Employee Investment Risk Tyrone Mason

Employee Investment Risk Tyrone Mason

Philosophy 243

6/17/2013

During the 1990's, Enron, a company specializing in the trade of energy experienced extreme financial growth along with soaring stock prices. With over 21,000 employees, Enron was "one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of 111 billion dollars in 2000" (Wikipedia, Enron). Because of this Enron was named "America's Most Innovative Company" six years running by fortune magazine. On the other hand, however, the vast majority of Enron's financial growth was not legitimate whatsoever. This is because Enron's accountants employed the lawful practice of "mark-to-market" accounting which is defined as "the act of assigning a value to a position held in a financial instrument based on the current market price for that instrument or similar instruments"(University of Chicago Graduate School of Business). In other words, Enron was able to record potential future gains as immediate profits on their balance sheet. This, in turn, led many company employees to invest all of their assets in Enron stock without even considering the risk of their investment. These employee-investors were not even concerned "when Enron used company stock as the sole unit of deposit in employee 401 (k) earnings" (Ethical Theory and Business 7th ed). As the scandal was made public, Enron's shares dropped from almost one hundred dollars per share to just pennies. It was made evident that much of Enron's profits were the result of "deals with special purpose entities which it controlled. The result was that much of Enron's debts and losses were not ever reported in the financial statements"(Sorkin, Andrew Ross. Risks Too Great). Inevitably, Enron met its demise in late 2001 when its accounting practices were made public leading the company to file for bankruptcy. After the scandal, former chairman of the board Kenneth Lay went on trial facing charges ranging from money laundering to bank fraud. Lay pled not guilty to all charges claiming the he had been "misled" by those around him( Berenson, Alex The New York Times. Oct, 28th 2001). Lay ended up passing away before any verdict could be decided but at the time of his death the Securities and Exchange Commission was seeking more than ninety million dollars from him. Unfortunately for employee-investors the discovery of the scandal did not come soon enough and all employees with assets invested in Enron lost it all.

The problem that we must answer now is if it ought to be the company's responsibility to lay out potential investment risk to its employees or should employee-investors determine this risk on their own? In Enron's case it is much like a two-way street since Enron did not disclose documents to employees that would have made its accounting practices and financial situation apparent. Although legal, the fact that this documentation was withheld from investors in the first place should have been an indication to employee-investors that they should most likely not invest in Enron.

The ethical issue here is whether or not companies like Enron should be required to disclose this type of information to their employees. By disclosing this information, employees would very easily be able to determine the amount of risk associated with investing in their company. In addition to helping employees decide whether or not to invest in their company, disclosing this type of information should also be considered the morally and ethically correct thing to do. The reason that this is the correct thing for a company to do is because it provides employees with a sense of confidence in their company in the way that employees will know that nothing is being hidden from them. It also helps to boost morale and not only gives employees the incentive to invest but also to work harder and improve the company's profits. All businesses and companies should deem it necessary and ethically correct to make their accounting practices available to all of their employees not only for their personal gain, but for the company's as well. Big companies such as Enron should make it a point to always do the ethically correct thing in order for their company and the business world as a whole succeed.

On the other hand, however, by not disclosing this information, it is a situation where the rich are supposed to get richer and the poor inevitably end up poorer. It should be made evident that the sad fact of this world is that the majority of people are not ethically and morally correct and thus do not see it in their best interest to make ethically and morally correct decisions. Much like in this situation, Enron executives planned to reap the benefits of employee-investors dumping all of their assets into the company which would sky-rocket stock prices that these executives would cash in on. Unfortunately, employees were unaware of the fact that vast majority of Enron's debt and losses were, for the most part, unrecorded. Despite this, there should have still been evidence available to employees to indicate that Enron's financial status was not nearly as great as it was portrayed to be. For instance, "Enron created businesses and partnerships to hide its debt. These practices inflated stock prices while falsely establishing the company's financial position and stability"(Ethical Theory and Business 7th ed). Then, however, Enron used company stock as the sole means to fund employee 401 (k) earnings. A legitimate company, on the other hand, will almost always use other inputs as well as stock to fund its employee 401 (k). By doing this, a legitimate company succeeds in making it evident that their company is financially sound because it shows that they have alternative assets other than just stock which can very often be misinterpreted just as in Enron's case. The fact that Enron used company stock as the sole funding for its 401 (k) ought to have been yet another indicator to investors that Enron's financial status was not at all sound. Despite the fact that employees were aware of this practice, they showed little concern and it did not hinder their investments in any way. Because these workers only took the time to examine the numbers that the stock market was showing, they ignorantly got sucked in and dumped large majorities of money into Enron's collapsing empire. Employees always need to be aware of the potential risk associated with investing in a company like Enron. They also need to be able to determine the acceptable amount of risk that they