A focus on workplace culture: Could Enron happen in 2022?
The end of 2021 marked the twenty-year anniversary of the Enron scandal. Since then, and in the wake of the 2008/2009 financial crisis, regulatory and corporate governance expectations have evolved along with attitudes towards corporate culture, businesses have acknowledged the value of diversity of thought and the importance of psychological safety, and the rise of social media has helped workplace activism to become a defining feature of the workplace. With all these developments, could Enron still happen in today’s world?
In the few years before its collapse – and in an era of minimal regulatory scrutiny compared to today’s landscape - Enron’s leadership managed to pull the wool over the eyes of the regulators with their fake holdings and off-the-book reportings. Its corrupt, fraudulent, and allegedly dishonest executives, leaders and advisors, including the former Chairman, CEO, CFO, and accounting advisors, went to extreme lengths to hide the company’s debt, resulting in one of the largest corporate bankruptcies in American history in 2001.
The Enron scandal resulted in new laws and regulations regarding financial reporting for listed companies in the US and wider corporate ramifications worldwide. But since Enron, the focus on corporate culture has evolved and investors, shareholders, consumers, and wider workforces increasingly hold companies and their leaders to account for their conduct and decision making beyond financial reporting.
The focus on culture and ‘tone from the top’
Culture – historically seen as a softer, HR or personnel issue – has been on the board and management agenda for many organisations over the last decade. As employment lawyers, the work we do with businesses on culture, ESG, the future of work, diversity and workplace activism forms much of our advisory bread and butter nowadays. This momentum is not slowing down.
For years now, governments, businesses and regulators have recognised and pushed for healthier workplace cultures as the link between poor culture, poor decision-making and conduct failings has been laid bare.
Regulators are increasingly expanding their supervisory and enforcement powers to monitor corporate culture and leaders are expected to set the tone from the top. If the same focus on culture with the risk of personal accountability for leaders had existed twenty years ago, would the same chain of events have unfolded as it did in Enron’s boardroom?
Whistleblowing and psychological safety
Prior to Enron’s collapse, its vice president wrote a letter to its Chairman/CEO warning of the risks if its accounting scandals came out. No action was taken. The company collapsed a few months later. It later came to light that the company had sought legal advice about dismissing the whistleblower almost immediately after she blew the whistle.
Over the past twenty years, we have seen vast improvements in attitudes towards whistleblowing and speak up + listen up + follow up practices in the UK, both at a corporate, regulatory, and individual level. UK businesses have increasingly recognised the value in whistleblowing policies and procedures for reporting concerns as part of general risk-management and good governance. Regulatory requirements have surpassed legal requirements in some sectors, requiring some business to have facilitates and procedures in place for concerns to be easily reported, as regulators continue to push the importance of psychological safety as part of a healthy workplace culture.
These developments are also happening in other jurisdictions (the new EU Whistleblowing Directive came into force in December 2021 – requiring many EU jurisdictions to up their game to implement new whistleblowing practices) and protections for whistleblowers were introduced in the US following the Enron scandal.
If a culture of psychological safety was present at Enron at the time, or it had a better regulatory environment for concerns to have been raised, would more whistleblowers have come forward, and if so, would they have done so sooner to expose the company’s fraud before it was too late?
The power of diversity vs Groupthink
What happened at Enron wasn’t an honest mistake or a decision taken by its leaders based on a knee-jerk reaction on a bad day. It happened over a series of events, over several years, involving the same group of senior leaders making the decisions.
Groupthink at board level is an inevitable risk and arguably, no boards are immune. Boards are the ultimate decision-making group for the company. But there are ways to avoid, or minimise, the risk. In recent years, there has been a regulatory push for diversity across UK boards in light of evidence showing diversity of thought leading to better decision-making and enhanced risk management.
Thankfully, today’s focus on diversity at board level is better than it was twenty years ago. And yet, the stats from UK benchmarks, pledges, and charters we see championing diversity at board level show us that progress in board diversity is still slow.
Internal investigations when the wheels are coming off
The increase in investigation work we do with businesses relating to workplace behaviours, poor conduct and decision-making at a senior level has increased significantly in recent years. The Covid-19 pandemic has shown us that inaction, for whatever reason, is bad risk management and can lead to worser consequences. Whether to comply or pre-empt regulatory involvement, media attention or workplace activism, businesses are more amenable to conducting internal investigations into conduct than they were twenty years ago. But with that comes personal accountability and questions around independence, openness, and impartiality of process. Workplace investigations can also open cans of worms – but those cans in themselves can be necessary for short-term pain and long-term gain to enable cultural growth and sustainability.
Enron in 2022?
So, do we think Enron could happen in 2022?
Perhaps the same chain of events would not have unfolded as it did. Perhaps concerns would have been brought to light sooner so that remedial action could have been taken, and personal accountability identified before it was too late.
But the recent Theranos scandal has shown us that corporate shames of these magnitudes can still happen in today’s regulatory and governance landscape. Once a star of Silicon Valley, the heights of the blood-testing company began to dismantle in 2015 after a whistleblower raised concerns about its testing device and success claims. Within a year, its founder and CEO, Elizabeth Holmes, was exposed as a fraud and the company collapsed in 2018. Whilst public blame lies at the door of its founder and CEO, there was a board of directors sitting with Elizabeth responsible for the company’s decision-making and governance in the months and years before the scandal unfolded.
Twenty years may have passed since the Enron scandal, and developments in corporate culture, regulation and governance may mean it wouldn’t happen again in the same way again today, but that’s not to say it will never happen again. Directors and senior leaders would be wise to remember the cautionary tales from these events and the potential for personal accountability and falls from grace in today’s business world as the focus on workplace culture continues.