How did we get into this mess? Ask the management

By Stefan Stern 2008-10-16
We may never know who really wrote that internal Lehman Brothers memo of June 8 this year, but it certainly asked the right question. “Why did we allow ourselves to be so exposed?” it demanded.
By early June it was too late to start worrying about all that. And in theory it should never have been necessary to do so. When Dick Fuld, Lehman's former chief executive, was interviewed by Euromoney magazine in July 2005, he explained why.
“I expect everyone at the firm to be a risk manager,” Mr Fuld declared. “All 12 of us [on the executive committee] are focused on all parts of the business. It's all about risk management. If it's just me then we're in trouble.”

No wonder, if that statement was true, that Mr Fuld displayed such an air of pained bewilderment at his congressional committee hearing last week. His expression of regret at the collapse of his bank should be included in every MBA syllabus.
“I wake up every single night thinking, ‘What could I have done differently? What could I have said? What should I have done?' And I have searched myself every single night . . . I made those decisions with the information I had . . . This is a pain that will stay with me the rest of my life.”
There has been much outrage, some of it real, over the money earned by Mr Fuld in his years at the head of Lehman Brothers – as much as $350m between 2000 and 2008. We didn't hear many complaints when the economy was healthy and both he and his investment bank were winning awards. But it is not the cash that bothers me most. It is the competence – or lack of it.
It cannot just be greed, or stupidity, that has led so many financial institutions astray. Management itself has failed in its most basic supervisory task. There has been a lack of control and understanding. And an unwillingness to heed warnings that came from impeccable sources.
In a well-publicised speech in February 2005, Paul Volcker, the former Federal Reserve chairman, said: “Circumstances seem to be as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there should be so little willingness or capacity to do anything about it.”
What has gone wrong with management? We seem to have moved far away from the highly successful approach described by the business historian Alfred Chandler in his book The Visible Hand – The Managerial Revolution in American Business (1977). “In making administrative decisions, career managers preferred policies that favoured the long-term stability and growth of their enterprises to those that maximised short-term profits,” Chandler wrote.
It was this approach that built the great businesses of the 20th century such as IBM, General Electric and Procter & Gamble. In these businesses, as Will and Kenneth Hopper point out in their essential book The Puritan Gift, the main tasks of the CEO were to determine strategy, appoint divisional heads and supervise their work.
“[The CEO] could perform these roles well because he had grown up in the business and knew more about its problems, opportunities and people than anyone else. He had lived it – to the point where he would often know almost intuitively what decisions to make.”
According to this analysis, appointing the lawyer Chuck Prince to run Citigroup, a bank, does not make much sense. But Mr Fuld was a Lehmans lifer. Surely he knew what his business was all about? Ah, but finance is a particularly slippery domain, the Hoppers argue: “An understanding of finance [tells] people how to fund activities, not which activities to fund.” Several bank bosses got giddy on the dancefloor.
Always chasing the next deal, too many businesses neglect the boring but crucial issue of management. As Tom Stewart, the former Harvard Business Review editor and now chief marketing and knowledge officer for consultants Booz & Co, points out, the current financial crisis has its origins in plain bad management.
“It's no accident that Goldman Sachs – which of all the investment banks is the one that appears to value management most – has survived this crisis best,” he says. “I bet that each of the players and victims in this crisis began to smell the rot in their mortgage-derivatives books at about the same time, within weeks, even days of each other. But who managed the crisis – and who just looked for a deal that would save the year?”
Management – solid, dull, unflashy – ought to be taken more seriously. When presented with the internal June 8 memo on Capitol Hill last week, Mr Fuld said: “This document does not look familiar to me.”

Yes, greed is bad, and stupidity is bad, but bad management is worst of all. I am sympathetic to those finance professionals who, through little fault of their own, are now out of work or struggling to cling on.
But I have no sympathy for those ousted executives who, like the condemned men in that old Scottish tale, protest their innocence and complain at the injustice of their fate. You may remember that, as they head towards the eternal flames of hell, the sinners cry out: “Oh Lord, we didna ken, we didna ken!”
And the Lord answered: “Well, ye ken noo.”