Who's Watching?

As a society, it is our responsibility to see that the institutions and entities that we find ourselves depending upon are functioning in ways that will not hurt us in the long run. I see this trend all the time—of news being reported weeks, months, even years after the fact regarding the corruption or wrongdoing of a once upstanding corporation. And who often receives the blame for these actions? Oftentimes, it is the CEO, board of directors, and any other individuals in administrative positions simply because they are seen by our society as carrying most of the weight of the company upon their shoulders.

However, based on chapter two of The Rise of the Rogue Executive, there are watchdog agencies present to guard from such scandals. The piece reads, “To be sure, all the misdeeds, the cheating, and deceptions still represent seemingly small numbers of individuals and organizations” (25). It’s easy to throw around statistics and claim that because these incidents occur so seldom in the grand scheme of things, it’s not a big problem after all. Nevertheless, when controversies arise as in the cases of WorldCom and Enron, fingers are pointed, positions are relinquished, and most importantly, thousands of individuals are affected negatively, losing jobs, retirement plans, and dignity in the business world. That is why, in my opinion, I blame the lack of oversight in the Enron case. Regardless of the cries against government regulation and intervention, I believe that there should be some interaction with the state in terms of acting as the all-important watchdog.

Why do corporate scandals continue to happen and how can good leadership prevent or minimize these scandals from happening?

In Rise of the Rogue Executive, Sayles introduces the 1980s as a “decade of greed” and the 1990s as a decade of “excessive greed and arrogance”. In continuation perhaps the 2000s are the decade of supreme greed, arrogance, and stupidity. In the 2010s we will see CEO’s be even more greedy and arrogant. Since every human being has the capacity to err or act inappropriately in the hopes of not being caught, corporate scandals are bound to exist as long as corporations do. Good Leadership can minimize these scandals by providing the honest and effective guidance that ensures good decisions are made and organizations are honest about their failings when mistakes are made.

The Enron case illustrates that Good Leadership needs a good environment. While Skilling, Lay and many other members of Enron’s leadership were crooks, it would be tough to prove that every single member of the Board of Directors, every trader that fudged their numbers to appear profitable, every lawyer and accountant involved in the cover up, were members of a cabal of thieves that shared equal culpability for the crime in question. It is very apparent that Enron’s culture and organization gave people, who would have otherwise acted in accordance with the law, the incentive not to do so.

In light of what we know about human nature it is unreasonable to expect Good Leadership to happen when there is little or no accountability. We can maximize Good Leadership by continuing to expect our leaders to be moral, but be smart enough to know that at times they won’t be and have checks and balances in place to minimize the damage. Leaders and followers bear the responsibility of facilitating an atmosphere that promotes critical thinking.

Leadership at Enron

I place the lion’s share of the blame for Enron’s monumental collapse on Kenneth Lay, Jeffrey Skilling, and Andrew Fastow, the primary engineers of Enron’s corporate fraud. In order to prevent these kinds of disasters from happening in the future, we must closely examine the kind of leaders these men were.

The different kinds of bad leadership – toxic, incompetent, and intemperate leadership – are not as coarse-grained concepts as their distinct definitions would suggest. Indeed, the actions of the Kenneth Lay and associates serve at once as instructive examples for all three types of bad leadership.

In one sense, the Enron executives can be thought of as toxic leaders. They fostered a culture where “talent” replaced the organizational necessity of a reciprocal relationship between leaders and followers, creating benign followers who did not question the specious methods of their leaders. This, however, was not the only problem for the Enron executives.

Lay and associates also qualify as incompetent leaders. The end result of their tenure would suggest this – surely only incompetent leaders could bring about such a magnitude of failure. Yet, if accolades and past successes are any indication, the Enron executives’ failures did not stem solely from incompetence.

What’s left, then, is the category of intemperate leaders. While the lack of self-control in these leaders is typically associated with their private lives, I would posit that it was Lay and associates’ professional intemperance that was their undoing. Their greed and vision of Enron becoming the world’s greatest company drove them beyond responsible leadership practices. They let the perfect be the enemy of the good. As such, intemperance was the primary (but not the only) culprit in the case of Enron’s collapse.

Leadership in the Black Box

In chapter four of "The Rise of the Rogue Executive" by Leonard R. Sayles and Cynthia J. Smith, the authors discuss the evolution of so-called “Black Box” accounting systems. Taking their name from the “black box technologies” (technologies so complex that their inner workings are essentially unknowable to the average person), the accounting systems are described as contributing to a perceived spread of corporate fiscal irresponsibility. The ease and discretion with which accountants and CEO’s can manipulate, hide, and even destroy computerized financial records has undoubtedly been a factor in some of the most high-profile cases of corporate fraud in the last 20 years.

The leaders of these unsuccessful and/or fraudulent companies operate in black boxes of their own. While many unsuccessful CEO’s have been very public figures, the same cannot be said for the management structures of their companies. In many famous instances, the management operated without external accountability

In the case of Enron, the Audit and Compliance Committee, chaired by Robert Jaedicke, was created to ensure that the actions of Enron’s management met with federal and internal regulations. The Audit and Compliance Committee reported to the board of directors, who were responsible (along with the company’s external auditing firm, Arthur Andersen), for overseeing the legal and ethical integrity of the company’s financial reporting. However, in 1999 the board temporarily suspended the code of ethics to permit Andrew Fastow, the chief financial officer of Enron, to hold positions with Enron and its partner companies.

Even when the board made recommendations and regulations meant to restrict the management of Enron, it was often ignored. When the board required reviews of all financial transactions and CEO signatures on related documents, they were granted brief and incomplete reviews and ignored completely by Skilling (the CEO). This lack of accountability on the part of the management allowed the company to commit massive fraud behind the backs of their shareholders, and eventually lead to the downfall of Enron.

Though convenient, leaders cannot operate in “black box” environments. The lack of accountability and oversight in the case of Enron no doubt contributed to their fraud and destruction. A leader cannot operate in a vacuum, outside the view of those that they lead. The role of leadership requires that the leader be held accountable for their actions, outside the Black Box and in the light of day.

Model the Way

Leadership is practiced not so much in words as in attitude and in actions.
-Harold S. Geneen

In reflecting on this quote, it certainly applies to both good and bad leadership. It reminds me of one of the practices of effective leadership as described by Kouzes and Posner: "model the way."

Unsuccessful Habits of Lay and Skilling

In the case of Enron, there were many mistakes made on the behalf of the leadership. When looking at the Seven Habits of Spectacularly Unsuccessful People, there are immediate parallels between the examples listed in that article, and the leaders of Enron, including Ken Lay and Jeff Skilling. And, while arguments can potentially be made for each of the seven habits, in my opinion the most prevalent in this instance are habits #3 and #6.
Habit #3 is when the leader believes that they have all the answers. In the case of Enron, it seemed as though Lay and Skilling believed that their ideas were golden, and immune from failure. This led to aggressive expansion that ended up having a major impact on the ultimate destruction of the company. Perhaps if they questioned themselves more, they would have found something that might have argued against all the acquisitions and new ventures. This also made it extremely tough to oppose them, as they were “full steam ahead” trying to build the company into the greatest in the world.
Habit #6 is when the leaders underestimate major obstacles. Immediately I connected this habit to the Enron leadership not immediately taking the correct measures to fix their financial problems. Instead, they simply manipulated a few numbers on their financial statements, and went on with their business plan to try and keep finding new ways to take over the industry. Perhaps it would have been smarter for them to realize that maybe it would be better to be conservative and stick to what they were good at. This led to them getting in more and more debt, and they were never able to recover, even after trying illegal measures.

The "Toxic" Leaders of Enron

The leaders of Enron, though they may have started out innocently, were definitely “toxic” leaders. These leaders, especially Jeffrey Skilling and Ken Lay, created an environment that fostered “benign followers”—those who are afraid, for one reason or another, to challenge the leader—and further perpetuated the bad leadership of those in power. By switching the staff and firing employees often, the leaders instilled fear in their followers, and created a situation in which the workers were afraid to challenge them.
In her “Allure of Toxic Leaders”, Jean Lipman-Blumen states that in corporate leadership positions, “status and meaning become one” (141). Toxic leaders and their followers begin to equate their high status within the company with their lives having meaning. The company not only encompasses their careers, but starts to reassure leaders that they are good people. In Enron, specifically, the staff was constantly told that they were the cream of the crop, and eventually, this confidence caused them to become “toxic”.
In addition, the Enron leaders lost sight of their goal. Instead of focusing on their initial avenue of business, natural gas, Enron expanded to cover water, oil, and even broadband. The company overextended, and began to revolve more around the theoretical idea of a company like Enron and the supposed genius of the leaders than the actual products. The leaders created a culture of supposed excellence, focusing more on the fact that their company was run by the “best of the best”, and thus ignored the actual mission of the company. Because of their cultivation of “benign followers” and their over-investment in the “genius” of their employees, the heads of Enron were “toxic” leaders.

Who to blame for Enron?

I believe that Enron’s top executives, mainly Lay and Skilling, are mainly to blame for the Enron collapse. As intemperate leaders, Lay and Skilling were surely able to lead an effective and efficient company, but they lacked self- control and in turn followed a path down a slippery and slimy slope to disaster. They fostered a competitive environment that crushed any little creativity employees had and had them constantly worried about the permanence of their job. Not only were Enron’s top executives intemperate, they were also just plain toxic. Lay blatantly lied to employees, sending emails of false hope. He also conned his employees into keeping any and all stocks they held in the company all the while he sold millions of dollars worth of his stock. As employees of Enron, many were making a decent living. Many shut themselves off from the utter corruption they saw. Speaking out would surely cost them their jobs and possibly their child's college fund. Looking back, many would want to say they would have been the whistle blowers, they would have spoken out, but personally I don’t think I would have. Maybe if I did not have a family or anything to live for I would, but I do. It may be selfish, but I believe too much was at stake.

I also find that the auditing firm Arthur Anderson played a key and pivotal role in this collapse. Ordering all Enron related documents to be shredded after the scandal illustrates just how toxic this firm was in the grand scheme of events.

Arthur Andersen’s Fault

When asked who was at fault for Enron’s downfall, it is important to note that there is no single right answer. There are many different people and groups at vault all to varying degrees. Kenneth Lay and Jeffery Skilling are most certainly at fault, but I do not think you can blame a man for acting in his own best interests and for doing what he “thought” would protect a the company. However, you can blame an organization whose sole job is to audit the books, for screwing up the auditing of the books. For this reason I put Arthur Andersen most (but by no means completely) at fault. As a separate entity from Enron, the firm was the only check put in place on Enron’s’ accounting. However it failed to properly report those findings as evidenced by not only the tragedy that was Enron’s finances, but also by the shredding of documents. Arthur Andersen not only had the information to stop the Enron train wreck, it also had the means of doing so. They were expected to remain objective in the auditing of the finances but by instead became too invested in the company and the fees it generated. Whereas Ken Ley faltered in his attempts to keep the company afloat, he still “tried.” The job of Enron was to produce earning for its investors and they attempted to do so. Arthur Andersen’s job was to keep the books clean and they failed at just that.

Jeffrey Skilling- A Bad Leader

The leaders of Enron displayed many of the common characteristics of bad leadership. Jeffrey Skilling, who served as president and chief operating officer of Enron from 1996 until 2001, when he became CEO of the company, exhibited numerous forms of bad leadership. In fact, Skilling may be more responsible for the shocking collapse of Enron than any other leading figure. The reason that Skilling was able to reach such a high position in Enron despite his bad leadership was his initial success, as he was largely responsible for the development of Enron’s highly profitable “gas bank.” However, after this success, Skilling almost immediately displayed one of the characteristics of bad leadership described in Seven Habits of Spectacularly Unsuccessful People: he relied on what had worked for him in the past. Once Enron’s growth began to dwindle, he tried to extend the same business model that he had used for natural gas to electricity, water, broadband, pulp, paper, and lumber. Rather than examining these different areas individually and applying the best business model to each one, Skilling forced his old business model onto these separate markets. Then, once certain markets began to fail, such as the broadband industry, Skilling exhibited one of the most harmful attributes of bad leaders: he refused to admit he was wrong. Skilling could not admit that the company was expanding at too fast a pace or that the business model was not working in some areas since his credibility depended on the success of the company. Moreover, the success of the company itself relied on the public’s misconception that Enron was financially stable. As a result, Skilling never attempted to change the hopeless direction in which the company was heading, and instead focused his efforts on making the company appear to be successful to the public and the employees.

Skilling also had a huge ego and seemed to consider both himself and the company to be invincible. As stated in Seven Habits of Spectacularly Unsuccessful People, “When CEOs actually do possess a measure of genius, they are especially prone to slide into this illusion of personal preeminence.” As an incredibly talented businessman and graduate from Harvard Business School, it is not surprising that Skilling fell into this trap. Unfortunately, Skilling’s feeling of invincibility and belief that he had all the solutions to Enron’s problems ultimately led him to ignore the numerous risks of his business model. What is even more unfortunate is that these characteristics helped lead to one of the largest business failures in history and ruined thousands of peoples’ lives.

Enron and Corporate Scandal

When analyzing Enron’s collapse, it is important to keep in mind the specific action that landed it into trouble. Enron’s main wrongdoing was their use of “creative” accounting schemes. In an attempt to boost their financial records, it created subsidiary companies and subsequently transferred liabilities to those companies. Enron’s accounting scandal ultimately led to its demise. Thus, it seems reasonable to place the blame of the debacle on the people directly responsible for overseeing and approving the legitimacy of these accounting records. The people I am referring to are Jeffery Skilling and Kenneth Lay (CEOs), Andrew Fastow (CFO), and Arthur Andersen (auditing firm).

The Enron case is one of many corporate scandals, and it is unlikely to be the last. Corporations’ primary mission is to earn profits for its shareholders. This objective often comes in conflict with legal and moral standards. Sometimes the desire to earn money outweighs the risk of legal consequences. As long as businesses are greedy, there will always be cases of this scenario.

I do believe, however, that good leadership can reduce instances of corporate scandal. For instance, a morally conscious CEO/CFO will not sign an accounting document with the knowledge that the document is untrue and misleading. Enron may not have gone down had Skilling and Fastow been honest with their business dealings. It amazes me how easily the bad leadership of a few people can destroy a corporate. Conversely, the good leadership of a few people may not be enough to save one.

-Jack Sun

Bad Leadership & Twitter

On Monday, March 21st, Twitter celebrated its 5 year anniversary. After reading a recent article in the New York Times called "Teaching to the Text Messsage" by Andy Selsberg, I was contemplating how to create a writing assignment that challenges students to write both critically as well as concisely.

Selsberg claims that "learning how to write concisely, to express one key detail succinctly and eloquently, is an incredibly useful skill, and more in tune with most students’ daily chatter, as well as the world’s conversation."

So, yesterday I gave a pop quiz in my Bad Leadership class.

The question: What is the difference between bad & good leadership?


Answer must be 140 characters or less!

With his permission, here is one student's response:
"The difference between bad & good leadership is respect & results."
-Eric, First-year Student in Bad Leadership

What would your answer be in 140 characters or less?




p.s. Follow me on Twitter (jstratton22) to see more answers to this pop quiz question!

assumed consensus

I believe that the “curious atmosphere of assumed consensus” was the main cause of the Bay of Pigs. Schlesinger and other dissenters were impacted by the uncritical environment of their White House meetings. While Schlesinger had many issues with the supposed consensus opinion, he remained largely silent during the meetings. Had he or other dissenters spoken up and defended their critical viewpoints, perhaps the incident may have been avoided entirely.

One attribute of the group that intrigued me was their blindness to the obvious reality of the circumstances. The group’s underestimation of Castro’s military power is an apparent example. Castro’s army consisted of approximately 200,000 troops. Kennedy’s administration believed that their team of 1,400 exiles could succeed against Castro’s much larger military, despite being out numbered 140 to 1. The degree to which the group misjudged the situation is shocking.

Clearly, the Kennedy administration was a bit optimistic of their side’s power (it seemed like they were a bit delusional). However, I do not believe Kennedy’s advisers deserve all the blame. They were interacting within an environment that used social pressures to discourage any serious suggestion that challenged the assumed consensus. In his role of President, Kennedy himself heavily influenced and shaped this uncritical setting. His demeanor towards his advisers impacted their willingness to challenge his opinions. Additionally, when choosing his cabinet, Kennedy often valued the advisers’ loyalty more than their expertise. Both of these factors influenced the unfortunate outcome of the Bay of Pigs. In the end, it seems that both the advisers and Kennedy were blameworthy.

1. What ways could the advisers maneuvered the uncritical environment and be taken seriously?
2. How can incidents of groupthink be reduced in a group that you are involved in?

Becca, hindsight certainly is 20-20. It’s considerably easier to label leaders’ actions as unethical or label the leaders themselves that way from the vantage point of the present, but as Terry L. Price explains the content of morality isn’t clear, especially when decisions are actually being made. As students of history we have the advantage of knowing the outcomes of people’s actions those outcomes generally color our view of the events that caused them. Price explains that we also unnecessarily assume that leaders share the same understanding of morality that their followers do. The assumption is ridiculous considering that philosophers argue about the content of morality till this very day. Leaders and followers can also disagree on the scope of an immoral act. Naturally, times arise when deviating from morality has positive consequences we hope will outweigh the immoral means used to achieve them. Leaders, due to their position, have greater access to resources. They commit the same small infractions that we do, for example David lusting after another man’s wife, but on a greater scale, for example David sending the woman’s husband to die in battle. It is easier how leaders can confuse the scope of their morality or lack thereof from the cognitive perspective.

1) Does the cognitive explanation of ethical failures apply to JFK and the Bay of Pigs?
2)How can we/ do we have to educate leaders about ethics?

A Rose-Tinted View on Things

Largely noted as an utter disaster and failure of John F. Kennedy’s tenure as president, the Bay of Pigs invasion stands today as a historical event that displays classic examples of poor leadership and even poorer followership according to Janis’s “Groupthink” article. Janis outlines six characteristics of the group’s flawed judgments during the planning process for this important attack on Cuba, many of which also reflected on the nature of Kennedy’s bad leadership. For example, the “illusion of invulnerability” stood out to me as a matter of very positive group dynamics gone wrong. As a select group of specialized members chosen by such an illuminating and optimistic figure as Kennedy, these collaborators had no choice but to feel a sense of good will and cohesiveness. However, this case demands even more of a steady manner of planning and levelheadedness. It is too easy in scenarios such as these to develop what Janis mentions as “unlimited confidence” (327). One cannot simply cast aside notions of possible complications such as the enemy getting the better of one’s strategy or unforeseen issues that arise in the future.

However, I find it most interesting that such a failed invasion did not hurt the Kennedy administration in the historical eye. Looking at the Kennedy years from a retrospective point of view, today’s society tends to view these years through the proverbial rose-tinted glass, considering first and foremost JFK’s buoyant mannerisms, his administrations positive contributions such as the Peace Corps, and finally his lamented death. True, the Bay of Pigs remains in the history books as a failure but not of Kennedy’s; rather, it is seen as more of a failure on the part of the American government than of an individual. This phenomenon can be noted once again on the other side of the spectrum: in terms of positive innovations, Kennedy becomes responsible for the work.

Questions:

Could it be that Janis also falls under the spell of the rose-tinted glass when considering the Bay of Pigs invasion and the planning that went into it?

When is groupthink a good thing?