Enron, Ethics and Systems Theory

Enron’s 64 page Code of Ethics was prefaced with a letter from founder Kenneth Lay in which he proclaimed the organization is “responsible for conducting the business affairs of the Company in accordance with all applicable laws and in a moral and honest manner (TSG, n.d). The Code of Ethics also states it is based on several values such as respect, integrity, and communication (Cernusca, 2011). However, Lay’s seemingly sincere words and Enron’s code only prove to be rhetoric unrepresentative of actual organizational practices. The following will share an example of an unethical decision made by a CEO Kenneth Lay, how the decision-making process was flawed, and how Lay’s unethical decision impacted the organization’s communication process, goals, and strategies.  In addition, there will also be an explanation of ethical behaviors of company leaders. Lastly, presented will be strategies supported by system theory principles and best practices that support communication practices.

Unethical Decision and Impact

In 1987, when an internal audit found employees from the oil trading division to be embezzling funds, rather than be reprimanded the employees were praised by Lay who wrote in a memo “keep making us millions” (NPR, 2017). The decision by Lay not to punish the unethical actions of his employees was severely flawed as it placed priority on the bottom line and undermined the organization’s communication process, goals and strategies.

Communication process. Ethical codes are created to establish standards that are used as guides and work to become normal habits among an organization (Doorley & Garcia, 2015). And for most employees speaking up about an unethical issue is difficult (Mihelic & Lipicnik 2010). Instead of reinforcing the standards set by Enron’s ethical code, Lay’s response undermined the purpose of an ethical code and created a culture in which unethical behavior is rewarded. Lay’s response also created an environment where the communication process is ineffective because it creates a closed system in which employees are deterred from speaking out.

 Strategies and Goals.  A closed environment that does not foster effective communication inhibits the smooth operation of an organization and causes internal conflict. In an unstable environment, that is rampant with conflict strategies, plans for achieving goals cannot be successfully carried out, and goals cannot be reached. For example, Enron was once ranked the sixth largest energy company in the world but in reality, this ranking was a farce as it was based on inflated financial statements that falsified profits and concealed debts (Di Miceli da Silveira, 2013). Eventually, Enron’s unethical practices brought down the company in 2001, and 16 executives sentenced to prison for crimes related to financial malfeasance (Silverstein, 2013).

Ethical Behaviors of Company Leaders

Effective company leaders are not only involved in disseminating ethical standards to an organization, they also model them, and are held accountable. For example, former Boeing CEO Harry Stonecipher revised Boeing’s Code of Conduct after the company suffered reputational damage and replaced its previous CEO (Doorley & Garcia, 2015). The revised Code of Conduct required employees to promptly report any unethical conduct, which led to Stonecipher being fired for having a romantic affair with a female subordinate (Doorley & Garcia, 2015).

System Theory strategies and best practices

System theory proposes the idea that communication can be used as a maintenance mechanism or a tool to help resolve internal conflict (Almaney, 1974). An example of an internal conflict would be the aforementioned scenario in which Enron employees were found to be embezzling funds. An ethical code is a communicative tool that can be a maintenance mechanism when it is reinforced by leadership. Leaders shape ethical values through their actions and by policies and processes (Mihelic et al., 2010). Best practices for leaders to foster ethical behavior is by setting the example of adhering to ethical standards, encouraging employees to speak up when aware of unethical practices, and rewarding ethical behavior (Mihelic et al., 2010). As in the aforementioned Boeing example, Stonecipher being fired modeled that everyone, especially leadership is held accountable, and ethical standards are to be adhered to by those at the top and throughout the organization.


Codes of ethics and rhetoric in support of ethical standards have no value unless leadership model ethical behavior. They also need to create a culture in which it is expected for internal stakeholders to speak up when aware of the unethical behavior, and one in which unethical practices have consequences and ethical behavior is rewarded. This creates an organizational culture with an open communication process that is prepared to resolve internal conflict and carry out strategies to effectively reach goals.



Almaney, A. (1974). Communication and the systems theory of organization. Journal OfBusiness Communication, 12(1), 35-43.


Di Miceli da Silveira, A. (2013). The Enron Scandal a Decade Later: Lessons Learned?. Homo Oeconomicus, 30(3), 315-347.

Doorley, J., Garcia, F., H (2015) Reputation Management: The key to successful public relations and corporate communication. 3rd Ed. Routledge, New York, NY

Mihelic, K. K., Msc, Lipicnik, B., Phd, & Tekavcic, M., Phd. (2010). Ethical leadership.

International Journal of Management and Information Systems, 14(5), 31-41. Retrieved f rom http://ezproxy.snhu.edu/login?url=http://search.proquest.com.ezproxy.snhu.edu/docview/819649567?accountid=3783

National Public Radio [NPR] (2017, March 1) The History of Enron Once a New-Economy

Trailblazer, Now Beleaguered and Bankrupt. www.NPR.org. Retrieved from http://www.npr.org/news/specials/enron/history.html

Silverstein, K. (2013, May 14 ) Enron, ethics and today’s corporate values. Forbes.com. Retrieved fromhttps://www.forbes.com/sites/kensilverstein/2013/05/14/enron-ethics-and-todays-corporate-values/#4018394b5ab8

The Smoking Gun [TSG] (n.d).Enron’s ‘Code of Ethics’.Thesmokinggun.com.Retrieved from.http://www.thesmokinggun.com/file/enrons-code-ethics?page=1

COVER PHOTO RETRIEVED FROM: http://joannagracedelacruz.weebly.com/journal/service-learning-6-enron


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