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Monday, May 2, 2011

Leadership at Lehman: On the Failure of Richard Fuld

The failure of Lehman Brother suggests that too much power may go with formal position while non-positional leadership in organizations is not given enough of a chance to check the excesses of office. Richard Fuld could take advantage of much having to do with his formal position so he would not have to lead. In contrast, a competent subordinate, Mike Gelband, faced a considerable headwind in trying to lead through persuasion without the benefit of a position trumping Fuld’s own.

Americans generally viewed Richard Fuld as among the gilded leaders of Wall Street until shortly before his downfall. Only then did most of us learn of the man’s outlandish emotional immaturity. What a contrast from what we imagine a CEO on Wall Street must be like. We naturally presume that an adult child cannot possibly assume such heights—not at the top of one of the glass temples of Capitalism. I suspect that we as a society esteem the CEO position too much, projecting too much onto it. I doubt it is likewise in European society. Perhaps Europeans who say wealth is valued too much in American society are correct; more generally, Americans tend to privilege materialism and praxis, as well as empiricism over theory. In effect, all this essentially provided camouflage for Fuld, who could take advantage of being on the high ground, societally as well as within Lehman Brothers.
Is leadership a mere projection of what we value? If so, do we give incumbents such as Fuld too much credit?  Admittedly, we only grudgingly admit that people we don’t like are nonetheless exercising leadership. The malady is even worse concerning what constitutes ethical leadership. Rare indeed is the person who acknowledges ethical leadership that differs from his or her ethical position on an issue.

Fortunately for Fuld, he could also rely on the close association typically made between leadership and having a surplus of power based on formal authority to force an organization toward the leader’s preference. If leadership is the formulation of a “vision” that is sufficiently accepted by enough followers to become an actuality rather than remaining merely as the leader’s ideal, then does the raw power of formal delegated authority count as an exercise of leadership? To be sure, it is said that a general leads forces into battle; nothing is said of whether the soldiers have accepted the general’s aim. Military vocabulary having been adopted as verbal currency in the corporate realm, Fuld could draw on the analogy such that making rash decisions and barking orders could be counted as leadership. That he faced opposition within the ranks must have made it particularly tempting to resort to such “leadership.”
In the summer of 2005, Mike Gelband, the global head of fixed income trading spoke to about 45 people in the distressed debt department about the firm's extraordinary leverage (twenty-two times net worth). He claimed the bank’s vulnerability was contingent on what he recognized as a housing bubble that would go bust with tremendous repercussions not only for Lehman, but also for the entire American financial system. He predicted that the baleful effects from the bubble would come to roost as soon as 2007 and 2008. Later that day, he went to Dick Fuld, the CEO, and other executives on the isolated top floor to make the case for going short wherever the housing market was involved, hence hedging the market’s risk.
Rather than formulating an alternative view of the economic lay of the land and persuading his “lieutenants” to adopt it, Fuld conveniently reduced his “leadership” to decision-making and giving orders. He went with the bank’s immediate profit, which involved increasing the activity of the mortgage-securities department. He turned a blind eye to all the risk already taken on in ordering that the bank’s real-estate exposure be increased. Nevertheless, “the general drift” from the executive floor “was that Mike Gelband had developed some kind of an attitude problem, and it needed to be changed, real fast.”[1] Because Fuld, unlike Gelband, could rely on the sheer power of authority, Fuld’s reckless real-estate strategy could simply be declared (rather than persuaded) as the default. Attention could be quickly directed to scapegoating Gelband while the blind spot in Fuld’s “vision” could go unchecked.
Fuld could have been motivated to scapegoat Mike Gelband if he stepped into the leadership void by actually persuading Lehman employees of the value of his interpretation, or “meaning.” Fear and uncertainty would have intensified the employees’ desire for meaning that a leader can provide.  Unfortunately, Larry McDonald reports that few at Gelband’s crucial 7am presentation in 2005 looked convinced.[2] Alex Kirk had already been convinced—having been the person to arrange for the presentation—and Larry had had his own reservations concerning the housing market, no doubt influenced by his bearish father. Furthermore, Gelband clearly did not persuade Fuld or the executives surrounding him. Even if Fuld’s hold of the higher ground by the sheer authority of office meant that Gelband faced an uphill battle in persuading executives to give up Fuld’s declared default, Gelband did not exercise leadership skill even though the content of his leadership “vision” was spot on. Therefore, the verdict on Gelband is mixed.
In Fuld’s case, both the persuasiveness and content were deficient; accordingly, the verdict can only be more dire than that on Gelband. Because Fuld relied so much on the power of his office, Gelband’s opposition can be liken to non-positional leadership. Such leadership is notoriously difficult, especially if it up against persuasion coming from a higher office. That Gelband was not successful in changing minds even in the absence of persuasion being used by the CEO and chairman of the board suggests that non-positional leadership may be particularly difficult in terms of credibility, while position itself may make it too easy to sidestep leadership.

[1] Lawrence McDonald, Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (New York: Three Rivers Press, 2009), p. 138.
[2] Lawrence McDonald, Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (New York: Three Rivers Press, 2009).