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


Creativity is a Leader’s not-so-secret Weapon

November 18, 2007

convergence_jackson_pollock.jpgCreativity has always been a powerful attribute of successful leaders. This has become more obviously the case over the last few decades, as leaders are seen to be engaged in creating visions, strategies, products, designs, businesses, and even creative networks. Change involves creative individuals, teams, organizations, and clusters or communities

This post accompanies a presentation on creativity and leadership (fostering creativity)

Creativity has pervaded so many aspects of all our lives. It transcends business life, as it transforms it, and in many of its manifestations it can be linked with leadership.

Definitions, definitions

Like leadership, creativity has acquired a bucket-load of definitions. One explanations of their shared profusion is that both cut across a range of academic and practical domains, so that ‘bottom-up’ and ‘top-down’ definitions have not yet successfully been reconciled. (Will they ever be?)

However, in preparing this, I was somewhat encouraged to find myself able to condense down a lot of the definitions into two robust ones that serve to capture much of the variety. Borrowing from various sources, I offer the all-purpose general suggestion that:

‘Creativity is concerned with discovery processes leading to new and unexpectedly valuable ideas’.

The second suggestion is that creativity occurs when somneone is

‘Looking where all have looked, and seeing what no one has seen’.

Looking but not seeing

The looking and seeing definition is an old favourite of mine. It captures the received wisdom that a creative act for someone, a moment of insight, occurs because many others have looked but not seen. I seem to remember a quote from Lord Chesterfield who confided in a letter that ‘from a hayloft, a horse looks like a violin’. The violin/horse in the presentation illustrates the noble Lord’s insight.

More significantly, the history of creative discovery relates of numerous people who were the first to see something that subsequently established as true (or, in an even more philosophically complex description, ‘truly creative’).

From Archimedes to Alexander Fleming; from Newton, to Mme Curie; from the little boy who saw that the Emperor had no clothes, all have been hailed for their significant moments of insight.

Theories of creativity

The insight school of creativity is but one among various sub-sets within cognitive psychology. Humanistic psychologists have contributed self-actualizing and transcendent theories. Information scientists have offered data-processing models. From rather different directions, we have natural scientists taking an evolutionary stance, and creationists offering their own theological interpretations.

Creativity in action

I want move from more refined theory into creativity in action. In doing so, I borrow a neat taxonomy which I learned from the Hungarian scholar Istvan Magyari-Beck. Isvan proposed some years ago that a new discipline of creatology could be developed, which could be structured into levels of the individual, group, organization and culture.

At each level, different issues arise, although there remains an overriding practical concern that requires some theoretical grounding at each level: How might creativity be fostered?

The creative individual

Magyari-Beck indicated that most studies have been at the level of the creative individual. This was true in the 1980s, and is only marginally different today. One difference is acceptance (particularly through the impact of the work of Teresa Amabile) that creativity is essentially a socially-constructed phenomenon.

Another shift parallel one in leadership research. For as long as they had been studied, Leaders were considered exceptional individuals, with special inherent traits. Only around the 1960s did the trait view of the exceptional leader soften into the situational and contextual view. Even today, the leader as ‘somebody very special’ is a widely-held belief.

Likewise, the creative individual was for a long time considered to be inspired and gifted. Around the time leadership was taking on a more egalitarian hue, educationalists and humanistic psychologists were exploring ‘everyday creativity’. Maslow, Carl Rogers, Fromm and others introduced a wide audience to the notion that ‘we are all creative and have the capacity to achieve that potential’.

The creative group

The creative group has become the shock-force for organizational change. More and more non-routine tasks are conducted in projects. Project teams are expected to show creative skills while seeking goals or targets of the wider organization.

Tuckman’s celebrated four-stage model suggested that all teams develop and change, until they achieve the norm of an effective team work. Rickards & Moger and co-workers at Manchester wondered how teams might be able to outperform expected behaviors. Their answer was through creative efforts which broke through behavioural and structural barriers.

The Creative organization

The creative organization was the subject of one of the earliest texts on creativity. However, it took the rise of the so-called Creative Industries to accelerate interest in such institutional forms. Today, the largest players in the world of electronic, communication and entertainment technologies have exploded into economic and social importance.

Nevertheless, we do well to remember that creative organizations can compete successfully in what appears to be rather ill-favored origins. Toyota, and the Chinese multi-national Haier come to mind.

The Creative culture

And so we reach the highest level of complexity in Magyari-Beck’s taxonomy. His own country had been at one time a hotspot of creative culture. Hotspots from ancient cultural clusters in China, Mesopotamia, Athens, Paris moved to modern hotspots including Cambridge (England and New England), Silicon Valley, even, some say, ‘Madchester’.

Peter Kawalek and his team seem to be rescuing the creativity in Manchester from the Madness.

The still-controversial social scientist Richard Florida is mapping the creative hot spots of the world in increasingly in-depth studies.

To go more deeply

This brief voyage around the world of creativity leaves too many ports of call unvisited. I hope to collect the views of several audiences (including blog readers) which will lead to suggestions for other perspectives.