Faculty
comment on Enron debacle
SOM
profs say case will produce mistrust in employers, rethinking of boards'
role
By
JOHN DELLA CONTRADA
Reporter Contributor
In the
wake of the Enron debacle, many Americans will begin to question how
much they trust their employers, says a School of Management faculty
member who researches the development and consequences of trust in the
workplace.
"I expect
that a number of people will re-evaluate their relationship with their
company and consider whether the trust they placed in their leaders
in the past still is warranted," says Donald Ferrin, associate professor
of organization and human resources.
"It's the
people who have even the smallest suspicions about their own company
who will be affected most by the Enron situation," he adds.
Ferrin
notes there are several factors that contribute to the breakdown of
trust at companies. The most damaging factor, he says, is the one perpetrated
by Enron's leadership: failing to meet the expectations of employees.
"Unmet
expectations lead to a breach in the psychological contract between
employee and employer, which is defined as 'what the company owes us,
and what we owe the company,'" he says.
The breakdown
of trust has obvious negative consequences for both employee and employer,
such as poor job satisfaction and poor job performance, says Ferrin.
But, he adds, the most underreported result of employee mistrust could
be the one that's most damaging to a company: a decline in what Ferrin
calls "organizational citizen behavior."
"These
are the duties that we perform on the job that fall outside of our formal
job description," he explains. "If you think about it, much of what
we do in our jobs falls outside of our job description. We do them for
the good of the organization."
"When there's
mistrust, we're much less likely to perform those duties."
Ferrin's
research points to several actions and practices that promote employee
trust in a company and its leadership. The most influential is "transformational
leadership," where leaders gain trust by showing concern and respect
for employees.
Other key
trust-building factors include how much support a leader has, or is
perceived to have, within an organization and whether employees feel
they are treated fairly by company policy and in their personal dealings
with their employer.
The fall
of Enron also demonstrates that an inherent management problem previously
thought to occur only among a company's top managers also occurs within
a company's board of directors, according to two other SOM faculty members
specializing in strategic management.
In Enron's
case, the existence of the "agency problem" within its board of directors
is partly to blame for the company's mismanagement and apparent unethical
behavior, say John Stephan and Harold Star, assistant professors of
management science and systems, who are researching the role of boards
and CEOs in setting corporate strategy.
"The agency
problem states that because top managers are typically not owners of
a company, they can't be trusted to act in the best interest of those
who do own the companythe shareholders," says Stephan. "Boards of directors
were seen as a solution to the agency problem because they have a legal
responsibility to protect and serve the shareholders.
"But what
the Enron case illustrates is that the agency problem also exists within
a company's board of directors," he adds. "Boards, too, have incentives
not to act in the best interest of shareholders."
Stephan
and Star maintain that the agency problem at Enron and other companies
often is created because the CEO also serves as chairman of the company's
board of directors.
"When the
chairman is the CEO, then the nature of information that goes to the
board is often distorted," says Star. "Making matters worse, the CEO
typically stacks the board with cronies and supporters.
"As a result,
the oversight role of the board is very easily co-opted into a rubber
stamp role," he adds. "That was the case at Enron."
The researchers
predict the Enron case will prompt a lot of re-thinking about the role
of the board of directors and whether it's better or worse for a board
to own shares of a company.
"The general
feeling has been that board members should own shares if they are to
represent the shareholders," says Stephan. "But what we're learning
from Enron is that when board members own shares, there's a disincentive
to ask the really tough questions for fear that those questions will
drive down the stock prices."
Adds Star:
"The scary thing about Enron isn't Enron. It's that Enron may be just
the tip of the iceberg. There are lots of companies who have boards
that are closing their eyes to some pretty shady practices."