Restoring Trust in Wall Street Leadership

The devastating financial crisis of 2008 has claimed another casualty: trust in leaders of America´s most important financial institutions.

Gaining the trust of the people is essential for every leader.  Leaders cannot be effective without full confidence of the constituencies that grant their institution its legitimacy, nor can capitalism function without trust. Trust is "the coin of the realm."

According to the just-released 2008 survey taken by the Center for Public Leadership at Harvard Kennedy School, an astounding 80% of the American people believe we have a leadership crisis in the country today.  Unless we get better leaders, 79% feel that the United States will decline as a nation.

Business leaders rank near the bottom of the list, with only 45% reporting confidence in them, down from 59% last year.  Only Congress and the President fare worse.  In contrast, military leaders have the confidence of 71% of the people surveyed, making it the highest group in the survey.

This decline in confidence in business leaders is extremely worrisome.  Not surprisingly, given the current fiscal crisis, the trust issue is most acute among leaders of financial institutions. If we can´t trust in the people who invest our life savings, who can we trust?

For many leaders, the criticisms are well deserved.  The heads of failed institutions like Lehman, AIG, Bear Stearns, Countrywide Financial, Fannie Mae, Freddie Mac, Wachovia, and Washington Mutual have done a great disservice to their clients, employees, shareholders, and the nation. It is a disgrace that the U.S. government has had to bail out so many firms to keep the financial system from unraveling. 

To their discredit, many of these leaders opposed to mark-to-market accounting rules, regulation of credit default swaps, greater transparency for hedge funds, or insisting that mortgage bankers obtain financial statements before granting mortgages.

These failures were not caused by complex financial instruments.  They result from failures in leadership. Heads of the failed firms forgot two basic principles of business: to sustain success, firms must serve their customers well for the long-term and contribute to ensuring healthy markets. 

These principles have been central to successful Wall Street leaders for generations. Former CEOs Walter Wriston of Citigroup and John Whitehead of Goldman Sachs always believed clients´ interests and sound capital markets were essential to their firms´ success. So did Treasury Secretary Henry Paulson in his investment banking days. Warren Buffett has consistently spoken out about the problems financial firms were getting into, but few were listening to him, in spite of the enormous success of his firm, Berkshire Hathaway.  

In recent years, financial firms engaged in a mad rush to justify high fees for managing clients´ money by producing outsized short-term returns.  This caused many leaders to lose sight of the importance of protecting their clients´ long-term investments and their financial security. In the scramble to make money for themselves, the failed firms underpriced risk and relied upon excessive leverage - in excess of thirty-five times as much debt as equity. Gambling with their firms´ futures, these failed leaders created massive short-term gains, followed even greater losses, and wound up putting their firms out of business.
No wonder the public has lost confidence in business leaders.

The wisdom of President-elect Barack Obama applies here when he said about the war in Iraq, "I don´t just want to get our troops out of Iraq.  I want to change the mindset that got us there in the first place."  In Wall Street´s case, it´s not sufficient to get out of the mess we´re in.  We need to change the mindset that led to these problems, so we don´t repeat them in the future.

Correcting the system´s immediate shortcomings, as hard as that will be, is insufficient. We need leaders who can envision the way 21st century global financial markets must function to maintain stability and serve all participants fairly.  Wall Street leaders must work with their government counterparts to put in place institutional rules and oversight to guarantee that markets function smoothly in the future, even under the most extreme circumstances.

We cannot solve problems of this magnitude simply by replacing today´s leaders with people who think and act just like them.  We need new leadership and a new mindset for leaders of America´s great financial institutions. Their new leaders should have five characteristics in common:

1. They should be authentic leaders, focused on serving their clients and all the institution´s constituents, rather than charismatic leaders seeking money, fame, and power for themselves.


2. They should place the interests of their institutions and society as a whole above their own interests. 


3. They should have the integrity to tell the whole truth, admit their mistakes, and acknowledge their shortcomings.  Authentic leadership is not about being perfect.  It is having the courage to admit when you´re wrong and to get on with solving problems, rather than covering them up.


4. They need to adapt quickly to new realities, changing themselves as well as their institutions, rather than going into denial when things don´t go as intended. 


5. They need the resilience to bounce back after devastating losses. Resilience enables leaders to restore trust by empowering people to create new solutions that build great institutions for the future.

Some of these leaders have already emerged on Wall Street. The short list includes J. P. Morgan´s Jamie Dimon, Wells Fargo´s Dick Kovacevich, Goldman´s Lloyd Blankfein, and Morgan Stanley´s John Mack. Their firms participated in the same markets as did the failed firms, and used similar financial instruments. 

What´s the difference? They kept their clients´ interests paramount, took a more prudent approach to risk and leverage, kept their accounting conservative and transparent, and focused on long-term sustainability.

This short list is insufficient.  What´s required is a new generation of authentic leaders to step up to leading America´s financial institutions.  These new leaders must be committed to shifting away from short-termism to focus to long-term results for their clients and their firms and to ensure sound, enduring capital markets for our country. 

Only then can the financial community regain vitally needed trust and confidence of the American people. And only then can we be assured that we won´t be back in a similar mess in a few years.

Leaders Can Learn A Lot From Obama

The sweeping victory of Barack Obama ushers in a new era of leadership that will impact every aspect of American institutions and sounds the death knell of top-down, power-oriented leadership prevalent in the 20th century. 

A new style of "bottom-up, empowering" leadership focusing on collaboration will sweep the country. A new wave of 21st century authentic leaders will take over U.S. institutions of every type: business, education, health care, religion, and nonprofits. These new leaders recognize that an organization of empowered leaders at every level will outperform "command-and-control" organizations every time. 

The 20th century leaders focused on money, fame, and power, earning the title of the "me" generation.  Their leadership destroyed many great institutions, as evidenced by the failures of Enron, WorldCom, and dozens of companies like them. The recent fiascos on Wall Street can be traced to the failure of "me" leaders who put themselves ahead of their institutions. 

Unfortunately, the top-down style didn´t stop with business. It bled into K-12 education, which focused more on administrators than on teachers and students, and into health care, with health plans and hospitals so caught up in billing procedures and regulations that they denigrated the vital patient-physician relationship.   

In the nonprofit world, even as venerable an institution as the American Red Cross had such dysfunctional governance that it couldn´t deliver the massive contributions the poured in after September 11 and Hurricane Katrina to people desperately in need. Mainline places of worship have steadily lost membership to newer ones, largely because their priests, rabbis and preachers did not engage their congregants. 

The worst example of top-down leadership is the administration of President Bush, whose "I am the decider" attitude and centralized White House decision-making turned knowledgeable government leaders into mere implementers of failed policies.   

The leadership style of President-elect Barack Obama promises to usher in the "we" generation.  The best evidence is not in his campaign promises, but in the remarkable way he ran his campaign.  In sharp contrast to the "Washington-centric, tops down" organizations of Senators McCain and Clinton, Obama´s organization was derived from his formative experiences as a community organizer. Lessons learned in Chicago´s streets translated into history´s most successful campaign organization.            

Let´s examine his organization to see what leadership lessons can be learned:

• Obama created a "grass roots" movement by building an ever-expanding organization of empowered leaders, who in turn engaged people from their social networks like Facebook.


• The entire organization was aligned around a single goal - electing Obama as president - and operated with common values ("offer messages of hope, don´t denigrate our opponents, refuse to make deals").


• Campaign leaders subordinated their egos and personal ambitions to the greater goal.  Those who deviated quickly exited.


• Obama set a clear, consistent tone from the top ("No Drama Obama"), and never wavered, even when things weren´t going well.


• Obama´s greater mission transcended internal goals, such as fund-raising, endorsements, and campaign events, but each of these areas had goals tied to the greater mission.


• The campaign team used the most modern internet tools to communicate, motivate, and inspire people and to guide their actions. Each day 5 million people received personal messages from campaign headquarters or even Obama himself.


• This organization collaborated across a wide range of geographies and campaign functions, all tightly integrated nationally and executed locally.

 
In the corporate world, progressive business leaders are adopting this new style and achieving great success.  Look at the remarkable results of Google in harnessing the Internet for vital information and of Genentech in creating life-saving drugs.   

Well-established American icons like IBM, Johnson & Johnson, Avon, and Procter & Gamble have shifted steadily to the collaborative, empowered organization style and have results that prove it works.  IBM´s Sam Palmisano has converted his 344,000-employee organization from a silo mentality to an integrated global network, focused on leading by values. J&J´s Bill Weldon uses the J&J Credo and a decentralized organization to keep J&J growing as compeititors stagnated.   

Avon´s Andrea Jung has quadrupled her organization of six million "empowered women" to sustain Avon´s growth for a decade.  A. G. Lafley has transformed P&G into a global powerhouse by empowering people throughout the world.  

These examples aren´t limited to business.  In religion, the most rapidly growing churches are Rick Warren´s Saddleback and Bill Hybels´ Willow Creek.  Both organizations build around small groups of empowered people who are dedicated to serving people as far away as Rwanda and Zimbabwe.  In education, Wendy Kopp´s Teach For America created a corps of committed teachers achieving great success in inner city classrooms.  

In health care Mayo Clinic´s well-established collaborative model is being adopted by major systems like Allina Health System to fulfill its healing mission. Among non-profits, Gates Foundation is working with local, "on the ground" organizations such as Carolina for Kibera to help people in the Kenyan slum.  

These trends portend massive changes in the 21st century leadership of American institutions, led by the Obama government itself.  The most successful leaders will be those who can align people around common goals of serving people and empower them with a collaborative style.  Their organizations will be the winners in restoring the U.S. to global greatness.