Blog > Category: Leader
Originally Posted on Harvard Business School Working Knowledge
Toyota's tragic automobile recalls offer a historic opportunity for Ford's CEO Alan Mulally and General Motors' new CEO Ed Whitacre. After years of decline, they can reestablish the preeminence of American-made autos if they are wise at leading through this crisis.
In the past month Toyota has recalled almost 9 million vehicles—more than the entire number it sold the past three years. The irony is that Toyota gained significant market share in the past decade at the expense of its American competitors by offering superior quality vehicles. Now quality has become Toyota's Achilles' heel.
"This [process] will take enormous effort, ingenuity, and discipline along with massive investments."
No doubt Toyota will regain some of its lost market share in the short term, to the extent the automaker's production systems can respond by increasing production rates without incurring problems of their own. The bigger question is, will Ford and GM be able to capitalize on this opportunity for the long term?
I was with Whitacre when he initially learned that Toyota was suspending sales of 57 percent of its autos sold in the United States. He responded immediately by directing his executives to ramp-up production as quickly as possible.
While Whitacre and Mulally maximize current sales, taking advantage of this opportunity in the near term is not a long-term strategy. All too often, both GM and Ford have squandered similar opportunities by simply raising prices and profits, as they did during the three-year import quotas in the mid-1980s. They must recognize that no matter how wounded Toyota is in the short term by its quality problems, this company is a very tough and able competitor that will move quickly to revamp its quality and its product offerings.
On the march
GM and Ford need to move aggressively to secure their market share gains by investing windfall profits to make their auto lineups more competitive for the next decade. That means introducing new designs that offer attractive features, improved fuel efficiency, and better customer value along with superior quality. This will take enormous effort, ingenuity, and discipline along with massive investments.
In this regard, Ford has the jump on GM. When Mulally was hired from Boeing in 2006, Ford was in trouble. The company was stretched thin with too many product lines spanning too many countries and appealing to too few consumers. Mulally's first act was to borrow $23.5 billion by mortgaging the entire company to give Ford the runway necessary to retool its aging lineup.
Mulally moved fast, trimming unpopular lines, cutting management layers, and insisting on an R&D overhaul that hurt short-term profits. Having weathered the 2008 crisis without U.S. government support, Ford has $23 billion in cash in the bank and a lineup of eco-friendly automobiles to which U.S. consumers are gravitating.
GM only emerged from bankruptcy last July, when Whitacre was installed by the Obama administration as its new board chair. Since that time, he has acted decisively, removing Fritz Henderson as CEO and assuming the mantle himself. Whitacre quickly reorganized the company from top to bottom, cut out layers of middle management, initiated new product development programs, and revamped GM's international sales and marketing. He also put himself on the firing line, publicly taking ownership for GM's turnaround and appearing in a series of advertisements challenging consumers to compare GM autos with its competitors.
Glimmers of Ford's and GM's potential shone brightly at the Detroit Auto Show last month. Mulally showcased his new model range. Car experts and reviewers alike agreed the new models revitalized Ford. Whitacre also unveiled a new line of cars, admittedly trailing Ford, particularly in hybrids. He boldly predicted GM would be profitable in 2010 and would pay off its government loans.
January sales for Ford and GM jumped 24 percent and nearly 14 percent, respectively, year over year, in spite of high unemployment and low consumer confidence.
Chrysler falls further
In contrast, look at Chrysler and its new CEO, Sergio Marchionne. He ambitiously projected that Chrysler would become profitable in 2010 on an 18 percent increase in sales. Instead, Chrysler sales dropped 8 percent in January. Marchionne has not been aggressive in revamping Chrysler vehicles, repositioning the company's brand, or reorganizing its beleaguered management. As a result, it is falling further behind and missing this golden opportunity.
The last and perhaps most important lesson for leaders going through a crisis is that they cannot just play defense by cutting costs and waiting for the crisis to pass. They have to go on offense simultaneously by transforming their organizations and investing heavily in revamping their products and their marketing to focus on winning now.
That's precisely what Mulally and Whitacre are doing. They may not be automobile industry veterans, but they are highly competitive leaders, skilled at winning in the marketplace. The American automobile industry is a lot stronger today because of their decisive, visionary leadership.
I was very excited to hear about the Pepsi REFRESH project when it was announced at the beginning of the year. CEO Indra Nooyi’s decision to allocate marketing dollars to a community-reinvestment effort deserves great applause as it stands as a prime example of progressive, conscientious 21st centruy leadership. By shifting Super Bowl advertising dollars to philanthropy, Pepsi is making a smart investment in marketing and in communities.
The program is simple. Pepsi REFRESH invites anyone to submit a grant proposal for a project - all proposals are then judged by the Pepsi's online community, from their dedicated Facebook fans and Twitter followers, and beyond. Grants of $5,000 to $250,000 are awarded to dozens of applicants every month.
This project is exciting on multiple levels. First, it marks an encouraging departure from a dated era where corporate philanthropy and community empowerment was seen
as a “nice-to-do," only done to enhance a firm’s public image. Over the past generation, corporate philanthropy has been impacted by Milton Friedman’s view that business is a “profit maximizing” entity, rather than an institution chartered by society as a steward of its financial and social well-being. But now, the idea that philanthropy is better left to shareholders is fading away - and I am glad to see Pepsi reinforcing a new ideal.
Second, Pepsi Refresh represents a marketing innovation. Indra Nooyi has long been at the forefront of progressive leadership, but green-lighting this project shows that she and her team at Pepsico are committed to exploring new ways of engaging customers. Instead of bombarding viewers with Super Bowl advertisements, Pepsi is seeking out their customers where they live – offline and online – and delivering value to their communities. Millions of Pepsi customers are engaging in social media and connecting online, actively seeking company engagement on this level. People want companies that seek out their advice and ideas, companies that talk with them in the way they want to communicate.
Third, this project is an investment in the next generation of leaders. The Pepsi REFRESH project empowers community activists, students, small business owners, and non-profit overseers in an unprecedented way - with no-strings-attached investments in their projects and complete corporation-backed empowerment. Not only is Pepsi providing funding for these projects, they’ve left the decision-making in the hands of the masses. Votes online will dictate what project - what up-and-coming leader - receives funding, not votes around a boardroom.
The Pepsi REFRESH project represents a monumental effort to be a trend-setter by redefining corporate marketing and customer engagement. If Pepsi is “the choice of a new generation,” then Pepsi REFRESH may well be “the empowerment of a new generation.”
Originally posted on the Wall Street Journal on January 7, 2010
America faces a deepening leadership crisis. A recent survey by Harvard's Center for Public Leadership found that 69% of Americans lack confidence in our leaders. Worse yet, 67% believe that "without new leaders, America will decline as a nation." Wall Street leaders are at the bottom of the list, closely followed by media, political and other business leaders.
I believe the root cause of America's economic crisis is leaders who practice "short-termism." What we need to get on the road to economic recovery are innovative, visionary leaders who can resist short-term pressures and build sustainable growth companies.
Two such leaders are Amazon's Jeff Bezos and Cisco Systems' John Chambers.
In the past decade both have overcome severe crises to emerge as role models of the kind of leaders America needs to build an innovation economy.
At a 1999 CEO conference at the height of the dotcom bubble, I witnessed a telling exchange between Mr. Bezos and Warren Buffett. On stage, Mr. Bezos was proudly proclaiming Amazon's success (measured in eyeballs) when Mr. Buffett challenged him from the audience.
Having worked the numbers, Mr. Buffett said there was simply no way to justify Amazon's stock price, even assuming remarkable growth and profitability. At the time Amazon was near $105 per share, with no earnings but a growing revenue base. Mr. Bezos protested Mr. Buffett's critique, but suspicious murmurs rumbled through the audience.
Cisco's Mr. Chambers was also on stage that day. Cisco was riding high with a rising stock price. Throughout the next year Cisco stock increased to $77 a share, making the company the world's most valuable in March 2000.
The higher they go, the farther they fall. In 2001 the dotcom bubble burst. Thousands of startups went belly up as the venture capital market virtually shut down. Amazon and Cisco both suffered from aftershocks of the implosion.
Amazon's stock collapsed to $6 per share. Cisco's crash was just as dramatic: from its high water mark, Cisco stock dropped nearly 90%. If Warren Buffett was in the business of shorting stocks, he could have made a killing on his prescient analysis.
Wall Street called for the blood of e-commerce and technology companies. Skeptics projected the end was near. Unlike many of their fallen contemporaries, however, both Amazon and Cisco rebounded.
Amazon's Mr. Bezos simply ignored the stock collapse as he moved forward with his strategic vision. In 2003 Amazon posted its first full-year profit. Throughout the decade Mr. Bezos continued to expand the company's product offerings. Even amidst the current economic crisis, Amazon's third-quarter profits surged 69% as the company established its supremacy in e-retailing.
John Chambers oversaw a similar recovery. Cisco has continued to dominate the market for computer servers and expanded into related products, such as its dramatic new TelePresence offering.
What allowed Amazon and Cisco to persevere as other Web 1.0 contemporaries tanked? How have they successfully navigated another vicious downturn?
The answers can be found in the belief that Mr. Bezos and Mr. Chambers have in their strategies and an unwavering passion for serving their customers. They power their visions with big investments in innovation and manage for long-term growth, even at the expense of short-term profitability.
Mr. Bezos founded Amazon.com in 1994 with secondhand computer stations in his Seattle garage. "There's no bad time to innovate," Mr. Bezos told BusinessWeek in 2008. "You should be doing it when times are good and when times are tough." Currently, Mr. Bezos is transforming the book-reading business with the Kindle e-reader, Amazon's first in-house hardware product.
Mr. Chambers has continued to build Cisco through innovation and long-term acquisition strategies. The company introduced its TelePresence product and focused its acquisitions on video and mobile technologies.
Through their long-term commitments, Mr. Bezos and Mr. Chambers have created tremendous value for their shareholders: Cisco's market capitalization is now about $140 billion, while Amazon's is about $58 billion.
To put the American economy back on the road to recovery, we need more long-term, visionary leaders like Mr. Chambers and Mr. Bezos who can transform entire industries and build sustainable innovation machines.
About the Author
Bill George is author of "7 Lessons for Leading in Crisis" and professor of management practice at Harvard Business School. The former chairman and CEO of Medtronic, he currently serves on the boards of ExxonMobil and Goldman Sachs. He previously was a director of Novartis.
There's been a lot of chatter in the blogosphere on the heels of last week's World Business Forum. Here are 10 of the premier blogs I've come across from several folks you'll recognize.
Andrea Meyer - Bill Clinton & Bill George on Leadership (World Business Forum #wbf09); “Former President Bill Clinton was asked about his lessons on leadership. His answer was threefold:
- It begins with a vision of where you want to go: you have to articulate where you are, where you want to go, and how to get there
- A leader has to continually communicate and sell the vision
- Leaders need to understand people, not just policies
That last point about leaders needing to understand people was the comment that was most retweeted during the live-tweeting of Clinton’s talk. It was the point that resonated the most deeply with the audience.”
Dr. Ellen Weber – Jeffrey Sachs on Influence and Money Abuse
Wonder why so little of the money trickles down to any of brilliant ideas you champion? Or do you have ideas about what potent solution could turn this ferocious downturn around? Jeffrey Sachs called for a complete change in economic policy...
Kathy Robison - Thinking Without the Box
“So how do you go about getting rid of the proverbial box? It is hard enough just to get people to think outside of the box, how can we possible get rid of the box? The reality is, that the box is the very thing that is holding us back. The box is a framework that is often hard to look past when it is staring you in the face. We are stuck in a business model born 150 years ago during the Industrial Revolution, and it simply no longer provides what is needed for businesses to continue to flourish.”
Steve Todd - World Business Forum 2009 Wrap-up #WBF09: “…in summary the speakers provided the audience with advice and insight into the following different areas:
- Trends and directions in managing people within global corporations
- Must-have qualities for corporate leaders
- Trends and directions in corporate marketing
- Economic outlook from outside of the US
- A call to action by former US President Bill Clinton
Stuart Miniman - Connections Make the Event
What pulls people into conferences? Big name speakers, a nice location, and all of the trinkets that you can fit while not going over your luggage weight limit (or in yet another conference bag)? Of course not, it is the information that is important. At the World Business Forum this week, it was the connections to ideas and people that made the event worth attending...
Paul Glader – WSJ @ WBF - Clinton: Bush Administration Should Have Rescued Lehman
“I feel more strongly now it was wrong,” said Mr. Clinton. “They decided not to facilitate a loan to Lehman Brothers. They thought Lehman Brothers was so much smaller than AIG or Bear Stearns, they could afford to let it fail. The problem is that Lehman Brothers had already paid. When they failed, all the rest of us paid. It led to a collapse of the stock market. Every bank in America that had mortgage investments it hadn’t sold off looked like it had bad loans.”
Linda Petock - World Business Forum: Lessons from the Bloggers Hub
Throughout it all, there were several key concepts that kept cropping up: transparency, innovation, global interdependence, emerging markets, resiliency, and compassion. What does this mean for you as a professional and a job seeker? To paraphrase Gary Hamel: "We are no longer in the knowledge economy. We are in the creative economy."
Margery Weinstein - Is Your Company See-Through?
Not to be overly titillating, but the most successful company going forward may also be the most see-through...
Kelly Evans – Kraft CEO: With or Without Cadbury, ‘We’re Ready to Take That Next Step’
Ms. Rosenfeld toyed with the crowd at the start of her speech today (the subject of which was titled “Leading Transformational Change”): “Before I get going,” she said with a wry smile, “our lawyers have asked me to tell you all the following.”
Hank Wasiak – All-Star Morning Wisdom from the World Business Forum
Setting the Stage. Les Hinton, CEO of the Dow Jones Company summed up the past year with a quote. “If you ride through hell, you don’t stop.” He advised the audience to be vigilant and “keep on riding” since there are still challenges ahead. It’s not over yet. He was simultaneously optimistic about focusing on the future, the importance of small business, and sticking to what business does best: creating value!
It’s been a little over two weeks since the “Summit on Leadership in Crisis," and we’re still seeing questions and feedback pour in via Twitter and email. I was flipping through several of these over coffee this morning, and while I don’t have the other panelists here with me, I thought I’d take a crack at answering a few as a way to wrap up this first discussion on leadership in crisis (of many more to come).
As always, would love to hear your feedback.
Q: “How does an organization get back the confidence needed to perform @ high levels in tough time?”
A: It needs to start at both the very top and the very bottom for confidence to spread within an entire company in the midst of crisis. Leaders at the top need to be honest and candid about the challenges ahead, while continuing to project optimism and inspiration. Our panelist Anne Mulcahy did a phenomenal job of this when she first took the helm at Xerox.
But employees cannot just rely on confidence to trickle down from their CEO – mid-level managers and the employees also must be bulwarks of poise and self-reliance. Companies need all employees asking: “What can I do more efficiently and positively today, and how can I help someone else do the same?” To regain confidence, leaders need to make it a company-wide prerogative.
Q: “Our crisis of capitalism seems to be mainly a crisis of character. How can we – or can we – develop character traits like courage and integrity?
A: “Crisis of character” is an apt description for the “short-termist,” unprincipled leadership that led to the economic crisis. And while recognition of the root cause is a great first action in ensuring that we do not repeat the economic collapse of 08-09, it is merely the first of many needed to combat this “crisis of character.” The next steps require a working combination of several congruent elements:
First, leaders must begin taking themselves to task and ensuring that their behavior is geared toward long-term viability not just short-term profit-seeking. Likewise, boards of directors need to make a concerted effort to incentivize those positive behaviors, primarily by tying compensation to performance. Furthermore, the U.S. government must resist the temptation to over-regulate and install overly-restrictive executive pay standards. Regulation is important, but it can easily go too far.
We need all decision-making bodies to jointly foster a climate where traits like courage and integrity are concretely rewarded, not simply lauded as idealistic traits. The best way to encourage principled behavior to take root in the capitalist system is to incentivize it. This, in turn, will help ensure the long-term viability and profitability of American companies.
Q: “How can we solve any major problems in this climate of incivility? And what kind of leadership is required to bring us back to civility?”
A: To the first question, unfortunately we will be incapable generate the most necessary and comprehensive solutions if the current climate persists. While speaking to our audience during the Summit, David Gergen gave an honest assessment of the state of incivility in American political discussion – if we continue trending along this path of vitriol and blind argument, we risk sowing the seeds of our republic’s demise. If we continue to yell, rather than debate respectfully, we’ll continue putting off solutions to issues like health care, education, and energy policy reform. And accepting this legislative stalemate could lead to our being surpassed by other nations, both in progress and in prestige.
Partisan jockeying should have no place, and instead leaders must be willing to risk popularity in the interests of real solutions. We need leaders who are capable of making the difficult decisions and of reaching reasonable compromises; and we need them to insist on doing so in a respectful manner. It would be helpful if that mentality not only blossomed in the halls of Congress, but in the blogosphere and the mainstream media.
The Aspen Institute recently made the following announcement:
“Twenty-eight leaders representing business, investment, government, academia, and labor joined the Aspen Institute Business & Society Program’s Corporate Values Strategy Group (CVSG) to endorse a bold call to end the focus on value-destroying short-termism in our financial markets and create public policies that reward long-term value creation for investors and the public good.”
I am one of those twenty-eight leaders, and am proud to join the likes of Warren Buffett, Louis Gerstner, Barbara Hackman Franklin, and Richard Trumka as a signatory to the statement, “Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management.”
Short-termism (seeking quick profit at the expense of strategic growth and sustainable profits) is the bane of long-term economic prosperity. Short-termism derails growth strategies, is a detriment to long-term market health, and sows the seeds of greed-driven stock price manipulation. And in the current financial crisis, short-termism led many CEOs to irresponsible behavior in order to juice quarterly profits, ultimately putting the American economy into a tailspin.
It is imperative that we take shareholders who advocate short-termism to task, but we cannot force-feed just any solution. Rather, we need to incentivize the right one.
The proposal in this statement leverages responsible investment behavior by:
1) providing market-based incentives through restructured tax policy;
2) aligning investor interests with company interests; and
3) increasing the transparency of shareholder/investor influence.
Ultimately, these measures are aimed at encouraging shareholders and corporate leadership to “adopt long-term strategies for growth and sustainable earnings, and to rely on long-term, forward-looking metrics in the consideration of compensation and performance incentives.” I am sincerely confident we can achieve these goals.
Every signatory has their own reasons for joining the Aspen Institute in this project. I’ve included just a few of mine below in the hopes that it encourages other leaders to follow suit.
First, I became a signatory because I feel that it is incumbent on America’s leaders to voluntarily commit to upholding and encouraging responsible business practices like these. We’ve been reminded all-too-recently of the business community’s potential ability to over-leverage itself in the interest of short-term profit, so it seems clear that the best means if ensuring responsible behavior is a mutually-enforced, preemptive commitment.
Secondly, I am very confident that putting these leverages into action is a key step towards making certain that we do not have to endure a similar financial collapse. The only way we can truly reform the financial system to the point where we will not risk collapse is if we incentivize responsible behavior on Wall Street. This plan does that explicitly. The market will always have ups and downs – such is its nature, and the nature of capitalism – but extreme highs and crashing lows reflect a maladjusted system.
Thirdly, I signed on because this plan encourages simple, sound, and profitable business-logic. Strategic, long-term investments reap considerable benefits without the unreasonable risk accompanying short-term profit gimmicks that can lead to economic collapse.
You only need look at Berkshire Hathaway, Goldman Sachs, or IBM for top tier examples of success by long-term investment. And you only need look at GM, Lehman Brothers, and AIG for examples of those who subscribed to short-terminism.
You want smart investing? Make it long-term.
Hats off to Ed Whitacre. He has officially taken ownership of General Motors. Much like Lee Iacocca at Chrysler in the 1980s, Mr. Whitacres’s face is now stamped on the GM brand with his upcoming TV spots.
I have been highly critical of GM leadership in the past, and with good reason. But this campaign is a good decision. The ad is candid, challenging, and optimistic. Will this sell more cars? That’s difficult to say. But it’s the right step towards rebuilding the GM brand.
The accountability is there. Whitacre admits, “Before I started this job, I’ll admit, I had some doubts.” So did we, Mr. Whitacre. Not about your personal ability, necessarily, but about the viability of GM. We still do. Kudos for addressing the elephant in the room though.
The challenge is there. “I just know that if you get into one of our cars, you are going to like what you see.” American consumers love a good “test-our-product” campaign (see: Pepsi Challenge, Tide’s 100-wash guarantee, etc.). Test-drivers are revving their engines.
The reassurance is there. “So we’re putting our money where our mouth is. Buy a new Chevy, Buick, GMC, or Cadillac, and if you’re not 100% happy, return it. We’ll take it back.” A cynic might argue that he’s actually puttingour money where their mouth is, but that’s neither here nor there. The forthright confidence and reassurance is pervasive.
The crux of this ad is a straightforward Ed Whitacre, with his disarming southern drawl, putting his reputation on the line and his face on his brand. The best companies do this. Steve Jobs stands behind Apple. Howard Schultz stands behind Starbucks. Warren Buffett is Berkshire Hathaway. How are GM’s cars? The jury is still out. But thanks to Ed Whitacres’s ad, I am warming up to its leadership.
With the “Crisis Called. Who Answered?” World Business Forum Contest well underway, we’ve received scores of submissions from all across the country. Here’s another compelling nomination, this time from Anwar Chowdhury in support of UK PM Gordon Brown. Reactions?
I nominate British Prime Minister Gordon Brown for his leadership in leading us out of the abyss caused by the financial crisis. Amongst world leaders, he played the most significant role in quickly identifying the need to stabilize the financial system by injecting money into financial institutions to recapitalize so that banks could continue to lend money to businesses and individuals to protect jobs. He also played a significant role by hosting an international summit of world leaders to stimulate the economy.
He emphasized the need for concerted global action and cautioned us against protectionism that would result in a much more serious and prolonged recession.
At the time of crisis, his voice was one of reassurance that we would be able to control the damage and restore confidence in the financial system.
He is also a leading advocate of strengthening the regulation of the financial industry to avoid future catastrophe.
The World Business Forum is three weeks away (Oct. 6th–7th), so there’s still time to submit a nomination – who would YOU nominate as the best crisis-time leader in America.
The “Crisis Called. Who Answered?” World Business Forum (WBF) Contest is off to a breakaway start, with nominations pouring in for the best crisis-time leader across the past year. This particularly compelling nomination comes from Rochester, New York in support of Dr. Bill Cala.
Bill Cala leads with a sense of service that defies the rise and fall of finances. Just retired from a busy and highly successful superintendency, Bill brings hope to hundreds by the schools he raises and supports in Africa.
In addition, Dr. Cala is currently launching a high-performance Regional School here in Rochester, NY. Bill plans to lead an organization for disadvantaged youth from urban areas to learn and lead alongside advantaged youth from suburbs. His idea is for mutual learning and teaching that brings together differences in ways that benefit all, and builds community.
Bill spends personal finances extravagantly to fund much of his philanthropic work, is highly respected and sought after from areas of both learning and leading, and serves with unique humility and passion.
While most business and government leaders in my area cut employees and slashed programs, seeing only financial crisis, Bill gave back more because he saw how others were harder hit by broken financial systems they must deal with daily.
Bill and his wife Joanne, travel to Africa each summer to oversee several schools and water systems they built in extremely poor areas. Then, for several months following, he facilitates many highly successful leaders here in Rochester, to give back to disadvantaged and those in need.
As a renewed leader Bill leans toward transformational ethics, reconfigured intellectual systems that work more for youth and less to sustain bureaucracy, and mind-bending generosity that gathers the best and brightest together to build and serve those who possess less fortune, for whatever reason.
I’ve personally been deeply inspired by Dr. Cala, and yet I know that I am only one of many who’d rejoice if he won admission to your wonderful World Business Forum at Radio City Hall on Oct. 6th and 7th, 2009. Thank you kindly!
Dr. Cala is undoubtedly among the best in American leadership. And while he is most certainly in the running, the contest is not over yet – who would YOU nominate as the best crisis-time leader in America.
In these days when corporate executives are keeping their heads down and trying to stay out of trouble, it is refreshing when one CEO steps up to a challenge and a broader responsibility. In taking over Bear Stearns, the failing investment bank, just hours before it would have been forced into bankruptcy by a proverbial "run on the bank," JP Morgan CEO Jamie Dimon took on a broad public responsibility to keep financial markets from unraveling and apparently made a very attractive purchase for his institution.
Not that Dimon acted alone. He had a little help from his friends - namely, Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke - who urged Dimon to step to the challenge of taking over Bear and agreed to guarantee up to $30 billion in failing mortgage-backed securities.
Having watched their shares fall from $170 per share a year ago to the $2 settlement outraged Bear´s shareholders. On the other hand, media pundits like CNN´s Lou Dobbs called it a "corporate bailout" and charged the Bush administration with enriching Bear´s executives. Not exactly, Lou. Thirty per cent of Bear Stearns´ shares are held by executives and employees, who saw their value decline by more than 98 per cent in the last year.
The reality is that there are many more legitimate claimants to a firm like Bear than just its shareholders, especially when its equity value is collapsing. Investment firms will heavily leverage their equity - in Bear´s case, more than 30:1 - and the lenders and a wide array of counterparties all have a stake in the financial health of the firm. I believe that Paulson and Bernanke acted wisely to negotiate a settlement that kept Bear from defaulting on its debt obligations while letting the equity holders take the largest financial hit. After all, they were responsible for the position that Bear Stearns got itself into this past week, and they should pay the price. By the way, this responsibility should also mean that Bear Stearns executives like CEO Alan Schwartz and former CEO James Cayne, who held the top slot until this past January, should not receive any termination or change-of-control payments as a result of the sale to JP Morgan.
