"The Ethics and Legality of Financial Regulation: What Enron Revealed"

 An Aristotelian Approach

Enron Corporation, an energy firm based in Houston, Texas, was one of the world's largest corporations at the turn of the 21st century (Benston and Hartgraves, 2002, p. 105). In early 2001, Enron enjoyed a market capitalization of over $60 billion dollars, a stock price of over $80 a share, and the title of America's most innovative large corporation on Fortune magazine's list of Most Admired Companies (Healy & Palepu, 2003, p. 3). This façade of soaring revenues and profitable innovation, however, soon dissolved. On November 8, 2001, the firm released a restatement of several years' financial statements that reduced shareholder wealth by $508 million (Benston & Hartgraves, p. 106). The price of Enron stock plummeted, and about a month later, Enron Corporation filed for what became the largest corporate bankruptcy in U. S. history (p. 106). Investigation into Enron's accounting revealed that firm management had been illegally manipulating the company's financial statements "to hide losses and debt from investors," thereby inflating the firm's earnings and stock price (p. 108). Following the bankruptcy, Enron was subjected to a full criminal investigation, and former CEO Jeffrey Skilling was convicted of fraud for his stock price manipulation (Casey, p. 57). 18 U. S. Code Section 1346 states that fraud includes "scheme[s] or artifice[s] to deprive another of the intangible right of honest services," and it was this definition of fraud that led the courts to convict Skilling (p. 57).

Section 1346 seems focused more on the ethical rights of all market stakeholders than it does on the protection of just firm shareholders, primarily because it does not address the consequences of a firm's actions. The law states that it is a felony to engage in a "scheme or artifice" to cheat anyone out of honest services, and this wording implies that it is not the result of the scheme that is unethical--the intent alone of an agent to "deprive anyone of honest services" is enough for that agent to be found guilty. This focus on the intent of the agent, rather than the nature of the action or its consequences for recipients, draws a direct parallel to Aristotelian virtue ethics. Aristotle asserted that ethical behavior is determined by what a virtuous person would do in a given circumstance. He identified twelve primary virtues in his Nicomachean Ethics and included both truthfulness and magnificence (also referred to as "Greatness of Soul") as two of these virtues (1975, p. 97-105). The honest services clause seems to be a legal application of these Aristotelian virtues: the inclusion of the word "honest" reveals a connection to Aristotle's truthfulness, while an agent's attempt to "deprive" someone of something suggests a malicious intent that conflicts with Aristotle's "Greatness of Soul." However, the shortcoming of applying virtue ethics to business law lies in the virtual impossibility of legislatively mandating in an agent the desire to act virtuously; instead, laws simply help categorize actions as legal or illegal and incentivize agents to comply with these laws through threats of legal punishment. Analysis of internal Enron emails shows that firm executives were focused on profitable results, not ethical intent; managers regularly used language laden with time-money metaphors reflecting their "focus on profits above all else" (Turnage, 2013, p. 520). The distinction between results and motives echoes the subtle difference between focusing on firm shareholders and focusing on all market stakeholders: profitable results, even those obtained illegally or unethically, can temporarily benefit firm management and shareholders to the detriment of stakeholders. Enron leadership ignored ethical and legal duties owed to stakeholders to benefit management and shareholders in the short term, and this decision is evident in management's deliberate funneling of losses off the financial statements "to conceal Enron's poor cash flow even as its stock value skyrocketed" (Turnage, p. 520).

As with an Aristotelian approach, a deontological interpretation of the honest services clause suggests that the clause protects the ethical rights of all market stakeholders. Deontological ethics assert that the ethical acceptability of an action is determined by how that action reflects the rights and correlative duties of agents (Kernohan, 2012, p. 85). The assignment of rights and duties can be seen in Section 1346: the definition's wording suggests that everyone (implied by the section's use of the word "another") has a right to "honest services," thus by deontological principles creating a negative duty for every agent to not "deprive" anyone else of that right. Even the language surrounding Enron's fallout seems to apply deontological principles: as in many other corporate scandal cases, Enron executives were found guilty of "breaching their fiduciary duties" (Casey, p. 1 and throughout, emphasis mine). Under deontological ethics, it is this breaching of duty that made Enron's actions unethical--not the inherent character of the agent, as in virtue ethics, or the results of the bankruptcy, which would be considered under consequentialism. U.S. law asserts that management's interests should ideally align with the firm's duty to provide honest services: in Guth v. Loft, Inc., the courts determined that "undivided and unselfish loyalty to the corporation demands that there be no conflict between duty and self-interest." Unfortunately, this alignment between duty and self-interest didn't occur at Enron, where executives acted with an "aggressive self-interest" that ultimately rendered the firm incapable "of maintaining the long-term relationships with publics and stakeholders necessary for enduring organizational survival" (Bowen & Heath, 2005, p. 90-91).