Tuesday, September 30, 2008

U.S. Financial System in a Death Spiral

Our financial system along with our stock markets are collapsing. There also is currently no plan to get us past this crisis. Why, then do I feel better than I have in years about our future? After years of disappointment about the lack of the Government’s unaccountability to the American people, the failure of the $700 billion bailout actually gave me hope that we can force our representatives to vote against a bill that is not in OUR best interest – even with the pressure from the administration to pass it.

Instead of writing about the details of the $700+ billion bailout, I thought I would just list the 2007 compensation of the executives associated with the companies involved in the collapse. As you look at the table, keep in mind that these people took home millions of dollars while the rest of us are left to clean up the messes they left behind.




FNMA (Fannie Mae)

Daniel Mudd

$ 12.2 million

FHLMC (Freddie Mac)

Richard Syron

$ 19.8 million

Lehman Bros

Richard Fuld

$ 22.1 million

Morgan Stanley

John Mack

$ 41.7 million


Martin Sullivan

$ 13.9 million

Goldman Sachs

Lloyd Blankfein

$ 68.5 million

Merrill Lynch

John Thain

$ 83.1 million

Merrill Lynch

Stanley O’Neal

$161 million

Washington Mutual

Kerry Killinger

$ 14.4 million

I think it’s important that these guys (along with the Board members of the institutions they destroyed) go down in history as the group that led to the collapse of the United States financial system (along with the economy, in general). We may never recover from the effects of their greed and self-centered actions. But, as is typical in these types of situations, they will attempt to retire rich and comfortably while millions of Americans struggle to keep or find jobs, make mortgage payments, and watch their investments continue to shrink.

Another Failure of Leadership

The executives listed above failed in their absolute number one priority of leadership: to improve the long-term health of the organizations they lead. I understand that this is not necessarily in line with the traditional American system of management, but it is absolutely necessary for the survival of our businesses and way of life. The greed that has developed in the board rooms and executive offices in U.S. companies has got to be stopped or the economic decline that began 30 years ago – and has grown to become a full-fledged crisis in recent months – will continue to send us into a death spiral. Although I’m actually happy that the people are forcing Congress and the President to develop a plan that will result in a true fix to the financial system – instead of another band-aid on an arterial wound – I am afraid about the fall-out in terms of jobs over the next several weeks. When American companies need to shed large costs quickly, they fire people. I can only hope that we don’t get that that stage in this crisis.

Leaders in U.S. companies need to start paying attention to their fundamental responsibility to the organization and the people they lead. There are top executives who do not display the level of greed exemplified by the gang that destroyed the country. Executives at companies like Toyota, Honda, Nucor Steel, and Hillerich & Bradsby (makers of the Louisville Slugger baseball bats) have shown over the years that a focus on the long-term health of the organization instead of their own bank accounts leads to sustained positive results and financial success for everybody.

Rewarding Greed

I recently got into a discussion with the Chairman of the Board of a $400 million U.S. company on the subject of executive bonuses. He was adamant that executives need to be rewarded on results and nothing else because it removes subjectivity in bonus calculations. Well, this looks like a sensible concept on paper, but as current events have shown, it is not in the best interest of the organization.

I have been saying for years how destructive traditional executive compensation plans are to business and the investment firms involved in the crisis have proved me correct. Rewarding executives on “results” turns them into short-term, greedy tyrants. I have personally witnessed personalities of managers change when they are given targets that are tied to monetary rewards. Remember Maslow, Kohn and Hertzberg? These guys have hundreds of articles and papers that discuss the link between intrinsic and extrinsic rewards and the type of behavior associated with each (possibly a future blog entry, but not enough time to get into it here).

First of all, rewards need to be given based on areas that strengthen the long-term health of the organization. Things like lowering employee turnover, training hours, quality levels, customer satisfaction, and even supplier satisfaction will lead to behavior that strengthens the organization. Secondly, executive bonuses need to be capped – an executive must never receive grossly high compensation while others in the organization are not rewarded (or rewarded at token levels). Bonuses should also not drain the organization of capital that can be used for future downturns or improvements like employee development, new products, new technologies, etc.

The most important thing to remember, though, is to appoint, hire, or promote people who have the proper values and understand that the job of a leader is to serve those he or she leads. This is critical to strengthening the organization and making it able to withstand downturns.

So as we go forward (and I’m assuming we will move forward), I appeal to the U.S. Government to take whatever time is necessary to truly fix the problems that exist today. Do not worry about re-election and today’s stock market and PLEASE do not let Sarbanes or Oxley get involved.

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