The complete lack of ethical leadership displayed in the Enron scandal has hardly been unique over the last decade, but rather seems to be one of many examples of massive corporate fraud, corruption and lack of social responsibility to employees, consumers, shareholders and the general public. Fraud and corruption on Wall Street and the mortgage industry resulted in the worst financial meltdown in history, and WorldCom under the leadership of Bernie Ebbers collapsed in one of the worst corporate frauds in history. Over the last decade, public confidence in corporate leadership and the economic system in general has been badly shaken, and with good reason. There are some exceptions to this dismal picture of business ethics in recent decades, like the Gap Code of ethics, but not nearly enough of them.
Milton Friedman and other free market economists have argued that profit maximization is the only realistic criterion by which business organizational effectiveness should be reasonably judged. Corporations have no moral or ethical purpose, and exist only to make a profit for their shareholders, but events over the past few years have demonstrated conclusively that this attitude is disastrous. According to a survey of 65 senior executive in October 2004 by the Economist Intelligence Unit, Corporate Social Responsibility (CSR) is becoming more important to companies than ever before: 85% of executives believed it was central or very important to their decision-making; 64% thought that it helped the bottom line; 61% believed that it improved staff morale (Economist, 2005, p. 3); and 81% of investors regard it as central or very important to their investment decisions (Economist, p. 4). Companies no longer simply talk about CSR to appease labor and environmental groups but now regard it as “a normal facet of business” that only “outliers” will ignore in the future. In the United States, one-ninth of all investment dollars are already in socially responsible funds—about $2 trillion—and this will increase in the future (Economist, p. 6). Thus even from a narrowly utilitarian and profit-maximizing viewpoint, Corporations that are perceived to be lacking in social responsibility can face catastrophic consequences, including losses in profitability and public trust, as well as possible lawsuits and criminal prosecution. For this reason, to improve its public image or to avoid lawsuits and regulatory actions by governments, a company might take a utilitarian position that acting in a socially responsible position might be in its rational self-interest, no matter what the objective merits of the case on human rights grounds. Yet the Enron scandal, the financial meltdown on Wall Street and many similar cases demonstrate that ethical business leadership has often been absent, although there are a few exceptions like the Gap Company.
Enron collapsed very quickly in November 2001, and its failure should have been a warning to serious dysfunctions in the entire corporate and financial system, but this did not happen. Its executives admitted that they had falsified its records going back for at least five years, although in reality they had been doing so since the 1980s. When the company filed Chapter 11 bankruptcy it laid off over 20,000 workers and at least $24 billion in pension assets, stocks and mutual funds also vanished (McLean and Elkind 2003). In addition, the Arthur Anderson accounting firm that had been complicit in covering up the fraud and embezzlement at Enron for many years, also went out of business. This catastrophe also demonstrated that Wall Street banks, stock analysts and ratings agencies had either been deceived or allowed themselves to be deceived by Enron when they continually painted a positive picture of the company and its future prospects. Later in the decade, the exact same problem would occur with the banks and investment firms that were marking ‘assets’ of dubious values like subprime mortgages. They also collapsed and ended up receiving trillions in dollars in bailouts from the Congress and the Federal Reserve, which was also yet another indication that Wall Street and corporate America had basically bought the government and both political parties. Enron had certainly done so with donations to politicians of both parties, and was especially close to both George Bush’s, who helped the company obtain the deregulation it desired and billions in government subsidies.
In Criminology Today, Gene Stephens, predicted that the Internet would make white-collar crimes like those of Enron far more common since the company found it easier to conceal bogus transactions, clients and traders using the new technologies. Advancements in copying technology, instantaneous financial transactions and rampant corruption in the U.S. all facilitated the white-collar crime epidemic (Schmalleger, 2008, p. 508). As Joseph F. Coates asserted "the crimes that have the widest negative effects- in the advanced nations will be increasingly economic and computer based”, including electronic theft and fraud, manipulation and disruption of records, and tampering with security systems (Schmalleger, p. 504). Enron was a house of cards that should have collapsed years before, except that the accountants and analysts who concealed the fraud, and in fact were ordered to do so by their superiors. Its profits were all smoke and mirrors, but Wall Street promoted the company as if it had invented a new business model. None of the analysts and accountants went to prison, unlike Ken Lay, Jeff Skilling and Andrew Fasto, and they all denied any wrongdoing. Cliff Baxter, another executive who had been very close to Skilling, committed suicide after the scandal became public, although his manic depression could also have been a factor. Arthur Anderson had been lying about Enron’s false accounting since 1987, when it already knew that the company was making fictional trades, setting up offshore accounts under the names of persons who did not exist and engaging in dishonest financial reporting (McLean and Elkind 2003). All of these are felonies under federal law, but at Enron they continued for years until the company finally crumbled like the pyramid scheme that it really was.
In contrast to all the blatant and obvious failures in ethics social responsibility in recent times, Corporate Responsibility Magazine listed the Gap as one its 100 best corporate citizens in 2010, with a rank of ninth overall and the best in the retail category. This is based on factors like human rights, philanthropy, environment, employee relations and governance. Gap has been praised by the International Labor Rights Fund, Workers United, the Natural Resources Defense Council and Ethical Trading Initiatives for its ethical social, labor and environmental policies (Gap Social Responsibility Report, p. 11). It sought to build links with unions and environmental organizations, governments, employees, unions and community investment funds. Gap developed new policies of social and environmental awareness designed to “appeal to its young and progressive clientele”, or at least the type of customers it hoped to attract. Perhaps this helped improve its sales in a very difficult economic climate, which rose by 12% in 2010 (Malhortra 2010). In India, Gap received the Personal Advancements, Career Enhancement (PACE) award for improving the promotion and educational opportunities for women in the textile and garment industries. Gap also received the award for World’s Most Ethical Company in the retail sector, and since 2008 (Malhortra 2010).
Gap has always tried to attract a young clientele and the use of child labor and slave labor in industry was highly damaging to its corporate image and brand names, so it responded with new policies of corporate social responsibility that examined its entire supply chain to eliminate the worst abuses. Gap does cancel contracts with manufacturers in the developing world that do not meet the standards of its Code of Conduct and now claims that it no longer employs child or sweatshop labor. This is still common in the developing world, with children as young as five being employed for very low pay to help prevent their families from starving. In 2008 there were over 260 million child laborers in the world, with at least half employed in dangerous conditions (Gap Social Responsibility Report, p. 34). Gap has a “zero tolerance” policy for child labor, and refused to work with the government of Uzbekistan when it organized children to harvest cotton (Gap Social Responsibility Report, p. 37). 60% of children in India worked and did not receive adequate educations, and in 2007, the Observer in the UK reported that children as young as ten had been sold into slavery in Indian textile and garment factories that made products for Gap. Gap cancelled contracts with 136 factories in 2006 because of violations of it Code of Conduct, including 42 in China and 31 in India. As of 2010, 22% of Gap’s products were manufactured in China, but the company stated that it had no contracts with sweatshops since 2004 (Malhortra 2010).
In light of Enron’s example and the more recent fraud and corruption among the large banks and investment houses, the main recommendation would be that the provisions of Sarbanes-Oxley and Dodd-Frank be enforced vigorously around the world. Companies that continually lie to public and investors and cover up their true financial condition should be driven out if business and their CEOs and CFOs should face criminal and civil prosecution. With Sarbanes-Oxley, few people really “thought that the tightening of the rules was a bad thing”, although there were frequent complaints about the costs of compliance (Holt 2008). These stricter controls over accounting and auditing practices caused many corporations to delist from U.S. exchanges, yet foreign countries have also been passing their own versions of SOX since 2002 and regulations are certainly going to become even stricter and better enforced because of the recent financial meltdowns in Europe and the United States. In the future, laws and regulations like SOX and Dodd-Frank are going to be the international norm. SOX was correct in forcing CEOs and CFOs to sign all financial reports are certify them as true to the best of their knowledge, even though they may not be familiar with every detail of the transactions of large corporations. On principle, making the boards and the leading executives civilly and criminal liable for all false reporting should act as a deterrent to ethical and legal violations in the future, as long as the law is enforced.
That massive fraud at Enron had continued for so many years without any real auditing, regulation and public scrutiny should have served as an object lesson that something had gone seriously wrong with corporate America. Lay and Skilling eventually went to prison and Congress passed the more stringent Sarbanes-Oxley Act in order to prevent such fraud in the future, but in the end this was not sufficient to prevent the larger collapse that occurred on Wall Street in 2008-09. In that case, the entire global financial system came close to the type of crash that the world had not seen since 1929, and ultimately the fiasco cost the United States trillions of dollars. Enron is a testament to the deregulated, out-of-control capitalism that had been brought back to life in the United States by the Reagan administration. None of this was new in American history, and such massive fraud, corruption and speculative bubbles had all occurred in the past, but evidently every generation needs to learn the same lessons again and again. New regulations like Sarbanes-Oxley and Dodd-Frank have been put in place to prevent a repetition of these scandals, despite considerable resistance from the business community over the costs of implementing the new rules. Such changes were essential in order to restore some semblance of public trust and confidence in corporate capitalism after a decade of scandals. Very few large companies seemed to be living up to even basic standards of ethics and social responsibility, although Gap was an exception. In many ways, though, the criminality of Enron’s leadership has become a symbol of a scandalous era in American history that has a great deal in common with the Gilded Age.
Anand, S. (2011). Essentials of the Dodd-Frank Act. NY: John Wiley.
Enron—The Smartest Guys in the Room (2005). Starring John Beard and Jim Chanos. Directed by Alex Gibney.
Gap Inc. 2007/2008 Social Responsibility Report.
The Importance of Corporate Social Responsibility (2005). The Economist Intelligence Unit.
Holt, M.F. (2008). The Sarbanes-Oxley Act: Costs, Benefits and Business Impacts. CIMA Publishing.
The Importance of Corporate Social Responsibility. (2005). The Economist Intelligence Unit.
Malhotra, H. B. (2010). “Gap's Social Responsibility Driving Retail Growth”. The Epoch Times, May 3, 2010.
McLean, B. and P. Elkend. (2003). The Smartest Guys in the Room. Portfolio Hardcover.
Schmalleger, F. (2008). Criminology Today: An Integrative Introduction. Pearson Education, Inc.