Seven years on: 3 Business lessons from Dick Fuld and the demise of Lehman Brothers
Some of the biggest business mistakes made in recent times were those that led us into the financial crisis. These mistakes affected us all, even those of us who played no part in creating them. There were numerous factors that played a part in the failure of the banks which we won’t be going into, however we can single out an event which has particular relevance in the story and relevance today as it has reared its head in the news once again.
Funnily enough I remember where I was in October 2008 when the Dow Jones index crashed. The news was on the front page of the metro newspaper – a big red downward staggering line. I even remember economics tutor at the time saying “This is the most interesting time ever to be studying economics”.
Interesting turned out to be an understatement to say the least!
Some seven years after that period which marked the beginning of the largest financial meltdown in living memory, the Ex-Lehman Bank CEO Dick Fuld made his first public appearance a few days ago. As most of you will know, Lehman Brothers was at one point was the 4th largest investment bank in America – before it fell victim to the largest bankruptcy in US history resulting from its frankly perverse role in the creation of wide-spread private debt trading and risky practices. What followed around the world was the crumbling of bricks that supported the pyramid of over-exposed risk positions held by investment banks, the collapse of house prices and what became known as The Great Recession.
The story of what happened at Lehman Brothers is almost typical of what was going in many such institutions at the time. Even so, the lessons to be learned from mistakes by Dick Fuld are not exclusive to the financial services industry – they can be applied to any business no matter how small or large, for both the owners and employees.
Of course Dick Fuld himself was not solely responsible for everything that happened. This is obvious, but hearing him speak out publicly for the first time since 2008 has made a few people look on with a face of confusion. Its understandable Fuld wants to protect the remaining scraps of his personal brand, but his demeanour when discussing what happened made me feel uncomfortable as he displayed very little remorse. He said in his appearance “Did we try to do everything we possibly could? Yes. Did we fall prey to other agendas?… I’ll leave it at that”. He seemed almost not bothered, going as far as to say “My mother still loves me”.
Laughable? I think not. Acknowledging that there were many factors leading to the crash is one thing, but there is still no hiding from what went wrong right under his nose –
“The perfect storm led to the crash” – Really?
The business environment is constantly changing; be it a swing in the economy, a new law that forces you to change the way you operate, a change in consumer preference, a natural disaster or a new disruptive technology that pulls the rug out from beneath you. As sudden or as unexpected as these things can occur, I’m sure all of us can agree that there is no such thing as a perfect storm (an unavoidable catastrophe). There are a number of things you can do to effectively mitigate the risk of failure if any such were to happen, here are 3 that we have learned from Dick Fuld’s mistakes:
1. Hiring a good team is only half of it – you have to listen to them
(Dick hired the wrong people, fired the right people and didn’t listen to either of them!)
Competency in decision making is not only derived from having the right people for the right roles in your business. What also counts is whether you listen to these people when they voice pitfalls or potential stumbling blocks in your business’s operations. Listening seems to be the one thing that many people don’t want to do – in hindsight everyone loves to talk about the ‘warning signals’ that were present but forget to mention the real reason why they weren’t acting on them.
When things seem to be going well it’s often hard to listen to anyone looking to make you change the way you run your business, but by ignoring them you limit your growth and expose yourself to risk. Being open to change and listening to others (particularly your own employees) is a better approach to helping keep your business on track, and is what may have saved Lehman Brothers.
Dick Fuld turned out to be infamous for being a ‘dominant CEO’ who was pushing the high risk agenda onto his board members. This is not the right way to go about decision making in any business, and it can works both ways; Shareholders who reward board members (by voting them in) for chasing high returns and encouraging them to be risk inclined should also be questioned. It was reported that Michael Gelband who was once head of fixed income at Lehman Brothers was pushed out of the organisation after he opposed Fuld by raising issues about the increase in risk exposure, advising senior management to change strategy… Need I say more?
Your business has stakeholders that spread far and wide – further then your own office, and its collective decision making that will reap the best rewards for everyone. Even so, consulting your stakeholders is only part of it– you need to respect them. Regulators and risk managers are always going to be vilified and not taken seriously if your company culture is based on short term gain. This shouldn’t happen.
2. Define your culture
All decisions are made by the people in your firm – so ensure these decisions are aligned with your culture and commitment to your customers. I used to think company culture wasn’t a big priority, but over time I’ve realised this shouldn’t be the case. Company culture defines the way teams work, the way individuals communicate, the way decisions are made and the intentions behind such decisions. It’s also important to remember that having expectations of employees is not the same as having a culture. Expectations are boundaries and targets that are to be followed, but culture is the ‘way of life’ at a company. Increasingly we are seeing the benefits of having a company culture which is driven by collaboration instead of hierarchy, responsibility instead of recklessness and balance instead of extremes. Entire sectors are now being run more in this way; just look at what is happening in Iceland’s banking sector. Business is changing and becoming more about principle and wider purpose than it is for greed and self interest.
3. Stress testing – think ‘what if?’
The asset to equity ratio at Lehman Brothers was so high that the ‘what if’ was simple – what would happen if our illiquid assets were to fall in value and we had to cover using our equity value? The answer was simple – bankruptcy. You could point to the regulators who didn’t have the rules in place which dictate that banks needed a higher ratio of capital in relation to risk-weighted assets (i.e risk exposure) however, it’s more appropriate to consider the decision making that led to such a vulnerable position for the company. I’m sure there was more than one person in the organisation that was raising concerns; the problem was that nothing was being done soon enough. Solely blaming regulators for what happened as Dick Fuld has would be like blaming the national speed limit for someone who crashes their car at 150mph on the motorway.
Setting up internal regulation and complying to external regulation is not easy for most companies as tightening things up means you may hinder market forces and put boundaries on creativity. Even so, what’s important to remember is that Financial Services is not actually an industry. The entire banking sector is a service sector to the business world – and any service is damaged when you emphasise profits as a goal over client centricity. In financial services, any innovations regarding the delivery of service should only be undertaken in the interest of clients. Strictly adhereing to best practice is what was necessary at Lehman – you don’t need a regulator to do that for you.
Even if your business is not delivering financial services, the benefits of assessing risks still hold true because anticipatory measures are a better technique for prevention than response. Your business will be more successful if you plan to weather the storm of adversity than if you simply ride the wave good fortune blind sighted.
Think about the ‘what if’ situations that can affect your business and try to eliminate any functions that are operating on a shoestring. For example, what if the single supplier for a material goes out of business? What if the exchange rates change and my costs go up – will I still be able to make a good profit? Do I have the capacity to cope with a sudden surge in demand? Do I have the tools that give me foresight into how the industry is changing? Investing time and money into these areas such as these will pay off in the long term.
Understanding where your successes are derived from is also a good way of understanding how to protect yourself from failures. Think about the factors that lead you to deliver a great product or service that your customers like – what are the causes? Is it great supplier who delivers quality components, a star employee, a unique distribution channel or a great manager you’ve hired– all of these things need to be protected and covered for with alternative plans. This could mean delivering training to employees on multiple business functions, maintaining good relationships with suppliers or most importantly simply asking your employees about their concerns and whether they have any suggestions for improving the way things are done. You’d be surprised as to how much you find out. This is especially true for SME’s who are often are reluctant to take advice. Many such businesses could flourish if their leaders were to open their minds!
In Dick Fuld’s case it seems he didn’t value the things that really make up a successful company, and the result spoke for itself.
A lot has changed since 2008 both inside and outside of financial services. It’s crazy to think that back then we were only just starting to use social media such as Facebook and Twitter. We didn’t have Instagram, selfie cameras or #hashtags, and WhatsApp sounded like something you say to your friends when you greeted them. A vine was something that grapes grew on, and there was only one iphone which couldn’t even take videos.
Who knows where we will be in another 7 years… Hopefully not discussing another major cock-up.