The Enron failure demonstrated a failure of corporate governance, in which internal control mechanisms were short-circuited by conflicts of interest that enriched certain managers at the expense of the shareholders.
In fact, Enron's Performance Review Committee (PRC) instituted a management model informally called "rank and yank". This model consists “yanking” (meaning firing) for poor performance. As for those individuals in charge of control, they soon learned that if they did not help commercial dealmakers achieve financial goals by pushing deals through the system, the PRC would complain about them. The culture should have dictated that the control professionals with the most complaints be rewarded for doing their job and throwing up red flags on suspicious deals. Moreover, once upper management starts applying undue pressure and exerting inappropriate influence, people begin to stop questioning authority because they think it is futile to do so. Also, people tend to assuage themselves of guilt when they are controlled by authority; they start hiding behind the mask of the corporation. This is what happened at Enron. The tone at the top really is crucial, and if the people at the top are disregarding corporate ethics, so will everyone else. At Enron, there was a vacuum in leadership . Besides, managers with significant stock options have incentive to increase the stock price of their firm, and variance, by taking on more risk. Costly risk taking was employed at Enron with the use of the highly structured and hedged partnerships. In reality, Enron management had huge potential and realized payoffs by way of their stock options, which provided them incentive to take on unnecessary risk and manipulate earnings. Indeed, Enron was driven by reported earnings. Enron wa ...