The Significance Of Reputation: Analysis Of The Rise And Fall Of The Controversial Companies Enron And BP
Benjamin Franklin once said, “It takes many good deeds to build a good reputation, and only one bad one to lose it”. This is true for both an individual’s and a business’ reputations. According to an article from the Harvard Business Review, a company’s reputation is based upon the interactions between stakeholders of the company in categories such as “product quality, corporate governance, employee relations, customer service, intellectual capital, financial performance, handling of environmental and social issues”. An important question is: Can an entity build a good reputation, have a lapse in one of those categories, and survive? In this paper I will discuss the rise and fall of the controversial companies Enron and BP.
Enron will forever be known as one of the biggest accounting frauds in the practice. Many accounting courses will include a lecture on how not to have another Enron scandal. Enron was founded in the year 1985 as a merger between two gas companies. Enron made their revenues by buying, selling, and trading energy online. E-commerce was just beginning at the time, and Enron was at the right place at the right time. Their revenues were astounding. They started out simply as a merger between two gas companies but ended up being a bigger company and having larger revenues than both of its parent companies. Things were going great for Enron. They even instituted their own values statement in the form of the acronym RICE in their code of ethics.
RICE stands for:
- Respect – Enron values to treat others as they would like to be treated.
- Integrity – They collaborate with customers and prospects openly and truthfully.
- Communication – Communication is important. As a team, they must communicate to move the company forward.
- Excellence – They will not stop until they are the best. Continually setting goals will help them reach their target.
This acronym hung in as banners at the headquarters to remind employees how they should act. Enron was doing so well they were recognized by the famous Fortune magazine. They were even voted as one of the top companies to work for and received a nomination for being the “most innovative company in America” for six years in a row. Enron was also developing a great reputation with consumers in the United States. They came out with new ideas and even made developed their own online commerce website for trading energy. Shortly after that, Enron decided to go public. Their stock price was a measly $40 per share in January 2000. Seven months later, their stock price reached an all-time high of $90. A high share price reflects high shareholder confidence in a company. After looking at their exponential growth and earnings over a short period of time, everyone wanted a piece of Enron. They were earning billions of dollars at their peak. Or so their financials showed.
After doing so great and being recognized for it for so long, how could they mess up? Enron pushed the envelope on trading energy, selling broadband, and how to be creative in their accounting practices. It started with their arrogance. As per their values statement, Enron was committed to excellence. They were not interested in anything less than that. They built a reputation upon leading the industry. Enron started feeling the pressure when companies started entering the sector and taking some of their market share. They knew to make their company more appealing to potential creditors, investors, and shareholders, they would have to increase revenues and decrease their debt and expenses. The way they chose to do this was not by paying off their debt or reevaluating assets. They chose to achieve this by creating special purpose entities and shifting their debt to that entity. The entity would receive funding from a bank, and Enron would not have to report that debt on their financials. They would, however, count this money loaned to them as revenue. They did this with many special purpose entities. They would also book contracts (with or without the intention of fulfilling them) and count them as revenue before completing them. It took a while for this to be caught. The public started getting suspicious whenever the CEO Kenneth Lay disposed of almost 63, 000 shares, resigned, and appointed a new CEO within a short period of time. It was getting harder and harder for Enron to keep up with hiding their debt and raising their share price. Enron finally crashed on December 2, 2001. They filed one of the largest bankruptcies in history. Their share price dropped down to ten cents in January 2002.
Stockholders in Enron lost tremendous value in their portfolios. Employees at Enron were devastated. This was supposed to be a great company. This scandal shocked the world. Enron did not only ruin their reputation, but they also ruined the reputation of their auditing firm, Arthur Andersen. Arthur Andersen did not do their due diligence to Enron or Enron’s shareholders. Their job was to sign off and develop an opinion Enron’s financials. They knew there were bad things going on in their accounting practices but signed off on the financials anyways. However, there was one good thing that came from the Enron Scandal: the Sarbanes-Oxley Act (SOX). It provides accountability on higher officials in the company for the company’s financials. It also provides rules for independence of auditors and rules on disclosures concerning financial statements. Enron serves as a learning experiences for companies to come. A great company can make an ethical lapse and fall. The story of the company BP is very similar one to Enron. BP was an oil company with roots tracing back to 1866. They went through many name changes and were acquiring smaller oil companies at their whim. They even acquired two companies with roots tracing back to Standard Oil. The BP we know today is a result of a merger between them and Amoco in 1998. Within the next 24 hours of the merger, they would become the world’s largest producer of natural gas and oil in the United States. They also lead an initiative to build brand awareness and tout themselves as a different kind of oil company. This initiative was called “Beyond Petroleum” and showcased BP as an environmentally friendly oil company. This worked because more and more people started recognizing their logo. Their brand power increased tremendously: hitting 50 in 2008. They were also voted as having the best accountability rating by Fortune magazine in the preceding year.
Like Enron, what could this “environmentally responsible” company do to ruin their reputation? It all started in 2005. An explosion occurred at their refinery in Texas City, killing 15 people and injuring 150. Next, in 2006 they had an oil spill in Prudhoe Bay, Alaska. Many people do not recall this oil spill because it seems so insignificant to the oil spill that happened in 2010. In April 2010, BP caused one of the biggest environmental disasters in history. They were leasing an oil rig from Transocean that was located in the Gulf of Mexico. Haliburton was the company that set the cement for the rig. The oil rig, Deepwater Horizon, exploded and collapsed, causing oil to leak for 87 consecutive days. The cause of this explosion was determined to be a combination of Haliburton’s cement failure, BP’s negligence, and Transocean’s owning of the rig. BP received most of the blame with regards to the disaster, however. On their part it was a combination of inadequate training, safety shortcuts, changes of plans, and poor decisions by management. It is estimated that approximately 3. 19 million barrels of oil spilled into the Gulf. Eleven people were also killed as a result of the explosion of the rig. Countless marine life ecosystems were harmed. BP failed their stakeholders in their handling of environmental and societal issues. In response to the spill, this previously ranked top company in accountability refused to take the blame for the spill. It became the blame game between BP, Transocean, and Haliburton. Haliburton received 3% of the blame, Transocean received 30% of the blame, and BP received the remaining 67% of the blame.
After the spill, the company started feeling the financial effects of this disaster. They were fined billions of dollars from the government and their reputation took a huge hit. Their failure to ensure safety of their employees, protect the environment, accept the blame, and mitigate damages from the spill were all factors in their declining reputation. In the year following the spill, BP suffered a $5 billion loss. Their share price plummeted. Feeling the effects of a tarnished reputation, BP initiated a campaign where they accepted the responsibility for the spill, apologized, and pledged millions of dollars to hopefully curb the effects of the disaster to wildlife.
Today, BP is still conducting business. Though not quite up to the scale at which they were previously conducting business. BP continues to show results of their corporate social responsibility efforts and donates money to protect marine wildlife after the spill. In my opinion, I think the reason they did not completely dissolve is that they finally took responsibility and started acting to right their wrong. It was not very quick action, but it was action. The people at Enron did not do such a thing. They acted out of their own self-interest and when it came time to face the world, they cowered. They did not own up to their mistakes. The actions and responses by these companies go to show that it is not only important to show the world that you are an ethical company, but you need to live up to the expectations that you have set for yourself. Words are nothing compared to actions.