In the late 1990s, the state of California deregulated many of its electricity markets, opening them up to private sector energy companies. Enron Corporation had long lobbied for deregulation of such markets and would likely have profited greatly had Californiaâ€™s experiment succeeded and become a model for other states. Enron CEO Ken Lay wrote a public statement saying that Enron â€œbelieves in conducting business affairs in accordance with the highest ethical standards… your recognition of our ethical standards allows Enron employees to work with you via armâ€™s length transactions and avoids potentially embarrassing and unethical situations.â€ At the same time, Tim Belden, a key Enron employee in its energy trading group, noticed that Californiaâ€™s â€œcomplex set of rules…are prone to gaming.â€
According to Bethany McLean and Peter Elkind, authors of The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron, â€œIn one scheme, Enron submitted a schedule reflecting demand that wasnâ€™t there… Another was a variation of the Silverpeak experiment: Enron filed imaginary transmission schedules in order to get paid to alleviate congestion that didnâ€™t really exist… Get Shorty was a strategy that involved selling power and other services that Enron did not have for use as reserves…â€ Some Enron employees admitted that their schemes were â€œkind of squirrelly,â€ but used them because they were profitable. The impact on customers was clear: electricity prices rose and rolling blackouts occurred. Enronâ€™s profits, however, quadrupled. An Enron lawyer later wrote that the Enron traders did not think â€œthey did anything wrong.â€ Another employee admitted, â€œThe attitude was, â€˜play by your own rules.â€™ …The energy markets were new, immature, unsupervised. We took pride in getting around the rules.â€ In October 2001, Enronâ€™s unethical and illegal business practices became public knowledge. Enronâ€™s stock prices plummeted, and the company filed for bankruptcy in December 2001.
Reflect on and answer the following questions:
1. What is the role of corporate governance in business conduct for a company? 2. How do you think authority was distributed at Enron?
3. Many of Enronâ€™s employees were not involved in the scandalous activities, yet they were affected by them anyway. Imagine you were a young employee at Enron at that time and saw the unethical conduct of those around you. How would you do?