Enron Collapse Stewart Hamilton Case Study

Case details

About the authors

Professor Stewart Hamilton, Dean of Finance and Administration at IMD, Switzerland and Research Associate Jinxuan (Ann) Zhang discuss the case series China Aviation Oil.

Why China Aviation Oil?

Stewart Hamilton: Although I have written a book1 and cases on corporate failure (Enron2, Parmalat, WorldCom, Swissair), my only Asia Pacific case was Barings Bank3. A former student wrote to me when the China Aviation Oil (CAO) scandal broke in 2004, and I realised that this was an opportunity to fill that gap.

The near-collapse of CAO was the second largest corporate scandal after Barings in Singapore. CAO was an overseas listed subsidiary of a Chinese state-owned company, which I thought could make it a good case to illustrate risk management issues, corporate governance, approaches to restructuring, and the implications for Chinese state-owned companies expanding overseas. I did not write the case immediately because it was too early with the investigation still underway. I also did not have the right resources to be able to work on it, including someone who could understand the Chinese context and materials, and speak Mandarin.

Managing field research

Our process of creating a case involves initial research based on publicly available information, followed, where possible, by meetings with the parties involved in order to get as broad and balanced a picture as we can. IMD cases are non-judgmental, as we prefer to let the facts speak for themselves. Investigating CAO was not a smooth process, since we were talking about a failure case in the Asian context - a sensitive issue. An MBA student of mine from Singapore made the initial introduction to meet one of the advisors on the restructuring of the company. However, we then needed to contact the majority of the interviewees for the case series directly.

I had foreseen difficulties including my lack of understanding of the language and culture. Fortunately Ann4 came on board at the right time. Another difficulty would prove to be how to get at the true story - a balanced story, given the massive publicity around the case in Asia: the media may not tell what really happens. Differentiating facts from opinions also became a huge challenge as did the timing. At the time of writing, restructuring the company was still in progress and we were not sure whether the parties we interviewed would be open with us (even if we could secure the interviews) since some of the questions might relate to commercially sensitive information.

Jinxuan (Ann) Zhang: Knowing the language, culture and Chinese context did help, but the other challenges remained. We had our initial draft before we began interviewing. The interviews allowed us to flesh out the publicly available information, which we came to realise was not only too dry, but also not necessarily balanced. We managed to interview more than 30 of the main stakeholders in Singapore and China. We also had several rounds of interviews with the key people, who were more open to us, once we had earned their trust. This was especially challenging, as we were talking about failures, and most wished to remain anonymous.

We have a lot of information that we will never be able to disclose, but which helped us better understand what happened, and allowed us to put together a balanced, non-judgmental case series. I remember that only after seeing one of the key players for the third time, I was told, 'Now we have the trust.' We then had to reflect the facts without breaching confidentiality. In the end, we received positive feedback on our case drafts from all interviewees from whom we had asked for comments.

Why a case series?

Stewart Hamilton: Initially, we intended to write a failure case to examine what went wrong, and then a follow-up case on the subsequent restructuring. However, while interviewing, we realised that there were intriguing stories about how the initial crisis was handled and we already had too much information. To achieve the best results for teaching and learning, we decided to structure the series in three: (1) the near collapse, (2) crisis management, and (3) successful restructuring. This is the first case series on a successful restructuring overseas for a Chinese stateowned company and we would expect participants to gain a clear understanding of some broad issues:

  • strategic considerations for a Chinese company wishing to expand overseas, and key success factors
  • many of the factors contributing to failure are similar and equally applicable to different business contexts, though the types of failure may differ
  • the need to be open-minded: the 'rules of the game' are different inside and outside China
  • the need for increased awareness and a better understanding of differences: financial, legal, cultural and even moral
  • the need to work with differences, rather than avoid them.

I always test a case in class before I finalise it. We tested the CAO case series with volunteers from the MBA class and invited their feedback on how to improve it, including identifying ambiguities we may have overlooked because we had been working on it for so long. It really worked well. We also sought feedback from more than ten key stakeholders, colleagues with knowledge of China, and IMD's outstanding team of editors.

Any advice?

When writing a case, let the facts speak for themselves and separate facts and opinions. Don't take anything for granted: part of the challenge came from the fact that all our interviewees were doing us a favour. In contrast to a normal business setting, we had nothing to offer or trade, and it takes time to build trust. Be persistent. Don't give up just because people respond negatively at the beginning. Do your homework first, and know what you are talking about.

For teaching CAO, we have prepared a comprehensive teaching note, accompanied by a detailed PowerPoint presentation. Teaching colleagues in other organisations should be able to extract quite easily the materials that they need to conduct a good class session. We also believe that this case series can be taught from many angles including finance, cultural issues and governance.

1 Greed and Corporate Failure: The Lessons from Recent Disasters, Stewart Hamilton and Alicia Micklethwait, (Palgrave Macmillan, 2006).
2 The Enron Collapse (IMD-1-0195) won the Finance category at the ecch European Case Awards 2004.
3 The Barings Collapse (IMD-1-0155) won the Finance category at the ecch European Case Awards 1999.
4 Jinxuan (Ann) Zhang, IMD MBA 2002.

Case details

Click on the case title to view further details and, where available, an inspection copy.

China Aviation Oil (A): All at Sea
Stewart Hamilton and Jinxuan (Ann) Zhang
IMD - International Institute for Management Development
Ref IMD-3-1888
Also available:
Simplified Chinese translation
Ref IMD-3-1888-ZH

China Aviation Oil (B): Stormy Waters
Ref IMD-3-1889
Also available:
Simplified Chinese translation
Ref IMD-3-1889-ZH

China Aviation Oil (C): Oil on Troubled Waters
Ref IMD-3-1890
Also available:
Simplified Chinese translation
Ref IMD-3-1890-ZH
Teaching note
Ref IMD-3-1888-T
Teaching note supplement software
Ref IMD-3-1888-S

About the authors

Professor Stewart Hamilton is Professor of Accounting and Finance and Dean of Finance and Administration at IMD, Switzerland.
e stewart.hamilton@imd.ch

Jinxuan (Ann) Zhang is a Research Associate at IMD, Switzerland.
e jinxuan.zhang@imd.ch

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Choice Outstanding Academic Title 2006 'Stewart Hamilton and Alicia Micklethwait provide the most comprehensive view yet of the many corporate failures that occurred in the early twenty-first century. Written in clear and concise prose, Greed and Corporate Failure illuminates the root causes of the problems faced by corporations on both sides of the Atlantic. With candour, precise logic, and uncommon pragmatism, the authors give the reader a practical set of recommendations to prevent their recurrence. It is a 'must read' book!' - Bill George, Author of Authentic Leadership and former Chairman and CEO of Medtronic 'Anyone interested in value creation - whether management or investor - will find this analysis of failure deeply instructive. Sustained success comes from avoiding the causes of failure that Hamilton and Micklethwait identify.' - Donald H. Brydon, CBE, Chairman of AXA Investment Managers, Smiths Group plc and the London Metal Exchange 'Hamilton and Micklethwait take a cool and sceptical approach to the stories of Enron, Parmalat, Tyco, and other corporate disasters. This is the first time we have seen such a convincing yet fascinating explanation of what lies behind the latest crisis of capitalism. This is an authoritative analysis which deserves to be read by all those interested in knowing how businesses go wrong.' - Joanna James, Managing Director, Advent International 'By sharing some of the lessons and challenges of Greed and Corporate Failure, the authors help develop one of the most regarded leadership skills - that of 'seeing reality in the eye'. It will spark useful thoughts to what is needed not to repeat some of the mistakes of the past.' - Paul Polman, CFO, Nestle SA 'At last, a book that analyses the corporate failures of recent years and draws general conclusions. We learn that accounting irregularities are often a result of, not the root cause of, failure which usually stems from corporate cultural weakness. Stewart Hamilton and Alicia Micklethwait have managed to produce a serious academic analysis as a rattling good read. Board rooms around the world should have this book as prescribed reading.' - Sir Robert Smith, Chairman, Scottish and Southern Energy plc and The Weir Group plc 'Would you like to know why so many firms with household names have gone under? Read this book. The businesses are very different but the answers are remarkably similar and not what you probably thought. It is not a technical book and the authors have the courage not to pull any punches. Enjoy it.' - Stuart Wheeler, Founder and retired Managing Director of IG Index 'A most thought provoking review of a very topical subject. A must for professionals and for all investors. I commend this book, particularly to students who intend to make a career in the business world' - Christopher Reeves, former Chairman, Merrill Lynch Europe, Middle East and Africa. 'The authors...have produced a readable and authoritative account of corporate failure and its causes. It will be an excellent addition to the bookshelf of anyone who wishes to understand the root causes of corporate decline and failure.' - Edge Magazine

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