Case Study on Corporate Governance: Enron Scam

Enron was America’s energy based company founded in the year 1985. It was the result of merger between two well established brands Houston natural gas and Ohama-based Internorth Inc. Basically it carried out business in producing natural gas and pipeline operations for the same. It decided to expand its’ bases further in late 1980’s and early 1990 at the places like U.K, Europe, South America and India. In 1999 it launched its’ broadband service unit and Enron online. Over time, eventually, Enron claimed 90% of its’ trades through Enron online. In August 2000, Enron claimed all time high with profits of more than $90 US. It was ranked 6th largest energy company in the world. However February 2001 reported to be start of downfall of Enron’s downfall. It had increased on its debt levels to $37.7 billion which was almost 91% higher compared to previous 12 months period. Inspite of this, Enron assets increased to 19.03%. In August, Enron’s Chief Executive and Vice-President Mr. Skilling resigned and Mr. Ken Lay was replaced as Chief Executive Officer (CEO). Further in October, the company reported its’ first quarterly loss of $618 million US and reduction in shareholder equity of over $1 billion in four years. Subsequently, it was reported that U.S. Securities and Exchange Commission is looking into Enron’s transactions with Mr. Fastow for partnership. It was then reported that Fastow had been replaced as CEO by the head of Enron’s industrial market units, Mr. Jeff McMahon. However, the company’s share prices continued to decline. In November 2001, J.P. Morgan and Solomon Barney agreed to provide $1 billion in secured credit.

Eventually Enron’s market cap tumbled down to $8.9 billion that is 26% drop in just 1 week. Its’ asset volatility remained to 20%. In November, Enron reported that it overstated its’ earnings dating back to 1997 to almost $600 million. On 9th November 2001, the company reported to deal with its smaller rival Dynegy Inc. to buy Enron’s stock at $9 billion. Chevron Texaco agreed to inject $ 1.5 billion fresh capital immediately. Enron then disclosed that a deterioration of its’ credit ratings could accelerate repayment of the $690 million loan. However, major credit rating agencies downgraded its’ bonds & as a result Dynegy terminated to buy Enron. Enron temporarily suspended all its payments other than those necessary to maintain core operations. In December 2001, Enron finally filed for Chapter 11 bankruptcy and hit Dynegy with a $10 billion breach of contract lawsuit.