Organizational Failure

The merger of Houston Natural Gas and Inter North, two major North American energy companies in 1985 saw the creation of Enron, which by 1989 was trading natural gas commodities at North American bourses. However, in one of the largest corporate scandals in American history, Enron in the course of under a year (December 2000 – November 2001) had its stock stumble from $84.87 to under $1. Enron then filed for Chapter 11 bankruptcy in December 2001. The analysis of these events offer insights into organizational failure and provide a model to test various organizational theories (Sterling, 2002)

Until the summer of 2000, Enron was a prosperous corporation generating revenue, new business and jobs on the regular. Enron initially began as a gas pipeline company but rapidly metamorphosed into the globe’s largest trader in gas, water, electricity and commodities as varied as bandwidth. Subsequently, review of Enron’s bookkeeping revealed inconsistencies. Evidence of tampering with the companies financial reports became apparent. These revelations nullified its profits sending it into loss (Fox, 2003)

Enron was suddenly embroidered in a massive credit crunch with a subsequent implosion of the corporation. It turned out that the company’s executives, aware of the imminent collapse sold their stock in the company in bulk while an unsuspecting public went on purchasing artificially bloated Enron shares. To confound the situation further, the revelation came that the same executives had effected changes in the company’s pension plan effectively freezing the employee retirement funds in Enron stock, a nose diving stock. Hence, while the executives abandoned ship, the workers woke up to a worthless pension plan (Fox, 2003)

Arthur Anderson Inc, Enron’s accounting firm raised all sorts of eyebrows in their attempt to explain how they gave a clean bill of health to a company with all manner of concealed losses. Later, it was revealed in the wake of a civil action of the accounting process that Arthur Anderson Inc had destroyed evidence in soft and hard copy concerning Enron’s accounting. The former auditing giant has since collapsed predictably. Enron’s downfall is stemmed on various factors. Enron tried to expand into new realms of business unsuccessfully. In striving to become the globe’s largest commodity trader, Enron outstretched itself. The most significant contribution however could be attributed to corruption (Sterling, 2002)

Enron’s dubious cash flow originated from spurious accounting. Whenever a subsidiary started losing money, Enron set up a shell company that would buy the failing subsidiary effectively erasing losses from its balance sheet. In its place was a cash ‘inflow’ from the shell company. The accounting never indicated that Enron had lent the money to the shell company in the first place. Equally corrupt was the fraudulent practice of recording the entirety of energy transactions as capitalization, rather than the actual amount of money made from the sale (Fox, 2003)

An analysis of various organizational theories attempts to predict and explain the rationale behind the collapse of the Enron Corporation. Classical organizational theory was proposed in the first half of the 20^th century merging the theories of scientific management, bureaucracy and administrative theory. The theory was rigidly mechanistic with its major shortcoming being the view to justify employee motivation to work strictly as a function of economic reward. Despite this, it reasonably explains the Enron debacle on the basis that the corrupt management practiced fraudulent business on the knowledge that handsome financial gain was in the offing (Crowther & Green, 2004)

Neoclassical organizational theory on the other hand evolved through the human relations movement. It was a reaction to the rigid, authoritarian structure of classical theory. Its objections to the rigidity of classical theory manifest as a call to the adoption of motivation, creativity and the promotion of individual growth at the workplace. This theory also explains some aspects of the Enron affair. At Enron, a corporate management structure existed whereby a non-rigid structure allowed executives to exercise their creativity with minimal regulatory oversight, albeit destructive creativity, in their stepwise manipulation of the company’s accounting. This allowance is also loosely based on contingency theory, which like neo classical theory views conflict as an entity to be avoided but goes on further to envisage conflict as inescapable but nonetheless manageable (Crowther & Green, 2004)

Systems organizational theory initially developed by Hungarian biologist Ludwig von Bertalanffy in 1928, and only recently applied to organizations today offers a different angle of assessment. The theory asserts that all components within an organization bear relation to one another. Changing one variable inevitably influences many others. It envisions a state of dynamic equilibrium within an organization as the elements within interact with the environment. This theory perhaps best predicts the events that unfolded at Enron. Consider the variable of sound accounting practice. With this variable changed, the equilibrium in the company had to shift to accommodate fraudulent accounting, resulting in all stakeholders in the company being affected in some way as alluded to above (Zey, 1999)

Enron’s leadership, management and organizational structure all played defining roles in the collapse of the company. The leadership selfishly steered a company forward with dishonesty to the shareholders and employees. The management accommodated the leadership’s shortcomings by effecting fraudulent business practice and the systems organizational structure assumed by the company ensured that the repercussions of the corruption permeated all levels of the company.

References:

Crowther, D., Green, M. (2004). Organizational theory. CIPD Publishing.

Fox, L. (2003). Enron: The Rise and Fall. John Wiley and Sons.

Sterling, T. F. (2002). The Enron scandal. Nova Publishers.

Zey, M. (1999). Rational choice theory and organizational theory: a critique. SAGE.