Bright people, dumb actions

PUBLISHED : Saturday, 02 April, 2011, 12:00am
UPDATED : Saturday, 02 April, 2011, 12:00am


In some quarters, a view persists that the financial meltdown of 2008 was somehow unavoidable. It is a notion, though, that Professor Jeffrey Gandz, of the Richard Ivey School of Business, is keen to scotch.

In the book Leadership on Trial, written with three Ivey colleagues, Gandz pinpoints the failures -systemic and individual- that created a crisis many warned about and did see coming.

Rightly, he focuses attention on those at the top who led the charge headlong into disaster. But the aim was to go beyond the neat and easy explanations that too often just put the blame on 'greedy bankers' and the bonus culture. He searched for the underlying causes that can and must be fixed.

'A number of these organisations had gone down a very destructive pathway in terms of shareholder value and social [consequences],' Gandz says. 'Something had gone very wrong in leadership, with some very bright people doing some very dumb things - that includes politicians, bankers, regulators and those carrying more debt than they should.'

The basic hypothesis sees three fundamental sets of reasons. First is the failure of certain leaders to understand the mechanics, links and complexities of the financial system. What becomes clear is that too many senior executives lacked the skills to oversee businesses. Gandz contrasts this with the CEO of Toronto Dominion, which came through the crisis largely unscathed, whose golden rule is: Don't do anything you don't understand.

Second is a personality type and approach to leadership almost guaranteed to cause trouble. This is rooted in the win-at-all-costs, hyper-competitive cultures that make pay the marker for success. 'With that comes overconfidence, hubris, denial of problems building up at the periphery, and intolerance of dissent,' Gandz says.

Third is that small subsidiaries of large organisations were allowed to take risks that undermined the whole capital base, with little to no supervision. That points to significant problems of organisational design and puzzling negligence on the part of those in charge. In too many cases, there were poor reporting systems and no absolute overview of total risk.

'It is not as if people didn't know what needed to be done,' Gandz says, referring to the regulatory recommendations that followed the collapse of Long Term Capital Management a decade or so before. 'But there was an almost stupid reliance on mathematical models that ceased to work once certain conditions - such as rising property prices - ceased to exist.'

In the prescriptive section of the book, conceived as a manifesto for developing future leaders, the stress is on three essentials: competencies, character and commitment. It is made clear that any leader must be ready to spend time in the trenches and cannot expect a jet-set lifestyle if unable to comprehend the risks of, say, 5 per cent of staff producing 50 per cent of corporate profits.

'As educators, we have probably been over-focused on competencies, with not enough time spent on developing character,' Gandz says. 'The problem is I can teach a risk analysis formula, but I don't have a formula for how temperate or judicious a leader should be. In the business schools, maybe we didn't address the reckless pursuit of profit as well as we should have, but we can encourage people to express their own values and say if something is not right.'

Standard bearer

Gandz names Standard Chartered as a good example of an institution that largely dodged the financial crisis, thanks to principled management and a commitment to social issues.

He is impressed by the bank's position that it is possible to create shareholder value and social value at the same time and let the two become mutually reinforcing.

The bank, according to Gandz, wasn't involved in the subprime lending or the overly fancy structured vehicles. 'They are taking a strong social position at the forefront of microlending and going into countries where other banks don't go.'