Abstract

This paper discusses internal dynamics of the firm that contribute to the failure of knowledge conditions, using the Enron scandal as a case study. Ability of the board to effectively monitor conduct at operational levels includes various dynamics: senior management being isolated from those at operational levels; individuals pursuing subgoals that are contrary to overall corporate goals; information flow along a narrow linear channel that effectively forecloses adverse information from getting to senior management; a corporate culture of intimidation, discouraging open expressions of doubt or skepticism, resulting in reluctance to challenge senior officials, and pushing the limits of ethics and the law.Elements of information blockage in the corporation include: the "law of diminishing control"; deliberate concealment of information by officers; motivation to report to the boss what one perceives the boss wants to hear; theory of "bounded rationality" that explains surprising role of irrationality in decisionmaking – unconscious emotions and motivations. Discussion of behavioralist studies of cognitive dissonance, belief perseverance, confirmatory bias, entity effect, motivated reasoning, group cohesion or "groupthink," and the false consensus effect. Problem of overoptimism – tendency of many people to overrate their own abilities, contributions and talents – and tendency toward puffery and dismissal of risks in formulating disclosures and press releases.