The Scientific Leader Blog

Dick Fuld, CEO of Lehman Brothers presided over the biggest bankruptcy in history by a large margin.  Bloomberg reports that he will address the House Oversight Commitee on Government Reform today, October 6, 2008, to better understand and avoid future Lehman-type collapses.

Fuld offers an interesting case study in executive risk and emotional denial.  He is expected to deny responsibility, claiming that this crisis is unprecedented, with unforeseen circumstances.  If this is true, then either Fuld is dishonest or he is incredibly uneducated about history.

In 1870, European lenders supported the growth of new lending institutions, similar to what the Clinton administration did to encourage lenders to invest in subprime loans (e.g. give below-market loan rates to very high risk borrowers).  This easy credit led to a housing boom throughout europe, creating uncollateralized bubble, just like what happened in the US in 2008.  By 1873, cheap US weat imports into Russia lowered European incomes, and mortgages began failing when they could no longer afford the houses.  When banks began to loose money, just like today, they wouldn’t lend to each other anymore and this caused inter-bank loan costs to sky rocket.  Eventually, this came back to squeeze credit in the USA, and caused a stock market crash in the US – causing hundreds of banks to close, factories to fail and 25% unemployment in New York City.

Fuld appears to have failed in three ways: (1) he lacked skill in managing risk, (2) he may have misrepresented the extent of Lehman’s losses prior to the collapse and if his testimony is as expected, (3) he is apparently in denial about his own accountability.   Each of these three can be addressed with both executive and board talent management methods that I’ve used in prior roles.  First, it appears that he either took on far too much risk exposure to subprime loans or failed to use modern Real Options and Value at Risk (VaR) methods to ensure his firm would survive if a subset of his portfolio failed.  In my next book, “Leading Scientifically” to be published by Pearson Education / Prentice Hall in 2009, introduce the Cue See(TM) model and software such as Johnathan Mun’s Real Options Valuation Toolkit address these.

Second, if Fuld did misrepresent the state of Lehman’s losses and risk exposure, it suggests he’s unconscientious, and Industrial/Organizational psychologists such as those at The Scientific Leader, have good pre-employment assessment tools to screen out this sort of behavior before hiring an employee.  Similarly, periodic culture/climate surveys can also detect a pattern of imprudent behaviors and falsehoods that could have been addressed to Lehman’s board about the “climate” for transparency, one of the key ideas in COSO’s Enterprise Risk Management framework.

Third, Fuld appears to be absolving himself of responsibility -  resolving his cognitive dissonance between his perception of himself as a very successful CEO, and the reality that he led Lehman to their demise.  To preserve his own view of himself, he’s looking for explanations outside of his own success to account for his failure.  Executive coaching, offered by The Scientific Leader, together with systematic assessments (e.g. 360 degree surveys) can help ensure leaders maintain a sense of humility and humanity about their own limits and need to accept failure appropriately at times.