The banking crisis of 2008 (and the role of CEOs and boards in the debacle) has given management strategy analysts a lot of material to work with. Is there a perfect management strategy and a perfect personality? Mike Gallagher looks at the options
Banks and their managers will perhaps forever be categorised as pre-Lehman and post-Lehman after the well-remembered crash of one of the world's biggest investment banks. How the bank managed to end up on the financial rocks will no doubt continue to obsess management strategists for as long as the Belfast-built boat has. Movies are expected out in 2011 about the Titanic moment in which Lehman sank and nearly dragged several other top tier banks down with it. James Woods is reported to be playing Richard Fuld.
Arguments have raged for centuries about what makes a company or organisation great. Is it an inspiring leader with a singular vision. Is it someone who rules from on high or is it someone who leads by example and takes inspiration from the talented team that surrounds the throne?
The verdict on Lehman seems to be that the man in charge wasn't really in charge at all. If anything, he was out of touch with what was going on and despite his lofty position, somehow failed to see the looming crisis.
In one of the better books on what brought down the bank (A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers) author Lawrence McDonald wrote, "If only Chairman Fuld had kept his ear close to the ground on the inner workings of his firm - both its triumphs and mistakes. If he had listened to his generals, met people who formed the heart and soul of Lehman Brothers, the catastrophe might have been averted. But instead of this, he secluded himself in his palatial offices up there on the thirty-first floor, remote from the action, dreaming only of accelerating growth, nursing ambitions far removed from reality."
McDonald had something of an inside view as the bank lurched towards catastrophe. He was, for a time, Vice President of Distressed Debt and Convertible Securities Trading at Lehman and like so many others, was out of a job after the traumatic events of 2008.
PULL OR PUSH?
Would Lehman, or indeed any of the other banks (some of them in the Middle East) which have failed in the past two-and-a-bit years, have been saved by a more consensual management style?
Another question is whether a CEO needs to be seen to be leading, outspoken and 'out there' or is he more effective by operating in a low key manner and by delegating roles?
There is, unfortunately, no easy answer. A team of academics at Wharton, Harvard Business School and the University of North Carolina has tackled the eternal question and their findings are interesting.
"Extraversion predicts leadership emergence and effectiveness, but do groups perform more effectively under extraverted leadership? Drawing on dominance complementarity theory, we propose that although extraverted leadership enhances group performance when employees are passive, this effect reverses when employees are proactive, because extraverted leaders are less receptive to proactivity," they said in a paper entitled Reversing the Extraverted Leadership Advantage: The Role of Employee Proactivity.
What the study suggests is that managers need to be highly adaptable in a post-Lehman world where sentiment can change rapidly; effectively meaning that any boss needs to be able to anticipate the most subtle of changes in order to be able to maximise employee gain. Timing, it seems, is everything.
The paper points out that introverted leaders can be just as effective as extraverted leaders, given the circumstances.
"We propose that when employees are not proactive, extraverted leadership contributes to higher group performance, but when employees are proactive, this relationship reverses to negative. There is good reason to believe that in a changing business world, less extraverted leaders bring important strengths to the table. As organisational life becomes more dynamic, uncertain, and unpredictable, it has become increasingly difficult for leaders to succeed by merely developing and presenting their visions top-down to employees," they said in the paper.
"More than ever before, leaders depend on employees to proactively advance bottom-up change by voicing constructive ideas, taking charge to improve work methods, and engaging in upward influence. However, research suggests that many leaders find these proactive behaviours threatening or distracting from their own visions, and thus fail to benefit from employees' contributions,"' they added.
"We propose that leaders who are low rather than high in extraversion will be more receptive to bottom-up proactive behaviours from employees. As a result, we hypothesise that when employees are proactive, extraverted leadership will be negatively rather than positively associated with group performance," the authors, Adam Grant, Francesca Gino and David Hofmann pointed out.
MUTINY FOR THE BOUNTY
Being attuned to the noises coming from the floor of a given organisation, from the bankers at the sharp end of the business which will be the first to notice any changes in the environment is not easy, and by the law of averages becomes ever more difficult as the company expands.
Having an effective communication channel which runs from the top down and the bottom up is generally seen as being the best way to increase productivity and spot potential hazards before they become proverbial icebergs. Motivating the front line staff to feel like they have a say in the running of the company, without creating a situation where the CEO's role is seen as supplementary and peripheral (where the staff think they are running the company) can be as damaging and as ruinous as a megalomaniacal leader who is deaf to any reason. That's when it all ends up looking like something from a George Orwell novel.
However, at a base level, having staff which aren't motivated to sell the products any given bank, or managers who feel their input is not valued is inviting disaster and ultimately, could be seen as a case of poor risk management with 'human capital.'
"The day soldiers stop bringing you their problems is the day you have stopped leading them. They have either lost confidence that you can help them or concluded that you do not care. Either case is a failure of leadership," said Colin Powell, the former Chairman of the US Joint Chiefs of Staff and former US Secretary of State.
In an analysis of proxy statements from the Standard & Poor's (S&P) 500, filed in 2010, Deloitte found that just 22 per cent cited that the company's chief executive officer had any involvement or responsibility for risk management.
"Most board members and C-suite executives mention that they discuss risk management issues on an ongoing basis, but that story may not be fully communicated in the proxy disclosures we analysed," said Maureen Errity, the Director of the Deloitte Center for Corporate Governance.
THE ART AND THE SCIENCE
The Dubai School of Government (DSG) has examined the problem of how poor management of companies can have an adverse effect on the economy.
Susan Crotty, an Assistant Professor at the DSG, in an article in UAE's The National newspaper noted that, "The business culture has to be imbued with an understanding that management is a profession where skills have to be developed and honed over time. It is an art but also a science; management means far more than merely ordering people around. The science part comes from good empirical research done by people with research training."
Mudara - Institute of Directors (IOD) frequently holds workshops on management and corporate governance issues where attendees grapple with the various methods of resolving corporate conflicts, how to improve corporate governance planning and the challenges of best-practice implementation.
"I think the biggest thing was corporate governance where the board was hand-picked to be massage-able. They were hand-picked so that they could be, kind of, abused. If you look at 2007, the Citigroup board and the Lehman board had very few financial experts on those boards. There was a disconnect between Lehman up on the 31st floor and the trading floor," McDonald told Banker Middle East.
CEOs and other C-level staffers which have grown accustomed to managing a bank through a fairly sustained boom time may find themselves in unfamiliar waters when the economy crashes or the bank finds itself in a crisis situation where a certain amount of leadership is required during a period of unpleasantly prolonged bloodletting. They may have also have the threat of jail hanging over them as their management practices are examined by law enforcement agencies.
"Media reports ... stated that a South Korean court ordered a company's Chairman to pay almost $60 million in damages to his company for loss-making deals conducted under his authority. In this economic climate, directors are left particularly exposed to such proceedings as their actions are put under increasing scrutiny," Sophie Di Meglio, an Underwriting Manager for Management Liability at Zurich Insurance Company wrote in a Hawkamah Newsletter.
Mark Beswetherick, a Senior Associate at Clyde & Co, also writing in the Hawkamah Newsletter, explained that directors and senior management have been forced to look more closely at their personal exposures following a surge in corporate litigation and regulatory investigations across the Middle East in the last 12 months.
"As a result, many directors and managers have found that they are being called to account not just for the company's decisions, but also for their personal actions, and face not just the risk of regulatory investigation, but also personal civil claims, or even criminal prosecution," he said.
THE PERCEPTION OF INDISPENSABILITY
Therein lies one of the big post-Lehman concerns for management staff and a tricky subject that has been covered in varying detail in this publication over the years. That is, whether managing a bank is like managing a football team? It is a pertinent question for bankers which will be dealing with the project finance demands of Qatar's World Cup 2022 tournament demands. Is it better to be a player-manager, or is it better to stay off the field and direct (and motivate) the team from the sidelines?
This is where the academics have waded into the debate with lots of theories.
Joachim Hüffmeierlow and Guido Hertela at the Department of Psychology at Westfälische Wilhelms-Universität in Germany have suggested in a research paper entitled, 'When the whole is more than the sum of its parts: Group motivation gains in the wild' that being part of a team and being put under pressure to hold up, helps to deliver. This was especially so when the competitor was second, third or fourth as part of a team.
Hüffmeierlow and Hertela, using data from swimming competitions at the 2008 Olympics noted that, "Based on an instrumentality × value approach, we expect that late positions in a relay trigger motivation gains in groups due to an increase in perceived indispensability for the group outcome. This idea has been initially tested in a pilot study with competitive swimmers, demonstrating that perceived indispensability for the relay outcome indeed increases with later serial positions in a relay."
"Moreover, the main study with data from the 2008 Olympics revealed performance times consistent with this pattern of indispensability perceptions: while starting swimmers in the swimming relays performed at similar levels as in their individual competitions, swimmers at the later positions showed higher performance in the relay compared to their individual competition heats," they said in the Journal of Experimental Social Psychology.
What the study indicates, at least if it is applied in a managerial role, is that associates can be motivated to excel if the lead player 'raises the bar' or creates a level of excellence that underlings are motivated to better when they feel they are part of a valued team.
It seems to combine the most effective bits of leading by example, close team work and inspiring others to go beyond themselves. It also, naturally, says a lot about the competitive spirit which drives the best teams to glories like the Olympics and World Cup. Another view is that some managers and some teams do better if they are led from the middle instead of from the front.
LEADERS IN SILOS
McDonald, who does scores of speaking engagements across continents, (remembering what happed at Lehman) told Banker Middle East that what ultimately brought down the bank was the 'siloisation' of the firm.
"Picture in your mind a field with like, 10,000 silos - that's Lehman. The board is on one side; they are all cornered off in a completely air-tight silo. The risk management committees were in silos; the different department heads, the guys that had mortgages, the guys that had high yield [were in silos] and the worst was the management up on the 31st floor. They were completely isolated. It is that recipe which brought down the firm," he said.
Would it be safe to say that it was hardly democratic or meritocratic?
"Lehman? It was a complete dictatorship. Dick Fuld was CEO for 16 years and during that time Goldman Sachs had five different CEOs. The Goldman partnership would never allow the Lehman type of dysfunctional monarchy. Those partners at Goldman would have chopped a guy like Dick Fuld to ribbons. There is too much wealth in each one's hands to allow one man to go amok," he told Banker Middle East.
© Banker Middle East 2011
