Subprime Leadership – The real cause of the GFC?

by 16 Sep 2009

The failings of leadership have been cited as a cause of the global financial crisis. Sarah O’Carroll speaks to Harvard Professor Bill George and other leaders in the industry about what went wrong – and how it can be fixed

The topic that dominated the meet ing of the world’s leaders in Lon don recently was bankers’ bonuses, remuneration, and leadership. The G20 leaders discussed the failed business models and failed leadership which brought about the great recession.

As the economic storm recedes and com panies emerge to sift through the rubble and rebuild the damage done and return to nor mal, the realisation is dawning that we don’t know what “normal” is. In order, therefore, to prevent the same crisis recurring a few years down the line, questions have been raised about the fundamentals of leadership and how they must change.

The failings of leadership

If the leaders of today take away just one lesson from the crisis that recently unfolded it should be the importance of taking a long- term approach to business and not to focus on short-term gains.

Bill George, author and professor of management practice at Harvard Business School, says that because corporations and successful organisations are not built in a day they must be built for long-term growth and sustainability through innovation, cre ativity and strong leadership.

“Too many leaders focus on getting the numbers right today but they don’t really focus on building their leadership for the long term,” says George.

CEO of Lloyds International David Smith also believes leadership played a sub stantial part in what we’ve seen unfold in the last three of four years.

“If you look at the period we’ve just come through, I don’t think anybody in the Western world could have predicted the crash or did predict the crash,” says Smith “It came as a surprise to everybody.”

Smith does believe that it was attributa ble to a conforming culture of leadership and lack of innovation and questioning that led to a knock-on effect of bad leadership.

“What we have seen is a bit of a herd men tality and people conforming – and if we learn anything we should learn that a leader’s job is to make sure we’re not blind to what is ahead of us and we don’t conform and cre ate these cultures which almost become a self- believing feedback loop,” he says.

It is the responsibility of leaders, he says, to have one eye on the future and to build long-term sustainable business models.

“Some of the flawed business models and failed leadership were almost completely dependent on an endless supply of liquidity and capital and in hindsight you think lead ership really should have been much more effective at creating models that could sus tain the sort of downturn we have just seen.”

Is regulation the answer?

Regulating compensation is not going to solve the problem, says George, because he believes there will be many unintended consequences that are outside the eye of the regulator.

“I think the answer is to create incen tives for long-term performance not short- term performance and I would include the tax laws in that – I think tax should be high for short-term gains,” he says. “That’s the only way we’re going to get back to an investment society. Right now we’re in an instant gratification, spending, society where people like making a lot of money off other people rather than creating and making it through fees.

“I would rather see this as an investment society where we invest in companies, invest in research and development, invest in capital equipment and invest in leadership – as you know, none of these things are short term.”

Who are the leaders?

Leadership, says Smith, goes right through an organisation, from the high-profile lead ers in the US and the UK that have been paid millions, to the chief risk officers, the HR managers and down divisional heads. He says that everybody has a responsibility to lead and in order for the style of leadership to change, the command and control struc ture must be turned on its head.

“It’s quite hard for all parts of the organisation to behave like leaders if the man or woman at the top doesn’t allow that information or feedback to filter up – and if you combine that with poor oversight from the board or independent directors I think you’ve got a recipe for disaster,” he says.

“[Particularly in] those organisations that have so prominently failed – you’ll find a combination of all of those factors which will show that leadership has failed.”

What’s HR’s role in changing leadership?

According to both Smith and George, the HR department should be central in building a long-term leadership culture in a sustainable environment.

“For too long, HR have been regulated or regimented down to a lower level of power and importance – they should be equally as important as the finance department or the legal department in a major firm,” says George.

It is the human resources department’s job to build the leadership today – and for the future – he says, and to build the culture of the company. However George also says that the CEO needs to be the real chief human resources officer and that there is no substitution for face-to-face interaction.

“They should take the leadership role, they can’t just del egate this like they would to an accountant on how to keep the books,” he says. “The CEO must be the role model that he or she wants reflected in the organisation. And then that person must be out and about with the people at all levels and not just dealing with people at a board level.”

Smith says that HR practitioners need to influence the discussions that take place, have lasting influence on the commercial terms of the business and be part and parcel of the top team.

“HR [practitioners], in a very sophisticated way, have tentacles into all the decisions of the business and I think that must be made clear to everybody,” says Smith.

“If one accepts the theory that the world has changed on the back of the GFC – maybe not forever, but certainly in the medium term – I think the way that we design our com pensation schemes, our incentive schemes and the way we motivate and lead people will be different. And I think that thought leadership in part should be led by our HR col leagues,” he says.

Proactive, says Smith, is an essential word in the process for HR, as is strategy. He says that the role of HR isn’t just about responding to people’s queries, but is a much more proactive role.

“It’s about taking that step forward, – thinking about where we’ve come from, thinking about where we want to go and [how to] influence leaders across all levels of the business.”

What action can be taken now?

Now is the best time for HR departments and executives to turn leadership on its head and make steps forward to being leaders of the future. This will not mean going back to previous practices, George says, but developing new strategies and a whole new mindset as to what it means to lead a company.

First, he says, leaders need to develop themselves as leaders and this comes from experience. He emphasises the importance of dealing with a crisis as one of the best lessons in leadership.

“There is no better test,” he says. “You can do all the simulation you want, you can do all the case studies, you can analyse how other leaders did – but there’s nothing that substitutes doing it yourself.”

George advocates that HR leaders take the top poten tial leaders of the future and get them involved in line assignments where they have to face a crisis and perform. He believes it is only through this that they can make mis takes and learn.

The lessons George learned when he was general man ager of a small firm at the age of 27 were invaluable to him when he became CEO of Medtronic 20 years later. These were learned, he explains, not because business was so great, but because of struggles such as having to recall products, dealing with safety issues and dealing with the competition. Although they were lessons on a small scale, they became life lessons for him in leadership.

“There is no substitute for learning in a crisis,” he says.

The lessons for leading in a crisis on which George has based his new book, 7 Lessons of Leading in a Crisis, are universal lessons, whether personal or career-based. He says the book is not just for CEOs, but rather is about how anyone can deal with a crisis.

He remains adamant, however, that all good leaders will demonstrate the ability to plan ahead while formulating policy that is positive now. “We should promote leaders who have that long-term view of the world, long-term vision and are willing to make that long term commitment and not trying to make quick-fix solutions,” he says. “If we have leaders who are just looking for a quick fix we’re going to be right back in this problem in five years.”

Bill George, Professor, Harvard Business School

Bill George is a professor of management practice at Harvard Business School, former Chairman and CEO of Medtronic, currently serves as a director of ExxonMobil and Goldman Sachs, and recently served on the boards of Novartis and Target Corporation. He is the author of three best-selling books True North, Finding Your True North, and Authentic Leadership, and his latest book is 7 Lessons for Leading in Crisis. He has been named one of the "Top 25 Business Leaders of the Past 25 Years" by PBS, "Executive of the Year-2001" by the Academy of Management, and "Director of the Year-2001-02" by the National Association of Corporate Directors. George received his BSIE with high honours from Georgia Tech, his MBA with high distinction from Harvard University, where he was a Baker Scholar, and honorary PhDs from Georgia Tech and Bryant University.

David Smith, CEO, Lloyds International

Dave Smith was appointed Chief Executive of Lloyds International in February 2009. Lloyds International is a member of the Lloyds Banking Group, one of the world's largest financial services organisations. Lloyds International is supported by 900 colleagues and has three strong customer facing brands of Capital Finance Limited, BOS International and Bank of Scotland Treasury, offering a range of asset finance and corporate lending solutions to suit both small business and larger corporations. Prior to this appointment, Smith was Head of Bank of Scotland Treasury Australia and Director of Bank of Scotland Treasury plc. He joined Halifax Bank of Scotland (HBOS) in 1998 as a part of a team that founded the Halifax Wholesale Banking Division and is married with two young daughters.