Name Mohammed Ali Allauddin

MNGT 5590
Fall2, 2010
Final Exam

Even though this is a take-home final exam, it is not an open book/open note exam.
Please complete it using only the vast knowledge you have acquired from class/studying
and retained in your brain. This stuff means something only if you have cognitively
processed it and absorbed it.

There are 2 parts to the exam – a case with questions and some general questions.
Remember:
• there is no credit given for filler
• lots of credit for organized concise thought
• legible typing (no fancy fonts)
• proper grammar and sentence structure counts
• and (of course) use of stuff we learned in class (books or class discussion)

Also remember, repeating the question in the answer to make it longer doesn’t help. I
left only a small space between questions because you can expand the space as you
type, and not take up any more room than necessary.

Finally, if I ask for examples, please give them. If I ask for your opinion please provide
it in sufficient depth so I can tell if you have really thought it through.

CASE 1

Few business episodes have been the subject of so much debate and despair as the swift
descent of once-admired energy trader Enron. The saga of this firm, which rose to prominence as
rapidly as it subsequently fell, serves as a kind of morality tale of corporations, regulators, and
investors. As we have discussed in class, the tragic effects of Enron’s overreaching arrogance
provide a textbook example of both the best and the worst of American business culture and
practice. Although the catastrophe’s complete impact may never be completely determined, it
seems likely that Enron’s collapse caused more than one major company to cease to exist, several
industries experienced radically changed environments, regulators and investors modified their
behavior, and all firms are now subjected to greater scrutiny and regulatory oversight. So how did
one of the brightest stars of American business, the company that was called “a proven winner”
and “ a New Economy wonder,” come to epitomize one of capitalism’s most serious weakness—
unbridled and unprincipled greed?

A little history
Enron began innocently enough with the 1953 formation of the Houston Natural Gas
Production Company, which owned a few gas wells near Corpus Christi, Texas. From that time
into the 1980s, the company grew by merger and acquisition, and in 1985, it merged with
InterNorth, Inc., changing its name to Enron. Kenneth Lay, CEO of Houston Natural Gas, was
named chief executive. An important part of Lay’s strategy for the firm was to diversify beyond the
regulated and therefore relatively low-profit gas pipeline industry into unregulated markets. Jeffery
Skilling joined the firm in 1989, the same year that Enron began to offer financing to oil and gas
producers through a subsidiary. Enron continued to expand into other utility businesses, especially
electrical power generation and trading, and also increased its international presence with offices
in Europe, India, and South America.
In 1999, the company first ventured into a radically new industry—broadband services. This
unit trades excess Internet capacity, serving as an intermediary between buyers and sellers, in
much the same way that it traded electrical power or natural gas. The company’s new strategy was
to become a trader for “every commodity on earth,” and at the time seemed to be on its way to
accomplishing that feat. By 2000, Enron was the sixth-largest energy company in the world based
on market capitalization. Forbes recognized Enron as the thirty-sixth-largest firm in the United
States overall and the seventh-largest in sales.
Meanwhile, profits abounded. Lay donated generously to the city of Houston, where Enron was
headquartered, and in return was given naming privileges for its new sports venue, Enron Field.
Lay also raises $100,000 for George W. Bush’s election campaign and was rewarded with a
personal invitation to the Washington inauguration, which included seating at a private White
House luncheon with the new president. Enron’s annual stockholder meeting in January 2001 was
a study in corporate egotism. Executives met at a San Antonio, Texas hill country resort, and
champagne and cigars were free for the taking. At this meeting, Lay boldly asserted that he
expected Enron to become “the world’s greatest company.” On February 5, special bonus checks
worth tens of millions of dollars were prepared for Enron executives. However, in what might have
been the first outward sign of the trouble to come, Lay resigned as CEO in February 2001, keeping
his position as chairman of the board, while Skilling was tapped to be his replacement.
On the surface, Enron had the appearance of assured success, but underneath, a tangled web
of deceit was slowly emerging. Fortune writer Bethany McLean, who has covered Enron
extensively, prepared an article titled “ Is Enron Overpriced?” in March 2001, when the stock was
valued at $80 per share, near its $90 per share high. The article, in part, noted, “The company
remains largely impenetrable to outsiders, as even some of its admirers are quick to admit.
Start with a pretty straightforward question: How exactly does Enron make its money?
Details are hard to come by because Enron keeps many of the specifics confidential for what it
terms ‘competitive’ reasons. The numbers that Enron does present are often extremely
complicated. Even quantitatively minded Wall Streeters who scrutinize the company for a living
think so.” Insiders saw problems, too. One of Enron’s tax lawyers, Jordan Mintz, began work in the
CFO’s office October 2000 and immediately had questions about some of the files he had read.
Deals looked questionable, and many had not been signed by COO Skilling, as required by law.
Mintz’s boss, Chief Accounting Officer Richard A. Causey, advised him to forget about it, telling
him, “I wouldn’t stick my neck out.” When Mintz ignored the warning and emailed Skilling in spring
of 2001 to ask him to sign the documents, his message went unanswered. In August 2001,
accountant Sherron S. Watkins also noticed bookkeeping irregularities and wrote to Lay, who was
now chairman. In response to the allegations contained in Watkins’s message, the firm’s attorneys,
Vinson & Elkins, conducted interviews, but no further action was taken.
Ironically, accounting, an area often stereotyped as dull, lies at the heart of this complex and
riveting story. Accounting problems first began to show up in small ways and to raise nagging
questions; one problem area was a group of partnerships that Enron had spun off from its mainline
operations. This is a common type of corporate risk management which allows a company to
divest risky investments to separate partnerships that are then sold to outside investors who are
willing to assume the increased risk. Accounting rules insist that the deals be done at “arm’s
length,” meaning that the partnerships must be truly independent of their parent. In Enron’s case,
however, Chief Financial Officer Andrew S. Fastow and members of his staff owned the
partnerships, a fact unknown to most Enron employees, auditors, and lawyers.
The lack of arm’s-length, independent-party transactions led to some strange results. For
example, when terms of the partnerships needed to be renegotiated, Fastow served as the
representative for the partnerships while other financial mangers, his subordinates, negotiated on
behalf of Enron. Enron’s board of directors approved Fastow’s role in these negotiations, then
asked Skilling to provide oversight. Enron profited tremendously from these deals since it recorded
a profit on the initial sale while moving any associated expenses or losses off its books. The
conflict of interest ran even deeper because more than a dozen Enron executives obtained
securities brokers’ licenses, and the firm owned an investment bank as a subsidiary. Skilling
initiated this change, which allowed Enron to serve as the broker as well as the buyer and seller in
some of its partnerships transactions. And Enron managers collected hefty fees for negotiating
some of the firm’s most costly and doomed investments.
Another example of creative accounting involved the partnerships that were financed with
Enron stock. According to some of the legal requirements of the original deal, if Enron’s stock price
fell below certain trigger, the partnership’s assets and debts would revert to Enron. The triggers
were intentionally set low, some as low as $ 28, at a time when Enron was trading at around $ 90.
But when the scandal broke, the stock price fell rapidly, ending up below even the lowest trigger in
a matter of weeks. Enron was then forced to account for the partnerships’ losses on its financial
reports, which ran in the hundreds of millions of dollars, negating Enron’s annual profits several
times over.
A third accounting problem was the extensive use of “off-the-books” transactions. Most
corporations engage in some types of complex financial deals, and many do not report the results
on their audited financial statements because current accounting rules do not require reporting
when the parent company owns less than half of the voting stock of the partnership. A firm’s
involvement in these off-the-books deals means that investors and even stock analysts, who are
paid to oversee and report on corporate finances, do not have access to all the information they
need. Most companies claim that these transactions are so small the results would have only a
negligible impact on earnings, but that was not the case at Enron, whose losses were at least $500
million. “Four or five [off-the-books partnerships] would be a lot,” says lawyer Allen Tucci. But
Enron was involved in over nine hundred of the complex deals, many of them located in countries
which offer tax havens, further reducing Enron’s expenses and artificially raising profits.
As Enron’s troubles began to mount, a few analysts and industry observers questioned the
firm’s apparent profitability, but others determinedly defended the company. Amid these questions
and the then existing energy crisis in California, which had a negative impact on Enron’s electricity
trading unit, the stock price continued to fall. Skilling abruptly resigned firm in August 2001, and
Lay returned to fill the CEO slot. By late September, the price had fallen blow trigger levels,
causing auditors at Arthur Andersen to unwind the deals, placing the full loss on Enron’ books.
At about this time, Andersen employees realized that they had made a terrible mistake-in the
previous year, they had overstated Enron’s earnings by $1 billion. Although Andersen’s
accountants blamed the complexity of the deal for the errors, Enron was required to restate
earning to reflect much lower levels of profitability.
Enron’s downward spiral accelerated and the U. S. Securities and Exchange Commission
(SEC), which regulates financial markets, began an investigation which widened in November
2001 to include Arthur Andersen. Fastow was put on administrative leave. Lay had talks with
several high-ranking government officials, including Federal Reserve Board Chairman Alan
Greenspan, Treasury Secretary Paul H. O’Neal, and Commerce Donald L. Evans, to request
government assistance, but all help was denied. Dynegy, another Houston-based energy
company, had talks about a possible merger with Enron, but the increasing public disclosure of the
firm’s problems caused the merger to fall through. Finally, unable to meet its obligations, Enron
filed for bankruptcy protection on December 2, 2001.

Case 1 Questions

1. Based on what you’ve learned in class and in the books you’ve read during this class, what were
3 of the specific organizational environmental challenges faced by Enron throughout its history? Be
clear in identifying each one and describe what impact challenge had on Enron’s fate

- Organizational structure
- Organizational activities
- Corporate governance

I think the biggest impact challenge had on Enron’s fate was Organizational philosophy.
The complexity of financial data and source of revenues also made it difficult to understand the
accounting fraud. A good governance requires the firm to keep its financial data sound so that the
firm can determine and maintain acceptable levels of risk. Because risk is the key driver of
organizational activity, and corporate governance is the organization’s strategic response to risk.
Since the financial data did not reflect the real situation of the company and there was no
transparency, this leaded Enron executives to make wrong and ineffective decisions.

2. Enron was not an effective organization; it did not accomplish what it set out to do. What do you
think are the 2 main organizational causes of its lack of effectiveness? Give an example to support
each cause.

Organizational objectives –Good example to me is from case study where it was not clear how
exactly Enron made money and those details were not disclosed based up on competitive reasons.
If Enron organizational objectives were open and followed process to disclose there accounting
book keeping irregularities Enron as Organization would have been more effective.

Skills in Leadership – Good example is accounting problems which began to show up and raised
nagging concerns.

3. As in your midterm, you’re now a fancy Org. Behavior consultant – Enron is now a shell of a
company, the bad guys are in jail, ordinary people’s lives have been destroyed, internal and
external trust within Enron has been obliterated, and everyone all the way to the top are constantly
saying “they made me do it.” The fate of the entire organization’s future rests in your capable but
somewhat inexperienced hands (but you can’t let them know that). What are the specific steps
that you would take do to make things better at Enron and how would you go about implementing
it? Be specific with your examples.

Understand what motivates people

I will start talking to employees at all level to gather information coming up with questionnaire to
gather data so that I will be able to come with my recommendations. Good example is to setup
meetings with managers and find out what expectations they have set with each employee

Separate auditing from consulting functions

From the above case study I think allowing Andersen to both audit and consult with Enron created
at least an appearance of a conflict of interest. I will change this work environment by making them
two separate entities.
Example-
Provide recommendation to have Enron Consulting as consulting firm and Enron accounting as
accounting firm

Build Organizational Ethics –

Build robust Ethics Infrastructure which would be self Sustaining
Example C
Create Hot line numbers where Employees can seek guidance

Set Organizational activities/Goals

Would make certain to remind people of the short term and long term goals of the job. They should
see how their goals support the organization's mission and vision.
Example to achieve this to tie goals to code of conduct or code of ethics

OTHER QUESTIONS

1. From the material presented in the Covey’s The Speed of Trust, discuss (without looking at
the book) why some leaders succeed and why some fail. Give examples.

Some leaders succeed because they see success on the far side of Failure i.e. they learned
from their failures

Some leaders fail because they don’t recognize or learn from them

Parents to me are example for both.

For me first born goes through trial and error but by the second baby they would have
learned from their mistakes which would make them better leaders fr their kids. This same
example goes for why leaders faile because if they did not learn from first baby birth they
failed

2. You are interviewing for a new job but want to make certain that you’ll fit into the culture
established by the leadership. Give 5 specific questions that you will ask that will allow you
to sufficiently determine the leadership style and culture of the organization so that you can
make a decision. Explain how each question will help you decide. Use references to the
concepts you learned in class as they apply to organizational success.

Strategic vision of the organization – This will let me companies long tem goals and short
term goals
Organizational Structure – This will help me understand how the organization is structure
and their about their leaders. Similar to key elements External, Internal and Individual
Organization Objective – What is the objective of the company what are their core beliefs
and ethics
Organization decision making – This will let me know how corporate governance as well
as Organization decisions are made and also how volatile decision making is
Ask about companies Management style and type employees fit in well – This will
allow me to see if my style of leadership fits with company management style
 3. As a result of this class, what is one thing you’re do differently in your sphere of influence to
take better advantage of your newfound knowledge of organizational behavior?
Implement the theories of Behavior and Motivation.
Be effective leader

4. Covey identifies 13 behaviors that he feels contributes to a high level of trust. They are:

Competence based Character and competence

Character based behaviors
behaviors based behavior
Talk straight Deliver results Listen first
Demonstrate respect Get better Keep commitments
Create transparency Confront reality Extend trust
Right wrongs Clarify expectations
Show loyalty Practice accountability

Which 3 do you feel are the most important? Describe those 3 and tell why you feel that way.
Demonstrate Respect, Deliver results and Listen first

Demonstrate respect is how we show repect for Individual and important for enhancing
commitment and influence

Deliver results – At the end of the day how good your matters only if deliver results in an
organization .i.e. Strategy x Execution = Results

Listen first - As a leader you should be god listener because you might get into situation like
conflict, Understanding emotions of employee. That way you can be a better mediator.

5. Why did I spend so much time in class sermonizing on the importance of leaders
understanding themselves, their individual purpose and what makes them tick? Do you
agree? Why or why not?

I agree. If the leader does not understand his style of Leadership or what style he wants to
follow then he would not be more effective leader and their purpose will be lost. If the
Leader cannot understand themselves they would not be better listener which would mean
they would not be able to work as Mediators or understand emotions of Individuals
 6. Some managers describe organizational news saying “we,” some use “they.” What's the
difference? What should they say? What can you tell about an organization by this
distinction?
When managers say “We” as a company they are considering to make decision part of the
organization which he agrees. If they say “They” then they have already made the decision and he
is not fully agreeing with the decision