They also hid their losses with this aim of maintaining the rise of the shares. Andy Fastow, ENRON’s chief financial manager, was responsible for this, transferring the debt to other companies that he himself invented.
They made the liberalism one ideology, seeking all possible “legal vacuums” in U.S. laws to take over more and more money. Kenny Lay, president of the company and one of the accused for corruption in this case, argued for the deregulation of the electricity sector, wanting to rid of any law and state control. This could be “moral risk”, as they have acted to seek their personal aims at the expense of shareholders. This fits perfectly in the agency theory, but here both (President and Main Managers) had the same goal, and were so blinded by the money they did not realize what they were doing. All economic operators involved here preferred to close their eyes before denouncing what was happening. "The Agency Theory suggests that executives have powerful economic incentives to disclose only the information given to them or the organization a strategic advantage." This is what happened in Enron, acquired great dimensions.
This problem of asymmetric information is not alone in that regard. We also know the workers and top executives with “privileged information” had sold their shares before the price fell, even when they wanted to show to the environment that the company was going well. With this action they won more than one billion dollars . By contrast, 20.000 employees lost their jobs (this may result in loss of specific human capital), and billions of dollars in their pension plans, after being blocked by the company. It was impossible for them to sell the shares as well, because it was prohibited by the company.
Skilling, Lay and other main characters in this game managed to apply the techniques of Wall Street to the energy markets to achieve greater efficiency and lower prices. They did this trying their services (which were power plants, water companies, gas distributors, among others) as a “commodity" that could be bought, sold and stored as the actions and debentures. Skilling became Enron in a stock market for natural gas. Since ENRON’s bankruptcy, the State’s permissiveness towards private companies was questioned, in terms of providing goods and energy. According to the Final declaration of the V General Assembly of the Club of Madrid Energy and Democratic Leadership, “Energy is a common good, and governments have a crucial role in the design of initiatives that encourage energy efficiency. Many governments and private companies have fallen into the trap of corruption and mismanagement. Specifically, we call on all countries to enhance transparency of revenues and finance in the energy sector".
Another cause that led to the problems was the destruction and concealment of information. This caused a loss of credibility with investors and customers. They tried to avoid at all costs keeping the price of the shares and they disguised the accounts up to the point that they got good profit figures for the Company. This problem of conflict of interests should usually be resolved by the auditors. But unfortunately, they also participated in the embezzlement. Arthur Andersen, one of the world's largest consulting firms at the time, also contributed to the destruction of files, using a system of "aggressive accounting" to manipulate information. And this was possible because Enron had a complex corporate structure, consisting of over 3000 companies through holding together. This could be a problem of the contacting costs within the firm, because the larger is the firm, the more difficult is its management, and it’s more likely to make mistakes and be less responsive. Therefore, it was virtually impossible to audit by conventional methods and it made it quite possible "to draw” its results. The consultant also helped ENRON to play in the stock market with the retirement savings of its employees. Arthur Andersen not only provided consulting services to ENRON, but it also provided the audited report about the financial results of these consulting activities. This was an obvious conflict of interests.
It also sought to mislead consumers in California, so that caused a "energetic crisis". This was caused by cuts in electricity, or fire at the plants to reduce supply. With a free market in which prices fluctuate with the laws of supply and demand, less supply (caused by an artificial shortage) the price increases. And this is what happened in California. While thousands of families were left without light by strangers maintenance problems, electricity prices reached impossible fees.
Political corruption has also been an added problem in this case. The Enron scandal is splashed up to the White House, having many relationships with key officials. Enron provided millions of dollars to finance the electoral campaign of the ex-President Bush, becoming their main source of funding. Moreover, Kenneth Lay was a personal friend of Bush since he was governor of Texas. Dick Cheney, vice president at the time, was also related to the world of energy, and refused to provide information to Congress about it. All of this questioned the funding of political parties, as they have a direct influence on governments in favor of private enterprises, and this is detrimental to public interest. Enron executives may supposedly helped Vice President Cheney to write the National Energy Policy, and this was reported by New York Times in an article called “Bush Task Force on Energy Worked in Mysterious Ways", published in May of 2001.
ENRON also revealed one of the cons of globalization, and is that when one country sneezes (especially a country like America), everyone takes a cold. But these criminal acts to the detriment of shareholders, employees and the community put into question the whole system of deregulation that characterized the globalization so far and gave a great impetus to the idea of corporate social responsibility and business ethics.
The Enron case is one of those issues that affect all three levels of a company: the micro level or the level of specific decisions of entrepreneurs, the mesolevel of the company as a whole, and the macrolevel of economic, judicial and political institutions.
And cases like this, or the Watergate case, have a high economic cost, that in the case of powerful enterprises affects not only its shareholders and employees, but all
the national and international economy; a political cost that is translated in the public disenchantment and disaffection, and a high social cost in loss of social capital, so hard to earn, so easy to squander, so expensive to replace.
It was a tragedy, not only economic but human. We can speak directly about economic mechanisms that contributed to the crisis, but in my opinion, what has impulsed the causes which led to financial bankruptcy, was a succession of facts with a huge moral vacuum in this particular environment. . The corporate climate has contributed to the result that we know today. It is not enough that the company had a code of ethics or that once ruled the desire to be an ethical organization. "The ethical climate is not a thing but a process (...) An ethical climate or develops or deteriorates, it is enriched or impoverished. Needs constant care and attention”.
Pride, arrogance and greed led to the company (which seemed an invincible giant that would give benefits forever) fell sharply. All operators preferred to accept their piece of the pie rather than denounce the situation, and this made it lasted so long without being discovered, and helped it to take such large dimensions. Enron, as a good trading company, had to do business trying to boost good credit and customer confidence. But, instead of this, they dilapidated all this with their lack of morality, and this created a huge lack of confidence in Wall Street.
This case should serve us to understand that the "invisible hand" that Adam Smith talked about (leaving the freedom to self-regulate markets), should be monitored, in my view, by States to impose laws and restrictions on private companies for avoid situations like the one produced.
Cfr., Bowie, N. “The Blackwell guide to business ethics”, p.2
Woodstock Theological Center, “Creating and Mantaining a Corporate Ethical Climate”, p. 12, Georgetown University Press, 1990
