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Organisational Failure Case Study - Enron

MGTS 7601 Presentation

Bella Zhang

on 16 May 2011

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Transcript of Organisational Failure Case Study - Enron

Enron Organisational Failure Group Members:
Zhang Xinyu
Huang Rong
Zhang Kun
Feng Yan
James Lutton The most notorious bankruptcy in US History Content Structure 1 2 3 4 Leadership Failure Organizational Structure Failure Organisational Cultural and Ethical Failure Discussion Recommemdation Enron Corporation An energy company established in 1985, based in Houston.
7th largest company in USA.
Stock rose by 311% from 1990 to 1998.
Rated as “American’s Most Innovative Company”.
22,000 staff and claimed revenues $101 billion in 2000. Enron Scandal After several years of international and domestic expansion,Enron was billions of dollars into debt.

In 2001, Sherron Watkins, VP of Enron noticed that the Enron was unstable.

In October, it was revealed that Enron’s reported financial condition was the result of institutionalized, systematic, and creatively planned accounting fraud. The Consequences Stock Fell — $90 to $0.61
Bankruptcy filed December 2, 2001
20,000 employees lost their jobs
Total retirement Loss $1.2 Billion
Shareholders lost $11 Billion Leadership Failure Kenneth Lay
Founder, 1985
Graduated from University of Missouri, 1965
Masters Degree in Economics
Ph.D while working at Humble Oil
Openly religious, while extremely driven by money Jeffrey Skilling
CEO (President)
B.S in Applied Science, 1975
MBA from Harvard, 1979
Share lay’s vision
Worked for Enron, 1990
COO, 1997
CEO, February 12, 2001 Andrew Fastow
Special Purpose Entities Transformational leadership
A leadership that change teams or organizations by creating, communicating and modeling a vision for the organization or work unit, and inspiring employees to strive for that vision Charismatic Leadership
The highest form of transformational leadership Cult leadership
The extreme case of charismatic leadership Encouraged employees to achieve goals and pursue wealth at any costs.
Showed their arrogance and intolerance towards employees.
Developed a method of accounting that were able to hide billions in debt from failed deals and projects.
Misled Enron’s Board of directors and audit committee on high-risk accounting practices.
Pressured staff to ignore the issues. Cult leaders energetically promote a compelling organisational vision.
Exaggerated claims common
Negative information restricted (positive information maximised)
Image of uniqueness projected Structural Failure Complicated Structure Enron Corp. Enron Capital & Trade Resources Corp. ECT Investing Corp. ECT Investment Holding Corp. ECT Investing Partners, LP Enron Transportation Services Company ECT Equity Corp. Middle-level Forgotten Centralization Cultural and Ethical Failure Collaboration
Tolerance of mistakes
Openness about failure Good Organizational Culture Enron Culture Lack of Ethical Commitment Cutting-edge accounting
All the employees were forced to accept
Staff were demoted Three Key Ethical Related Actions Setting a good example for ethics
Keeping promises
Support others in adhering to ethics standards Enron profile and its demise Leadership Hierarchy The orders from higher levels must be executed without queries, because those who executed the orders did not have some powers of administration. Deceptive practices barrier

Many deceptive practices could not be exposed by the middle-level staff for their ability of monitoring was limited because of centralization in the structure. Discussion What lessons can be learnt from Enron’s collapse? Recommendations Leadership Develop an effective, visible and dynamic senior executive team
Develop individual leadership among senior managers
Develop a board with a greater sense of authority Structure Adjustment of the Organizational Size
Deeper research on Investment Companies Culture Greater focus on ethical leadership
Revision of the previous ethics code
Shift in culture Achua, C. F., & Lussier, R. N. 2010.Leadership: theory, application, & skill development. South-Western Cengage Learning, Ohio.
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Cohen, D. A., Dey, A., & Thomas, Z. L. 2005. Trends in earnings management and informativeness of earnings announcements in the pre- and post-sarbanes oxley periods. Evanston, Illinois: Kellogg School of Management. p. 5.  
Conger, J. A. 1989. The charismatic leader: Behind the mystique of exceptional leadership, JosseyBass, San Francisco.  
Dorothy, L., Maryam, A., & Timothy, K.2006. The role of culture in knowledge management: A case study of two global firms. International Journal of e-Collaboration. 2(1): 17-40. 
Kumar, A. 1998. Encyclopaedia of human rights, violence and non-violence. Institute for Sustainable development.Lucknow.
Seeger, M. W., & Ulmer, R. R. 2001.Virtuous responses to organizational crisis: Aaron Feuerstein and Milt Cole. Journal of Business Ethics.31: 369-376.
Seeger, M. W., & Ulmer, R. R. 2003. Explaining Enron: communication and responsible leadership. Management Communication Quarterly.17:58-84.
Werther, W. B. 2003. Enron: The Forgotten Middle, Organization (London, England) (1350-5084), 10 (3): 568. Reference Thank you! Any questions? Comments? Characteristics of Cult leaders Leadership Failure Effects Whistle-blower:
Sherron Watkins Discussion Was this an aberration? Did Enron’s board fail in its governance? Debt Payable Debt Payable Debt Payable Debt Payable Debt Payable
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