Module 3 – CaseUTILITY ETHICSBackgroundIn the Module 3 Case, we will use the Utility Test to inform our understanding of the Enron case study.Required ReadingVisit the library, and locate the following article:Madsen, S., & Vance, C. (2009). Unlearned lessons from the past: An insider’s view of Enron’s downfall. Corporate Governance, 9(2), 216-227. Retrieved from ProQuest.Optional ResourcesThe following additional readings may also be helpful to you as you consider the Case:Chandra, G. (2003). The Enron implosion and its lessons. Journal of Management Research, 3(2), 98-111. Retrieved from ProQuest.Free, C., Macintosh, N., & Stein, M. (2007). Management controls: The organizational fraud triangle of leadership, culture and control in Enron. Ivey Business Journal Online. Retrieved from ProQuest.Sims, R. R., & Brinkmann, J. (2003). Enron ethics (or: culture matters more than codes). Journal of Business Ethics, 45(3), 243-256. Retrieved from ProQuest.AssignmentIn a well-written, 4- to 5-page paper, apply the Utility Test to the Enron case study.Keys to the Assignment1. Choose an ethical issue raised by the Enron case study – e.g., Enron’s accounting fraud, the company’s reward systems, its use of “special purpose entities,” or Enron’s “deal making” culture.2. Apply the Utility Test: http://ethicsops.com/UtilityTest.php3. Be sure that you follow each step of the Utility Test (use a separate section heading for discussion of each step of the test):A. Introduce the test.B. Briefly discuss why utility ethics is a valid way of deciding right and wrong.C. Apply the tesStep 1: Identify the alternative actions that are possible and the persons and groups (the stakeholders) who will be affected by these actions.Step 2: For each of the most promising alternatives, determine the benefits and costs to each person or group affected.Step 3: Select the action in the current situation that produces the greatest benefits over costs for all affected.Step 4: Discuss what would happen if the action were a policy for all similar situations.D. Draw a conclusion. If the same action is selected in Steps 3 & 4, then the action is an ethical one. If different actions are selected, decide whether the individual action will produce the greatest good and the least harm, for all affected, over the long term.4. Be sure to use at least two sources from the library to support your discussion and analysis (choose sources that are not included in the Background section of Module 3).Follow the guidelines in The Student Guide to Writing a High Quality Academic Paper.You are expected to demonstrate evidence of critical thinking – as defined in the background materials and the grading rubric.Assignment ExpectationsYour paper will be evaluated using the grading rubric.Privacy Policy | ContactUnlearned lessons from the past: aninsider’s view of Enron’s downfallSusan Madsen and Charles VanceAbstractPurpose – The purpose of this paper is to capture an insider’s view of the organizational cultureand management practices that contributed to the downfall of Enron. In light of the currentworldwide financial and economic crisis, this article aims to highlight some of the unlearned lessonsfrom the past.Design/methodology/approach – A qualitative interview case study was used for the basis of thispaper.Findings – This article shares an insider’s (former vice president’s) insights related to the practices andculture that led to Enron’s unethical decisions and strategies. It discusses one man’s view of the historyof Enron, as well as what should have been learned and applied to the global financial industry to help tominimize or even avoid today’s painful economic crisis.Practical implications – Six main causes of unethical behavior for individuals in organizations areoutlined, and important lessons learned are presented. The article also discusses the importance ofreflecting and remaining inwardly vigilant, while outwardly thinking of and serving others.Originality/value – The information for this article was based upon an original interview.Keywords Ethics, Governance, Organizational culture, LeadershipPaper type ViewpointAlan P. Warnick was the Vice President of Organization Development and Trainingfor Enron Operations and was an insider during the years leading up to thecorporation’s downfall. His previous experience also includes positions as ChiefHuman Resources Officer for Enron Chemical and Great Lakes Chemical Corporations,General Manager of Human Resources Strategy and Change at Reliant Energy, and aconsultant with Chase Manhattan Bank and American Training. Al is a senior levelhuman resources executive with broad experience in large, multidivisional andinternational corporate environments. He has initiated and led many large-scaleorganizational change projects focused on building organizational capability. He hassubstantial experience in reengineering critical HR processes, working with businessunits to develop high impact people strategies, and realigning the mission, role, andstructure of the HR function. He has extensive background in mergers and acquisitions,business ethics, culture change, and organization development and learning. Hiscorporate accomplishments have been widely published and cited in leadingprofessional journals and magazines, and he has been a guest speaker at numerousmanagement meetings and professional conferences. Al is currently the interimdepartment head and executive-in-residence in the Department of Management andHuman Resources at Utah State University.PAGE 216 j CORPORATE GOVERNANCE j VOL. 9 NO. 2 2009, pp. 216-227, Q Emerald Group Publishing Limited, ISSN 1472-0701 DOI 10.1108/14720700910946640Susan Madsen is AssociateProfessor of Management,based at Utah University,Orem, Utah, USA.Charles Vance is Professorof Management, based atLoyola MarymountUniversity, Los Angeles,California, USA.InterviewAuthorsWe are very pleased to be able to get your valuable insider’s perspective on the individualand organizational dynamics involved in the Enron experience.Al WarnickI’m happy to share my experiences, observations, and learning from that experience. Butbased on our recent devastation in the financial services industry, we certainly haven’tlearned much from Enron. When I see what has gone on at AIG and other financial servicesorganizations, it sure reminds me of what went on at Enron: a relaxation of regulations thatallows people to take risks that ultimately lead to greed and corruption – but this time it is ona vastly greater, industry-wide, global scale. The huge economic pain that we currently arefeeling is to a great extent likely due to systemic similar conditions that led to the Enroncatastrophe.AuthorsTo help us begin to better understand – and hopefully finally learn from – those similarconditions that contributed to today’s global economic plight, please give us a littlebackground on the organizational culture and management practices leading to thedownfall of Enron.WarnickWell, Enron Corporation came together as a corporation in 1985. It was a merger betweenInterNorth Corporation and Houston Natural Gas (HNG). InterNorth Inc. was formed as aholding company for Northern Natural Gas, founded in 1931. InterNorth had theirheadquarters in Omaha, Nebraska, and they pretty much covered the central United States.Their gas pipelines went from Texas up through the Dakotas into Minnesota, and they ranone of the largest natural gas pipeline systems in North America. The merger was spawned,in part, by a corporate raider out of Minneapolis who was putting pressure on InterNorthCorporation and on Houston Natural Gas. When they merged, the company’s name initiallywas HNG InterNorth. Sam Segnar, the president of InterNorth, became the president of thenew entity.Before proceeding, let me give you some background information that will help illustrate theabrupt cultural change when Segnar took over. Willis Straus had been a long time chairmanof InterNorth Corporation and beloved by everybody. He was the ‘‘father’’ of the wholeexpansion from its Northern Natural Gas roots. Straus was powerful, but you would not havecalled him arrogant. For example, they had a dining room on that top floor of the InterNorthbuilding – the old Houston Natural Gas building – in downtown Omaha. Any employeecould eat there; you didn’t have to be an executive. It was kind of an interesting egalitarianorganization. Straus always had his table, but he would go around visiting with employees atany level of the company who were eating up there. Everyone loved him. When he retired, hehad handpicked his successor who was Sam Segnar. Sam was not beloved by everyone asStraus had been, and in fact beloved by almost no one. Sam had been involved in thecompany years prior to the merger, and people generally didn’t like him. He was arrogantand clearly an elitist. Interestingly, one of the first things he did was to turn that top floor of theInterNorth building into a suite only for executives, and he had his office moved up there.Everyone talked about how much money he spent putting in very expensive furniture,copper baseboards, and an amazing fireplace in his office. When Straus headed thecompany, it was quite an egalitarian place to work because there wasn’t a lot of emphasis onstatus. That immediately changed when Sam Segnar became the new chairman.Kenneth Lay was the chairman of Houston Natural Gas. Now usually in a merger like this, thechairman of the company being acquired leaves and gets a lot of money from the stock andVOL. 9 NO. 2 2009 jCORPORATE GOVERNANCEj PAGE 217golden parachute agreements. However, in the negotiations for this merger, Lay suggestedthat they combine the boards of directors. He reasoned that because they had eightmembers on the InterNorth board and Houston Natural Gas had only six, InterNorth wouldstill have the majority status and would still get to make all the crucial decisions. Sam Segnarthought that sounded fine, which (in later reports we heard) was a surprise to Lay. I guess henever imagined in his wildest dreams that Segnar would really go for that. After that tookplace then all Ken Lay had to do was to go around to the board members and find two ofthem who didn’t like Segnar. Within one month Ken became chairman of the board. That’s thekind of maneuvering that characterized Ken Lay. He was extremely shrewd and extremelybright – he had a PhD in economics. He had a lot of history with the Department of Energybecause he had been employed there and was well-connected. He had lots of politicalconnections, even with the president of the United States. One of the first things he did wasto move the Enron headquarters to Houston. I think initially people at Enron thought Ken wasdoing well, but the attitude changed particularly when Jeff Skilling arrived.Let me tell you a little more about Ken Lay. He really had a distorted image of himself. Hethought of himself as the grandfather that everyone loved. Initially people liked him,especially compared to his predecessor. Ken did keep the elitist division Sam had createdbetween executives and employees. He was more visionary, but kept the culture. Ken madeand spent a lot of money, and everyone knew it. In the end, he received hundreds of millionsof dollars. After he died his wife said that money was all gone. How he could spend thatmuch, I have no idea. I don’t think he was a gambler, because he loved money too much tobe a gambler. He had endured extreme poverty in growing up, and ironically it was hisobsessive hatred of being poor that greatly contributed to his downfall.AuthorsTell us how you were involved in these companies.WarnickI came from the InterNorth side and had been with them for nine years before the merger. Ihad joined InterNorth in 1977, and in the early 1980s I became Director of Human Resourcesfor the Petrochemicals Division, which was one of four or five operating companies inInterNorth. Mine was the head HR job in that division, so I reported to the President. After themerger in 1985, the corporate headquarters moved to Houston, and I was in one of itsoperating companies.After moving to Houston we immediately noticed some interesting things. Our firstimpression of them Ken Lay and his leadership team was that they were big spenders. Fromour point of view, as past InterNorth employees, we felt that they had really quite exorbitantrelocation benefits. I was actually on the committee that put the benefits plans together in1986 and 1987. Then they sold the Petrochemicals division to US Chemicals to pay for themerger, and we relocated to Chicago. I stayed with them until fall of 1987, and then I left andtook a job as head of HR for another company.It wasn’t until 1991 that I received a call from Enron saying they wanted me to come toHouston to be the Vice President of Organization Development for all of the operations. Atthat time they had five different gas pipeline companies and a liquids natural gas operation. Idecided to accept the offer and began reporting to a man by the name of Jim Barnhart, theExecutive Vice President of Administration, who reported directly to Ken Lay.Jeff Skilling came onboard in 1990, and so he was already there when I came back inJanuary of 1992. He was in the marketing end and reported to Ken Lay, and I was in plenty ofmeetings with him. Jeff, who initially was a McKinsey consultant at Enron, became a centralpart of Enron’s huge culture shift. Because of the complete change in leadership, Enron wasable to make a significant culture change that would be nearly impossible for otherorganizations. It was like the Anglo-Saxons being taken over by the Normans.PAGE 218 jCORPORATE GOVERNANCEj VOL. 9 NO. 2 2009AuthorsWhen you returned to Enron, what were the most immediate concerns you had as youbecame involved in day-to-day operations and change efforts?WarnickI immediately discovered that they had a tendency to move people around a lot. They weregreat shufflers. I also noticed, again, that they were big spenders, which came from theHouston Natural Gas side of the merger. The InterNorth side was much more conservative inits style. Enron new leaders had big plans. For example, they came in one time saying thatwe were going to double Enron’s stock price in a short amount of time, which interestinglythey did and a whole lot more. In fact, I remember when I was still with the Petrochemicaldivision right after the merger, one of the executive vice presidents (who came from the HNGside) came to Chicago to meet with us. He said, ‘‘We’re going to do this for two or three yearsand then double the stock, then we’ll move on and do other stuff.’’ The big reaction from uswas ‘‘Well, that’s good for you. You can play with us for while, but then what happens to therest of us after you’re through doing your thing?’’ Early on we felt like we were their toy untilthey made a lot of money, and clearly their desire was to make a lot of money!AuthorsSo, were they pretty forthright about that?WarnickNo question about it. They intended to change the natural gas industry. At that time it was avery regulated industry. It was a great place to invest your money in a slowing economy. Butwhat Enron leaders wanted to do was lead a paradigm shift for the industry. In fact, theyintended to change the whole business paradigm about natural gas. Ken Lay’s vision – andhe was a very visionary man – was to deregulate the industry and let the price of natural gasfloat with the market. His business vision was that Enron would be the first company thatreally got on this bandwagon while everyone else was fighting deregulation. Enron wouldthen capture the entire market differential, which is where you can really make money. Hisvision was that Enron would be the first ‘‘Natural Gas Major’’ – like the oil ‘‘majors.’’ No onehad thought of natural gas being in that kind of position.AuthorsDid he pull people on board pretty quickly?WarnickIf you weren’t visibly committed to the team, you were out. It was like the mafia coming in andshooting a few people just to let people know that they meant business. If you were not on theteam, then you would be fired. There were some really good people, without discussion, thatwere fired. He would go around and figure out who was going to support his position andwhat he was doing – and who might give him trouble. Those who would give him troublewould be gone. That threatening culture remained until the end. It was a very cut-throat,externally-competitive, and internally-competitive culture. Many people could do very wellworking at Enron, and the leaders spent money very freely. The idea was that ‘‘we’re going toget rich, and you can get rich too if you join us.’’AuthorsDid people from the start have concerns regarding the ethics of the culture and thebusiness?VOL. 9 NO. 2 2009 jCORPORATE GOVERNANCEj PAGE 219WarnickRemember that we were coming from a very conservative and regulated industry, so wewere very careful about not offending any regulators or government officials because theydetermined what the price was going to be. Therefore, Enron leaders would never think ofbreaking the law or doing something technically illegal. In some respects the industry waslike the flock of sheep that are kind of ‘‘fit for fleecing,’’ because people generally didn’t tendto think in those kinds of terms. The people who joined the company were very hard working,loyal, dedicated, and overall good folks. They were not hired to be creative and share newideas. They were rewarded to make sure that natural gas flowed and that people got whatthey expected. Employees were rewarded for making contracts and delivering. Operationalexcellence was really the ‘‘name of the game.’’AuthorsPlease talk more about Enron’s reward system and what parts of that system directly led to orinfluenced unethical behavior.WarnickThe reward system became even more liberal as time went on. From a reward standpoint,they decided to remove all caps on compensation. You could make any amount, and Enronprided themselves in paying above average salaries. When the industry was regulated, youdidn’t trade natural gas. But afterwards, people could get rich because there were no caps.The average tenure of a trader at Enron was about 18 months. They would work their foolheads off, and they were not nice people. They were not fun to be around – being niceseemed to interfere with short-term profits. You wouldn’t want them as your neighbors. But,they would work ungodly hours, make their millions, and then leave. Ken Lay didn’t mind ifthey made money because it made him money.Jeff liked the GE model of ranking employees, so he brought that to the company. Thebottom percentage of employees in perceived performance would be fired. This practicewas something that also led to a very cut-throat, competitive environment. Because theyused this ranking method of performance management, appearance mattered more thananything else. No one ever wanted to stay in a job long enough to see the actual results fromtheir work. They just wanted to look like they were going to get results. They wanted to be offto the next job, so they could make the big leap. There was no accountability. You alwayswanted to leverage your position into something else.AuthorsHow did you experience this culture change to a more internally competitive workenvironment?WarnickI immediately noticed when I came back to Enron in January of 1992 that things hadchanged a lot from where they used to be. At InterNorth we used to have meetings with all ofthe heads of human resources. The agreement was that we would be completely honest witheach other and support each other.We knew that what was shared at these meetings stayedconfidential because we were helping each other solve problems. When I brought up aproblem, I could get great counsel and advice. It was a wonderful, supportive kind ofinteraction. After I returned to Enron, I went to the first of these meetings, and the differencewas very striking. I still knew some of the people, since I had been gone for only four years.At this meeting I was very open and presented a problem I was having in my area andwanted ideas for solutions. After the meeting, I was immediately told by people who knew methat I needed to keep that kind of stuff to myself. They said, ‘‘You don’t realize that thatinformation will now be shared with the people who may have something to gain by puttingyour boss down. That will be used against him, and then it will hurt you as a result of that.’’PAGE 220 jCORPORATE GOVERNANCEj VOL. 9 NO. 2 2009Wow, had the corporation changed! That was when it just really struck me how differentthings had become.AuthorsWe heard that Jeff Skilling and Ken Lay really believed that they were operating ethicallyduring those years. How can that be the case?WarnickI do think they believed they were operating ethically. I really believe that Ken Lay, up until theday he died, thought he was ethical. He had a PhD in economics and was the son of aBaptist minister, and he had a basic understanding of ethics. But he really thought that whatthey were doing was creating a new business model. Someone I know personally was in ameeting with Ken Lay and Jeff Skilling, and this individual heard Jeff say to Ken, ‘‘If you willlet me do what I know how to do, I will make you richer than you can possibility imagine.’’Now it is important to understand from Ken Lay’s background that he grew up poor and hehated being poor. Money, and making a lot of it, was not only attractive to him, but it seemedan obsession. From that point on, Jeff Skilling had anything he wanted, and he was enabledin a way that he could do no wrong. Ken Lay’s primary role in this ethics scandal was as anenabler. The real architect of what went on was Jeff Skilling. He pushed for ‘‘mark-to-market’’financing, which was the key to everything else. I think that one thing was the key to thedownfall of the corporation. The SEC did approve it, so what he was doing then was notillegal. Has anyone ever required the SEC to account for that decision? For Jeff, Ken, and thecorporation, how things appeared officially on paper was the most important thing. That’swhat mattered, but this was a very superficial level of judgment.AuthorsDid the typical employees understand what was happening?WarnickI don’t know about the regular employees, but at my level – the VP level – we all knew in 1992what was going on. Although many of us weren’t financial people, we all knew; we all said toourselves – ‘‘This is a house of cards.’’ We knew that it wouldn’t take much to blow all thisover. In fact, I remember that there was a big celebration when they got the SEC approval.Jeff knew that if they got SEC approval he could do all of the other things he wanted to do.Jeff showed tremendous increase in revenue and theoretical profits, but the word aroundwas that we never really made any money in the trading process. A lot of money was flowing,but we knew we weren’t making money.I think it is interesting that although we knew what was going on, it seemed that they alwayshad an answer for everything. The two stock answers to our concerns were the SEC hasapproved it, and our auditors say we are operating by appropriate standards. There was alack of true accountability in the culture. Tomy knowledge, they never advocated or asked usto do something illegal. Yet, there sometimes seems to be a fine line between what is legaland illegal. There is a gray area. Enron leaders would take all of the gray as being white, andthey would come right up to the edge of black before they would say ‘‘It’s illegal.’’ You wouldnever do that in the old traditional InterNorth or in the natural gas regulated culture ingeneral. You would always keep that buffer. You didn’t even want to be in the gray. Jeff wasthe architect of it, and Ken Lay was the enabler. Both of them were movers and shakers, andthey considered this to be the ‘‘new business model’’ that they were creating.AuthorsDid people still leave early on because of their ethical concerns, even though Ken and Jeffseemed to have justifications that satisfied many?VOL. 9 NO. 2 2009 jCORPORATE GOVERNANCEj PAGE 221WarnickOh yes. Many left, and in fact that is why I left. We knew years prior what was going tohappen. Yet, we couldn’t voice our concerns openly. If we voiced it openly, we would not bearound the next week. There was a threat, and it wasn’t a veiled threat either. You had plentyof evidence. It was a culture of threats, and people knew. We knew what was going on, sohow did Jeff Skilling and Ken Lay NOT know it? I don’t know what was in their hearts. I’vethought a lot about how someone like Ken Lay, who genuinely felt he was an ethicalindividual, could end up doing such unethical things. It ought to scare all of us. You canjustify your actions so fast, and I think that’s what Ken did.Ken and Jeff were actually some of the genuinely brightest and most gifted people I haveever met. But I’ve decided that the smarter you are, the more capable you are of unethicalbehavior. I believe that competence can be a key factor contributing to unethical behavior.Ken Lay was a visionary, and Jeff Skilling was a guy who loved power. I think Jeff alwaysknew exactly what he was doing, and he thought he would get away with it. It was interestingto watch as Enron saturated markets as they were trading on everything. They were tradingfutures on the weather! The logical thinker in me would have to say, where does this all endup?I’ve always thought it is interesting that individuals could continue to think they were actingethically when such negative things begin happening around them. Their success – orappearance of it – led to enhanced egos, a sole focus on money, and an increased lack ofmorals. By the end, there were reports of expense report inflation, off-balance sheet deals,accounting cover-up, misleading the public, self-dealing, chasing the big bonuses, insidertrading, wild parties, and even theft. All of the signs were there years prior, so it is stillamazing to me that they somehow couldn’t see it.AuthorsYou bring up an important point: how could they be truly visionary, as you call them(particularly Ken), and at the same time not see or at least acknowledge that the house ofcards would soon be crashing down around them.WarnickAgain, they saw this as the new business model. That’s at least my characterization of it.From Jeff Skilling’s point of view, assets were a hindrance. They had no stomach foroperation – no patience for operating anything! It wasn’t fast enough; they were interested inchanging the corporation into basically a trading company with no assets. That would havebeen perfect from their point of view. I think they felt they could always stay ahead of themarket. There was this big wave back then, and they thought they could be fast enough tomaneuver around it. We could see what was happening.I think a part of it was self-deception that led them to not admit what was going to happen. Ialso think there was an addictive quality to this. People wonder how alcoholics or gamblerscan’t see what is going to happen to them down the road, but sometimes they really can’tbecause they deceive themselves. I think that’s another side of the addictiveness, and I thinkthey were blind to it. They were visionary to a certain point, but money made them blind. Theyrationalized to themselves and others that the all was OK since the auditors said they werefollowing acceptable accounting practice. Those of us who were not accountants or auditorswould say, ‘‘Arthur Andersen is there, and I guess that’s what they say, so that should to begood enough for me.’’ But it never felt right – never. I always got answers, but never feltsatisfied with those answer. It was a competitive, cut-throat place to be, so people couldn’tchallenge and then stay. It was not a fun place to be.PAGE 222 jCORPORATE GOVERNANCEj VOL. 9 NO. 2 2009AuthorsTell us more about the organization’s culture changes you saw when you came back to Enronin the early 1990 for the last time.WarnickRemember, this type of environment was a huge cultural shift in a relatively short period oftime, particularly for the InterNorth side of the organization. Think about the commonly heldnotion among management scholars that it takes five to ten years to change anorganizational culture. This was moving very fast. It was when I came back in 1992 that Inoticed the closed culture. No one dared speak the truth. Remember that Jeff brought theGE model of ranking employees to the company, and it was one practice that led to thecut-throat, competitive environment I spoke of earlier. You would never share any informationwith someone else for fear of them being ranked higher than you. I watched this happen;people would literally find something out and they wanted to be the first to get into the bossesoffice to tell them. They wanted to get the credit. After two years as the VP of OD I justcouldn’t take it anymore. As I said, it was not hard to see during my first week back in 1992that things were not right. Once you’ve been outside the culture for a little while and youcome back, I think you see more clearly.AuthorsDid that closed culture spread into all levels of the company?WarnickSure. It’s like any culture. It was just the way we do things. The culture was one where first,appearances mattered most, and second, if you could beat someone there with the ideathen you felt rewarded. Remember, the movement of people was huge. If you stayed in a joba year or two, that was a long time. What you would do, in order to get promoted, was toappear to have made a difference. You wanted to have things that showed you did. This wasa part of the culture – the show, ‘‘big splash’’ kinds of stuff. You wanted to get attention and tobe noticed. Those who didn’t care for it eventually left.AuthorsIt seems like the culture changes in part resulted from some strategic changes made by topexecutives that were probably implemented through HR, such as the change in rewards asyou mentioned.WarnickYes. As I have considered the strategic changes, particularly in HR, from the time I was therein the 1980s until the time I returned in the 1990s as a VP, I think there were a number oftransitions that led toward ultimate unethical behavior within the organization. Jim Street, theSr VP of HR at the time described it to me. In the 1980s Enron recruited engineers and otheremployees from mid-level schools, and when I returned in 1992, the company was recruitingMBA’s from top schools in the country. The initial culture seemed to value loyalty andtechnical competence, but when I returned they valued deal-makers more than anyone else.Originally they measured performance through standards, and in the 1990s they weremeasuring performance by comparing employees to each other. In the 80s rewards toemployees were based on business success, but when I returned I found that rewards werefocused primarily on deal value. Finally, in past years an employee’s reward size was alwayslimited, while in the 1990s, the reward size became unlimited. Enron leaders strategicallymade these decisions to make it possible for Enron to ‘‘succeed’’ in the way they envisioned– to make money.VOL. 9 NO. 2 2009 jCORPORATE GOVERNANCEj PAGE 223AuthorsIt sounds like this was not a developmental culture where managers and leaders tried todevelop others.WarnickInterestingly, there was actually a disdain for training and learning. They just wanted to goout and hire the resource they needed right now. They didn’t have patience for thedevelopment of people. When someone was no longer needed, they let them go. Enronbelieved that you don’t develop people, you hire them. You don’t develop things, you buythem. We bought our competence. I remember talking to my boss one time, the chairman ofall of the operations, and I said, ‘‘We need to do some business practice benchmarking if weare really going to improve and get where we need to be.’’ His reply was ‘‘Why should we dothat? We can’t learn anything from them.’’ I thought to myself, ‘‘Here I am, I’m the ChiefLearning Officer of this corporation, and you are telling me we don’t have anything to learn.What am I doing here?’’ For me that was the straw that broke the camel’s back. There was anarrogance in this organization that was hard to describe. They really believed that nobodycould teach them. The hype was that we were the teachers, we were the leaders, and wewere the innovators. It was definitely not a learning organization, and I was hired as the headof learning! Can you imagine my challenge!AuthorsPlease talk more about your job for those last two years at Enron after you returned in 1992.WarnickWhen I came back to Enron as vice president of Organization Development, my charge wasto instill a new formal culture and vision. The vision was that ‘‘Enron will be the first natural gasmajor, the most innovative supplier of clean energy worldwide for a better environment.’’Their three values were:1. ‘‘Your personal best makes Enron best,’’;2. ‘‘Communicate – facts are friendly,’’; and3. ‘‘Better, faster, simpler.’’The second value was the one everyone looked at and said, ‘‘Yeah right!’’ Facts might befriendly, but contrary opinions at Enron were not. Everyone really lived by the ‘‘Better, faster,simpler’’ value in everything. My charge was to incorporate that vision into the culture, whichwe called ‘‘vision to reality.’’We created and implemented a lot of initiatives, and I thought wedid some very good things. For example, we developed a program to train internal changeagents. These were people in various jobs, so their change responsibility was in addition totheir regular jobs. The presidents or vice presidents of each of the companies or divisionswould nominate two people every six months for a training period. These had to be peoplewho already embraced the vision and had potential to be a vice president sometime in theircareer. It became a very prestigious thing to be a part of this. These individuals startedgetting promoted at a phenomenal rate in the organization. If you got nominated to that – itwas your ticket to the future. It was really a unique kind of model. Of course we did regulartraining activities too, however, that was downplayed because Enron really wasn’t interestedin training people.AuthorsWhat specific events, if any, led to your decision to leave Enron?PAGE 224 jCORPORATE GOVERNANCEj VOL. 9 NO. 2 2009WarnickI led lots of initiatives, and one was a big initiative to look at alignment of strategy in thecorporation. When I first returned to Enron, I immediately noticed that there was a tendencyon the people side to implement leading kinds of practices like skill-based pay. There wereall kinds of best practices being used, and when we would talk to managers in Enron abouthow these practices related to where we were trying to take the company, they would saythey had no idea. I knew we needed to work out alignment issues. So, I went up and visitedwith a well-known strategy consultant. I had ideas about how I thought we should moveforward, and this consultant knew the research around these issues. He gave me somepointers and told me I was on the right track. Yet, I found Ken, Jeff, and others didn’t careabout having practices aligned with their vision. They didn’t care about operations. Theyreally only cared about Jeff’s model to create revenues and the corresponding increase inprofits, at least on paper. When I realized that I really couldn’t help the company strategicallyand that they didn’t want to be helped, I just couldn’t stay.AuthorsWhat are some lessons learned from your experiences?WarnickThere are several lessons at various levels. First, in terms of running a corporation, soundaccounting and business principles are there for a reason. Enron was able to do what it didbecause it convinced – at least Ken and Jeff did – a lot of people that they had the newbusiness model. Well that business model was only paper thin and blew up. There arelessons to be learned there, that good sound business principles, true and tested over time,are still true, whether others believed them or not. We could sense there was somethingwrong, and this is why I left my VP position at Enron after only two years.Another major lesson I learned from these experiences is that we really don’t know where thefuture is going to be. We need to be open and vigilant, and we can’t afford to move ahead inblind overconfidence. The leadership at Enron had an unfounded faith in themselves. Theybelieved they could create anything, and they would worry about the future when they gotthere. They really thought they had the world by the tail.I also learned that if you ever think you don’t have something to learn, you are in big trouble.Once you get to that point that you discount feedback, and then stop getting feedback, thenyou lose contact with reality. This is what happened at Enron. They were off into their ownworld. They really had lost contact with reality, and they didn’t want to know anythingdifferent. In hindsight we can see it pretty clearly and say. ‘‘Sure, they should have knownthis,’’ but from their point of view they were blazing trails. They didn’t want to look back at thepast, and they didn’t want others telling them what they couldn’t do because they felt they’dalready shown they could. It all looked good from their perspective of blinded arrogance.AuthorsThis sounds very narcissistic.WarnickYes, very narcissistic. John Kotter has commented that if you look at history, great leaderstend to be very self-confident people. They have a huge capacity to remain steady and makedecisions under stressful conditions when other people are falling apart. But this confidencenever moves into arrogance, and they are often described by others as having a humbleattitude and open to learning from mistakes. When I look at what went on at Enron I am struckby the arrogance of the leadership, who basically believed that their visionary new businessmodel allowed them to not have to put up with the restrictions that the less visionary rest ofthe business world had to abide by. As Kotter (2003) says, we don’t find this sameVOL. 9 NO. 2 2009 jCORPORATE GOVERNANCEj PAGE 225self-centered nature and arrogance with the great leaders in history. So another importantlesson for each of us is to consider to what degree we believe we are privileged and ‘‘abovethe rules’’ that others are still subject to. If this is how you feel, you’re in real trouble.There is a wonderful article in the Academy of Management Executive (Kroll et al., 2000) onNapoleon’s downfall, providing leadership lessons on hubris and arrogance. It is amazing tothink that Napoleon in 1812, as emperor of France, king of Italy, and master of the Europeancontinent, led his army numbering over 500,000 men to conquer Imperial Russia. And inDecember of the same year less than 20,000 of his army would make it home alive.Napoleon’s hubris that contributed to his downfall included the same elements that led to theunethical behaviors and eventual downfall of Enron: narcissism, a series of great successes,an uncritical acceptance of accolades, and feelings of exemption from the rules. Theseelements can then turn confidence into arrogance, move people toward reliance on asimplistic formula for success, and lead to a failure of leaders to properly acknowledgeimpending threats and face changing realities. Now, if there was ever a company foundedon hubris, it was Enron.AuthorsFrom your experience and insights, can you summarize your thoughts on what causesunethical behavior in individuals and organizations, and then give some recommendationson how we can try to avoid and guard against sowing the seeds of unethical behavior?WarnickAbsolutely. After years of reflection and considering the important work of others like Kotterand Kroll et al., I believe that there are six main causes of unethical behavior for individuals inorganizations. These include competence leading to success, increasing arrogance frompast success, addiction to praise and status, faulty reward systems, self-deception, and theenabling behaviors of others. These are the core causes of ethical downfall – and theycertainly fit the case of Enron. I also believe that history will prove that these causes havebeen sparked and spread like wildfire across companies throughout the financial servicesindustry, contributing significantly to our very recent economic disasters.I also believe that there are some very real strategies that individuals and companies todaycan use to guard themselves against even the beginning steps toward unethical behavior.First, you must continually reflect on your own experiences as individuals, groups, andorganizations. You can’t learn from experiences unless you reflect on them. And as youreflect, to be able to learn you must be humble and open to the possibility of your being inerror and needing improvement. Second, you should always listen to naysayers. In fact,some of your most valuable friends and associates will be those who you can trust to tell youthe unvarnished truth about yourself and your ideas, no matter how painful. Third, leadersand managers should transcend personal interests, and always model responsible behaviorthat is in the long-term best interest of the organization and society. Fourth, you must notcompromise your moral values under the pressures of competition or popular acceptance,but always stand strongly for what is right. Finally, all individuals should look beyondthemselves and give service to others, maintaining an attitude of helpfulness and a concernfor others’ well being. It is especially when people become selfish and self-centered thatunethical behaviors emerge, often even when individuals are not consciously aware of whatis happening. This lack of awareness was true of Ken Lay. I knew him well enough to knowthat he saw himself, until the day he died, as a very ethical person.We must reflect and remain inwardly vigilant, while outwardly thinking of and serving others.In organizations it is so important that leaders in particular remember these strategiesbecause they drive the organization culture, and the culture in turn drives behavior. Anethical culture is developed and maintained through both the words and actions of itsleaders. We now are beginning to see, with the recent debacle of the financial servicesPAGE 226 jCORPORATE GOVERNANCEj VOL. 9 NO. 2 2009industry, how the lack of regulatory vigilance can allow greed, deception, and corruption tospread beyond a few organizations’ borders to infiltrate an entire industry and profession. Ibelieve that in the recent collapse of the financial services industry – somebody wasdeceiving somebody. Like with Enron, things were going great, and then came the greatcollapse. This doesn’t happen without some kind of manipulation of corporate results tomake things appear better than they are. Enron was the master of financial manipulation. Weshould have learned. I’m amazed that there has not been a call for the heads of responsibleleaders, as we heard at the fall of Enron. We must truly learn from Enron and apply thislearning at all levels of practice in the profit and non-profit, private and public sectors. AsGeorge Santayana (1932) once wrote, ‘‘Those who cannot remember the past arecondemned to repeat it.’’ReferencesKotter, J.P. (2003), ‘‘An interview with John P. Kotter’’, Leader to Leader Journal, Vol. 27, Winter, availableat: www.leadertoleader.org/knowledgecenter/journal.aspx?ArticleID ¼ 130 (accessed 11 July, 2008).Kroll, M.J., Toombs, L.A. andWright, P. (2000), ‘‘Napoleon’s tragic march home from Moscow: lessons inhubris’’, Academy of Management Executive, Vol. 14 No. 1, pp. 117-28.Santayana, G. (1932), The Life of Reason or the Phases of Human Progress: Reason in Common Sense,Charles Scribner’s Sons, New York, NY.VOL. 9 NO. 2 2009 jCORPORATE GOVERNANCEj PAGE 227Or visit our web site for further details: www.emeraldinsight.com/reprintsReproduced with permission of the copyright owner. Further reproduction prohibited without permission.