Organizational Design and the Failure of Enron
Organizational Behavior and the Failure of Enron
Germaine Washington
LDR/531
February 13, 2012
James Kaczynski
Organizational Design and the Failure of Enron
This is an analysis of how the application of specific organizational-behavior theories could have predicted the failure of Enron. Although there are many types of core topics of organizational behavior, the focus of this study will be on how leader behavior and power, and motivation contributed to the bankruptcy of Enron.
In addition, a comparison and contrast will be discussed on the relationships between the board, executive management, middle managers, and the organization contributed to the failure. Many people assumed that creative accounting was the major downfall of Enron but according to Stewart (2006) “the more fundamental causes appear to have been matters of organizational design” (p. 116). Leader Behavior and Power
It has been widely publicized that when CEO Jeff Skilling joined Enron in 1990 he immediately pushed the pipeline company into becoming an energy bank. This change in process allowed Enron to become the middle man for the gas market that at that time had become unreliable due to de-regulation. This action resulted in an accelerated growth of the company. Skilling also persuaded the Securities Exchange Commission (SEC) and Arthur Andersen, an accounting firm to approve the use of mark-to market accounting (M2M) which is a technique where future profit streams normally spread over the life of a specific contract can be taken up front when the contract is signed. Stewart (2006) stated that “Enron used this authorization to record in a single year all of the profit that would normally be recorded over a 10 to 20 year period” (p. 116). This method of accounting made the company appear to be more profitable; however, the profit based on future earnings that may or may not exist for years. Since the company appeared to be financially stable no one questioned the
Germaine Washington
LDR/531
February 13, 2012
James Kaczynski
Organizational Design and the Failure of Enron
This is an analysis of how the application of specific organizational-behavior theories could have predicted the failure of Enron. Although there are many types of core topics of organizational behavior, the focus of this study will be on how leader behavior and power, and motivation contributed to the bankruptcy of Enron.
In addition, a comparison and contrast will be discussed on the relationships between the board, executive management, middle managers, and the organization contributed to the failure. Many people assumed that creative accounting was the major downfall of Enron but according to Stewart (2006) “the more fundamental causes appear to have been matters of organizational design” (p. 116). Leader Behavior and Power
It has been widely publicized that when CEO Jeff Skilling joined Enron in 1990 he immediately pushed the pipeline company into becoming an energy bank. This change in process allowed Enron to become the middle man for the gas market that at that time had become unreliable due to de-regulation. This action resulted in an accelerated growth of the company. Skilling also persuaded the Securities Exchange Commission (SEC) and Arthur Andersen, an accounting firm to approve the use of mark-to market accounting (M2M) which is a technique where future profit streams normally spread over the life of a specific contract can be taken up front when the contract is signed. Stewart (2006) stated that “Enron used this authorization to record in a single year all of the profit that would normally be recorded over a 10 to 20 year period” (p. 116). This method of accounting made the company appear to be more profitable; however, the profit based on future earnings that may or may not exist for years. Since the company appeared to be financially stable no one questioned the
References: Robbins, S. P., & Judge, T. A. (2011). Oranizational Behavior (14th ed.). Upper Saddle River, New Jersey: Prentice Hall. Stewart, B. (2006, Spring). The Real reasons Enron Failed. Journal of Applied Corporate Finance, 18(2), 116-119. Rapoport, N. B. (2009, May). Lessons from Enron- And Why We Don 't Learn from Them. Commercial Lending Review, 24(3), 21-24.