Leadership and the Financial Crisis – 10 years on
Written by Jim Shillady, Michael Greenspan & Daisy Dowling from Kiddy & Partners
We’ve all survived to mark the tenth anniversary of the financial crisis, yet, as we remember queues of panic-stricken depositors and the spectacle of major banks collapsing, we are still exploring exactly why and how it happened. Some of the biggest questions are those about leadership. What do we know about how it functioned amid unprecedented levels of uncertainty, unfolding disaster and the growing damage to an industry’s reputation? And how have the leadership lessons learnt from the crisis evolved in the last decade?
Brave new world
Whether bank failures were caused by overly complex financial instruments, misguided policy, poorly understood systemic risks or outright greed – on the part of bank executives, US consumers and/or shareholders, leadership shortcomings emerged as a principal underlying cause. And many of those shortcomings were expressed in the organisational cultures that senior leaders had allowed to emerge. What the financial crisis exposed was the gulf between firms’ lofty rhetoric and the nasty realities of the cultures prevailing in the City and on Wall Street. It also revealed profound weaknesses in the processes used to choose and develop the key players in those institutions and in remuneration systems that rewarded short-term financial performance at the expense of the manner in which it was achieved.
By pursuing short-term self-interest, senior leaders had also moved away from core business principles about first serving their customers – well, with passion and for the long-term. And they failed to acknowledge their role in the sustainability of healthy markets.
In the end the financial crisis pointed to the need for financial services to operate in a new environment. Today, those leading the industry understand the importance of sustainability, both of their own businesses and of the market, even if a few of their behaviours aren’t entirely consistent with that stance. To achieve such sustainability though, the focus is increasingly on corporate culture. Regulators now demand that banks be run on known parameters, with well managed risks, stronger reserves and an imperative for leaders at all levels to understand, monitor, and speak for the “cleanliness” of their businesses – culturally as well as financially. Those coming through the ranks now largely realise how important this is. So what leadership lessons can they learn, from leaders who weathered the immediate storm and have been involved in the re-shaping of financial institutions since?
Navigating the storm
How well prepared were those at the top to guide their people out of the whirlwind of 2007/2008? It’s safe to say, not very. From a world that had celebrated commercial smarts, transactional focus and an aggressive approach, leaders were now in a situation that demanded different skills to pull their organisations into the new world order. Some did not see this need and not all had the capability to meet it.
But mental agility remained vital and, certainly, the most successful City leaders today are those who have been willing to confront the fall-out of the crash and radically rethink their business models in an increasingly regulated environment. Successful leaders were always going to be the ones who could adapt quickly to the new realities and be willing to change themselves, their people and their institutions.
Extreme resilience and stress tolerance were key too. This was about more than upping the workload from 90 hour to 120 hours a week just to survive. It meant operating in the goldfish bowl of intense public and media scrutiny while your once highly-regarded profession became the object of ridicule and contempt. That resilience enabled some to bounce back after crushing losses, and, more importantly, to take solid steps to restore trust, as they worked more transparently and collaboratively to build better institutions.
Shifting leadership skills
But how far leadership has moved on in the last decade? It’s become clear that, to be effective, today’s leaders in financial services require a much broader skillset than in the past. They can’t rely on the same capabilities that mattered at the start of their careers. Today, it’s about being savvy about regulation, having full people oversight, knowing how organisations and cultures work and how to change them. And it means managing in a VUCA environment. Volatility, uncertainty, complexity and ambiguity are here to stay.
Leaders also require a different mind-set to balance the performance-led demands of shareholders with the prudential focus of regulators. Being CEO now means playing a key part in managing relationships with regulators and reshaping business models to deliver sustainable results in – at least for now – a low interest rate environment. So, there’s a greater need for political fluency and for effective communication.
Success also depends a long-term perspective that leaders must maintain in the face of shareholders who still demand short-term performance. Leaders need to be able to envisage, and contribute to, the way global financial markets must operate if they are to maintain stability and sustainability and to meet the demands of their entire stakeholder community. And they need to be able to bring that future-looking picture to the table, proactively guiding regulators and other stakeholders, not just responding to them.
The financial crisis, and the City’s efforts to recover from it, have also shown that trust is a fundamental of successful leadership – easy to lose and hard to restore. We need leaders who actively cultivate it in their firms, their communities and the societies in which they operate. They should be authentic and credible, focusing on serving their clients and all the institution’s stakeholders. The stereotypical Wolf of Wall Street, seeking only money and power, is truly dead as a leadership model now.
Just as the financial services industry has started to recover from crisis it’s been hit by the tides of populism, Brexit and anti-business sentiment. It seems we’re once again, asking leaders to make decisions with few facts. Which brings us to the role of luck in leadership.
Years of working with senior leadership teams in financial services show that sometimes it helps to be lucky. So much, so obvious, but what does that really mean?
First, effective leaders have the systemic business understanding to know how to increase the chances that even a decision made with poor information can succeed. Secondly, it’s about contingency planning for when decisions – even those based on apparently sound data – go wrong. But, thirdly, and most importantly, it’s about being agile, prepared and seeing opportunities where others don’t. So, what looks like being lucky is often really a set of capabilities that effective leaders use to combine risk management with entrepreneurialism and to talk credibly, to employees, customers and other stakeholders, about more positive futures.
Today’s leader is in a far more demanding role than his or her counterparts ten years ago. Yet financial services in general, and banking in particular, are seen as offering less prestigious and aspirational careers than previously. The big well-paid jobs still exist, but they come with very high levels of personal accountability, exposure and risk. Leaders have had to adjust their styles, working with different motivational levers to get the best out of their people. And at CEO and C-Suite levels these are all-consuming roles, which quite simply mean that those who hold them rarely switch off. So, financial services is no longer the ‘hot’ industry that an overwhelming proportion of the best and brightest aspire to; big firms have had to change the equation in terms of attracting and retaining talent.
At Kiddy, our concern is with the support financial services businesses provide for leaders, current and emerging, in today’s environment. To begin with, even seasoned leaders – whether individually or in teams – need opportunities to explore their roles and to become more confident by rehearsing what they’d do under real-world scenarios. Then they need learning that integrates an understanding of their capabilities with the development of new skills and behaviours. And, finally, the institution itself has to create ways of managing talent to reflect the complexities of its environment.
It’s ten years since the financial crisis, but the world is more dangerous now, we’ve had a 10-year uninterrupted bull run and a new credit bubble seems to be building. And human beings have been shown repeatedly to have very short memories for certain things. In that context, perhaps the ultimate leadership lesson is to be watchful and to be ready – and that it is possible to be both.