agency theory enron.pdf

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l of Business Ethics (2005) 59: 3 47-3 60 Springer 2005

Brian W. Kulik

ST RA CT . Applying evidence from recendy available

ethi sand legal theories, and (3) the proper

E. Kulik is a Ph.D. candidate in Management at

Washington State University s chool of Business. His work

focuses on the prevention of corporate corruption, corporate

govemance and ethics, teamwork and diversity, and research

methods. His research to date hasappeared in the Western

and National Academy of Management conference proceed

ings and the journalOrg anizatio nal Analysis. Heearned

M.S. degreesfrom Washington State University and T7ie

University of Cincinnati, and M.B.A. from Tlie University

of Denver.

ntrodu tion

What can a corporate executive do to positively

influence organization-wide ethical conduct? The

ethics literature is replete with suggestions, including

selection and hiring of ethically-oriented employees

(Abdolmohammadi et al., 2003), establishing codes

of ethics (Gaumnitz and Lere, 2004), promoting an

ethical culture (Sims and Brinkmann, 2003), devel-

oping employees internally (Becker, 1998; Petrick

and Quinn, 2000), and taking a stewardship per-

spective (Davis et al., 1997). Given the well-known

recent corporate scandals, and especially the plethora

of now pubhcly available information that is avail-

able from Enron, two critical questions emerge.

First, if the suggestions from the literature cited

above had been implemented by Enron's top man-

agement team, could Enron's ethics shortcomings

have been avoided and bankruptcy averted? Second,

if the answer to the first question is n o , then in

what direction(s) must the relevant ethics literature

proceed before suggestionimplementation congru-

ence is obtained?

The case of En ron stands as a unique oppo rtunity

to investigate the above critical questions because the

widespread interest in identifying Enron's downfall,

and what the business world should do about it, has

spawned a num ber of books and articles. In addition,

the previously private information now made public

by the company's bankruptcy proceedings has shed

light on Enron's operations to a depth that is not

available from most other companies, public or

private. For example, bankruptcy court-appointed

examiner Neal Batson's third ihterim report (2003)

found that six financial institutions had 'actual

knowledge' of Enron's wrongful conduct, gave


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8

Brian W Kulik

'substantial assistance' by aiding in the structuring

and funding of Enron's now infamous special-pur-

pose entities, that the amount of money involved

was 'material,' and that such disguise harmed other

creditors. These findings may help define hmits to

strategic alliances more clearly and delineate a firm's

motivation for the creation of such alliances. In a

recent book by Smith and Emshwiller (2003), the

Wall Street Journal reporters who first made known

some of Enron's impropriety (specifically, special

purpose entities, or SPEs, named LJM and LJM2) to

the public, chronicled their work before and during

Enron's demise. This work may be interesting to

researchers in the tactical positioning that companies

use in the disclosure of negative informa tion. Finally,

a book co-authored by Sherron Watkins (Swartz and

Watkins, 2003), former vice president at Enron,

details her involvement in Enron since 1993. Their

contribution was essentially an exposure of the cul-

tural and chmatic conditions within which Enron

employees worked . Th ere is a grow ing consensus on

the idea that Enron 's cu lture, rather than the isolated

actions of a few individuals, was the key enabling

mechanism that allowed the widespread practice of

unethical and illegal behavior based on self-interest

(Bryce, 2003; Cruver, 2002; Fusaro and Miller,

2002; Mills,

2003;

Sims and Brinkmann,

2003;

Swartz and Watkins, 2003; Windsor, 2004). How-

ever, no attempt has been made to link the charac-

teristics of Enron's culture to a theoretical base that

might be used to both test the potential imple-

mentability of recommendations to practitioners in

the ethics hterature and the closeness of Enron's

culture to those of other firms.

This paper first establishes a theoretical base which

might be used (1) as a means in itself of providing

practitioners a way to avert future Enron-hke deba-

cles by the identification and generalization of

Enron's culture and (2) as a test of

the

avertability of

Enron's downfall through some of the ethics litera-

ture's recommendations. To this dual end, I draw a

number of parallels between Enron's culture and

agency theory, a theory made popular by lawyers,

economists, and finance and management theorists,

that attempts to explain the effectiveness of corporate

govemance in publicly-held corporations. The next

section describes the key elements of agency theory

and how it is purported to work correctly. Then,

Enron's culture is identified as one centered in the

basic tenets of the agency relationship, with paral

drawn between their dysfunctional culture

agency theory 's characteristics. In search of a solu

based on recommendations made in the ethics li

ature, I investigate alternative approaches that

organization's cultural and ethical base might inst

be founded on, but I find hmits to their effectiven

in correcting the problems in an agency cultur

conclude by noting that, while enduring compa

cannot harbo r cultures based purely in agency the

vital questions must be answered before specific

effective measures can be taken to avert the em

gence of

destructive culture such as Enron's.

gency theory

Agency theo ry, as developed primarily by Jensen

Meckling (1976), is a popular tenet in corpo

govemance today. For example, the ISI Social S

ence C itation Index finds that Jensen and Me ckli

(1976) work has been cited more than 3,000 tim

since 1989 and every article in the Academy

Management Review's 2003 special issue on c

porate governance cited Jensen and Meckling (19

see Daily et al., 2003), and at least one textbook

strategic management (Hitt et al., 2005) structures

chapter on corporate governance around age

theory. Typical of

its

use in articles concerned w

corpo rate gov ernan ce. Daily et al. (2003) sta

Jensen and Mec kling (1976) propo sed age

theory as an explanation of how the public cor

ration could exist, given the assumption that m

agers are self-interested, and a context in wh

those managers do not bear the fuU wealth effect

their decisions (p. 372). Thus, one can hardly av

discussion of agency theory in any dialogue

corporate govemance.

In particular, agency theory states that, in a pu

corporation, there exists a central problem with

gard to shareholders' interests: top m anagemen t d

not always act to maximize shareholders' return

investment. With regard to a corporate execut

agency costs will be generated by the diverge

between his interest and those of outside sh

hold ers Qensen and M eckhn g, 1976, p. 3

According to Rediker and Seth (1995), mechani

used to ahgn the interests of

the

manager with th

of the shareholders take the fomi of threats


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Agency Theory Reasoning and Culture at Enron

349

toJensen, 1986, creditors under high debt

and incentives (stock ownership, salary, and

his incentive to devote significant effort to

ventures falls (Jensen and Meck ling, 1976 , p.

to the interests of the shareholders. Th us, agency

Unfortunately, some self-serving executives may

self

the 'pay package point'). As long as their

enc y culture The Enron case

2001,En ron was a highly respected

thetop 25 managers of

tune named Enron the most innovative company for

seven consecu tive years prior to its downfall (Cruver,

2003;Swartz and

W atkins,

200 3), and

as

late

as 2 1

it

printed a glowing interview of Ken Lay (Hamel,

2001). An article appeared in Money as one of six

energy stocks that can light up you r profits (Brush,

1997,p.108).

Chief Executive (1997) wro te

a

positive

profile of Ken Lay, stating that Lay estimates com -

petition will reduce consumer electricity

bills

by 30 to

40 percentwhich w ould be likeanational tax cut of

around $70 billion. (p. 41). Tha t same year (1997),

Ken Lay also attended the W orld Eco nomic Forum,

and was an honored guest at the opening of Rice

University's James A. Baker III Institute for Pubhc

Policy (Swartz and Watkins, 2003). Even when near

bankruptcy, despite a falling stock price throughout

2001 and some negative press, a positive article ap-

peared as late as November, 2001 in which the mag-

azine Better Investing (2001) noted that the

consensus opinion among the analysts making esti-

mates was that Enron's earnings will grow at an

average annual rate of 17 percent over the next five

years (p. 54), while on Octo ber 26 , the Wall Street

Journal's article on Enro n

began:

Enro n: Rarely have

somanyanalystslikedastock they concede they k now

so httle about (Craig and W eil, 2001), an article that

was at least

backhandedly positive in that the stock was

seen as still popular among investors even though it

was acknowledged that no one understood its balance

sheets. Furthermore, Enron had the support and

direction of consulting firm McKinsey and Co ., case

studies were written by Harvard Business School

Publishing (Rangan et al., 1996; Tufano and

Bhatnagar, 1994), and a supposedly exemplary E nron

team was profiled in a popular teamw ork book that is

still widely cited in the literature for its teamwork

theory (Katzenbach and Smith, 1993). Enronwasalso

popu lar from

a

societal poin t of view ,

as

CEO Ken

Lay

became a well-known philanthropist who contrib-

uted generously to a number of charities and pohti-

cians' campaigns with personal and Enron funds.

Philanthropy was not limited to Lay, but Sw artz and

Watkins (2003) and Bryce (2003) claimed that each

senior executive was involved in his or her favorite

charity. Taken collectively, one could conclude that

Enron had built up a considerable amount of reputa-

tional capital

with politicians, minorities, local

businesspeople, charities, academia, investors, and the

business press. At the same time, however, unusually


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5 Brian W Kulik

excessive perquisites were apparently consumed by

Enron employees at all levels of the organization

(Bryce, 2003; Cmver, 2002; Swartz and Watkins,

2003) as discussed in more detail below.

As Petrick et al. (1999) highlighted, reputational

capital is an important antecedent to sustainable

competitive advantage. How, then, could the

simultaneous building up of social capital and the

excessive, nonsustainable acquisition of pay and

perquisites by the very same corporate executives

have occurred? Identifying some of Enron's execu-

tives as anomalous bad apples, with personahty

traits includ ing greed, dishonesty, arrogance,

self

ishness, cowardice, hypocrisy, disrespect, and injus-

tice (Petrick and Scherer, 2003, p. 40) ignores

Enron's prior popularity and the substantial social

capital that these same executives had shored up. To

alternatively point to 'the system' as flawed and in

need of more controls, such as the use of more,

better, and more transparent accounting mles

(Petrick and Scherer, 2003; Senate Subcommittee

on Investigations, 2002) may merely motivate im-

moral, but innovative executives, accountants, and

lawyers to find different ways around the new

controls (Mills, 2003). Instead, Enron's core behefs

and values must be investigated in an effort to query

just how Enron could be simultaneously popular and

insidious. Only then can one hope to curtail the

prohferation of corruption, wh at Petrick and Scherer

(2003) called En ron itis (p. 37), regardless of any

future accounting, SEC, or NYSE mle changes.

Below, I argue that Enron's core values and be-

hefs were forged by the basic tenets of agency the-

ory. M y argu ment is in two steps: (1) Enron's senior

executives used agency reasoning to both determine

and explain their behavior and (2) this agency rea-

soning resulted in a corporate attitude throughout

the organization that led to a culturally accepted

behavioral norm: an agency culture.

Enron executives and agency reasoning

In speculative support of the first step of my argument,

note that many of Enron's executives were well ed u-

cated in business and economics to be sufFiciendy

familiar vwth agency theory. For example. Ken Lay,

with a Ph.D. in economics, must have known about

agency theory as one of several economic theories

describing the mechanisms of corporate govema

His own Ph.D. work was centered in free ma

theory (Fusaro and Miller, 2002), which he app

bo th ou twardly as a corporate strategy, or fomiula

success (Swartz and Watkins, 2003), and inwardly

retaining, every six months, only the upper 85th

centile of Enron's employees after their semian

ranking by the firm's perfomiance appraisal (Crv

2002; Swartz and Watkins, 2003). Executives Jef

SkiUing and Rebecca Mark, bo th H arvard M BAs,

must have been familiar with agency theory. So

should have Andy Fastow, with an undergraduate

gree in econom ics (and Chinese) from Tufts Unive

and an MBA from Northwestern University. Fin

Michael Kopper, who worked with Fastow on

now-infamous

SPEs,

held an advanced degree from

London School of Econom ics, and lsomust have

famihar with agency theory. Even if agency th

were not known among these and other executi

one of its central assumptions, that of self-intere

parties (Eisenhardt, 1989), is certainly fairly com

theory in many economics theories (Harrison, 19

and it is this assumption that is essential to thin

within an agency theory framework.

If Enron's executives were taught agency th

as part of their business/economics education,

they may have used 'agency reasoning' in the de

of Enron's organizational stmcture and its polici

efinition 1:

Agency Reasoning is any behav

demonstration of rational thought that links corpo

govemance mechanisms (incentives and controls)

individual behavior.

Thus, an individual expressing agency reaso

might express that his/h er lowp y h s negative e

on his/her incentive to m aximize his/her compa

profits. This definition leads us to a proposition

summarizes the first step of my argument:

roposition

1:

If Enron executives applied age

soning to both determine and explain their beha

then published material describing their behavior

contain agency reasoning.

Evidence for agency reasoning by Enron executives

The first piece of evidence is an argument give

the board of directors for approval of one of Fast

SPEs, LJM 2:


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Agency Tlieory Reasoning

nd

Culture

t

Enron

351

Based

on

Fastow's presentation,

the

Directors envi-

sioned

a

model

in

which Enron business units

con-

trolled

the

assets

to be

sold

to

LJM2

(or

alternative

potential buyers)

and

would

be

negotiating

on

behalf

of Enron. Because each business unit's financial results

were

at

stake,

the

Board assumed they

had an

incentive

to insist that transactions were

on the

most favorable

tenns available

in the

marke t (Powers, Tro ubh

and

Winokur, 2002,

pp.

152-153).

the

ofagents for Enron's business units were

and not wi th Fastow's . Fol lowing Re dike r

the

aligning mechanism that

the

in

this case

was

of

takeover

(of

losing o ne's

job

because

of

ofmon i tor ing per fomiance

the incentive ofa highpay

as

had

sufficient con trol ov er

the

per formance

and distr ibution of boriuses to

his own

'incentives' (Swartz

and Wat-

is beside the point here: In his presen-

to

Enron 's board

of

directors,

the

board itself

an impor tant goveman ce mechanism accord-

g

to

Hi t t

et al.

(2005), Fastow apphed agency

to predict the behavior of Enro n executives

by

using

an

In short , Fastow, and the

in

their approval

of

LJM2, applied

As further support

for

Proposi t ion

1, I

offer

a

ofReb ecca Mark 's c losingof the second

of the

Da bho l po we r plant deal (before

the

was completed) as described by Bryce

Mark prevailed. She got a bigger project. And a

bigger project meant nosurprise a bigger bonus.

Getting the second phase of Dabhol approved right

away 'meant doubling ortriplingherbonus,' saidone

Enron employee who worked on Dabhol. I ll never

again underestimate the power of an incentivecom-

pensation program and the desire it can instill in

people (p. 172).

one was never finished at Dabho l and E n r o n

the

failure

of

this

project . Mark, however , made money

on the

project

because she had ' incent ive ' to close the deal - the

biggest possible

but no

' incent ive '

to

show

prof-

i tabihty from operations or even a finished project.

Thus, Mark allowed herself

to

follow

her own self-

interest as long as the boundar ies set by control

mechanisms (such as scmtiny by Enro n 's aw ard-

winning board of directors or internal managerial

accounting efforts) were not crossed and sufficient

' incent ive ' was provided for through bonus pay:

Agency reasoning.

Evidence for agency reasoning by Enron employees

Leaders can have a major influence on an organi-

zation's culture (Schein, 1992)which in turn can act

as an impor tant control mechanism for individual

behavior. Schein (1992) described culture

as

emerging from the repeated resolution of recurr ing

problems

in the

same

way

over t ime . Thus , followers

may adopt their leader's values, beliefs, assumptions,

and expectations (Clawson, 2002)

if

these help solve

recurring problems. Schein's (1992) theory has re-

cendy received some empirical support

at the

supervisor-subordinate dyad level (Block, 2003),

wherein cultural dimensions of involvement , con-

sistency, mission, and adaptabil i ty were observed to

be strongly

and

posit ively correlated with

the

transformational leadership styles, weakly correlated

with

the

transactional style,

and

negatively correlated

with the laissez-faire style of leadership (see Yuk l ,

1998,

for

definitions

of

these three leadership styles).

These results suggest that leaders' values, beliefs,

assumptions, and expectations may at least partially

explain the behavior of followers, especially for

value-oriented transformational-style leaders. Fur-

thermore, f ive

of

Schein's (1992)

six

primary lead-

ership mechanisms of attention , reaction to crises,

ro le m odel ing

and a

leader 's be havior,

the

allocation

of rewards, and criteria of selection and dismissal

have recently been used

as a

framework

for

explaining why En ron's culture contrad icted its own

code

of

ethics (Sims

and

Br inkm ann, 2003) . Thus,

assuming that Schein's leadership mechanisms were

active

and

effective,

and

that leaders' styles were

predominantly transfomiational (as Bryce, 2003 ,

suggested when describing

the

differences

in

styles

b e t w e e n

the

transactional-styled Kinder,

and


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5

Brian W Kulik

SkiUing, his transformational-styled successor as

COO), the agency problem may be one of those

recurring problems identif ied by Schein (1992) that

allows leaders to propose their own solutions. Such

leaders may thereby influence their followers who

subsequently adopt their leader 's solution. For

example, Jeffrey SkiUing, Enron's de facto leader

whi le act ing as its C O O and then C E O (Bryce,

2 0 0 3 ; Cmver , 2002; Swar tz and Watkins, 2003),

apparently knew about and fostered his own agency

reasoning as a way of solving the problem of inno-

vat ion and mot ivat ion among employees. Bryce

(2003) no ted that Fastow abso rbed SkiUing's

methods of managing people and his view of the

w orl d (p. 202). It seems reasonable, then, to con -

sider that Enron's employees at aU levels of the

organizational hierarchy - applied agency reasoning

as a means to solve the agency problem, and evi-

dence of agency reasoning should appear in pub-

hshed stories of Enron employees:

ropos t on 2:

If employees at the lower levels of En-

ron's hierarchy frequendy applied agency reasoning to

both determine and explain their behavior, then

published material describing their behavior will

contain agency reasoning.

In support of Proposit ion 2, while numerous

examples were discovered, only three corroborating

excerpts are offered here. The first excerpt, from

Swartz and Watkins (2003), demonstrates employ-

ees'

use of agency reasoning in their summarized

view of En ron's cu lture - wh at the authors terme d a

'high r isk/high reward' mentali ty:

contro l mechan ism he re, wher e aU of the o

govemance mechanisms lay domiant (referred to

no ru les in the above excerpt). Bryce's (2

account of employees' expectations was htt le

ferent:

Flowers, first-class airfare, first-class hotels, lim

sines,

new computers, new Palm Pilots, new des

Enron employees began to expect the best of ev

thing, all of the time. And there were salaries, lot

salaries (p. 134);

as was Cruver 's (2003) account of his ow n beha v

and att i tude:

I continued taking business-related trips, stayin

the best hotels and eating in the best restaurants. Th

were the perks that the majority of Enron employ

enjoyed - and it was fair trade for being on the r

for being away from families, and for working f

teen-hour days. I considered it part of our comp

sation (p. 73).

Taken together , evidence in Swartz and Wat

(2003), Bryce (2003) and C m ve r (2003) prov

corroborative support for agency reasoning's pre

lence at lower levels in the organization's hierarc

individual behavior and motivation was explained

a part icular combination of pay and perquisi te

Jensen and Meckling's (1976) 'pay package poin

where, in the Enron case, high levels of motiva

and incentive alignment (personal and corpo

interests) were associated with the high posit ion

each individual 's pay package point .

You deserved the best laptop and hotel room because

you were traveUng around the world booking million

dollar deals. You deserved to cheat on your spouse

because you were so stressed... booking million doUar

deals.

On the edge, there were no rules to constrain

you r thinkin g at the office and, as it happened , no rules

to constrain your behavior outside it. The youngest

traders bought themselves silver Porsche Boxters and

submitted $10,000 expense reports... They deserved

it (p. 192).

If Rediker and Seth's (1995) substi tution principle

were to be applied to the Enron case, one would

have to conclude that ' incentive, ' in a combination

of many perquisites and high pay, was the active

Agency culture

A definition of agency culture

If individuals throughout both the upper and lo

levels of Enron's hierarchy employed agency

soning, then one might generalize the Enron con

to a particular kind of culture that might deve

elsewhere. Thus, I assert that Enron executives

plied a corporate governance theory as a basis for

foundation of their organizational culture. It is

thing to acknowledge the existence of the age

relationship, but quite another to develop a cor

rate culture from agency theory's basic tenets. W

the idea that culture, rather than individual tra


7/15


ar (Sutherland, 1940) is not n ew , the co n-

er culture is agency theory . No co n-

Dejinition 2: Agency Culture is a type of culture

wherein members repeatedly solve the agency problem

with agency reasoning to the extent that agency-rea-

soned solutions become instilled in members' values,

beliefs, assumptions, and expectations.

tions of a strong agency culture

is expected to de-

s) , and increase financial perfomian ce. R e -

At Enron, there appears to have emerged a

2003; Cruver ,

Swartz and Watkins, 2003). For example,

atkins (2003) described the culture as almost

ike (p. 193) a very strong culture indeed.

hout the durat ion of the employmen t c on-

Age ncy culture In search of an antidote

Integrity and selection

The idea that a manager should act with integrity is

not new. Fayol 's (1949) second principle of man-

agement includes the fol lowing recommendat ion:

The best safeguard against abuse of authority and

against weakness on the part of a higher manager is

personal integrity and a particularly high moral char-

acter of such a manager, and this integrity, it is well

known, is conferred neither by election nor owner-

ship

(p. 22).

That is, after being selected manager, an individual

does not then suddenly increase his or her moral

character and personal integrity to match the

requirements of the posit ion held, but moral char-

acter and personal integrity must pre-exist with in the

individual 's character . One might naively ask why

these additional factors should be considered. Isn't

technical and organizational skill sufficient for to-

day's manager? Barnard (1968 [originaUy pubhshed

in 1938]) provides some further insight:

Tha t w hich is unique to the executive functions,

however, is that they also impose the necessity of

creating moral codes. Thus, to the moral problem of

individuals generally, organization adds in the case of

. the executive substantial increase ofmor lcomplexity,

and of tests of responsibility, and the function of cre-

ating moral conditions. The latter is a distinguishing

characteristic of executive work . .. (p. 274).

Barnard went on to assert that unresolved moral

dilemmas move up through the organizational

hierarchy until they are resolved. Therefore, a cor-

poration's senior executives encounter only the most

difficult moral dilemmas that exist in the organiza-

tion; they may often have no choice but to create a

new moral code to resolve a situation. This explains

why high moral character is important for managers

to possess, as the creation of new moral codes

through the resolution of moral dilemmas is an

impor tant funct ion of management .

One might suggest a solution based on these

preliminary assertions: Select only those employees

with high levels of moral character and integrity.

This was in fact the recommendation of at least one


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9/15


updated objective codes that was the basis of con-

tinued success to that point in their lives. One

cannot merely argue that executives' sets of codes

needed an infusion of integrity, because it may have

never lost its sense of integrity in the first place, at

least from an objectivist's point of view. Thus,

objectivist ethics fails to provide an antidote to

agency culture in a munificent, rare-failure envi-

ronment. Clearly, waiting for failure to occur in

such an environment before employees learn

important moral lessons may be too htde too late for

organizations already exhibiting agency culture

characteristics. Again, we must look elsewhere in the

literature for any antidote to agency culture.

Integrity and integrity capacity

A second approach rooted in integrity is the multi-

dimensional construct of integrity capacity as pro-

posed by Petrick and Quinn (2000), and recently

applied to the Enron scandal (Petrick and Scherer,

2003). In short, integrity capacity explains that an

organization's members exhibiting high levels of

integrity capacity cognitively balance the use of four

ethics theories (teleological, deontological, virtue,

and systems development), combined with the bal-

anced use of four legal tbeories (positive law, natural

law, civic responsibility, and social refomi) to de-

velop (from coUective connivance to compliance to

integrity) and institutionalize a system of ongoing

moral improvement (Petrick and Quinn, 2000).

Integrity capacity assumes that any imbalance in the

above construct would likely lead to instances of

unethical behavior.

This approach would not have been effective in a

pure agency culture for two reasons. First, the temi

balan ced in this construct is ambiguous. Ho w can

ethical dilemmas be objectively balanced? Was

SkiUing balancin g deontolog ical and teleological

ethics equaUy by first rejecting Fastow's chief exec-

utive position in an early SPE named Chewco

(according to deontological ethics by foUowing

Enron's ethics code), but later approving Fastow's

chief executive position for SPEs LJMl and LJM2

(according to teleological ethics by maximizing

benefit to stakeholders after the code of ethics was

waived by the board of directors)? Second, Enron

executives may have actuaUy been operating under

coUective integrity as defined by Petrick and Quinn

(2000). Petrick and Scherer (2003) associated

Enron's employees with nomiative behaviors of

connivance and comphance, rather than coUectiye

integrity. The way for an organization to proceed

toward coUective integrity would be to anticipate

and avoid any behaviors today that wiU become

iUegal tomorrow, thus moving beyond 'mere'

comphance (Petrick and Quinn, 2000). However,

senior executives at Enron presented many of the

now-iUegal accounting practices of the SPEs as

'cutting-edge' practices to the board of directors

(Zandstra, 2002), suggesting that Enron executives

may have been trying to anticipate the direction of

future comphance, and were in fact changing the

current laws (such as deregulation of gas and elec-

tricity) to fit with their 'cutting edge' practices. This

appears at least on the surface to be an integrity-

based approach to such an extent that it won the

approval of Enron's board of directors. Furthermore,

Swartz and Watkins (2003) referred to widespread

deregulation as the N ew Econo my , and to Enron

as Houston's ambassador to it (p. 132). Impropriety

was acceptable in corpora te life because it was seen as

a game, the goal of which was to see how much

could be extracted witho ut ever paying up (p. 196).

In this sense, it could be argued that it was actuaUy

'coUective integrity' that Enron employees practiced

as defined by Petrick and Quinn (2000). In other

words, if integrity capacity were to be implemented

in its curren t state of develop ment, it may be difficult

in non-compliance situations to discern between

connivance and commitment. What is legal, yet

nioraUy questionable today may be legally proscribed

tom orrow - or it may be both legal and moraUy

acceptable tomorrow. Enron executives may have

seen market deregulation, balance sheet manage-

me nt, and the p rivatization of corporate information

as trends foUowing the latter direction rather than

the foniier. Perhaps the crux of the matter here is the

development of the idea of coUective commitment,

in which managers are expected to be concerned

with answering the question, W ha t principled

system is worth multiple stakeholders' ongoing

participation and com mitm ent? (Petrick and

Scherer, 2003, p. 40). For Enron, deregulated elec-

tricity and gas markets w ere seen as just such a

'principled system' in which there were only

winners: Consumers paid fairer prices and Enron


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356

Brian W Kulik

employees realized high pay package points for their

services. Likewise, hiding debt and poorly per-

forming assets through SPEs may have been regarded

as another 'principled system' with only winners:

Enron was able to keep its debt rating above junk

status (Bryce, 2003), thus keeping the company

operational and m aintaining a high stock price based

on its considerable reputational capital. For this,

Fastow, architect of the many SPEs, undoubtedly

justified his huge personal gains by his creation of the

'principled system' that benefited the most stake-

holders simultaneously. My point here is not to

defend the behavior of Enron executives by any

means, but to iUustrate how agency reasoning and

culture might circumvent the construct of integrity

capacity in its current form. It seems that more work

needs to be done in the construct of integrity

capacity before it can be apphed as a pragmatic

solution to the problematic agency culture.

Stewardship

Stewardship theory, developed as the antithesis to

agency theory, assumes that the agent's sense of

responsibUity has already aligned her or his interests

with that of the principal: Stewardship theory de-

fines situations in which managers are not motivated

by individual goals, but rather are stewards whose

motives are ahgned with the objectives of their

principa ls (Davis et al., 1997, p. 20 ). Thus ,

stewardship theorists assume that a 'pure' agency

relationship as put forth by Jensen and Meckling

(1976) does not, in reality, exist. While Eisenhardt

(1989) cited somewhat consistent evidence for the

agency relationship, there is more recent evidence

from perhaps finer-grained studies that the stew-

ardship relationship may also be needed to more

completely explain empirical results (Conger et al.,

2001; EUoumi and Gueyie, 2001; Finklestein and

D'Aveni, 1994; Frankforter et al., 2000; Golden and

Zajac, 2001; Rediker and Seth, 1995). The discus-

sion here does not concern the empirical existence

of agency and stewardship's prevalence in today's

corporations, but rather poses the question: W ould a

culture based on stewardship

a 'stewardship rea-

soning culture'

solve the problem of an agency

culture? At first blush, one may have reason for

optimism: managers, when coalescing corporate

culture, could stress what objectives the firm and

employees have in common. For Enron, ch

executives could have stressed the traders' love

gambhng, Enron's exceUent reputation, and the fl

experience (Csikszentmihalyi, 1990; Csikszentmiha

and LeFevre, 1989) that results from taking risks

an intrinsic reward for making profits while trad

gas and electricity. At Enron International, the id

of making a difference to those in less fortun

countries by providing more people in those cou

tries access to basic utihties could have been

vanced. In this way, the 'bonus' would have exis

in the form of intrinsic rewards rather thanend

the-year cash bonuses and stock options. But in t

sort of stewardship culture, power might swing o

to the profit-seeking fimi, which could manipul

the stewardship perspective to underpay

employees. As with the integrity capacity literatu

one might argue for a balance between agency a

stewardship, but again the term 'balance' sugge

more the existence of ambiguity in its applicati

than an implementable solution.

is ussion

Clearly, more work must be done before imp

mentable recommendations may be applied on

systemic, organizational level to counter any ext

agency culture. To make a difference, research

have until the next economic boom period, a

consequent wave of corporate improprieties, to fi

implementable recommendations, if any exist. W

regard to the approaches discussed above, a num

of questions must be addressed before any solution

the agency culture question might be found. C

cerning integrity based on objectivism, its stren

hes in the idea that ethics are objective rather th

relative, and thus integrity means more than sim

doing what one beheves, but also in having beh

based on rational values in the first place. Howev

more w ork must be done in the development of

sets of objective codes held by senior executiv

How and where are sets of objective, rational co

of

v lues

developed? Are MBA and other univers

business programs influential in altering an indiv

ual's integrity and mitigating agency reasonin

Perhaps more importantly, how and when do th

codes change to account for new perceptions a


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7

experiences? With regard to the development of the

construct of integrity capacity, considerable progress

has already been made toward identifying the multi-

dimensional and multi-step complexity involved in

creating an organizational system that is high in

integrity capacity. However, the key to the realiza-

tion of integrity capacity s fuU and considerable

potential is first in the further elaboration of the temi

balance to account for the co-existence betwee n

competing managerial, ethical, and legal theories,

and second in the clear distinction of the imple-

mentable differences between coUective connivance

and coUective commitment. Finally, while a stew-

ardship-based culture goes a long way toward

reduc ing the p roliferation of perquisites as com pared

to an agency-based culture, a culture based purely on

stewardship is an equally unlikely and unbalanced

solution, so that a similar question of balance be-

tween agency and stewardship in any organizational

culture should be a pressing question for ethics

researchers.

This paper suggests at least two additional direc-

tions for ethics researchers. First, much more

empirical work needs to be done to detemiine just

how widespread the existence of an agency culture

actuaUy is in today s organizations both in corpo-

rations and in society in general. In particular,

exactly how is an agency culture detrimental to

organizations? Can poor performance be directly

related to the presence and/or prevalence of an

agency culture? Second, while this paper focused on

the im mediately salient agency relationship as a

theoretical foundation, perhaps similar use has been

made of other economics and govemance theories

such as transaction cost economics or game theory.

Fusaro and MiUer (2002) suggested Coase s (1937)

free-market theory of fimi efficiency as a theoretical

basis for unde rstanding Ken Lay s understand ing of

market systems. Future work might address the

acculturation of other economics theories. For

example, what is the relationship, if any, between

the corporate use of outsourcing (as a means of

solving the recurring problems of internal cost and

quality) and the cognizance of transaction cost eco-

nom ics, and does it have similar moral-erosion ef-

fects on an organization s mem bers as does agency

culture? Based on the theory and perspective

developed in this paper, an empirical study might

shed more light on that and related topics.

A potential limitation of this paper is the relevance

of an analysis of Enron in the first place: Since the

corporate scandals of

2002,

has corporate culture in

America changed to the extent that the problems

attributable to Enron are no longer problems in

today s com panies? I chaUenge the relevance of this

relevance argument by suggesting that white-coUar

crime is cychcal, always re-emerging in economic

boo m times. Wh ile the questions raised in this paper

may (MiUs, 2003) or may not be immediately rele-

vant to the present state of corporate America and

beyond, finding answers to the questions raised

herein wiU likely be directly applicable to the next

and future periods of widespread economic growth

and prosperity, as each such period may well be

accompanied by corporate scandals.

Summ ary and onclusion

It has long been know n in the fields of m anagement,

social psychology, and organizational behavior that a

strong culture can act as a vital control mechanism

over individual behavior. The field of leadership has

to some e xtent investigated a leader s influence over

the culture that controls employees, and how an

organization arrives at a culture in the first place

(Schein, 1992; Sims and B rinkma nn, 2003). If a

leader can influence her or his organizational cul-

ture, the n it must be considered that the leader s

theories of govemance can be transformed into an

organizational culture that is then used as a general

meth od of solving problems. The best cultures that

have been proposed are flat, empowered ones in

which pay is at least partly based on fair measures of

performance and innovation leads to quick adapta-

tion and learning (Galbraith, 2002). The example of

Enron, which may be generahzable to examples of

other recently failed companies as well as currently

existing companies (MiUs, 2003), suggests the need

for researchers wh o apply a best cultu re approach

to recognize that an irresponsible use of power

(Gandz and Bird, 1996) may be prevalent in an

empowered, innovative culture when incentives are

established on the assumption of a pure agency

relationship betwe en a firm s ownership and its

employees.

Using recent hterature o n En ron s operations, I

have argued for the existence of an agency culture that


12/15

8

Brian W. Kulik

may well be as detr imental to the lon g-term health of

corporate A merica as i t was to En ron . I proposed that

an agency culture should be distinguishable from

other cultures because, in an agency culture,

employees te nd to explain their behavior scontrolled

by govem anc e mechan isms, defmed as agency rea-

soning. I t is important to note that , compared to

criticisms of Enron's improprieties and illegal activi-

ties, agency culture was the conclusion reached after

juxtaposing Enron 's populari ty on the one hand, and

its unsustainable corporate improprieties on th e o ther.

I further noted a number of undesirable behavioral

consequences that managers should expect to see in

their employees operating within an agency culture.

Lastly, I tumed to four possible antidotes to an agency

culture - selection, objectivist integrity, integrity

capacity, and stewardship to illustrate both the

shortcom ings of these solutions and a future direction

for m aking these approaches implem entable so that in

the future the eme rgence of an agency culture m ight

be averted. In short , we n eed to dev elop answers to a

strong agency culture that functions in a munificent,

few-failure environment containing new hires with

low ethical characteristics.

W e are increasingly a culture that not only focuses

on the short term (Piety, 2004), but also on the

agency relationship in our pursuit of wealth. The

perils involved in this pursuit was noted by Weber

(2001 [originally published in 1905]) , who wamed:

In che field ofitshighest development, in the United

States, the pursuit of wealth, stripped of its religious

and ethical meaning, tends to become associated with

purely mundane passions, which often actually give it

the character of sport (p. 124).

Agency culture seems to foster such a sporting char-

acter. In particular, the correction of an agency culture

toward the restoration of some sort of 'rehgious and

ethical meaning' (Conroy and Emerson, 2004) could

be a priority for any model that claims to systemicaUy

infuse ethically appropriate behavior throughout any

organization, given the environmental conditions

identified herein. However, it appears at this critical

point in American and global corporate history that

infusion-of-ethics approach es such as integrity and

stewardship fall short of implementabil i ty. What we

need is an ethics approach that addresses the agency

problem directly; otherwise, current ethics ap-

proac hes may n ot be as effective as they co uld be up

pract i t ioner implementat ion.

cknowledgement

would hke to thank Richard Reed and Je

Goodstein for their many helpful comments

earher versions of this paper and Dave Lemak

numerous discussions of the relevance of ethics

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Department of Management and Operati

Washington State Univer

Todd 337, Box 6447

Pullman, Washington 99164-47

U S

E-mail: bkulik@pullman.


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