Tuesday, December 30, 2008

Why Lehman Brothers collapsed - a systems view

I read an article in the UK's Times newspaper by Andrew Gowers, former editor of the Financial Times, who was working at Lehman Brothers as it collapsed. As the head of corporate communications at Lehman, Gowers had a ringside view of events. I’ve reproduced parts of his article below - it shows how the dictatorial attitude of Lehman’s CEO, Dick Fuld, lay the seeds for the company’s destruction.

Without further ado, here are some telling extracts from the article - you can read the full article here.

(all emphasis mine)

“To say he [Fuld] was surrounded with a cult of personality would be an understatement. He was the textbook example of the “command-and-control CEO”.

Those closest to him slaved like courtiers to a medieval monarch, second-guessing his moods and predilections, fretting over minute details of his schedule down to the flower arrangements and insulating him from trouble – from almost anything he might not want to hear.

His ferocity could be intimidating, his eyebrows beetling tight over his hard eyes, his brutally angular brow appearing to contort in rage. He would regularly upbraid colleagues for minor wardrobe malfunctions.

Even when in a relatively upbeat mood he seemed to take pleasure in violent imagery.

But the style also contained the seeds of disaster. It meant that nobody would or could challenge the boss if his judgment erred or if things started to go wrong.

The curious thing was that at some level Dick Fuld knew that trouble was brewing well before the crisis broke. I witnessed him give a fascinating talk about risk at a private lunch with newspaper editors nearly two years ago. With a precision that seems almost uncanny, he virtually prophesied the looming crash."

(So, he knew what was coming, but probably continued to delude himself because of the power he wielded)

"In truth Fuld had become insulated from the day-to-day realities of the firm and had increasingly delegated operational authority to his number two, a long-standing associate named Joe Gregory.

If Dick was the king, Joe was Cardinal Richelieu. [Joe] was also a ruthless enforcer for the boss. His job was not to encourage debate or intellectual curiosity in subordinates but to bend the bank to Dick Fuld’s will.

If something went wrong, you could be sure that Gregory would be on the telephone in a towering rage. Even very senior executives would dread getting one of those calls. They would describe the experience as analogous to being provided with “a new asshole” and called him Darth Vader behind their hands.

Standing in his way by showing aversion to risk could be fatal to your career. Divisional chiefs who urged caution or tried to rein back on risky bets were swiftly ousted.

So he [Fuld] was shut off from independent sources of information, from challenging questions and from up-to-date views from the front line of Lehman’s daily battle in the markets. He was fed instead with the carefully filtered facts that his inner circle thought he wanted to hear.

Here was a corporate governance structure almost preprogrammed to fail: an overmighty CEO, a top lieutenant eager to please and hungry for risk, an executive team not noted for healthy debate and a power struggle between two key players.

To make matters worse, they mounted an increasingly shrill campaign against their critics. One particular hedge fund manager, David Einhorn of Greenlight Capital, had been critical of Lehman’s financial disclosures, thus suggesting to some observers that the bank might have something to hide. Einhorn became an obsession for Fuld and his closest hench-men, who speculated openly about hiring investigators to tail him or search his rubbish bins.

You could say it was a case of shooting the messenger.

But it also led him and his closest associates latterly to say things that, while obviously sincere and reflecting genuinely held beliefs, had no connection whatsoever with business reality."

Fuld also reminds me of the attitude of Adam Applegarth, CEO of another shattered financial institution, Britain’s Northern Rock.

According to an article in the Daily Telegraph, an observer said: "He [Applegarth] had a habit of asking people who their top five fast bowlers [in cricket] were. And when they gave their opinion he would fire back that they were wrong and the real answer was X, Y and Z. Those who disagreed with Applegarth or questioned his decisions were brushed aside."

The Telegraph article added: "A banker once questioned Adam on his business model. Applegarth retorted that he clearly didn't understand the model or the business. That banker was ever after a persona non grata."

Is it any surprise that these companies collapsed? That said, it’s not the CEO’s fault; organization systems are set up as dictatorship systems, and that’s where the real problem lies.

(If you have any comments, please email me at cvdhruve@gmail.com. You can get more information about my book and reader comments at cvdhruve.com)

Wednesday, December 24, 2008


From the New York Times:

Laura Sweet, deputy chief of enforcement at the Medical Board of California, described the case of a resident at a University of California hospital who noticed a problem with a fetal monitoring strip on a woman in labor, but didn’t call anyone.

“He was afraid to contact the attending physician, who was notorious for yelling and ridiculing the residents,” Ms. Sweet said. The baby died.

(Full article here)

Fear. What system produces it? You know the answer: a dictatorship system. And dictatorship systems kill. Literally.

(If you have any comments, please email me at cvdhruve@gmail.com. You can get more information about my book and reader comments at cvdhruve.com)

Thursday, December 18, 2008

Why your boss doesn't seem compassionate

If you have power over someone else, you're likely to feel less compassion for that person's suffering, according to a study published in Psychological Science:

"The results, reported in the December issue of Psychological Science, a journal of the Association for Psychological Science, reveal that individuals with a higher sense of power experienced less compassion and distress when confronted with another's suffering, compared to low-power individuals."

Bosses come to mind.

Full story here

(If you have any comments, please email me at cvdhruve@gmail.com. You can get more information about my book and reader comments at cvdhruve.com)

Wednesday, December 17, 2008

Publicizing my book - trying Scott Adams

I’m going a little off-topic here, because like all authors, I get assailed with questions about how I got my book published, and my ongoing journey with the book.

Perhaps the biggest challenge for a first-time published author is, how do you get publicity for your book? One well-travelled route is getting big names to read the book and comment on it.

After my book came out, I emailed several big names in the business world asking if they would read the book and comment on it. Many of their assistants responded along the lines of, “Send the book, if s/he has the time, s/he will read it and respond.” In virtually every case, I didn’t hear again after I sent out the book. On some level this is perfectly understandable since the big-names are usually extremely busy and presumably, have tons of requests from other authors. Mostly, it seems to me that big-names end up commenting on other big names’s books, in a mutually beneficial, and perfectly reasonable, relationship.

That said, I sent an email to Scott Adams of Dilbert fame, especially because my book pertains to the root cause of boss behaviour. But that wasn’t the only reason I sent him the request. What I like about Scott is that he’s always thinking and searching for answers to rather deep questions, and is forever coming up with some model – or cartoon - to explain things. (My all-time favourite explaining the current financial crisis here)

Since my book offers a new way (ie, Systems Thinking) to explain the old problem of bad boss behaviour, I sent off my email to Scott, half expecting him to not respond – he obviously gets lots of emails every day, besides the comments on his blog.

I was pleasantly surprised when Scott himself responded, but disappointed to read that he has a policy of not reviewing books (this was several months ago, though I thought it would be useful to share, at least with authors who plan on writing to Scott - maybe his policy has changed!).

(If you have any comments, please email me at cvdhruve@gmail.com. You can get more information about my book and reader comments at cvdhruve.com)

"Bad bosses may damage your heart"

More evidence that bosses can do serious harm:

"A Swedish team found a strong link between poor leadership and the risk of serious heart disease and heart attacks among more than 3,000 employed men."

Full story here (BBC news)

(If you have any comments, please email me at cvdhruve@gmail.com. You can get more information about my book and reader comments at cvdhruve.com)

Wednesday, December 10, 2008

Malcolm Gladwell's Outliers and his explanation for plane crashes

Malcolm Gladwell, the celebrated author whose new book "Outliers" was recently published, talks about hierarchies and the problems it causes in plane crashes. In an interview, he gives the example of a crash of a Colombian airliner, stating that it was the country's hierarchical culture and a pilot's over-respect for authority that was partly to blame for the crash (listen to the interview here). In fact, Gladwell says that there is a strong correlation between plane crashes and the national culture (ie respect for hierarchy) of the pilots.

In my book, I've analyzed the world's worst aviation accident, the one that occurred in Tenerife, Spain, in which 583 people died. In that accident, a KLM 747 jumbo that was taking off collided with a Pan Am jumbo on the runway.

The KLM (Dutch) airliner hadn't been cleared for take-off because the Pan Am was still on the runway; nonethless, the KLM's captain began taking off. But what had happened in the cockpit was this: the flight engineer (lower ranked than the captain), questioned the captain, asking if the Pan Am had cleared the runway. The captain curtly said 'yes', saying the Pan Am was indeed off the runway. Effectively told to shut up, the flight engineer kept quiet. The captain got plane going, straight into the path of the Pan Am (it was foggy, so the pilots of both aircraft couldn't see one another).

Note that KLM is from Holland, a culture that is not as hierarchic as Colombia's. Nonetheless, the flight engineer kept quiet once his captain shut him up. The point that I am making is that while Gladwell says national culture plays a part, I am saying that the real issue is the power equation between a boss and his subordinate - in this case, the captain and the flight engineer.

(If you have any comments, please email me at cvdhruve@gmail.com. You can get more information about my book and reader comments at cvdhruve.com)

Monday, December 08, 2008

Why US car companies are in trouble

As you probably know, the top folks from America's top car companies - because of the dire straits they are in - went to the US government asking for money.

Why did these companies fail in the first place? Bob Sutton, Stanford professor, said in his blog (emphasis mine)

"My experience with GM is that – more so than any company I have dealt with – the norm in meetings is that the highest status person in the room does all or most of the talking. Plus, more so than any organization I have ever dealt with, employees are expected to express agreement with their bosses. Why didn’t anyone have the guts to tell the executives that taking a private plane to beg for a bailout was a bad idea? I suspect that it is just standard operating procedure: GM is a culture where subordinates are expected to shut-up and kiss-up when the boss is around."

Sutton added, "On the whole it is as if the system is designed to prevent the upward flow of information. At first, when I was in graduate school, I thought this was a personality characteristic of the first few GM executives I met. But then I started keeping track of what happened when managers and executives arrived and left meetings. To entertain myself as the top dog droned on, I would measure talking time. Regardless of the subject (and who had the greatest expertise in the room), the highest status person would blab away – and when he or she left the room, the next highest ranking person would then demonstrate GM’s blabbermouth pattern of leadership. Note I have been seen this pattern for almost 30 years at GM – the cars have changed but the yakking pattern has not. "

I'd say this is true not just of the auto companies but also of the financial services industry. Because the workplace system hasn't changed, the yakking pattern
cannot change. The results are not pretty.

(If you have any comments, please email me at cvdhruve@gmail.com)