Rules of the Game, Psychopaths and whistleblowers

The world of business, and the history of business ethics, are made of two parts: Before and after Enron scandal. In the immediate aftermath of the scandal itself, it seemed a critical point in history of finance and economics to economists and financial managers. So much so, that it was described world changing, even more than September 11th by economists like Paul Krugman (2002).

There are many lessons to be learned from this scandal, particularly within the realm of business ethics, but this essay focuses on two of the most important ones: The case of psychopaths as the outcome of the rules of the market game and the case of whistleblowers and their actions.

Games and psychopaths: In game theory, the rules of the games determine its outcome. This also means that the rules of the game also determine players that can stay in the game by winning it. Ironically, sometimes the rules are such, that the most crazy, or the most unimaginative and unperceptive player will win. A very good example will be chicken game (Poundstone, 1993): Imagine two teenagers that drive their cars straight towards each other. Whoever turns the wheel first, will lose. If none of them turns the wheel, they both die (or at least damage their cars severely).

Looking at the game, there is no doubt that if one of the players is insanely proud and wants to win the game no matter the price, without seeing one step ahead (i.e. eventual death), and the other player has at least some common sense, the insane player will win the game. If the game was to be repeated, or if there was a tournament of chicken games, I guess we can all see what would have happened in the finals.

Now, back to the case of Enron, there were two particular game changers (out of the ordinary of corporate businesses) that changed and shaped its seeming success and its impending doom, even before it happens, by determining the players that were allowed to stay in the games the company was playing.

The first rule, which was the prelude to the effects of the second, was simply deregulation. On the one hand, the usage of “Mark to Market” accounting, interestingly with the approval of Arthur Anderson (their accounting firm), and on the other hand there was an external factor of energy deregulation in California (Gibney, 2005). In particular, the fact that Enron’s profits based on mark to market were whatever they wanted them to be, in other words total subjectivity of the profits shown, was to play a key role in the game.

The second, and much more important in creating psychopathic environment in Enron itself, was the program called “Performance Review Committee” or PRC. This was a grading system introduced by Jeffery Skilling, the infamous CEO of the company, based on the notion of “Money is the only thing that motivates people” (Gibney, 2005). The system was a brutal process of elimination based on Skilling’s conception of Darwinian natural selection: Ranking people from one to five (“best” to “worst”), and then firing the ones that had not performed very well (i.e. had not made enough money) and giving huge bonuses to the ones that had.

What is the result of these two main game rules? No regulation boundaries, and then no ethical (or moral) boundaries. Then, the firm started eliminating those who may have had some ethical boundaries of their own based on PRC, which was designed to keep profit seeking people in (remember the example above about the tournament between chicken game players). Thus, the firm kept people that were motivated “solely” by profits: Let’s call them market psychopaths.

Now they had people, traders in particular, that were bound to nothing but making money. And with no regulations on electricity in California, they were prepared to shut down the entire power of a state just to make some profit out of it, and then later even joke about what had happened (Gibney, 2005).

Therefore, the first lesson that we learn from Enron scandal in terms of players themselves, is that the rules of the game matter, because they determine who stays in the game. If the rules of the game are unjust, as we can clearly see in case of Enron, the players will most likely act unjustly and wrongfully. One good reason for the existence of codes of ethics, aside necessary regulations is the exact same thing. They can affect the long run outcome of the games that corporations play, and in a good way.

On the importance of whistleblowers: The case of Enron can teach us something critical about whistle-blowing. Sherron Watkins, the Enron whistleblower, is a great example of how and why an employee should blow the whistle. Although the statement has been doubted (Ackman, 2002), the pattern of Ms. Watkins’s behaviour is significant. Aside from the fact that what she did first, which was writing to Ken Lay (Chairman and CEO of Enron after Jeff Skilling’s resignation), may not be considered whistle blowing at all (Ackman, 2002; Varelius, 2008); the pattern of first going to the management, and then blowing the whistle on the whole thing seems justifiable.

It seems, in each step of the way, first informing Ken Lay (the chairman of the board) and then publicly testifying against what people like Skilling had done (Gibney, 2005) three key elements play an important role. Interestingly, only two of them are immediately visible: Loyalty to the company (Varelius, 2008), and her duty for doing the right thing. She first went to the person that was supposed to be responsible for the fraud issues, but when he didn’t, or couldn’t do anything, she rightfully went to the public.

The third element which may not seem visible on the first look is the loyalty between employees themselves. In case of Enron of course there was none, since Ms. Watkins was sure based on evidence that Andrew Fastow was involved in fraud (Gibney, 2005).

Therefore, each stage of blowing the whistle is to be carefully weighed. Accepting the premise that blowing the whistle can be a moral problem (Varelius, 2008), this action by itself is not, and cannot be a moral problem if both of the previous steps have been followed, meaning that loyalty between colleagues and loyalty between employees and the firm has been broken or does not exist.

 

References:

Ackman, D. 2002. Sherron Watkins Had Whistle, But Blew It. Forbes. [Access online: http://www.forbes.com/2002/02/14/0214watkins.html%5D

Gibney, Alex (Director). 2005. Enron: The Smartest Guys in the Room. 2929 Productions. [Accesss online: http://www.youtube.com/watch?v=_xIO731MAO4%5D

Krugman, P. 2002. The Great Divide. The New York Times. [Access online: http://www.nytimes.com/2002/01/29/opinion/the-great-divide.html%5D

Poundstone, W. 1993. Prisoner’s Dilemma. Anchor. USA.

Varelius, J. 2009. Is Whistle-blowing Compatible with Employee Loyalty?. Journal of Business Ethics. 85:263–275.

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thetruthfulheretic

Dear fellow Homo sapiens, or if you prefer conscious mammals! And of course, friends nonetheless: I created my blog in order to speak my very weird mind, mostly about three subjects (as I identify myself and my state of mind with them): Atheism, as I was born in the Middle East and saw and felt the affects of Islam; Homosexuality and equal rights, as a gay man who has tasted the Homophobia and also Sexism in that society; and Liberalism and political philosophy, which I think is a good ground for secular values and criticism of fundamentalism. If you wish, visit and join your state of mind to mine. I hope they don't short circuit!

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