BUSINESS Cases in Corporate Ethics: Contemporary Challenges and Imperatives; Strategy & General Management, Ethics and Social Justice, Organizational Behavior, Human Resource, Operations, Finance and , Marketing and Sales.

Case 2.3: Sherron

Watkins and Whistle

Blowing at

Ozzie Mascarenhas SJ, PhD DRD Tata Chair Professor of Business Ethics, XLRI Jamshedpur, India

| Published: June 2015 |

Redistribution or use without the expressed, written permission of The Global Jesuit Case Series is prohibited. For information on usage rights, contact the Global Jesuit Case Series at [email protected] ______Cases in Corporate Ethics: Contemporary Challenges and Imperatives Jesuit Series, Madden School of Business, Le Moyne College, Syracuse, NY Donated by: Ozzie Mascarenhas SJ, PhD JRD Tata Chair Professor of Business Ethics, XLRI, Jamshedpur, India June 15, 2015

The fifteen cases in Business ethics included here represent the first installment of the thirty cases promised to the Cases in Business Ethics – The Jesuit Series at the University of Le Moyne, Syracuse, NY. We have added three more. The remaining eighteen cases will follow shortly.

The thirty three cases illustrate and depend upon the content of corporate ethics outlined in Table 1. As might be clear from Table I, the Course in Corporate Ethics has three parts:

 Part One explores the ethical quality of moral agents embedded in the capitalist markets such as the human person, the fraud-prone person, the virtuous actor (virtue ethics) and the trusting executive (ethics of trust).  Part Two investigates the ethical quality of moral agencies of executive decisions, choices and actions when supported by ethics of critical thinking, moral reasoning, ethics of rights and duties, and ethics of moral leadership.  Part Three examines the ethical quality of moral executive outcomes as seen through the ethics of executive moral responsibility and ethics of corporate social responsibility.

Even as research method and methodology are determined by the specific subject matter of inquiry, so also a course method and pedagogy and business cases are dependent upon the specific subject matter of managerial ethics.

The Business ethics theoretical framework visualizes eleven chapters as indicated in Table 1. Each Chapter is illustrated by three contemporary business cases, cases that happened or that got closed during the course of the semester when the courses was taught in 2012-2015.

In general, one of the three cases is international in character, one is national (relating to the Indian economy and markets), and the third relates to industry market situations.

The ethical questions provided at the end of each chapter are best answered with the aid of the corresponding chapter content. The cases and content are part of the Book on Corporate Ethics: Contemporary Challenges and Imperatives that is prepared for publication (Sage) by the end of 2015 by the author of the Cases.

Most of the cases capture major current market events during 2012-2015, and the content of the cases is presented without much stylizing and dramatizing as is usual with formal cases. The cases pose several ethical and moral questions, responses to which welcome group dialog, debate and discussion. Some of the cases reflect “Shades of Grey Areas” in business ethics that do not necessarily require one correct answer in terms of right or wrong, good or evil, true or false, just or unjust, fair or unfair. The cases stimulate ethical and moral reasoning, deliberation, dialog, discussion, decision, choice, analysis of decision-choice consequences, and responsibilities of due compensation for harmed stakeholders. Multiple competing answers should be encouraged, and 1 the students should argue which solution alternative is better, more objective and defensible, and more socially desirable.

Table 1: Business Ethics Theoretical Background for Situating the Cases

Part Corporate Chapter Title Business Ethics Cases Focus: 1. Ethics of Free Enterprise Case 1.1: Worldwide Collapse of Financial Markets in 2008 Capitalism: Case 1.2: Europe’s Boat People: A Moral and Political Disgrace The Free Case 1.3: Radiation Village: The People of the Nuclear Test Market Fallout 2. Ethics of Capitalism Case 2.1: The Enron Corporate Fraud Context: Abused: Fraud and Case 2.2: Satyam Computer Services Ltd PART ONE: Corruption Case 2.3: Sherron Watkins and Whistle Blowing at Enron Ethics of 3. Ethics of the Corporate Case 3.1: and his Great Human Personhood Corporate Human Person Case 3.2: Freedom Fighter, Doctor, Communist, Lakshmi Sahgal Business Case 3.3: Dr. Amar Gopal Bose, Acoustics Pioneer and The Inventor Inputs 4. Ethics of Corporate Case 4.1: Panama Nature Fresh Pvt. Ltd. Corporate Virtue Case 4.2: The Horrors of Chicken Farms Moral Case 4.3: Sexual Harassment at the Workplace: A Violation of Human Personhood Agent 5. Ethics of Corporate Case 5.1: Managing Trusting Relationships in Indian Organized Trusting Relations Retailing Case 5.2: Bain sues EY over $60-m loss in Lilliput Kids-wear Case 5.3: Building Indo-Japan Trusting Business Relationships 6. Ethics of Corporate Case 6.1: GAIL Pipeline Blast Kills Critical Thinking Case 6.2: Closing of Nokia Plant at Chennai Corporate Case 6.3: POSCO: South Korean Mining Project in Odisha, India PART TWO: Agency: 7. Ethics of Corporate Case 7.1: Dassault Aviation and the Defense Ministry, India Moral Reasoning Case 7.2: Arun Jaitley, Modiy’s Chanakya Ethics of Decisions Case 7.3: Mukesh Ambani: The New Media Moghul in India! Corporate Dilemmas, 8. Ethics of Corporate Case 8.1: The Glory and Decline of Merrill Lynch: Violation of Business Acts and Moral Rights and Duties rights and Duties? toward all Stakeholders Case 8.2: The Debacle of “Paid News” Media in India Process Actions Case 8.3: Vedanta’s Rights on Bauxite Mining in Niyamgiri Hills, Odisha 9. Ethics of Moral Case 9.1: Infosys: Leadership Crisis with Top Management Corporate Leadership Case 9.2: Headhunting for CEOs Case 9.3: SBI Complies with BASEL III Reforms PART Corporate 10. Ethics of Corporate Case 10.1: The Tata House: Icon of Corporate Responsibility Justice Case 10.2: Dubious Outcomes at Starbucks Coffee Company THREE: Decision- Case 10.3: Bajaj Auto: Chakan Plant Relocation and Labor Ethics of Outcomes & Displacement Corporate Social 11. Ethics of Corporate Case 11.1: Should Reliance Industries Ltd Reform? Responsibility Case 11.2 : Maruti Plant Violence at Manesar and Thereafter Business Externalities Case 11.3: India’s Super Rich: The High Jumpers Outputs

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Case 2.3: Sherron Watkins and Whistle Blowing at Enron Ozzie Mascarenhas SJ, PhD JRD Tata Chair Professor of Business Ethics, XLRI, Jamshedpur, India June 15, 2015 Sherron Watkins, Vice president and CPA at Enron, found a massive accounting discrepancy at Enron in the year 2001. In the last few months, working again in Andy Fastow’ s Global Finance, she had run over 'the most exceedingly awful bookkeeping misrepresentation ever seen'. Odds and ends of this story were beginning to break out to the press. On the off chance that the full story ever got out, Sherron was persuaded it could rapidly prompt Enron's destruction.

Fastow, Skilling and Lay were the key members in this whole gambit. They did everything possible to hide the truth. But Sherron was convinced that everything was not OK at Enron. Did Skilling resign after seeing that the things were already out of hand and it’s better to leave the ship before it sinks? Why didn’t take steps to correct the whole misdeed? Nothing more need be said about Fastow as he was the prime perpetrator why many people suffered to satisfy his greed. Ironically, even when the company was incurring massive losses these three individuals were drawing money in millions for their personal use. The board of directors was equally responsible for this predicament of the thousands of employees and shareholders. They allowed Fastow to go ahead with the shell companies by removing and freeing Fastow of the ‘conflict of interest’ clause from Enron’s Code of Conduct.

Until August 14, 2001, Watkins had viewed this result as an issue of time. So long as Jeff Skilling was Enron's CEO (Skilling accepted this position in February 2001), she felt there was minimal chance that Enron would make the radical strides important to reconstitute its funds. Skilling had been the senior empowering influence of Enron's forceful bookkeeping and Special Purpose Entity (SPE) bargains. Andy Fastow was Skilling's protégé.

Watkins analyzed resources that Enron had available to be purchased. Fundamentally she inspected a spread sheet that had book values with assessed increases or misfortunes on deals. It is here that she discovered what she thought was a bookkeeping extortion. Fastow supported various resources with some joint ventures called the raptors, evidently false structures or shell organizations. Huge dollar misfortunes that ought to have been borne by the raptors were bolstered again to Enron.

Sherron understood what was going on in the company. She had three alternatives each loaded with high risk: a) report her concerns about Fastow’s deals to Kenneth Lay, CEO of Enron; b) discuss these concerns with her boss, Andrew Fastow, CFO of Enron, or c) do nothing, but let thereby thousands of innocent people suffer huge losses. Under (a) and (b), there was a high chance that Watkins could be ignored or resisted and penalized for blowing the whistle, but there was also a small chance that she could be heard and corrective action taken immediately. Under (c), Watkins would avoid confrontation with Lay or Fastow, but the public (investors, creditors, employees, customers) would suffer if they relied on faulty data. Watkins blew the whistle, reported the matter to the CEO and was severely penalized, but enough damage had already been done to Enron that the company filed for Chapter 11 bankruptcy protection from its creditors in September 2001.

In summer of 2001, Sherron Watkins switched jobs within Enron to work for Andy Fastow, CFO. In this new back office role, a non-commercial one, Watkins examined assets that Enron had for sale. Basically she examined a spread sheet that had book values with estimated gains or losses on sales. It is here that she stumbled upon what she thought was an accounting fraud. Fastow hedged a number of assets with several entities called the raptors, apparently fraudulent structures or shell companies. Millions of dollars of losses that should have been borne by the raptors were fed back to Enron instead. The interesting part of the story is not the pseudo raptors but the real person behind this game plan.

In 1999, the BOD of Enron made an unprecedented move of waiving the company’s Code of Conduct to allow Fastow to start his own investment partnership, named LJM (named after his wife and children, Lea, Jeffrey and Mathew). Fastow raised $600 million from Enron for this limited partnership. This entity worked exclusively with Enron – to buy assets, and on hedging contracts. All losses of LJM came back to Enron but not its profits. The CEO, Jeff Skilling, concurred with Watkins that LJM was a shady deal; he resigned on August 14, 2001, barely six months on the job. Meanwhile, Enron’s cash flow had dried up by May 2001 as the government regulators stepped

1 in and put price caps. Also, Enron Broadband tanked and the telecom sector was in real trouble. Watkins wrote an anonymous letter to Ken Lay, the new CEO of Enron. Ken, however, did not hire independent inspectors to investigate the allegations of Watkins about LJM and other aggressive accounting structures at Enron. Instead, Ken began to unwind these structures and forced a write down (non-recurring expenditures) of a billion dollars in the third quarter of 2001, completely wiping previous year’s net income of $979 million.

Much of this loss could be attributed to Enron’s foray into unrelated businesses, especially water business, and broadband business. Moreover, the trading customers got very skittish. Enron had about $18 billion of energy contracts as receivables and $16 billion as trade payables. Within 6 weeks, Enron lost $4 billion in receivables as some of its trading customers went in for closures. On the other hand, most of its $16 billion dollar creditors demanded to be paid during the same time. Enron had no option but to file for bankruptcy by September 2001.

Sherron was criticized for not disclosing the facts to the US government directly and delaying justice by informing the CEO. But one must not forget that she had a family to run and her approaching the government agencies would have resulted in her losing the job. The decision to bring forward her findings in front of Kenneth Lay did backfire on Watkins. She should have half-guessed that many inside the organization were involved. Looking at the magnitude of fraud it became later evident that all were into it. By bringing the facts the way she did, it alerted the Enron management that they had loopholes in their system that were becoming evident. This also gave time to the Enron team to cover up some facts before it became public. But on a personal front she could continue with her job.

By hindsight, it would seem that reporting directly to the Federal authorities and law enforcement agencies would have been a better option for Ms. Watkins, considering a larger interest. A clear disclosure to the law enforcement along with going public in the media would have given her enough security against any probable financial/personal attacks. In short, as Forbes said, she had the whistle, but blew it.

Ethical Questions:

1. What is whistle blowing? Is it legally, ethically and morally justified? Discuss. 2. When is whistle blowing ethical and ethically mandating, and why? 3. When is it moral and a moral imperative, and why? 4. Will businesses in general and young entrepreneurs in particular be discouraged by whistle blowing? 5. How is whistle blowing different from one’s fiduciary duty to the company, and why? 6. Why is whistle blowing legal and legally protected in the USA, and now in India, and with what results? 7. How does whistle blowing help society, especially, shareholders, employees, customers and local communities? 8. Hence, was Sherron Watkins right and justified in whistle blowing at Enron? 9. Did she act too late or slow? What other more effective alternatives could she have chosen to expose and remediate the crimes of Enron? 10. Even though whistle blowing is legal in the USA and now in India, when and how is it ethically and morally justified and imperative?

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