Corporate Meltdowns – Failure of Financial leadership

AIG, Bear Stearns, Fannie Mae and Freddie Mac needed government bailouts or takeovers to survive. Lehman Brothers is in bankruptcy. Merrill Lynch has been sold. The shocking succession of corporate meltdowns signals a massive leadership failure across the financial services landscape.

Executives at these troubled firms may have ignored or failed to see the level of risk their companies were taking on in a crusade to enhance results and their own compensation. When markets turned against them their firms big as they were crumbled.

This type of lapse in leadership dates to the 1980s when companies began to focus on aligning executive incentives with shareholder interests. An excessive focus on individual financial goals, at the expense of managing in the best interests of the company overall, is at the root of the leadership debacle that has rocked the financial services sector.

It seems to work for the people in charge, but is it really working for the company? It’s certainly not working in the broader society. The shareholders and the executives who have shares in the company are in trouble, but this is spilling over into the economy in a way that which was not seen before.

Too many managers simply choose not to lead. Managers believe that if they hire smart people and provide huge financial incentives for individual results, management of the firm will take care of itself.

Surveys of incoming MBA students who had worked in finance, and particularly in investment banking, indicate that managers in these fields are particularly harsh and ineffective. These managers provide little feedback, expect long hours in the office even if they are not productive and destroy an employee’s work-life balance. The long hours make up for management’s lack of discipline and planning. All the problems were smoothed over by bonus money, based on individual performance. Taking risks to achieve individual targets, even if it puts others or the organization as a whole in danger, seems acceptable. Covering up failures became the norm.
Top level managers too often focus narrowly on issues that concern their organizations and do not pay enough attention to what is going on across their industry. These problems are so tightly connected to broader problems in the overall financial services and banking industries. Everybody in those industries needs to be better attuned to slowly percolating [crises] and ethical issues.

From the outside, it was perhaps easy to see that home prices were inflated even though complex securitization made it difficult to determine the true value of assets. But in many major industries, problems grow slowly and come to be accepted by members of the industry, only to explode later. The conflict inherent in allowing brokerage houses to provide research into equities they market as an earlier example of a problem waiting to happen.

Companies continually underestimate what they have to lose by allowing their reputations to be tarnished through “corporate Watergates.” Every year, companies lose more through damaged reputations than they do from regulatory fines or legal actions, although some firms in recent years have become more aware of the threat.

One thing you can say with confidence is that the next big ethical disaster to befall Corporation X is going to be one that will blindside most of the people on the board of directors and the top management, too. That’s all the m o r e reason for being more vigilant and for setting up processes, especially at the top levels of leadership, to allow people to talk about some of these things that are hard to talk about.

In today’s business climate, it often takes the board of directors to make a course correction when a company is on an illegal or irresponsible heading. But that happens rarely and typically only if some of the board members are veterans of the period before executive compensation was tied to stock price. They are more likely to recognize and point out “that what’s going on now is peculiar.”