HR Management & Compliance, Talent

Q&A: Cultural Red Flags Led to Disaster at Enron and Theranos

May 25 marked 13 years since Enron’s CEO and founder were convicted on fraud and conspiracy charges after the Texas energy giant imploded, wiping out $1.2 billion in shareholder equity. And June 15 will mark 1 year since Theranos’s CEO and COO were indicted in a scheme that defrauded investors to the tune of hundreds of millions of dollars.

Source: Krista Kennell / shutterstock

Today, we are lucky to be able to share a recent discussion that I had with Scott Young, Managing Director at CultureIQ Solutions, concerning what toxic practices lead to these incredible failures.

HR Daily Advisor: A lot of people use the word “toxic” these days. Would you mind taking a moment to define or identify what a toxic work culture is?

Young: “Toxic” is a word that gets mentioned a lot when it comes to culture, but the term is often used without explanation—just like saying that someone has an illness tells us nothing about what’s wrong or how to treat it. We can start to identify our workplace toxins by asking what specific behaviors have occurred that are damaging to the company, how widespread are they, and what happens when those behaviors take place. Is the “toxic” behavior rewarded, or do people just look the other way?

The cultural issues that led to the scandal at Enron are different from those that allow sexual harassment to spread. But some of the reasons why these different cultural problems develop and spread are often the same, such as a lack of accountability or good reporting processes for negative behavior; an inadequate performance management strategy to create disincentives for bad behavior; people being afraid to speak up; and leaders looking the other way. There’s a lot of similarity as to why these things aren’t nipped in the bud.

I will say that in most cases when there’s a huge culture problem, it became a big problem because those at the top were unwilling to put a stop to it. In many cases, these leaders won’t sacrifice the short-term profits generated by unethical behavior for the long-term benefits of confronting and stopping such behavior.

HR Daily Advisor: You have identified a few similarities between Enron and Theranos. Would you mind providing a brief overview of how each had a toxic work culture?

Young: In a start-up like Theranos, you can’t have culture without the CEO being the principal source of it or deciding to tolerate it. These firms are so small and so driven by the vision of the CEO that the CEO’s behavior typically determines the values and ethics of the company. This was the case with founder Elizabeth Holmes and her COO and former boyfriend, Ramesh “Sunny” Balwani. They were the ones charged in a “massive fraud” scheme that raised $700 million from investors for blood-testing technology that didn’t work.

In huge companies like Enron with thousands of employees, an unethical CEO can certainly be the source of a destructive culture, but it’s more likely that shady practices develop under layers of management. CEO Ken Lay told 60 Minutes, “Am I a fool? I don’t think I’m a fool. But I think I sure was fooled.” And his fraud conviction was ultimately tossed out. That said, his claims don’t recuse him or any other CEO from the responsibility of knowing how the business is bringing in revenue.

At times in government and business, a leader is intentionally kept in the dark about questionable practices. Strong and ethical leaders demand the information they need to push back that veil so they can root out unethical practices. But leaders who lack courage or a strong sense of ethics would prefer not to know about the behavior and therefore allow themselves to remain in the dark, enabling a bad culture. When there are policies and practices like Enron’s—with very heavy financial incentives to make high short-term profits without any value placed on the proper way to get there—people can be driven to be shady.

Theranos and Enron are similar in that way. Both were driven to bring in money by whatever means necessary, both fooled an amazing array of investors and the media into thinking they were legitimate, and both ultimately were brought down by whistleblowers who had had enough, in addition to a few reporters who saw through the schemes.

In part two of this article, we will explore more red flags from Enron and Theranos, including the downside to competitiveness, creative methods of achieving results, and a culture of intolerance toward criticism.

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