Leading Under Pressure: from Surviving to Thriving Before, During and After a Crisis
Chapter 1 excerpt:
Why (Crisis) Leadership Matters
As we are writing this chapter and contemplating what contribution we can make to the plethora of books on leadership, and the more recent emergence of books on crisis leadership in particular, the United States is in the midst of one of the most significant confluence of crisis events in its history. The euphemism of “a perfect storm” seems appropriate if not completely accurate. From our vantage point, though, the U.S. is simultaneously experiencing a massive financial crisis, a reputational crisis, and a crisis of confidence – the latter of which is largely a function of the two former.
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, September 15, Lehman Brothers filed for bankruptcy, was split up, and portions of the former firm were purchased by Barclays. The next week, on September 25, the nation’s largest savings and loan association was placed into receivership, ironically on the same day as that firms 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.
The causes of what has come to be called simply “the financial crisis” are too numerous to describe here. Economists, finance gurus, and the federal government will no doubt invest years in trying to identify the appropriate attributions. At the surface, however, it is clear that subprime mortgage lending practices played a major part. Subprime lending refers to the provision of credit to potentially high-risk borrowers, including those who have defaulted on prior loans or who have limited debt experience. When some credit issuers engaged in predatory lending practices, particularly for home mortgages, the result led to massive loan defaults, and lending institutions were forced to write-down billions of dollars in losses. At the heart of those losses were Freddie Mac and Fannie Mae, government-backed mortgage lending institutions that survived the financial crisis only with the substantial assistance of the U.S. government.
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. At the time of this writing CEOs from America’s big three auto makers (General Motors, Ford, and Chrysler) are meeting with members of congress to request their own bailout. This meeting is the auto manufacturers’ second attempt to request help. 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 corporate planes. The public outcry toward this extravagance suggested that the executives were incapable of fiscal management.
In short, it should have been no surprise that during this time period in which some of the giants of the US economy were failing, we saw successive days of hundreds of points lost in the Dow Jones, marked most vividly by a 777 point drop on September, 29 – the most catastrophic day on US markets in history. So clearly this is a tumultuous time for executives and leaders of every sort. And whether fault lies with a few executives that have severely mismanaged their firms, or with the ratings agencies that have long overvalued financial institutions, or with short-sellers attempting to manipulate the market, or whether this is merely a normal business cycle correcting the excesses of recent years, there is a sense of gloom and panic in the air. There is plenty of blame to go around and in due time we will eventually learn as much as we need to know. Those who are judged to be at fault will be punished, and the financial events of 2008 will become a discussion for historians. In the meantime, while the experts are hammering through solutions to rescue our economy, Americans, and some could argue citizens across the world are left trying to pick up the pieces.
So in addressing the question called for by the title of this chapter, crisis leadership matters precisely because crisis events are inevitable. Crisis leadership matters because leaders of organizations and nations can make a difference in the extent to which people are affected by a crisis. Crisis leadership matters because in its absence, the stakeholders who are adversely affected by the crisis cannot truly recover from the damaging event. And crisis leadership matters because despite the damage that is caused by a crisis, effective leadership is the one factor that creates the potential to be better off following the crisis than the state of affairs that existed before it.