Corporate Governance @ HRM - Enron Corporation, USA

 

SPE- Acronym for Special Purpose Entities. SPE’s reflect a common financing technique for companies. Companies can cut their risk by moving assets into separate partnerships that can be sold to outside investors. In Enron’s case, assets that were losing money were sold to partnerships. Enron listed the sales of these assets as earnings. However, to be legitimate, accounting rules require that an SPE be legally isolated from the company that created it.  The SPE’s relied upon Enron managers for leadership and Enron stock for capital. When outside auditors told Enron to treat some of the 4,000 SPE’s it had created as part of Enron, the company had to take the $1-billion charge against earnings.

Energy companies lobbied congress in the 1980s for deregulation of the energy business. Throughout all of this, Enron and its key members were making political contributions to the white house and congress. Kenneth Lay donated $100,000 to President Bush in 2000, and in 2001 Bush invited Lay to become an advisor to his transition team. In the year 2000, Kenneth Lay met three times with Dick Cheney to discuss energy policy review. When the review was published in May 2001, it was very favorable to the Enron and the energy sector.  He quit as CEO in February 2001.Energy policy was changed and Washington lifted controls on who could produce energy and how it was sold

By the late 1990s Enron controlled some 25 percent of all electricity and natural gas contracts traded worldwide and were considered the best in the business. This success led Enron to act as a market middleman for other commodities as diverse as lumber and Internet bandwidth (the rate at which data can be delivered over the Internet).

Jeff Skilling took and aggressive approach to expand Enron by trading futures in gas contracts. He was Enron's chief executive in the first half of 2001. Since joining the company in 1990, Skilling helped transform Enron from a natural-gas pipeline company into an energy-trading powerhouse. Under Skilling’s new plan Enron bet against future movements in the price of gas-generated energy. “Enron bought and sold tomorrow’s gas at a fixed price today”. With every trade, Enron took a cut for transaction costs

Using the internet to promote trading, Enron became the most successful player in the futures game; 90% of Enron’s income came from trades. Enron took advantage of the dot.com boom and traded internet bandwidth. The value of Enron’s online transactions was huge ($880 billion). The problem was Enron wasn’t making money on many of their online trades because they made the market very efficient. Enron began tweaking the numbers in their financial statements with accounting techniques to hide their losses

Jeffrey Skilling, Enron's chief executive in the first half of 2001. Since joining the company in 1990, Skilling helped transform Enron from a natural-gas pipeline company into an energy-trading powerhouse.

The company had a strong code of corporate ethics, written up in a 61-page booklet and centring on Enron’s guiding principles of RICE (Respect, Integrity, Communication, Excellence). These were prominently displayed on wall-posters, key rings, mouse mats and T-shirts and all employees had to sign a certificate of compliance. In practice, however, the unrelenting emphasis on profit growth and individual initiative tipped the culture from one that awarded aggressive strategy to one that increasingly relied on unethical corner-cutting. The corporate ethics were in place, but they were rarely policed and frequently ignored if they stood in the way of the more ‘important’ business. Enron employees were easily identifiable by their swagger. The rewards for those who performed well were high: bonus day at Enron became known in the city as car day.

Enron’s HR department developed human resource systems within Enron that measured and rewarded . The company’s benefits systems failed to meet its fiduciary duty to protect its employees’ retirement earnings. And its performance management system did not punish (and may even have encouraged) workers, managers and executives who took unreasonable risks. The most obvious error was the setting of retirement fund rules that restricted employees from selling holdings in Enron stock, while allowing senior management to sell large volumes of theirs. Having a percentage of an employee’s pay based on performance is an excellent practice. However, making the rewarded percentages too high can encourage employees to take unreasonable risks. The large incentives for rapid growth, stock price growth and short-term gain encouraged bad behaviour.

The Performance Review Committee had the foundations of the Vitality Curve, popularly known as the Bell Curve and originally pioneered by General Electric’s Jack Welch. Enron used the forced ranking system, or has infamously come to be known as the “Rank and Yank”. 

Here is how the employees were classified:

- Superior: Top 5% 

- Excellent:  66% - 95%

- Strong: 36% - 65%

- Satisfactory: 16%-35%

- Needs improvement: Bottom 15%

The employees were measured against their contribution to the company’s revenue and squeezed into a bell curve every 6 months by an evaluating committee. For the bottom-ranked, it was an out the door policy.

Enron created partnerships(SPE), and then passed the assets (losses) to these partnerships which eliminated the losses from their balance sheets. Andrew Fastow (Chief Finance Officer) created the partnerships. Condor and Raptor were two major partnerships named after characters of Starwars and also from Jurasik park , a science fiction film(1993. By the time Enron collapsed, it had created as many as 3,000 SPE’s.

Between January and August 2001 both Skilling and Fastow sold off about $20 million in Enron stock. They resigned after the close of markets on Aug. 14 2001. On Aug 14, 2001 when  Jeff Skilling resigned, Kenneth Lay became CEO once again. Stock prices began to fall, as investors were uncertain about the company’s stability.  This started a chain reaction: Enron had hedged against its own stock, so as long as the stock price was declining, it could not recover its losses. 

Kenneth Lay , the former CEO of Enron, helped start the company. Enron extended to him $7.5 million revolving credit line, which he reportedly used and repaid with Enron stock 15 times within a period of just several months.

When Skilling suddenly quit on Aug. 14, Lay called an all-employees meeting two days later and asked for comments from workers beforehand. That's when Watkins finally sat down to write a one-page anonymous letter on her computer at work. She dropped it in the box at headquarters the next day.

Kenneth Lay  returned as CEO in August 2001 until he resigned on Jan. 23, 2002. On Aug. 20 he exercised options to buy 25,000 shares at $20.78 a share. The next day he exercised an additional 68,000 shares at $21.56. On both days, the stock closed around $36, which meant Lay netted nearly $1.5 million before taxes. He continued to be a huge booster for the stock for another month. As late as Sept. 26, Lay would try to reassure Enron employees that "our financial liquidity has never been stronger."

December 2001, Enron filed for chapter 11 bankruptcy as it’s share price had collapsed from about $95 in Jan 2001 to under $1. Companies and large firms that are facing severe and unmanageable debt may seek to file chapter 11 bankruptcy, which allows them to re-organize so they can either continue their day-to-day operations or go out of business entirely. Under chapter 11, a company is protected from damaging lawsuits and other negative measures, but in exchange the company is usually required to have all its major business decisions approved by the bankruptcy court.

 

Questions

1.       Name the Stakeholders in the business of Enron, USA

2.       Spot the incidences that you feel had  conflict of Interest in relationship of stakeholders with reasons

3.       In spite of having best PRC and code of conduct how do you assess the CG failiures in the HR area

References

1.       https://www.econcrises.org/2016/12/07/enron-corporation-2001/

2.       https://edition.cnn.com/ALLPOLITICS/time/2002/01/28/know.html

3.       https://essays.pw/essay/accounting-treatment-of-the-enrons-deals-with-raptor-and-condor-accounting-essay-3941

4.       https://www.personneltoday.com/hr/did-hr-fuel-the-demise-of-enron/

5.       https://www.hrreporter.com/news/hr-news/could-hr-have-saved-enron/310126

6.       https://www.peoplematters.in/article/performance-management/enrons-prc-a-walk-down-memory-lane-of-a-symbol-of-poor-governance-18115

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