Unit: Leader Traits, Power, and Corruption (DB)
You have been asked to teach ethics to a group of managers. In one part of this course you will be discussing the "Power Corruption Cycle".
Use the Cybrary to find an example of power corruption or ethical lapses by an organization's leadership that you can use in this course. In 3-4 paragraphs, summarize the example and explain how the organization's corrupted leader(s) fits in the "Power Corruption Cycle."
Introduction:
Power plays a major role in the interactions occurring in the organizational life. Power over others is intertwined with an understanding of the leadership process. Power allows leaders to influence others and help their team, department, or organization achieve its goals. The causes of power corruption stem from personal characteristics of the leaders and from organizational factors. The individual leader characteristics and organizational factors combine to create a corruption cycle. The excessive power and accompanying corruption of leaders can lead to serious consequences for an organization, which can lead to poor decision making. (Nahavandi, 2006)
The Power Corruption Cycle:
The “Power Corruption Cycle” can be defined as the Power with access to resources and no accountability. In such situations, Corruptions occur where power is abused for personal or exclusive and elitist group’s gains or profits. Such situations lead to poor decision, coercion, low opinion of employees, ethical violations, more distance from employees and inflated view of self. (Nahavandi, 2006)
Reports of corruption and the misuse of power in organizations have become prevalent in our society. Within organizations where some people are given official power over the important outcomes of others, abuse of power is likely to occur. For example, big accounting scandals in recent years such as those of Enron Corporation have stemmed out of the fact that organization's corrupted leaders had access to resources of the organization derived from the power they possessed. This led to wrong use of the power for the personal benefits of the leaders. Such corruption arising due to power adversely affects the trust of the public and the stakeholders of the company.
The Enron Corporation Story:
Enron Corporation was an energy company based in Houston, Texas.Enron had created offshore entities, a unit which may be used for planning and avoidance of taxes, raising the profitability of a business. This provided ownership and management with full freedom of currency movement, and full anonymity, which would hide losses that the company was taking. These entities made Enron look more profitable than it actually was, and created a dangerous spiral in which each quarter, corporate officers would have to perform more and more contorted financial wizardry to create the illusion of billions in profits while the company was actually bleeding cash. This practice drove up the stock price to new levels at which point the executives began to work on insider information and trade millions of dollars worth of Enron stock. The executives and insiders at Enron knew about the offshore accounts that were hiding losses for the company, however, the investors knew nothing of this. Chief Financial Officer Andrew Fastow led the team which created the off-books companies, and manipulated the deals to provide himself, his family and his friends with hundreds of millions of dollars in guaranteed profits, at the expense of the corporation he worked for and its stockholders. (BBC NEWS, 2002)
In August of 2000, Enron’s stock price hit its highest value of $90. It was at this point in time that Enron’s executives, who possessed the inside information of the hidden losses, began to sell their stock. At the same time, the general public and Enron’s investors were told to buy the stock, as the sky was the limit. Enron’s executives told the investors that the stock would continue to climb until it reached possibly into the $130 to $140 range, while secretly unloading their shares as they knew the opposite to be true.
As executives were selling off their shares of stock, the price continued to drop. As the price dropped, investors were told to continue buying stock or hold steady if they already owned Enron because the stock price would rebound in the near future. Kenneth Lay’s strategy for responding to Enron’s continuing problems was in his appearance. As he did many times, Lay would issue a statement or make an appearance to calm investors and assure them that Enron was headed in the right direction. (Booth, 2002)
How the corrupted leader(s) of Enron Corporation fits in the “Power Corruption Cycle”
After reading about the Enron example of the “power corruption cycle” and abusing power, we can clearly see how managers at the top level involve in corruption by misusing the confidential information of the company and using their power to earn money for personal benefits.
You can also use the Enron example in the sense of huge manipulations with respect to trading of shares, manipulation of accounts, etc. which were done by Enron Staff. Another very evident form of power corruption is with respect to leaders of political and other influential organizations who often use their power to secure personal benefits in the form of winning government contracts for their near and dear ones or relatives, bribery and commission, etc.
According to Nahavandi, there are no magic formulas to prevent the rise of destructive managers and power abuses; however, he recommends the following factors to mitigate corruption of power:
• Involve leaders in day-to-day activities
• Reduce followers dependency on leader
• Use objective measures in decision-making
• Involve outsiders in decision-making
• Change the organizational culture.
Power allows for leaders to influence others and help their team, department or organizations achieve its goals; power is essential to effective leadership. However, the abuse of power by executives, as seen in the example of Enron, demonstrates how easily power can be abused. Excessive power can lead to potential negative effects. In addition, excessive power can lead to ethical consequences such as poor decision-making, reliance on authoritarian leadership, poor information flow, adversarial interactions, and subordinate resistance. (Nahavandi, 2006)
References:
Booth, C. (2002, June). Called to Account. Retrieved May 1, 2006, from TIME Web site:
https://www.time.com/time/business/article/0,8599,263006,00.html
BBC NEWS, (2002). Enron scandal at-a-glance. Retrieved May 1, 2006, from BBC News Web site:
https://news.bbc.co.uk/1/hi/business/1780075.stm#investigators
Nahavandi, A. (2006). The art and science of leadership. (4th edition) Upper Saddle River, NJ: Prentice-Hall.