year 1932, Northern Natural Gas Company was formed at Omaha at Nebraska. in the year 1979 it was named as InterNorth and it was one of the leading industry which was involve in selling energies and energies related products. It was carrying out production, transmission and marketing of natural gases as well as plastic products. In the year 1985 it formed a small company named Houston Natural gases. The company was bought by Physicians mutual after few years. One of the Ex- employees called Kenneth Lay was appointed the CEO and it was Lay and McNeil who was Lay secretary named the company initially as Enteron and later changed it to Enron in order to shorten it. The company was renamed because Lay completely changed its products and the style of marketing (Fox, 2003, pp 113). The company very soon became the largest energy trader as well as petrochemical trader. In the year 1999, the Enron Company began online operation and it was consider being the biggest online trading corporation. The trading involved exchange of natural gases, plastics, petrochemicals, electricity and crude oils. With the success in the trading field the Enron very soon also entered into shipping industries, coals, mines, paper and other such commodities. Thus it gained large profits and received various awards.

Products:There were around 30 different products that were being traded by Enron companies and some of these products were Petrochemicals, Power, Broadband, Shipping or Freight, Streaming media, Paper and Pulp, Plastics, Steel etc.

Failure of the Company:

On May 2001 there was sudden resignation of the Vice Chairman of the Enron named Clifford Baxter and in the month of August in the same year the CEO of Enron, Jeffery Skilling also resigned. The reason for resignation of both the officials was not disclosed and it was said that they retired for some personal reasons. This is was the first signal which said that the company was facing some kind of problems (Jensen, 1993, pp 831-880). The most surprising fact was that the CEO Skilling was appointed CEO just a month back and the Vice Chairman Baxter was selected in the year 2000. So there was no need for any kind of early retirements. At that time a lot of rumours were being spread against the accounting error of Enron. In October 2001 Enron took an after tax charge against the various reductions and earnings in the equity of the Shareholders which was associated with the transactions with LJM-2. LJM was actually a partner company of Enron that was handled and even some part of were own by Andrew Fastow who was the CFO of Enron. The LJM was providing Enron with assess sales and purchases. It was also providing instruments to avoid risks. For this tax charge the company declared that it is taking a $554 million out of $1.2 billion equity (Jickling, 2002).Few months after this, the company then declared that they have found some error in the accounting from 1997 to 2001 and so they are going to restate its various earnings of that time period. The Enron organization had other partners company which were known as Fastow Partnership, Chewco Investments and LJM Cayman which were all managed by Managing Director of Enron Finance unit Michael Kooper. He was directly giving all his reports to the CFO of Enron Mr. Fastow. All these sudden declaration of restating created a chaotic situation among the shareholders and the investors. As a result the Securities and Exchange Commission decided to get involved in the case. It was found that Enron had many partners and then the biggest thing that was caught was that the CFO of Enron Mr. Fastow in order to manage the two partnering company LJM-1 and LJM-2 were being paid excess of $30 million (Harris & Kramer, 2003). This completely broke the faith of the investors. Then it was found that the debt of the Enron was going on rising and finally in the year 200 on 2^nd December the company under the chapter 11 of the United States Bankruptcy code filed for bankruptcy.

It was estimated that around $11 billion were lost by the various shareholders of Enron. In the year 2000 the share of Enron was $90 per share but in the year 2001 it fell to $1 per share. The shareholders were in a state of shock and anger. During this period one of the rivalry company of Enron called Dynergy proposed to buy the entire company but the deal did not work out. During the time when the company filed for bankruptcy it was estimated that the entire assets of the company was $63.4 dollar and thus it was consider as America’s biggest corporate bankruptcy or corporate collapses (Kadlec, 2002).

Various investigations revealed that the company had failed terribly in accounting and audit. When Skilling was appointed the CEO he recruited various efficient employees who were asked to hide the debts and the projects that failed. They did this by creating loopholes in the accounting, showing financial reports which were very poor, using special purpose entities etc. It was said that the board of directors of the Enron were mislead by the CFO Fastow and other executives. These people also mislead the audit committee and pressurized its auditors to not give much importance to the issues. Enron auditor was known as Arthur Andersen and he was managing round five audit and accountancy partnership which were quite large. As a result after the bankruptcy was filed a lot of executives of Enron who were involved in misleading were charged against various cases and were put behind the bars (Klein, 2002, pp 375-400). Even the auditor of Enron Arthur Andersen was charged against many cases and the case was discussed in the United States Supreme Court. Even though the share holders were paid some kind of compensation but the loss was more than the compensation. A lot of money was lost in stock prices and pensions. The shareholders kind of lose trust on the public companies.

One main reason of the failure of the organization was also put on the shoulder of complicated corporate governance and this is even discussed in this paper.

Corporate Governance Structure of Enron:The corporate governance structure of Enron was formed is this manner:

CEO and the Chairman: Kenneth Lay

Chief Operating officer, President: Jeffery Skilling

Chief Financial Officer: Andrew Fastow

Chief Accounting Officer: Rick Causey

Auditing Officer: Arthur Andersen

This is just a small detail of the structure of the corporate governance (Munzig, 2003).

Failure due to Corporate Governance:

The main reason for the failure of Enron was its structure of corporate governance. Some of the points that were default in the corporate governance structure of Enron can be described as:

• For every organization it is always advised that the chairman and the CEO should be separate and they should perform their roles independently. The CEO should head the management whereas the Chairman should head the board. But in case of Enron both the CEO and the chairman were Kenneth Lay. This was just separated for a small period when Skilling became the CEO but again after his resignation both the task was managed by Lay (www.thehindubusinessline.com, 2002[A1] ). This kind of messed up and complicated the situations. Even when the company was charged he gave the statement that he was unaware of the fraud in the accounts and this was quite dangerous for him to say.
• One of the important committee for any organization is the Audit Committee and the board of directors should ensure that the audit committee is carrying out their functions efficiently. But the audit committee of Enron was a big failure. According to the Special Investigation Committee the board of directors of Enron asked the audit committee to carry out review of the transactions but the audit committee did not followed the instructions and carried out the transaction review in a very casual manner. Later on it was cleared that they were under the influence of the CEO and the executives who forced them to ignore the issues (Green, 2002).
• There were also conflicts in the interests of various directors. It should be noted that the Enron have large number of outside directors who purchased the stake of Enron and joined the board of directors. This is one of the good practices that were followed by Enron. But again large conflicts of interest were created among the directors. One issue was that one of the directors named Robert A. Belfer who was the Chairman of the Belfer Management purchased an energy company from the partners of Enron and even provided fund to start one more such energy companies. It was very important that the directors of the Enron Company received all the information regarding various dealings that were being taken place in the company so that the directors could perform their actions too. But it was found that many of the projects that were being deal by the Enron Company, the directors were unaware of it (Cohan, 2002, pp 275-300). When they were found guilty at United States Supreme Court, they said that did not have any information regarding various matters, one of which was the Murky deals. It was even believed that the directors might be lying in order to protect themselves and free themselves from the charges. The Special Investing Committee never believed that the directors were unaware of the information. In their report they said that there were many information that if would have known to the directors then they would have taken specific actions and avoided this bankruptcy situations but at the same time many of the information that came it was hard to believe that the directors were unaware of it. The Special Investigation Committee said that even if the directors were unaware but when they started sensing problems they would have definitely made investigations. According to one of the financial report of Enron it had around 3500 Special Purpose Entities which were responsible for shifting its debt and loss balance sheets (Munzig, 2003). According to the investigation team that even if the directors were unaware of these Special Purpose Entities which was quite not possible, but still if they claim so then it was their duty to keep a note of such things and educated themselves in these fields. It was quite amazing that being the directors of such a big company they were claiming to lack such crucial information.

Some of the blunders done by the directors of the Enron company which was later revealed by the investigation team were as follows (The Role of Enron’s Board of Directors in Enron’s Collapse, July 8, 2002)

1. One of the directors named Lord Wakeham was found to take around $72,000 from Enron is 2000 in order to run his individual consulting services. And the amazing fact was that this amount was not even included in his compensation money.
2. Again one more person named John Urquhart who was providing consultancy to Enron was paid an additional amount of $493,914 along with his compensation money in the year 2000.
3. It was revealed that from the year 1996 to 2001, the CEO and Chairman of Enron Kenneth Lay had almost donated $600,000 to the MD. Anderson Cancer Centre which is located in Texas. The directors of the Cancer Centre Dr. Lemaistre and Dr. Mendelshon were even serving as the directors of Enron.
4.  Again in one of the similar case a total donation of $50,000 was estimated to be given to Mercatus Centre located in Virginia. The donation came from Enron as well as Lay Foundation. Again the employee of the Mecatus centre Dr. Wendy Gramm was also the member of the Enron board.
5. From the year 1996 the agreement between Enron and the Belco Oils and Gas were going on. The arrangements cost around $10 millions to Enron. It was later revealed that the CEO and chairman of Belco Oils and Gas was also a board member of Enron.

• One more problem with the board of directors was that Enron being a public company the directors were not only the director of Enron. They were even handling other organizations. In one case it was found that one of the Enron directors named Mr. Raymond Troubh was not only the director of Enron but more than 11 companies. A director duty is to read all the information about the company progress before attending the annual meetings but if at a time the directors handle so many companies then they were bound to get confused and also ignore important facts (Roberts, 2002).

Enron corporate governance model followed was very weak and full of errors and as a result it was bound to get failed. All the above data that were revealed regarding the directors showed full corruptions that were being taken place in the organization from past so many years. If the organization would have maintained a strict structure at least lot could have been saved (www.thehindubusinessline.com, 2002[A2] ).

Points that could have avoided the fall of Enron:

From the discussions made above it was quite clear that the fall of Enron was due to arrogance that the employees had developed due to its enormous success. The diversification decisions that were taken by the team were very poor and also some of the actions implemented were baseless. The management also broke many ethical code of conduct and the corruptions and fraud was ignored by the members. The bankers, advisors, auditors also mislead the organization and all these facts ultimately lead to the fall of the company (Lagace, 2008). The corporate governance needed to be very strong. Each of the employees would have been conferred with different designations and different roles. The organization should not have allowed the directors to handle many directorships at one time. It was the duty of the directors to ensure that the auditors and the accountants are giving them correct report. They would have verified it again and again. The directors would have maintained their independency especially the outside directors. Even it was the duty of the stake holders and the employees to learn more about the company functioning. If they were suspicious about the directors they would have demanded for re election or would have complained to the stock exchange regarding the corporate governance. This could have at least avoided the loss that the shareholders and the employees suffered (Kaplan & David, 1990, pp 389-410). Again the company could have avoided the various unethical methods of doing business like providing excessive donations. If the auditors and accountants would have sincerely prepared the financial report without getting influence and submit it, then the government would have got information about the corruption from a long time and could have taken strict action against it.

Conclusion:Failure of the Enron and its bankruptcy affected a large number of people as it was a public company. Even the government suffered lot of economic losses. Even though the culprits were put behind the bars but still the share holders and the employees are still suffering. In order to prevent such type of collapses of the public companies the United States Supreme Court formed new laws in order to keep the accuracy of the accounts of the public companies more clear. Even one of the legislation Sarbanes Oxley Act was formed, according to which a very strict action would be taken on companies those were either destroying or altering the financial report, or creating any kind of frauds. The act also gave strict warnings to various audit companies and asked them to be independent in their procedures and not be influenced by any companies (Munzig, 2003). Even after all these laws it is the duty of the employees as well as the stakeholders to keep a sharp watch on the companies in which they are investing. The directors should also learn big lessons from this kind of collapses because any kind of corruption being done by them now will ultimately make them land into great troubles as in case of Enron even though the outside directors denied that they had information still they were caught and put behind bars. Thus, a company should be run by following all ethical conducts (Lagace, 2008).