“The Ethics and Legality of Financial Regulation: What Enron Revealed”
by Paige Lenssen | Xchanges 10.2/11.1
An Aristotelian Approach
Aristotle asserted that ethical behavior is determined by what a virtuous person would do in a given circumstance. He identified twelve primary virtues in his Nicomachean Ethics and included both truthfulness and magnificence (also referred to as “Greatness of Soul”) as two of these virtues (1975, p. 97-105). The honest services clause seems to be a legal application of these Aristotelian virtues: the inclusion of the word “honest” reveals a connection to Aristotle’s truthfulness, while an agent’s attempt to “deprive” someone of something suggests a malicious intent that conflicts with Aristotle’s “Greatness of Soul.”
However, the shortcoming of applying virtue ethics to business law lies in the virtual impossibility of legislatively mandating in an agent the desire to act virtuously; instead, laws simply help categorize actions as legal or illegal and incentivize agents to comply with these laws through threats of legal punishment. Analysis of internal Enron emails shows that firm executives were focused on profitable results, not ethical intent; managers regularly used language laden with time-money metaphors reflecting their “focus on profits above all else” (Turnage, 2013, p. 520). The distinction between results and motives echoes the subtle difference between focusing on firm shareholders and focusing on all market stakeholders: profitable results, even those obtained illegally or unethically, can temporarily benefit firm management and shareholders to the detriment of stakeholders. Enron leadership ignored ethical and legal duties owed to stakeholders to benefit management and shareholders in the short term, and this decision is evident in management’s deliberate funneling of losses off the financial statements “to conceal Enron’s poor cash flow even as its stock value skyrocketed” (Turnage, p. 520).
As with an Aristotelian approach, a deontological interpretation of the honest services clause suggests that the clause protects the ethical rights of all market stakeholders. Deontological ethics assert that the ethical acceptability of an action is determined by how that action reflects the rights and correlative duties of agents (Kernohan, 2012, p. 85). The assignment of rights and duties can be seen in Section 1346: the definition’s wording suggests that everyone (implied by the section’s use of the word “another”) has a right to “honest services,” thus by deontological principles creating a negative duty for every agent to not “deprive” anyone else of that right. Even the language surrounding Enron’s fallout seems to apply deontological principles: as in many other corporate scandal cases, Enron executives were found guilty of “breaching their fiduciary duties” (Casey, p. 1 and throughout, emphasis mine). Under deontological ethics, it is this breaching of duty that made Enron’s actions unethical — not the inherent character of the agent, as in virtue ethics, or the results of the bankruptcy, which would be considered under consequentialism. U.S. law asserts that management’s interests should ideally align with the firm’s duty to provide honest services: in Guth v. Loft, Inc., the courts determined that “undivided and unselfish loyalty to the corporation demands that there be no conflict between duty and self-interest.” Unfortunately, this alignment between duty and self-interest didn’t occur at Enron, where executives acted with an “aggressive self-interest” that ultimately rendered the firm incapable “of maintaining the long-term relationships with publics and stakeholders necessary for enduring organizational survival” (Bowen & Heath, 2005, p. 90-91).