′′How Corporate Governance Affects Strategy of Corporations?” – Lessons From Enron Corporation (Management Project)

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Corporate governance is a subject of academic and professional debate. It has and  it will continue to be a topic under scrutiny for subsequent deliberations since  there are many different research dimensions and contexts associated with it.

However, it has been observed that the linkage between corporate governance and strategy of a corporation remains as an untapped area with considerable avenues of research.

This paper tends to explore this linkage, using Enron scandal as backdrop. In the aftermath of the debacle of US energy giant Enron in 2001, the significance of corporate governance has come under heavy scrutiny of different researchers. Whereas different explanations have been attributed to its downfall, it has been  widely accepted that this was a case of failed corporate governance.

This paper tends to explore Enron downfall from the perspective of failed corporate governance. By defining and exploring corporate governance and its underlying issues, the authors have used Agency theory as a theoretical framework in unison with internationally renowned auditing company. Ernst & Young’s model – to understand the role of different actors and forces responsible for Enron collapse.

By using qualitative research method, the authors have used secondary literature as well as combination of questionnaires and telephonic interviews to obtain viewpoint of renowned international academic /  professional researchers. They have been identified through convenience sampling methodology. A few internationally renowned auditing companies have also been used as part of this survey to explore diversity of perspectives in this context.

Efforts have been made; to explore the main causes rather then to write just another case on Enron. After drawing lessons from Enron, the paper concludes with the understanding that there is direct link between corporate governance and strategy of corporations. However there is diversity of perspectives in this context and hence it requires further exploration and debate.


The field of Social sciences entails usage of scientific research method to study social phenomena. Scientific research method is a systematic approach towards  analyzing a research issue. The following Figure reflects elements of a scientific research:

Scientific Method Flow Chart.

Scientific Method Flow Chart.

Research Design:

A research method in social science field presents research design as key variable that keeps the research project collective. A good quality layout of research  design helps reader in understanding the study span. It explains the ways, methods, measurements and tools being used by researcher on the basis of research questions.

Kind of Research:

Scientific research entails systematic collection of data through qualitative or quantitative methods or through a combination of both. In recent years, several studies are based on a hybrid approach, in which researchers have used both approaches while conducting social science research.

Case Study:

According to Hartley J.(2004), case study research is a comprehensive examination  of data collected and analyzed in a particular social context, so as to study  specific phenomena. The context is of vital significance since it is intrinsically  associated with these social phenomena.

Data Collection Techniques:

According to Lyberg (1991), “There are several data collection techniques while considering its overall appropriateness to the research, along with other practical factors, such  as: expected quality of the collected data, estimated costs, redicted no response rates, expected level of measure errors, and length of the data  collection period.”


Cassell (2004), (Kvale, 1983; King N, 2004) defines the qualitative research interview as; “an interview, whose purpose is to gather descriptions of the life-world of the interviewee with respect to interpretation of the meaning of the described phenomena.” According to him, such interviews help in understanding  perspectives of the respondent about the causes and reasons of the occurrence of particular phenomena.

  • Exploratory Interview
  • Semi Structured Interview
  • Unstructured Interview


Questionnaires are popular means for primary data collection in qualitative  research. They entail a set of questions about a research topic. A researcher seeks answers to these questions and  they facilitate in shaping a research. Questionnaires can be generally classified as:

  • Open Ended Questionnaires
  • Close Ended Questionnaires


Corporate Governance:

The roots of corporate governance can be traced up to nineteenth century when American state corporation enforced a law about governing of corporate board with mutual consent of the shareholders in exchange of legislative rights and benefits  in order to make corporate governance more efficient. Since that time, most of the companies get engaged with this corporate friendly Delaware law.

Viewing the Organization as a Complex Web of Interrealationship.

Viewing the Organization as a Complex Web of Interrealationship.

Agency Theory:

Corporate governance draws its roots from many different theories of management and organizational studies. Different theories explain different organizational enomena. For this thesis, Agency Theory has been as part of our theoretical framework.

Ernst & Young Model for Effective Corporate Governance:

As authors of this paper we wanted to explore corporate governance using a model which could help us in order to develop a better understanding of key actors that are involved in a corporate governance system in the context of a corporation. In  this context, we explored certain models / research dimensions – notably, the model of Harvard Business School on corporate governance to identify key actors.

Correlation Between Concept,Theory and Model Used:

The frame of reference – comprising of agency theory along with Ernst & Young model–highlights interrelatedness of internal / external forces for an organization’s  strategic decision making. This framework taken in unis on indicates that the entire process entails constant information flow and feedback thus leading to decision  making at the top–which in turn affects strategy of the organization.

Theorectical Conclusion and Model:

Since firms have got different ownership setup, operate in different industries, in  cross-cultural settings, with different regulatory and statutory framework hence it is difficult to have a consolidated corporate governance theory. In this study, we  have merged Concepts, Theory, and Model in a way to get accurate picture of corporate governance’s effects on strategy of corporations.



In its simplest form a corporation is defined as an organization having its own legal entity separate from its owners thereby having its own rights, responsibilities and obligations. Commercial corporations operate for a profit  motive, capitalizing on their expertise, reach, resources and networks. Its owners  usually are very high in number (general public, group of investors, consortiums)  and they pool their investments in the form of shares, which are traded at stock  exchange.

Corporate Strategy:

Corporations are usually involved in multiple businesses and multiple markets, thereby operating through different units or subsidiary organizations. According to  Collis et al (1997), corporate strategy can be regarded as a value creating course  of action for all stakeholders by virtue of deploying and coordinating resources in  different markets and in different corporate activities.

How Corporate Governance Affects Dtrategy of Corporations:

An underlying aspect of the strategy-setting phase is that Board of directors should stay aloof from day to day operations of the company. According to Lorsch (2002), they should however gauge the general performance of the company through   special committees like the audit committee, compensation committee, etc. They have  to oversee the affairs of the company and see its statutory and legal compliance.

About Enron Corporation:

Enron Corporation was established in 1985 as a result of a merger between Houston Natural Gas and InterNorth in USA. Initially starting as a natural gas pipeline company, involved in transportation of natural gas from source to end consumer, interlinking hubs in between, Enron diversified its operation into other energy  related business, moving into retail, exploration, electricity generation, power  infrastructure development, water business, financial service, trading business and broadband services.


How the Strategy making process Works?

According to Mr.Q, strategy making is a continuous process rather than a single day activity. The top management views the external environment vigilantly. It  constantly receives information from company management and employees regarding  internal resources and activities through continuous information flow, thereby indicating systemic strengths and weaknesses.

Why Ernst & Young Model has been used:

This model is used because it identifies key actors in a corporate governance framework. The same actors also play a pivotal role in shaping corporate strategy. The model developed by this audit house has been used since auditors are outside  parties, who not only critically view a company’s resource management abilities  but they also can view the system critically, identify loopholes in processes, and indicate remedial measures.

We have also augmented our findings by using examples from Enron debacle and taking into  account, empirical views as collected from  leading professors and practitioners of corporate governance through interviews  and questionnaires.


Enroll Downfall in light of Ernst amd young model of Corporate Governance:

Different forces associated different expectations from Enron. Each actor asserted  his own pressure on the corporation to grow in an unprecedented fashion. The external environment wanted to capitalize on Enron’s resources, growth and reach.  They also wanted to be strategic partners in Enron’s success and to enter into a  win-win relationship. It is to be kept in mind that whereas good corporate governance is the prime responsibility of the Board, but it is equally imperative for stakeholders that they help the company in fulfilling its obligations as a good corporate citizen.


In a rapidly globalizing world, where cross border and transcontinental trade is  taking place at the click of a button, corporations have immerged as one of the key actors in the international system. Global integration through faster and cheaper  communication technology and rapid flow of financial capital has set about a new  kind of playing field for corporations as well as their stakeholders.


The relationship between corporate governance and corporate strategy has been identified in this research. However a quantitative relationship needs to be identified between these two concepts. Some issues in the realm of these two concepts are open for research. The first and foremost is “Should CEOs be shareholders in their company”?

The relationship between corporate governance and corporate strategy is a lot dependent upon board room dynamics  and  researchers  normally don’t have access to board room meetings. Hence it will be of interest if future research encompasses these areas.

Source: Linköping University
Authors: Hameed Ahmed | Ali Najam

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