The Rise and Fall of Enron

When iconic commercial corporations are mentioned, it is hard to review them without mentioning the Enron Company. The company was indeed dominating the energy trade in the United States until late 2001. The company made history when its revenue grew by USD 87.3 billion in ten years i.e. between 1991 and 2000. This can be termed as the company’s greatest peak period. By then the shareholders of this company had all reasons to smile as their company delivered a total return of 507 percent (Salter, 2005). However, the saying that “all that glitters is not gold” was a reality to the company’s stakeholders- from shareholders whose company was now worth pennies, to the management who could not even imagine the embarrassing fall of the iconic company. The reality was hard to bear. There were several reasons as to why the company came down at such a surprising and alarming rate.

These problems varied widely. Some were a result of a dynamic business environment (Perin, 2002). Others were a result of new opportunities that were used in a misguided way. Others resulted from the dropping market share. Still, some resulted from inefficient and ineffective business processes, both internal and also external. One of the major causes of the Enron collapse was its untimely investments. This was purely internal organizational policy behavior. It can be purely attributed to the organization’s poor insight into studying the market. It is a matter of fact that the company had embarked on a logistic of molding itself as an achieving trading platform, and indeed this dream was realized. If the company kept up with such multi-faceted activities of arbitrage, or better still invested in derivative creation and business and the like-minded processes as it did in the 1990s, then what become of the company would have been an exact opposite. In fact, by so doing the company would have measured to the level of a much broad economic as well as a well-established financial market. However, the economy and the financial markets were at their peak in the early months of the year 2000 (Salter, 2005). Every aspiring company would have wished to utilize this golden moment to the highest and make the best income out of it. This is where the Enron Company was misguided. The company assumed a lot. It thought it would build a strong “sky scrapper of cards”. But there was a risk that the company was assuming; the policy which they employed of mounting very many investments at the same time. This mistake was among the major ones that made the company register the highest business bankruptcy in history. The strategy was wrong and untimely.

Another major problem that resulted in the collapse of Enron was its poor accounting. The accounting themselves were a problem to the energy giant. This was still another problem that was a result of a poor internal organization policy. Enron was initially perceived to be a big company financially but this was not the reality. Enron’s idea to decentralize its activities into many subsidiaries and cover business units was a strategy to hide a big loss that could have halted the company a bit sooner. Opposite to the requirements where the publicly trading businesses are supposed to display their financial statements open to the public, the company’s finances were in an understandable network of carefully drafted inexistent dealings between the company and its subsidiary business units, which covered up the company’s real financial position. As a matter of fact, losses had already been incurred in the company. However, these losses were covered by the company’s subsidiary business units while the holdings were mentioned. This made the company borrow a lot and it was able to expand to the extent of being electronic commerce and other ventures that raised a lot of questions. The company therefore made a bulk of the stock. As a result, the company’s employees’ returns, pensions, and in the long run compensations were very appealing. However, this silver plate did not last for long as the fraud was detected. Following the fraud detection, the company lost a good number of businesses. Many people lost trust in the company. In fact, many business analysts say that “Enron drew itself out of business”. With the truth in the minds of the executives of the company, they sold their shares earlier before the collapse of the company. Hence, these executives looted billions from the company prior to its fall. The employees, who knew nothing of the background plans, were left with helpless options and worthless pension packages. Hence this was a major cause of the company’s fall that brought it to its current position.

Management culture was another big challenge that eventually resulted in the fall of the company and brought it to the position that it is in now. Enron’s problem did not just come as a surprise. It was indeed a buried dangerous explosion in the premises of the business. It is none other than the poor business practice that gave an upper hand to greed and worst of all the fraud. Instead of the business concentrating on building real value, the management’s major objective was to maintain the manifestation of the value. In so doing the stock price kept rising. This was an exact opposite of what other competitive businesses who were doing well in the cooperate sector were doing. The latter were rewarding performance at any cost. As a matter of fact, in a single year, the company replaced almost fifteen percent of its employees (Healy & Palepu, 2003). The employees therefore did anything that they thought could guarantee their jobs. The integrity of the internal organization of the company was also shaky. The company also attracted a lot of political relationships in the reign of President Bill Clinton as well as that of Bush. This drew attention and preferential treatment from the administration. They also enjoyed an irresistible atmosphere of legitimacy. With the above-mentioned privileges among others, fraud perpetration in the company was as easy and fearlessly done as opening the doors of the company itself. In this context, the accounting malpractice has been backed by a poor, greedy, self-centered and capitalistic kind of management, and the two also can be attributed to being the reasons behind the company’s dark collapse.

Another reason that can be attributed to Enron’s collapse was the misinformed use of the derivatives as well as what they called the special functions units. In so doing, Enron had to take care of the risks that came together with the relationships it had with its units. This was another internal policy weakness.

The company had succeeded to shield the losses that it had incurred (Moncarz et al., 2006). Was it not for the fact that the truth does not stay hidden for long, especially where more than two people are involved or affected, it can be concluded that the company can still shield its weaknesses? This can be termed as strength. Strength can also be seen where the company can win recommendable connections with the high and mighty in the political administration. This is by far strength. When the company was doing fairly well financially, it was able to motivate its employees by providing them with encouraging remunerations and pension packages. The company was able to attract high and qualified personnel in its executive leadership. This enabled the company to make some vital and rational decisions that the company took. This is also is a notable strength.

However, the weaknesses were also sound in the company (Thomas, 2002). When the topmost executives realized that the company was almost collapsing, they sold their shares in advance instead of soliciting ways of saving the company. This is a primitive approach and more so a weakness to a business challenge. The company was also replacing about 15 percent of its labor force every year. They, therefore, lost the self-motivation from the workers who were now fighting for their jobs’ survival. They also lost some potential useful skills from the workers who were lost annually. This also is a poor business approach and can be termed as a weakness.

The company can move out of the current situation and reclaim its former glory. It can also take the commercial arena by storm as it did in the 1990s. However, this can be achieved only if the company changes some mode of its operations. The company should introduce a policy that will help it run with zero political interference or relationships. The company should harmonize its books of accounts to state the real financial position of the business. The company should also invite independent auditors publicly. The invited auditors should scrutinize the company’s books of record display the criticisms and report publicly. The company should prepare its financial statements and display them publicly. The company should also substitute or replace the former executives with a new brand of leaders. All these will be aimed at reinstating the trust that the business enjoyed during its peak time. Some of the business partnership allies it enjoyed might come back. It is also good for the business to keep the public involved and also informed of the reforms that the company is making to help it regain the public reputation it used to enjoy.

However, finances will be a challenge to bring the above changes into effect. On the other hand, getting rid of the old leadership is also not easy. Winning back the public trust will also take time. It will be worth noting that patience and rational decision-making will be vital in the company’s recovery. The company should embark on ways of maintaining their employees rather than changing them more often.

It is worth recommending that this company gets a complete review of its operation and leadership structure. The leadership positions and jobs should also be reapplied for. The workers’ employment scheme should also be revised to ensure employees’ job security and promote innovativeness. The financial statements, balancing and release policies should also be reviewed. The shield business entities should also be disintegrated from the company. The looted company holdings should also be claimed. With all said and done, it is worth noting that rebuilding a company and reinstating its original reputation is harder than starting the company itself. Therefore, the company’s management should take time and be patient. They should also be very rational in the decisions they make.

References

Healy, P. M. and Palepu, K. G. (2003). The fall of Enron. Journal of Economic Perspectives, 17(2), 3–26.

Moncarz, E. N., Moncarz, R., Cabello, A. and Moncarz, B. (2006). The rise and collapse of Enron: Financial innovation, errors and lessons. Contaduría y Administración, (218), E-Journal. Web.

Perin, M. (2002). Broker fired in fall of Enron. Houston Business Journal. Web.

Salter, M. S. (2005). Innovation corrupted: The rise and fall of Enron (A). Harvard Business School, HBS Case No. 904-036.

Thomas, W. C. (2002). The rise and fall of Enron. Journal of Accountancy, Web.

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BusinessEssay. "The Rise and Fall of Enron." December 13, 2022. https://business-essay.com/the-rise-and-fall-of-enron/.