Journal number 13 – A reflection paper on the movie "Enron: The Smartest Guys in the Room"

Its APEC season and the next week after our professor will be on a business trip to India. In lieu of the classes that we will miss, she instructed us to watch the movie “The Smartest Guys in the Room” and write a reflection paper about it. This is about the Enron scandal that happened in the early 2000s that shook business world and the accounting practice globally.

Greed, cost-benefit analysis, and management integrity, these are just among the words that I found surprisingly present in most of the cases that we have tackled during the previous classes and this movie. Enron, before the financial scandal was one of America’s top companies with an estimated market value of approximately $70 billion. The film featured Enron’s executives who were involved in unethical practices that took place in the business. The film also portrays its founder, Kenneth Lay’s, humble beginnings and Jeffrey Skilling’s rise and demise in the business world before and after becoming Enron’s CEO. Based on the movie, Enron’s executives were involved in a couple of unscrupulous activities, they are the following:

• Lay found out that two his traders were involved with questionable trades that are putting the company in great risks. Instead of disciplining them and enforcing the company’s code of ethics, Lay encouraged them more as at that moment based on a cost-benefit analysis the company will in a better position than if the trader were fired as at that time that is the only part of the business in total that was making money. Another executive, Mike Muckelroy, found about this and showed his findings to Lay but the latter ignored this and when this was made known to the public he argued that he did not know of this even though there was evidence proving otherwise.
• Skilling got Arthur Andersen’s (America’s oldest accounting firm at that time and one of the original big five accounting firms) approval of using Market-to-Market accounting method. This let Enron cooked their books by valuing their contracts or assets by their potential value which is on the presumption that the company’s stocks will continue to increase in value. This is of course very uncertain especially in the commodities/oil market where prices are very volatile and uncertain. This enabled Enron to make their financial statements look good when in fact their business ventures are not doing so well like the ones they made in India. From a business standpoint, they knew that this would tantamount to misleading their investors that is why they secured the accounting firm’s approval to make it legal and appear that this is in the best interest of the company and the shareholders.
• Enron’s executives took advantage of the power deregulation law in the state of California. As stated by the company’s former Public relations spokesperson, there were several times that the company would not meet its targeted earnings. Miraculously, they will be able to do so in the 11^th hour. Little did he know that the company was manipulating the production of electricity to artificially increase its price to ultimately help Enron meet its financial targets. As a result there were massive blackouts even though there was enough capacity. What’s ironic in this instance is Enron used its resources to find legal loop holes in the free market and used it to unjustly benefit the company. The free market economy concept has actually good intentions behind it, however, because of Enron has done it made it look like that its not the case.
• Lastly, when the masterminds of all the above knew that Enron will eventually collapse, they headed for the nearest exits selling their shareholdings while making the public believe that the company is still doing well. In fact, in the movie, before Skilling resigned, he even encouraged his employees to buy the company’s stock for their retirement. This resulted to many employees losing their pensions and retirement funds when the company became bankrupt.

What’s worse in the case is that Enron has good employees like Cliff Baxter and Sherron Watkins; after finding the above, they escalated the issues to higher management and in this case to Skilling and Lay but the two ignored them. Enron’s collapse would have been prevented had top management listened to them as Watkins told Lay that companies that do come out and admit their wrongdoings were able to move forward whilst if they were found out by external companies they would most likely be dealing with serious repercussions that the company may not be able to overcome.

Truly, Lay’s story was one to be admired about by everyone as he started-out as a small boy delivering newspapers to founding and becoming chairman of one of America’s most valued company - Enron. Initially, I can’t understand how was Lay able to come to convince himself that what his executives were doing was right at the time. Personally speaking, I think that as successful businessman greed got the best of him later in his days as Enron’s Chairman that he was willing to take greater risk for unsustainable and short-term gains than sustainable long-term gains. Furthermore, he was enjoying political power by the backing of the Bush family making him think that he can bend the law according to his will. 

One of the realizations that I have made in watching the film is that we’re not much different for the US even though they are a developed nation while we are not. The only difference is that at least in their country the culprits are trailed and convicted unlike in our country where most of the time no one is convicted especially if they have the political and financial power to do so. Although the Enron scandal tainted America’s reputation in the business world it is also good in a way that the culprits were caught and made answerable to the public. They are in fact currently in prison and serving their jail terms. It also allowed the accounting practice and the business community to place safeguards in check to protect the public and shareholders from people taking advantage of loop holes in the free market to unjustly benefit themselves. Unfortunately, this is not the case in our country wherein there are hardly culprits punished even with widespread traditional and social media coverage. Last year we have the pork barrel scam and until now no one is still convicted and the present administration is still trying have the same by renaming it to Disbursement Acceleration Program. Personally, I think that they are trying to make this legal by making it into a law. On the other hand, very recently, we have the Tanim Bala scam at our airports, however, even with vast resources that the government has on its disposal it was not able to stop the scam completely and determine who the real culprits are. My point here is until someone is convicted, we will never learn as a nation as we have to know what has gone wrong for us to know what is right. Unfortunately, unlike the US, we have a very slow and weak judicial process that makes the powerful able to shield themselves from prosecution and punishment. In our case, one of the senators who allegedly used his PDAF funds to enrich himself is now out on bail and sitting on one of the highest post in our government.         

Journal number 12 – The Ozone Threat: Managing with Uncertainty

For this week’s class we were assigned to present our case study regarding the case that involved Dupont which discovered Chlorofluorocarbons (CFCs) in the early 1900s and was its largest producer globally until 1987 when the company decided to phase out its CFCs division. During that time, the chemical became a necessity in every household as a refrigerant for air conditioners and as aerosols. On the other hand, in the manufacturing industry CFCs are used as solvents. At the time of the case, the CFC market is an $8 billion market which DuPont enjoys having the biggest market share globally.

DuPont as a company also played a great role in America’s success story. In fact, in both World Wars, DuPont was the largest supplier of gunpowder for the US military. They were even the ones that produced the plutonium used in the atomic bomb. Aside from this, other products that made DuPont one on America’s top companies over the past two centuries are their development of nylon and Kevlar. Currently, they hold about 25,000 patents globally and have one of the world’s best R&D capabilities.

Crux of the case:

In the time periods between 1970s and the 1990s, there were several scientists who came up with studies regarding the Ozone layer. Some of them found that CFCs especially the ones being used as aerosol are the main culprits behind the widening of the Ozone Hole while other scientist came up with the opposite result. In other words, there were was already a consensus that something bad is happening to the ozone and some scientific minds claim that CFCs contribute to the ozone depletion, however, there was no concrete scientific basis during those times.

What made the case sensational is that scientists found out that a mere five percent decrease in the ozone levels might lead to 8,000 new cases of skin cancers. Also, CFCs lives are between 20 – 100 years which makes their potential adverse effect to the nature irrevocable if proven later on which actually happened in 1987. As there was no complete agreement in the scientific arena about the potential adverse effects of CFCs to the ozone layer, DuPont argued that they should be allowed to continue production of CFCs until such time a concrete study is done to prove its adverse effects. This is even though the safety of all inhabitants of Earth will be put at risk and in uncertainty.

To complicate matters further, some groups claim that even before the Montreal Protocol and the recorded widening of the Ozone Hole in the Artarctic, DuPont has already developed technology for safer alternatives (Hydro fluorocarbons or HCFCs) but chose not to shift production in order to increase demand and ultimately increase its price.   Also when a local ban in the US was put in place, DuPont instead of completely abiding shifted its focus on developing countries which has no ban in place. Thus it really squeezed what it can from CFCs before it phased it out of the market despite its potential adverse effects to the environment.

Conclusion:

As I have stated in our presentation, it was not easy approaching this case as no entity or person was really held responsible over the adverse effects done to the ozone. We tried exploring DuPont’s point of view in aftermath of the case, however, we discounted it eventually as it was hard to think that DuPont will become a better citizen of Earth. This was based on our research that after this case the company was also involved in another case involving disposal of toxic wastes in deep in the earth that led to the poisoning of water supply for 131,000 people in Delaware in the US. Before all of this, the company was also involved in the production of Tetraethyl lead (TEL) that caused the decrease in IQ of two generations of Americans. Just as the previous cases mentioned, DuPont made every single way possible to keep production of this products even to the extent of establishing dummy organizations to deceive the public.

In the end, we conclude that the problem with DuPont is the integrity of management. They were ready to make decisions as long as they can justify its legal even though it’s not ethical and sustainable for the environment. Based on our research, the company still remains one of America’s biggest and influential companies at the same time being among the dirtiest ones as well. This made us approach the case as how should the company make a decision that is ethical and sustainable for all stakeholders during the period that there was scientific uncertainty about the adverse effects of CFCs to the ozone layer.

We recommended that DuPont should have completely shifted to the production of alternatives immediately while still investing in R&D for superior alternatives as it was later on proven the HCFCs are also considered as an Ozone Depleting Substance (ODS) later on but is more environmentally friendlier than CFCs. DuPont may argue that it will have significant impact to their profits, however, based on our research this will only be temporary especially in the short-term because at that time they were the only ones that have this technology and is in position to dictate and lead the market. By doing so, they will be able to protect their profit margin and most importantly keep people’s safety and the safety of the future generation which will also be the source of the company’s future profit. 

Journal Number 11 – “Human Rights”

According to the United Nations Office of the High Commissioner for Human Rights (OHCHR), “Human rights are rights to all human beings, whatever our nationality, place of residence, sex, national or ethnic color, religion, language, or any other status. We are all equally entitled to our human rights without discrimination. These rights are all interrelated, interdependent and indivisible.”

The above is what we discussed during the last session. I personally believe that our country has improved a lot with regards to this issue but we still got a big room for improvement. For example in big cities like Makati and Manila you will not probably notice human rights abuses that much but when you go the far flung areas like in Mindanao, you will see be shock to see and be in disgust with the situation there.

At the moment, as a student and a citizen what I can do to help with regards to the issue is very limited. However, I am very willing to do whatever I can. Based on studies and history, we as a nation has a history of being discriminative to people even to those that are our own. This is especially the case for those that are in ethnic tribes, the less fortunate, and the uneducated. We tend to judge people base on where they came from, what the color of their skin is and what’s their status in the society. As I’ve stated above, I believe we have improved a lot but we still can and should improve with regards to this issue. What we can do as a private individual is utilize what we have studied in school and was taught to us in church. Though we have the natural tendency to discriminate, we can always stop for a moment to think and rationalize things base on our knowledge before we act or speak. If we do this we can make our environment better in our own little ways and if everyone does this then perhaps we can have a bigger impact to our nation and maybe to the world also.