Financial Meltdown: A Management Perspective

 
 
By Faisal Hoque  |  Posted 2008-09-24
 
 
 

After the meltdown on Wall Street, fingers are pointing in every direction. We are seeing yet another national feeding frenzy of recrimination. The lenders, the borrowers and the pundits all now say we should have seen it coming. The politicians have leapt in to solve a crisis they had a hand in creating.

We thought we could purchase a house we couldn’t afford because of the magic of always-appreciating home values. The bankers thought they could get away with lending to us because they could bundle the debt into a magic ball and toss it to someone else. And when the ball landed in the laps of two quasi-governmental organizations (Fannie Mae and Freddie Mac), everyone assumed the game could go on forever.

Magic.

We were just kidding ourselves–and each other. Some of it was innocent, but a lot of it was not. We can hope that government regulation will set things straight, but when has that ever made things perfect? It’s not about us asking some authority to make us do the right thing. It’s about us as a society understanding the right thing and doing it.

Ethos–Does It Matter?
The primary purpose of business should be to create a greater good for society— one that society values enough to reward us for our efforts. No, the purpose of business is not coming in at one cent over estimates for this quarter. That’s a game. No, we don’t give away our labors, either; we deserve our fair share for meeting a genuine need. A profit is an indicator that we are indeed meeting a need. However, anything more than what a free market would grant us is a game. Monopolies, oligopolies, tariffs, legislative favors and imperfect knowledge all indicate a less-than-free market, and we can play them for short-term gain—and, then, move on.  

This is an idealistic viewpoint, I know. But it comes from years of being in the nitty gritty of this quarter’s numbers at large corporations and years of sweating out the day-by-day survival of my own businesses. I am idealistic, but not naíve. In the end, I believe that conducting one’s self according to certain ideals is the only way to be successful in life, and it is also the only way to be successful in business.  Ethos does matter.

Where Were the Governance Grownups?
‘Governance’ has been a hot business buzzword for some years. Most every corporate Web site has a button for it. But where was it? What good did it do? Did it do anything?

The Wall Street Journal reported “Just three of Lehman’s 10 outside directors have direct experience in the financial-services industry. ‘For an extremely complex financial institution like Lehman, that set of directors probably wasn’t the best group to populate its board–or help prevent its collapse,’ contends Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware business school. A Lehman spokesman declined to comment.”

We’ll get a whole new kind of governance now, one run by Washington. Over the years, there have been efforts there to rein in some of the worst of the game’s excesses, but they were defeated.  How else would we explain the continuous, excessive rewards for executives and bankers, regardless of their performance? I’m not choosing one political side or the other. But if I had to write a business-focused follow-on to John F. Kennedy’s Profiles in Courage, would I have enough material?

Facts–Should We Care?
Is this really the information age? We’ve spent billions on information technology, and yet we were practically blind as we created the biggest economic folly in decades. Shaky mortgages by the pound were bundled with good ones–and nobody knew which was which. We just trusted the magic to make it all OK. Did anyone really know what a “collateralized debt obligation” was? No problem, if someone else would take it.

By one report, moves by former New York Attorney General Eliot Spitzer forced a restructuring on Wall Street that made research analysts uneconomical, and today, there are about half as many as the Street employed in 2000.

Brad Hintz, who covers brokerages for Sanford C. Bernstein, told Barron's, "Research analysts have gone the way of high-button shoes and buggy whips."

Just another contributor to our blindness. Doing the right thing requires knowing the right thing. Should it even be debated that fact-based, rational decision-making must be part of today’s enterprise DNA?

Business Model?
Men and women of vision who are leading according to values that emphasize the long run and making decisions based on the knowledge inherent in our knowledge economy will need the right business model. It will be one fashioned around information and knowledge. All these “things” at the root of the game were essentially just information.

This will be a holistic model–one that knows the doings of customers, competitors, regulators and the economic environment; that can bring that knowledge inside and act on it in a timely, intelligent way; and that harmonizes the conflicting desires of various divisions and functions in a way that supports the enterprise’s mission. You say we do all that now? Did Lehman Brothers? Did Merrill Lynch? All the brilliant graduates these firms hired, and all the millions they threw at technology, can’t put these Humpty Dumpties together again.

Business is complex, especially the finance business. These are rather simple suggestions–difficult in the execution to be sure–but not so complicated that we can’t consider them as we try to put together the future.


Faisal Hoque is chairman and CEO of BTM Corporation and author of forthcoming book Convergence Scorecard to be published by Harvard Business Press.  BTM innovates business models and enhances financial performance by converging business and technology with its unique products and intellectual property. © 2008 Faisal Hoque