Lehman Bros and the Limits of Leadership

September 17, 2008

Dick Fuld

Dick Fuld


Lehman Bros collapses as the Fed refuses the bank a bale out. To what degree might more inspired leadership have avoided this?

This week I changed my mind about an important aspect of leadership. I now believe I have been on the wrong track and asking the wrong sort of question. It is not a particularly good question to ask ‘did Lehman’s fail because they had a bad leader?’. Absence of Dick Fuld, another leader favoured for the same kind of things would have been in place. Lehmans, as with the other financial giants, acquired the leaders judged best in the wider financial marketplace. They got the leaders they deserved.

Background to a global financial crisis

September 15th 2008 marked the signal that the credit crunch turbulence had turned into a full-scale tsunami, almost a year to the day after of the collapse in confidence at Northern Rock hit the UK headlines.

Today, financial markets around the world plunged. There was a remarkable degree of consensus among informed commentators. Earlier predictions of the scale of the crisis were now believed to have under-estimated the likelihood of a shock of such magnitude.

One of the trigger events was the decision of the US Federal Bank to withhold funding to Lehmans. The US Treasury Secretary Henry Paulson said that the US was “working through a difficult period in our financial markets right now as we work off some of the past excesses”.

A more general view has the following elements. The global economy will suffer into the foreseeable future. The financial conditions are worse than any since the great slump of 1929. Maybe, just maybe, the economic consequences will not be as awesome, but they are almost certainly going to be from unpleasant downward for most people on the planet.

I will leave financial analysis to others, and pick up the leadership story. The hero to zero game is in full swing. The leaders of the greatest financial institutions in America stand charged with greedy foolishness. Cupidity and stupidity, as someone put it.

So what can be made of the leadership or lack of it among the biggest players?

In the glory years, Lehman Bros seemed to have had inspiring leadership. Or, at least, winningest leadership from Dick Fuhl. Inspiring but scary, earning him the label of the Gorilla, the scariest man on Wall Street.

A lifer, he joined the company as a young man nearly forty years ago. According to The Times, he left a career as an air force pilot after brawling with a commanding officer. His progress in the Bank was then upward, but always characterised by a pugnacious edge that would involve more brawls and near brawls.

Under his stewardship, Lehmans became more and more successful and in 2006, Institutional Investor magazine named Mr Fuld America’s top chief executive. Companies clamoured for his services, and he took positions on everything from the Federal Reserve Bank to the Robin Hood Foundation, a New York antipoverty group. His activities brought him billionaire status

He was also acknowledged as someone who offered generous rewards to staff who met his demanding targets. Say what you like about Dick, he looked after his people. Well, yes, up a point. And that point was sometime in the last few months. The Times continued:

Some say that the countless accolades encouraged Mr Fuld to take more and bigger risks, in particular piling into high-risk mortgages. Over the past few months he refused to acknowledge that Lehmans was in difficulty – despite frequent warnings from leading analysts. Had he acted sooner, he would have been able to avoid bankruptcy. A series of interested buyers surfaced in recent months, but Mr Fuld would not sell at the prices offered. By the time he appeared to face up to the situation at the end of last week, it was too late: Lehman was past the point of no return. Lehman staff say that Mr Fuld is broken and shell-shocked. He has lost a fortune, but for such an ambitious man, the biggest loss is to his pride.

Was Fuld’s a bad leader?

When I thought a little harder I had to admit that such a question is unanswerable in any covincing way. Why? Because it presupposes a set of criteria which identifies what a bad leader is or does.

Mr Fuld was by repute a bully. But that doesn’t make him a bad leader, of itself. His aggression may have been an asset to his organization for the better part of forty years, if he is judged on corporate performance.

Was he greedy? Not in the sense judged unacceptable to many of his peers, and compared to other leaders documented in earlier blogs.

Was he competent? In terms of delivering results, yes again.

So what went wrong?

The mother of all crises, arguably triggered by the unintended consequences of the decisions of leaders such as Fuld of Lehmans, Coyne of Bear Sterns, Crux of Morgan Stanley and Applegarth of Northern Rock.

The actions of the leaders of financial institutions have to be studied very carefully to see what might have been done to have made a significant and positive difference.

I am inclined to see a series of dramatic stories in which the leaders are not so much stupid as unable to recognize the risks they were taken. Not so much reckless or greedy as stuck in the comfort zone which was continuing to bring success. Their actions had contributed to the establishment of financial structure and norms of behaviour which worked. Unfortunately, they were not the bountiful and benign structures that they were taken for.

These leaders had made it by a Darwinian process that had selected them, because they were trusted to deliver the numbers. They were the leaders that the financial system deserved. Now it is paying the price.

Can leaders make a difference?

They sure can. These case examples suggest leaders can fail to break out of dominant beliefs about their businesses.

Might there be leaders out there in financial institutions who conform more to the Jim Collins picture of a creator of companies built to last? Who will overcome the overpowering effect of denial? I think so. But I’m not going to name any names.

Postscript

This week I changed my mind about an important aspect of leadership. I now believe I have been on the wrong track and asking the wrong sort of question. It is not a particularly good question to ask ‘did Lehman’s fail because they had a bad leader?’. Absence of Dick Fuld, another leader favoured for the same kind of things would have been in place. Lehmans, as with the other financial giants, acquired the leaders judged best in the wider financial marketplace. They got the leaders they deserved.

I also believe there has been a consistent prevailing set of conditions in which leaders are judged on operational success to an extent that there has been a splitting of the moral and the operational dimensions. It is similar to the belief about keeping politics distinct from sport, when a moment’s reflection should be enough to show the impossiblity of such a belief translating into the world of human events. (We even forgot the recognition of the short-termism the system was encouraging).

And yes, as my colleague Professor Peter Kawalek has been arguing, business educators risk standing accused of ignoring the banality of the bottom line, as we collude in preparing our graduates to fit into a financial system that has been a significant factor in the conditions that have unleased this economic tsunami around the globe


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