Enron Business Failure

Examining Enron’s Business Failure

“Failure happens less frequently when the right mix of resources is brought to the task” (McCarthy, Flynn, Brownstein, 2004, p. 273). How could a corporation ranked 7th in terms of revenue in the United States at the time, coined “America’s Most Innovative company” six years straight by Fortune Magazine not have an adequate mix of resources? Enron, a well-known business failure, primarily disclosed itself late 2001. Along in the exploited affair, Enron Corporation also took down its principal accounting firm, Arthur Andersen, leaving few in either organization unscathed. The Enron scandal was a product of accounting ambiguities, ill-intentioned entities, and erroneous financial reporting.

Organizational Structure

Enron paved the road to their destiny when “its management wanted to keep things going and its executives were paid almost exclusively in stock and stock options” (Guel, 2008, p. 434). This can manifest itself into a problem in corporate capitalism, leading to what is known as the principal-agent problem (Guel, 2008). A principal-agent problem is defined as “a problem that occurs when the owners of the company (the shareholders) are motivated by long-term profitability for the company and the managers are motivated by monetary gain for themselves” (Guel, 2008, p. 434). As in the case with Enron, their Chief Executive Officer (CEO)(the agent) made decisions inconsistent with the stockholders’ (the principal) desires (Guel, 2008). This undermines the notion that “the best way for stockholders to get the CEO to do their bidding was to tie the CEO’s compensation to stock performance” (Guel, 2008, p. 434). Because Enron’s management compensation was directly tied to stock performance, their shareholders assumed that management would make sound decisions for the organization. Instead, this rendered Enron’s management into a position that deceived the markets; meanwhile indulging in false gains. The deception was...