“The Ethics and Legality of Financial Regulation: What Enron Revealed”

by Paige Lenssen | Xchanges 10.2/11.1

Enron and Ethical Egoism

The “aggressive self-interest” displayed by Enron’s executives is characteristic of ethical egoism, a perspective that asserts that all agents are ethically obligated to act in their own best interests (Kernohan, p. 41). Agents need not consider what impact their actions might have on recipients, as they can assume others will also act in their own best interest. The presence of ethical egoism in corporations would explain why companies don’t always act in the best interests of their stakeholders; Shannon A. Bowen and Robert L. Heath assert that every organization “creates policies that are in its best interests and it expects its opponents to do the same, thus operationalizing the notion that the pursuit of self-interest alone is ‘ethical'” (Bowen & Heath, p. 87-88).

However, because the marketplace is regulated, corporations cannot function as true ethical egoists. Instead, they may operate as egoists under contractarianism, a system in which egoists form contracts that create mutual benefit for cooperating agents and punish those non-compliers (Kernohan, p. 50). Financial regulations are essentially contracts that involve individual firms, the government, and firm stakeholders. If these contracts are followed, firms can be confident that competitors operate under the same financial standards, the government (which benefits from an expanding economy) fosters healthy competition in the marketplace by regulating publicly traded firms, and stakeholders can invest their capital with confidence knowing that firms are operating honestly.

The legal ramifications of corporate fraud are necessary to ensure egoist agents abide by their contracts, because egoist firms are still “willing to commit crimes if the expected benefits of the crime exceed the expected benefits of engaging in lawful activity” (Perino, 2002, p. 675). According to Kernohan, operating under this system of contracts, punishments, and egoism “foster[s] the vices of greed, ruthlessness, and selfishness” (p. 51), all of which seemed present in Enron’s attempts at “subordinating [employees’] ethical sense to the needs of the corporation” (Tourish & Vatcha, 2005, p. 475).

If contractarianism does in fact encourage “highly competitive, self-interested behavior” (Kernohan, p. 51), regulation must be continuously tightened and modified to prevent assumed-egoistic firms from taking advantage of contract loopholes. From this perspective, it would seem that the legal ramifications for contract-breachers in 2001 were weak enough for Enron to risk breaking the rules. As a result, new, stricter financial regulation was enacted in the form of the Sarbanes-Oxley Act of 2002 (SOA). The SOA’s attempt to prevent fraud was presented “in the form of several new crimes and enhancements to existing criminal sanctions” (Perino, p. 676). For example, the SOA increased the maximum criminal penalties for individuals from “fines of $1 million and imprisonment of 10 years to fines of $5 million and imprisonment of 20 years” (p. 684). The maximum fines for corporations were also increased from $2.5 million to $25 million (p. 684).

Despite these large increases in maximum penalties, some critics argue that the SOA didn’t break much new ground in actually preventing corporate fraud. Rather than addressing the causes of fraud, the act’s provisions “intended to make it easier to win […] fraud prosecution” (p. 681). This seems to highlight the implicit disconnect between the underlying causes of corporate scandal and the legal responses to it: while the cause of business scandal and fraud can be described as a fault in ethical decision-making at the executive level, legal ramifications can do little to actually affect how corporations make decisions. These factors assume that corporations make decisions based on egoistic, contractarianist, or consequentialist principles; a company abiding by a virtue system or deontological ethics would not change its decisions based on legal consequences.