Let’s take a look at the corporate strategy of the large financial institutions that played an instrumental role in bringing on the financial crisis. The chief executives at these companies tended to favor an aggressive leadership style, which for a long time led them to aggressive growth; as they acquired companies, the largest companies became ‘financial supermarkets’ with a whole range of services. These financial institutions grew and grew, but eventually reached a point around 2004 where their growth stopped. The leadership of many of these companies started to be criticized for not integrating their acquisitions well. And so chief executives responded by making their companies more governance-oriented, with new constraints for things being signed off by teams. These new protocols and procedures made the financial institutions stabilize and stop growing, but they didn’t prevent the financial crisis, and the whole sector is now suffering as banks (and [...]

At the G20 and elsewhere, we’ve heard government leaders like Obama and Brown calling for more regulation to prevent financial institutions from growing too large to fail and obfuscating their responsibilities. These calls are all well and good, but they aren’t a panacea. The problem with too much regulation is that it slows down markets and hampers growth. The ‘greedy bankers’ that have been reported on so often in the press aren’t the problem—they’re only the symbol. They’ve just been following procedures in a marketplace incentivised by short-term thinking and by imbalanced approaches to risk-taking. [...]

Today it was announced that the seven highest ranking executives at Goldman Sachs will not be taking their bonuses this year . It’s an good move and will generate some positive publicity for the firm, especially because they announced their decision before other banks and before bonus season starts in earnest. Likewise, such a move was almost a necessity given the potential for public outcry if multiple executives were receiving bonuses worth over $50 million each after the company was one of the 9 banks that shared a $150 billion cash injection earlier this fall.
This move reminds me of some of that activity that Linda Lee Davies, Nada and I found in our recent book Leading for Success . One of the seven sides of great leaders we identified was ‘finding ways through.’ In the chapter dedicated to that subject, we said: [...]

This week’s financial upheaval on Wall Street gives us an opportune moment to discuss the leadership of executives at Merrill Lynch and Lehman Brothers. Have they been making good decisions over the past few months (and years)? Could they have possibly changed the outcome for their respective companies?
The effectiveness of leadership is determined by being able to recognize the appropriateness of actions relevant to the circumstances of the situation. As Henry Blodget explains in this article on Slate, Merrill Lynch’s CEO Peter Thain was brought in last year to ‘clean up the mess’ created by his predecessor. In the process he became aware of the growing problems posed by declining credit and real estate markets. He took responsibility bad debt and acted, taking big write-offs and swallowing his pride in the process. These actions helped Merrill Lynch stay strong enough to find a buyer [...]

Those ‘ traditional Washington Politics ‘ that Andrew mentioned in yesterday’s post refer to the way that in the US and UK, well organized and well funded corporate bodies can exert a great deal of influence on the government.
Companies can directly donate to a candidate and expect some sort of quid pro quo , or the influence can be less direct: Karthik Ramanna from Harvard Business School and Sugata Roychowdhury of MIT recently wrote a white paper that suggests that in the 2004 election, outsourcing firms located in political battlegrounds were underreporting their profits to deflect attention from their (likely profitable) outsourcing, so that candidates wouldn’t have to confront the issue.
 To get away from these sorts of direct and indirect influence, political and administrative boundaries need to be redesigned. Greater transparency of the interrelationship between politicians, advisors, civil servants, [...]

In the Wealth Creators , a book I wrote in 1991, I discuss how Heinz went from a small company to a big multinational one through effective leadership and a clear vision. Recently I came across a fascinating article by Malcolm Gladwell about one man’s quest to create an upscale ketchup that could compete with Heinz. He hasn’t been that successful, and it turns out the flavors in Heinz have something to do with it:
What Heinz had done was come up with a condiment that pushed all five of these primal buttons.  The taste of Heinz’s ketchup began at the tip of the tongue, where our receptors for sweet and salty first appear, moved along the sides, where sour notes seem the strongest, then hit the back of the tongue, for umami and bitter, in one long crescendo.  How many things in the supermarket run the [...]

Here is an interesting (though be warned, a bit tongue-in-cheek) case study  of what happened when executives at General Motors in the 1970s were forced to really embrace their brand values by driving (or being chauffeured by) cars from the divisions they worked in. When they all couldn’t have Cadillacs any longer, “fake luxury” took over, and brand lines took on similar upscale features.
It’s very important for executives to know the key values of their company or division and indeed live them. If no effort has been made to recognize the nature of the more deeply held views concerning the organisation, it is common for people slowly to become unaware of the key values that determine their behavior, and, as In this case, you get something as undesirable as “fake luxury.”