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A lot of discussions have been put forward concerning whether business corporations have a mandate for social responsibility or not. It is however agreeable that no business thrives in isolation. Businesses require the market and employees, thus any organization must have some interaction with the surrounding community. The term corporate social responsibility (CSR) refers to the role that business organizations have towards creating a healthy and prosperous surrounding community/environment. Frederick (2002: p. 306) suggests that the CSR of a particular organization is the measure of the organizations social responsiveness.
The discussion on business ethics and responsibilities of business towards the community has been witnessed where many philosophers support the argument, while others reject the responsibility. The term ethics may be defined as the study of morality that enables the formulation of specific rules and principles that determine right and wrong for a given encounter. On the other hand, rules and principles form ethical theories (Crane and Matten, 2007: p 8).
Some philosophers argue that the only responsibility of a business corporation is to increase profits without any concerns about social issues. Contrary to such arguments, the supporters of the stakeholders theory hold that businesses have a responsibility beyond the stakeholders including the employees, customers, community, and the environment at large (Jones, Parker& Bos, 2005: p. 5)
Business organizations participate in the different CSR through ethical practices. The term ethical practices refer to the right rather than the wrong practices towards helping society. Ethics aim at establishing a moral guideline towards the conductance of appropriate behavior. It is expected that the behavior should be conducted in a manner that professional standards will be met (Social Responsibility and Organizational Ethics, 2009: Para 1). Several theories have been put forward that tries to justify the social responsibility of organizations.
In the current business issues there has been witnessed the case where the fall of large and prosperous business organizations have been caused by the lack of the corporate business responsibility. On the other hand some companys success has been linked to their efforts in contributing to the responsibility and strongly upholding of the code of ethics. Social contract theories suggest that the managers of different companies have the mandate of formulating policies that are aimed at contributing to the social responsibility.
The issue of corporate social responsibility and business ethics has been in focus in recent times especially in USA after the collapse of Enron Company. The social contract theory illustrates that the corporate society in a form of contract with the business organizations that gives the managers of the organizations a mandate to make policies that portrays CSR. However, since the corporate society is unable to protect their interests due to lack of an explicit contract they only rely on the decisions that are made by the management of the companies in order to ensure that their interests are met.
This paper discusses the different ethical issues that were involved in the USA based company, Enron, which collapsed in 2002 after being declared bankrupt following a corporate fraud case where the top management passes policies and undertook deals that were aimed at benefiting themselves. This case shows how the corporate social responsibility which is anchored in business ethics contributed to the failure of this reputable company.
Enron case study
Enron was one of the worlds largest companies involved in the production of gas, oil and electricity in the United States of America. During its existence, the company was portrayed as beacon of success and prosperity in the worlds corporate level. The top management of the company was to be answerable to a board of directors that was charged with the responsibility of ensuring smooth running of the company through its partnerships, ventures, and investment decisions. In 2001, Enron Company collapsed for the reasons drawn from its failure to uphold business ethics which has been termed as the largest corporate fraud case of all times. The fall of Enron was witnessed through the loss of jobs by the employees and loss of investors money due to corporate greed (Berenbeim, 2002: p 1)
Although the case of Enron can be attributed to political influences, a lot of evidence has shown that the top executives intentionally manipulated a lot of the resources in the company for personal gains rather than for the corporate gains. It is thus possible to outline that the case in Enron company is a case involving business ethics in the fact that the managers were charged with the responsibility of not only of looking at the interests of the company as a business entity but also the interests of the corporate society. It has been claimed that the business entities must be accountable both to the corporate society as well as to the stakeholders on the issues relating to business ethics. Some aspects of business ethics include, releasing standard and quality goods and services to the consumers at fair prices, better pay for the employees, accountability by the management, environmental conservation measures, protection of customers interests etc.
This paper addresses the various ethical issues related to Enron Company including truth and disclosure, fiduciary duties of the managers and directors, whistle blowing, bribes and gifts and agent principal relationship.
Truth and disclosure
Business competition in the market should be ethical. Although the market in which Enron traded its products is a capitalistic market i.e. where one puts every effort to maximize individual gains, it unfairly interfered with the rights of other players in the market. According to Crane and Matten (2007; p 378) some of the unethical business practices that relate to the competition in the market include; negative advertising of other companies products, stealing customers, predatory pricing and sabotage. Enron Company, which is a petrochemical and energy generating industry through its marketing policies contributed to unfair competition to other producers of similar products in the market thus interfering with their performance.
The stakeholders who form an important part of the corporate society in any company have the right to be disclosed on the financial position of any company. In Enrons case, it is reported that the stakeholders were deceived of the actual position of the company financially. This was affected through illegal amendments of the financial statements that were presented to the general public. In addition, it is claimed that while the public was being reassured of protection of their stock through electronic media, the companys management was actually selling the stock. According to Higson (2003: p 194) in his corporate financial reporting theory shows that the business organizations have the responsibility to disclose the right information to the stakeholders and the public in general concerning their financial position. Further, he argues that social reporting or corporate social responsibility is designed to discharge social accountability.
The case of Enron shows unethical practices where, although the management undertook to report to the stakeholders and the public on the financial aspects of the company, it was actually disclosing the wrong and untrue statements.
Reporting as a responsibility of any business company is essential in the fact that it enables the general public and more so the stakeholders in making decisions that directly relate to their investments and interests in the company. Higson (2003, p 197), indicates that one approach to reporting is to provide investors with all the pieces of information that can reasonably be provided so that they can arrive at their own estimates of underlying financial performance . At some instance, the actual position of Enron Company was that it was bankrupt. This position had not been communicated to the stakeholders who could have made decisions to avoid the damages caused as a result. The fact that untrue and misleading statements were released to the public damaged the companys reputation. This is due to the negative perception of the corporate ethics the company had already committed in which case; Enron management completely disregarded their corporate responsibility for individual gains (Berenbeim, 2002, p 2).
Fiduciary duties of the directors and managers
One of the major obligations of a manager is to protect and uphold companys code of ethics. The board of directors of Enron Company allowed such breach to their code of ethics when they allowed the companies chief financial officer to serve as a general partner. As a matter of fact, the managers of any company should render their services to the company in good faith and in full disclosure of their undertakings (Berenbeim (2002, p 3)
The Financial Accounting Standards Board (FASB) provides that an investor with over 3% stake in partnership with a company cannot be regarded as a subsidiary partner, even if the company supplies the other 97 percent of the capital. In this case, the CFO had been linked to a company that was a major partner with Enron. However, even after the disclosure of this fact, the board of directors took no action in correcting the situation. Thus the management was not acting in the interest of the stakeholders but on their interest. Managers have a fiduciary relationship with the stakeholders who include the suppliers, customers, employees, the community at large and also the management which acts as the agent to the stakeholders. In addition, each stakeholder has a right to take part in decision making and determining the future of the firm (Norman, 2004: p 4).
Bribes and gifts
In order to conceal the evidence in the fraud, Enron had to issue out bribes and gifts to accountants, lawyers and analysts. The fact that issuance of bribes is an unethical business practice, the management of the Enron company tried to protect their actions from public scrutiny (Berenbeim, 2002: p 3). Bribery is one of the unethical business practices that heightens corruption and misappropriation of funds in an organization. Managers who are corrupt will use bribes to conceal evidence that can implicate them on fraud cases and also to perpetrate mismanagement of the firms resources.
The agent principle relationship
The management and the directors are the agents mandated to maximize value of the shareholders and other stakeholders. In this situation, one individual (agent) act for and in the interest of the principal. In this case the theory of principal agent is portrayed where the Arthur Andersen Company was hired to do the auditing of the company. This decision was carried out in the interest of the top executives who wanted to cover up the fraud practices. Later, the company was closed down after one year to destroy the evidence implicating Enron management with the scandal. Although the auditors were hired by the directors of the company, their work involved direct agency to the stakeholders of the company and therefore the stakeholders were to rely on the report presented by the auditors in order to understand the financial position of the company.
Whistle blowers
Whistle blowers publicize fraud issues in companies that are in the interest of the company. Companies that uphold ethics encourage whistle blowing. In the case of Enron, it was witnessed that the whistle blower of the fraud that was going on was sacked from the company. Whistle blowing is identified as a last resort to protect clients, employees or the organization against its self destruction due to unethical deals. It can be concluded that, in the various scandals that surrounded the collapse of Enron, many people were aware of the unscrupulous deals. However, it was only later that Sharon Watkins disclosed the unethical practices that were taking place in Enron. This prompted the dismissal of Watkins from the company. After this case, the Sarbanes-Oxley Act of 2002 was passed in the corporate governance law which provided whistle blowers with protection (Haynes & Boone, 2003: Para 3). In addition, in order to further protect the investors and other users of financial statements of companies, the Securities And Exchange Commission (SEC) was formed that was charged with the implementation of the reforms that were formulated to prevent cases similar to Enrons.
Conclusions and recommendations
The case of the collapse of Enron Company relates to the ignored business ethics and the corporate social responsibility by the company. Many conclusions can be drawn from this case which is regarded as one of the worlds largest corporate fraud cases. First, any company has an obligation to all of its stakeholders and the corporate society in general. The case of Enron portrays a situation where the interests of these groups were not met. The decisions by the executives were wrong and illegal. Although the company had a well laid code of ethics, the management of the company was unable to hold its integrity when it violated the same code of ethics. Secondly, the success or failure of a company is partly subject to its relationship with the corporate society and partly due to the efficiency of the internal management. Enron managers were thus not acting for the interests of the stakeholders but for their own individual gains.
The question of upholding business ethics in any business requires that the top management develop an organization culture that allows people to challenge ideas, plans and suggestions. Although people knew about the fraud that was taking place in Enron, the companys culture did not allow people to question the events that were taking place. As a result the mess as a result of the scandal eventually led to loss of jobs and peoples investments when the company collapsed. Research has shown that for businesses to successfully address ethical problems, they have to base their policies on the organizations culture on top of mandate of the law. Thus, for organizations to show adherence to the CSR they must invest in anti-corruption programs and strategies than entails the adoption of a culture of compliance with the ethical practices.
The government should act in the interest of the stakeholders, thus stiff penalties should be put in place by the government through its legislation to enable fair business practices that uphold morals. Although Enron had a code of ethics to be followed the management went forward breaking the same code. The government should put emphasis on the moral practices as a means of protecting the interests of the stakeholders. In addition the share holders should take the responsibility of monitoring the business activities taking place. Although the business ethics theories put the management accountable to the stakeholders, the stakeholders should take up the responsibility of challenging the activities of the businesses. This can be enhanced where the legislations are regulated to include a larger representation of the stakeholders in the decision making processes. The corporate fraud cases can be attributed to the fact that corporate social responsibility and business ethics theories focus only on the attention of the organization to the stakeholder and not the vise versa. In the case of Enron, employees lost their jobs and investors lost their money. This poses a challenge to strong holders of the CSR concepts where in addition to focusing on the responsibility of the organization to the corporate society and environment the concept should be adjusted to include the responsibilities of the stakeholders to the organizations to ensure that the organization prospers while their interests are taken care of.
In order to create harmony in the running of organizations where CSR initiatives are strongly held the concepts should include the actions to be taken against managers who fail to take the interests of the stake holders more seriously. Thus, it is not enough to have a code of ethics in the companies but what is most important is the integrity with which the ethics are upheld in the companys corporate culture.
In order to address the issue of agent and principal relationships the governments and other relevant authorities should work to implement legislations that prohibits auditing firms from offering consultancy services to the companies they engage in auditing. The important of such a legislation can is evident if the relationship between Enron and Arthur Anderson is closely analyzed. The later collapsed after one year of the collapse of Enron. This means that in offering auditing and consultancy services Arthur Anderson did have its own individual motives while advising Enron on some business issues.
Reference
Andrew Higson 2003 Corporate financial reporting theory and practice. Newcastle, SAGE
Berenbeim, R., 2002. The Enron ethics breakdown. (Online). Web.
Crane, A. & Matten, D., 2007. Business ethics: managing corporate citizenship and sustainability in the age of globalization. London, Oxford University Press.
Frederick, R., 2002. A companion to business ethics. Malden, Blackwell publishers limited.
Haynes & Boone. 2003. Corporate Governance, Ethical Conduct and Public Disclosures in the Post-Enron Era. (Online). Web.
Jones, C. Parker, M. Bos, R. 2005. For business ethics. NY, Routledge.
Norman, W. 2004. What can the Stakeholder Theory Learn from Enron? (Online). Web.
Social Responsibility and Organizational Ethics. 2009. Business Ethics. Social Responsibility and Organizational Ethics. (Online). Web.
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