First in Series: Calling All (Crisis) Leaders to Rebuild Trust in the Finance Industry
In one of my earlier blogs, I called on today’s leaders to put their egos aside in order to guide us out of a vicious cycle of bad decisions, short-sightedness, and financial despair toward an integrity-based vision where innovation and creativity is the norm. And now, several months later, I am calling all (crisis) leaders once again…but this time, specifically to guide us out of this financial crisis. In this series of blogs, I’ll address the destroyed trust that has occurred and recommend ways to rebuild that trust through effective crisis leadership.
The financial industry is undergoing one of the most tumultuous times in history and the consequence has been a precipitous decline in the public’s trust in the industry and in its leadership. Over the next few weeks I’ll provide an overview of the construct of trust, describes why crisis events erode trust, and offers guidelines for how to rebuild trust following a crisis. Using the principles of crisis leadership as a backdrop, I’ll demonstrate the significance of integrity, positive intent, capability, mutual respect, and transparency on the trust building process. Here I present the first in a series of blogs on Rebuilding the Image of the Finance Industry through Trust:
In a two week period in the fall of 2008, the U.S. witnessed the shocking collapse of several of its most seemingly stable and secure financial institutions. On September 14 Merrill Lynch entered bankruptcy and was quickly acquired by Bank of America. The next day Lehman Brothers filed for bankruptcy, was split up, and portions of the former firm were purchased by Barclays. The following week the nation’s largest savings and loan association was placed into receivership, ironically on the same day as that firm’s 119 year anniversary. The demise of Washington Mutual represented the largest single bank failure in American history. The landslide of financial failures started several months earlier when Bear Stearns, once recognized as the “Most Admired” securities firm in Fortune’s “America’s Most Admired Companies” survey was acquired by JPMorgan Chase for $10 per share, down from the 52 week high of more than $130 per share. Among them, these once stalwarts had almost 450 years of history, having previously survived other economic downturns, including the Wall Street Crash of 1929.
And banks and lending institutions were not the only industries affected by the crisis and in need of federal support. America’s largest insurance company, AIG, was close to insolvency before the federal government intervened granting the company a sizable portion of a $700 billion “bailout” formally called the Emergency Economic Stabilization Act of 2008. America’s big three auto makers (General Motors, Ford, and Chrysler) have met with the U.S. congress on multiple occasions to request bailout funds. (Their initial visit to Capitol Hill resulted in a failed attempt to secure funds and a public relations nightmare for the auto companies when all three executives independently arrived in Washington, DC from the Detroit metropolitan area on their private corporate planes.) The public outcry toward this extravagance suggested that the executives were incapable of fiscal management.
Needless to say this is a tumultuous time for executives and leaders in the finance industry and the events of 2008 will become a footnote in history. But in the meantime the industry is faced with a considerable dilemma —an overwhelming lack of trust.
Several years before these recent events occured executives expressed concern over the public’s trust. The Business Roundtable’s Institute for Corporate Ethics surveyed CEOs and found that regaining the public trust, effective management in the context of investor expectations, and ensuring the integrity of financial reporting were the three most important issues they faced. Their challenge is exacerbated because the public experiences an insurmountable power imbalance (Business Roundtable Institute for Corporate Ethics, 2009), where the industry holds the lion share of the power and is able to make decisions and take risks in ways that have tremendous impact on its stakeholders. Accompanying an imbalance of power is an imbalance in risk assumption and vulnerability, with the public assuming more risk than either an individual firm or the industry. With limited understanding and knowledge about the activities of the industry, the public is naïve to the potential impact of the industry’s behavior until something goes terribly wrong. When it does, the public loses faith in the industry and in its leadership.
How can the financial industry rebuild its image? I’ll address the answer in the second blog in this series, coming soon…