The Collapse of Enron: A Psychological Thriller

Simply the word “Enron” will cause anybody who was alive in 2001 to shudder. It has become associated with ruthless fraud and Ken Lay, Enron’s ex-CEO, has become the epitome of the corrupt executive. Though unscrupulous, Lay managed to transform Enron from an abstract concept to America’s seventh largest company in just 15 years. Initially a natural gas supplier, Enron molted through multiple iterations throughout the 1990’s, becoming a natural gas and electricity commodity-trader (O’Leary, 2002). However, regardless of what they bought and sold, it was their accounting tactics that makes them note-worthy. Enron traders would link buyers and sellers in commodity deals and then record future contracts as current company revenue (O’Leary, 2002). Once shareholders discovered this, Enron – a company with $62 billion in assets – filed for Chapter 11. This left 21,000 people out of work and investors incurred losses of $11 billion (Oppel & Sorkin, 2001). The three articles reviewed look at Enron from three different viewpoints. Clinton Free and others at the Ivey School examine the downfall of Enron by looking at leadership, culture and management controls. Conversely, Malcolm Salter at the Wall Street Journal analyzes Enron’s compensation system and applies to companies today. Finally, Oppel and Sorkin at the New York Times wrote an overview of Enron’s collapse over a decade ago. While the scandal was certainly not a grassroots effort, most of Enron’s employees blindly followed orders and acted as accomplices. Thus, how did the organizational structure of Enron allow the company to go bankrupt and shamelessly rob investors of billions?

In a corporate hierarchy, obedience is imperative; the vision and direction of the company should disseminate down to the lowest rungs. Obedience is when an authority figure – somebody with influence in a social context – is able to manipulate the actions of subordinates (Ciccarelli, White, Fritzley, & Harrigan, 2012, p. 482). The seminal study into this chilling facet of human nature was Stanley Milgram’s shocking experiment. Briefly, Milgram had an authority figure (an experimenter in a white lab coat) pressure the subjects of the experiment into giving anonymous individuals increasingly severe electric shocks. The unnerving conclusion of his research was that 65% of the subjects in the experiment were willing to give fatal 450-volt shocks (Ciccarelli et al., 2012, p. 483). Though Enron’s fraud was not a matter of life and death, the principles of Milgram’s study directly apply. When Jeff Skilling became CEO in 2000, he began by drastically changing corporate culture into one of extreme capitalism and machismo, making himself a deity in the eyes of his employees. For instance, he made the grand gesture of changing Enron’s slogan to “The World’s Leading Company” (Free, Stein, & Macintosh, 2007). He morphed into the experimenter from Milgram’s experiment. By creating a company culture centered on Skilling, each rung of the hierarchy derived their authority from him. Enron had an intricate corporate hierarchy in which each employee had a direct supervisor. Thus, employees were able to disregard the moral implications of their actions by following the orders of leadership (Free, Stein & Macintosh, 2007). Further, this culture was concretely reinforced through their Performance Review System, based on input from the employee’s boss and five co-workers. If an employee received a review that was in the bottom 15% of the company, they were most likely fired (Free, Stein, & Macintosh, 2007). It was an arbitrary system that enforced blind obedience.

Obedience was not just enforced by the worry of being laid off, but also by the way in which Enron employees were compensated. Therefore, the arousal theory to motivation is a pivotal element to consider in analyzing the demise of Enron. Arousal theorists believe that human beings have ideal levels of stress. Subsequently, the Yerkes-Dodson law states that performance on tasks depends entirely on the degree of arousal (Ciccarelli et al., 2012, p. 355). In general, the optimal stress level is moderate; however, those that require a higher-than-average level of arousal are known as sensation seekers (Ciccarelli et al., 2012, p. 355). Enron prided itself on predominantly hiring these types of individuals and subsequently weeding out those that did not belong. The ideal candidate would be a risk-taking and highly intelligent young man that could be molded into an exploitative trader (Free, Stein, & Macintosh, 2007). More importantly however, Enron used compensation systems that allowed these risk-taking individuals to thrive. For instance, Enron used a bonus system that encouraged traders to make as many risky transactions as possible and exaggerate their potential value to maximize personal gains and short-term profits for the company (Salter & George, 2008). Even if certain contracts did not come to full fruition, bonuses were not annulled. Thus, Enron was giving their traders the thrill of gambling without personal liability and reinforced this behavior with huge annual bonuses (Salter & George, 2008).     

In sum, Enron’s downfall was the result of two highly interrelated psychological principles: obedience and the arousal approach to motivation. Enron had a culture of obedience reinforced at every level of the corporate hierarchy, only hired people with specific personality types and used compensation packages that encouraged gambling. Both psychological approaches are equally important because one without the other would be ineffective. While obedience is alarmingly powerful in itself, employees need to feel stimulated in order to remain driven.    

By,

Jeremy Herman

References

Ciccarelli, S.K., White, J.N., Fritzley, V.H., Harrigan, T. (2012). Psychology (2nd

Canadian ed.). Upper Saddle River, NJ: Pearson Education, Inc.

Free, C., Stein, M. & Macintosh, N. (2007, July/August). Management controls: the organizational fraud triangle of leadership, culture and control in Enron. Ivey Business Journal. Retrieved from http://iveybusinessjournal.com/topics/the-organization/management-controls-the-organizational-fraud-triangle-of-leadership-culture-and-control-in-enron#.U1RBruZdXSk 

O’Leary, C. (2002, December 31). Enron—what happened?: year in review 2002.

Encyclopaedia Britannica. Retrieved from http://www.britannica.com/topic/

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Oppel, R.A. & Sorkin, A.R. (2001, December 3). Enron's collapse: the overview; Enron

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from http://www.nytimes.com/2001/12/03/business/enron-s-collapse-the-

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Salter, M. & George, B. (2008, December 15). Since Enron, little has changed. The Wall

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