A Preliminary Inquiry into the Responsibility of Corporations and Their Directors and Officers for Corporate Climate: The Psychology of Enron's Demise

93 Pages Posted: 13 Nov 2002

See all articles by Lynne Dallas

Lynne Dallas

University of San Diego School of Law

Date Written: October 24, 2002


With substantial inquiry concerning what individual Enron directors and officers knew, or what they should have known based on what they knew, little attention has been directed to examining the institutional structure at Enron that may have spawned the unethical behavior and to assessing responsibility for that structure. By institutional structure, I refer to Enron's ethical climate which is a manifestation of its culture. Corporate culture is defined as a complex set of common beliefs and expectations held by members of the organization which are based on shared values, assumptions, attitudes and norms. The corporation's ethical climate refers to the ethical meaning attached by employees to organizational policies, practices and procedures. These policies, practices and procedures influence moral awareness, the criteria used in decision making, whether morals will have priority over other values, and moral behavior. Important to ascertaining corporate culture are the employees' perceptions of the corporation's values as reflect by the corporation's mission statement and code of ethics, the criteria for business decisions, the words and actions of leaders, the handling of conflicts of interest, the reward system, the guidance provided to employees concerning dealing with ethical issues, and the monitoring system.

This article is a preliminary examination of the factual predicates for placing responsibility on the corporation and its directors and officers for a corporate climate that encourages and supports unethical and illegal behavior. This article explores (1) whether climates contribute to illegal behavior within corporations, (2) whether corporate climates can be ascertained, (3) whether some corporate climates can be identified that have a greater likelihood of fostering illegal conduct than others, and (4) whether climates can either be modified to encourage and support legal behavior or, if not, whether steps can be taken to decrease the likelihood of illegal behavior in such climates. Ultimately, the questions concerning Enron are: What was its corporate climate and did that climate contribute to the unethical behavior of its employees? If so, what was the responsibility of Enron and its officers and directors to ascertain, monitor, and modify that climate?

This article will respond to the call by the Advisory Group to the U.S. Sentencing Commission to consider whether the Federal Sentencing Guidelines should encourage organizations to "foster ethical cultures" to ensure compliance with the intent as well as the letter of the law, and if so, to consider how an organization's performance in this regard can be measured or evaluated. This article will also consider the effectiveness of provisions of the Sarbanes-Oxley Act of 2002 that require the SEC to promulgate rules and regulations requiring corporations to disclose whether or not they have a code of ethics for senior financial officers, and any waivers of such code, and provisions of the NYSE proposed rules promulgated to meet these requirements. Additionally, this article will raise the issues as to whether corporations and their directors and officers who sign the corporation's disclosure statements have an obligation to disclose their corporations' unethical climate and whether they breach their fiduciary duty to the corporation when they fail to take steps to discover, or to act when confronted with, their corporation's unethical climate.

JEL Classification: G30, G34, G38, K22, K42, M14

Suggested Citation

Dallas, Lynne, A Preliminary Inquiry into the Responsibility of Corporations and Their Directors and Officers for Corporate Climate: The Psychology of Enron's Demise (October 24, 2002). Available at SSRN: https://ssrn.com/abstract=350341 or http://dx.doi.org/10.2139/ssrn.350341

Lynne Dallas (Contact Author)

University of San Diego School of Law ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

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