Leaders need to re-think attitudes

1100 words

9 March 2009

Business Times Singapore

English

(c) 2009 Singapore Press Holdings Limited

RICHARD ARVEY looks at how the current global downturn is expected to affect the behaviour and perspectives of top business executives

THE rolling waves of the financial crisis have swept over the global landscape changing the contours of the financial world and altering the way of doing business in many ways. Our own economy in Singapore has not escaped the crisis. Banks and other businesses here have been under duress. For example, DBS Bank and other local enterprises have started to downsize. Some local financial institutions have also been trying to provide restitution to customers who bought financial products that were sold to them.

But what about the effects of the crisis on business executives and leaders? Will any adjustments occur regarding their attitudes and behaviour as a result of this crisis? I argue that such leaders will undergo the following changes in regard to their perspectives and behaviour:

Self-examination. Executives will examine how and why they personally engaged in 'excessive risk-taking' in their decision-making processes. While we have several examples of executives being questioned by governmental legislative bodies (particularly in the United States), there are very few, if any, executives who have informed the public about why and how they engaged in such practices.

Executives will try to understand the dynamics themselves. They should and will be frightened - they face possible job losses, personal financial losses through the withdrawal of pay premiums and bonuses and salary decrements, not to mention possible prosecution of criminal behaviour. Leaders will be asking 'Am I vulnerable?' to these possibilities.

Better decision-making under risky conditions. Executives will try to do a better job of 1) understanding the range of possible outcomes of the decisions made, 2) gauging the probabilities of these outcomes, and 3) assessing the potential consequences of such outcomes. Executives did not adequately forecast that housing markets would fall (i.e., a rare event), nor understand the enormous damage that developed due to the cascading nature of the debt crisis.

One potential downside is that executives may become extremely risk averse. An example is banks' lending behaviour which seems to have gone to extreme aversion, so much so they are not even lending to each other, let alone to consumers. Indeed, the Singapore government has had to develop schemes to share risks with banks to promote lending to customers. The flip side to excessive risk-taking is taking no risks - both alternatives can have major repercussions on our economies.

Recognition of factors that led to excessive risk-taking. Executives will begin to look at such external factors as yielding to stakeholder pressure, ignoring and/or discounting risks, doing what everybody else was doing (following the herd), regulatory lax, etc. as potential external factors that led to these decisions.

An article in the International Herald Tribune examining the downfall of Citigroup suggests that several executives had strong and long-lasting friendships with each other that may have interfered with objective examination of the risks involved. Executives will ask if they were subject to these influences and whether they are currently still vulnerable.

Understand that the public is outraged. The public is clearly outraged. These executives have put the world in a very dangerous position. This is no time to go on expensive retreats (as senior executives at the insurance company AIG did, even after the company received bailout funds). The public is outraged by the executive pay packages received by some bankers; executives should, and I hope do, reduce these packages. The name of the game up to this point has been a 'heads I win, tails you lose' proposition for the public. Executives have a role to play in managing and changing their own pay packages and becoming less self-serving. There is some empirical evidence that executives now take home some 10 per cent of the income of the firm, compared to a much smaller amount 10 to 15 years ago. CEOs and boards of directors must curtail these practices or other regulatory mechanisms will.

Understand that they are not 'Gods'. Executives need to come down to earth. Hopefully, the 'romance of leadership' under which executives were perceived as gods and invulnerable will be dashed by this crisis experience.

In his book The Black Swan, Nassim Nicholas Taleb argues that there is enormous randomness in our environments that shapes successes and failures. We tend to attribute success to ourselves and failures to external forces and chance. Leaders need to develop some degree of humility about their successes rather than become over-confident from them. Hopefully, leaders will adopt the philosophy that they are guardians of the resources of the firm and such resources are not to be squandered.

Recognition of the biases that influence their own decision making. Leaders will need to develop greater objectivity as a result of the crisis. The success of the past few years may have been built on other factors than their own skills and talents. Such self-confident attitudes can lead to taking on greater and greater risks in uncertain environments culminating with eventual disaster.

Consider the unfortunate death of Steve Irwin, who captured and wrestled with crocodiles, in September 2006. He repeatedly took risky positions and perhaps developed an unrealistic view that nothing was going to happen. But under repeated occasions, something really bad will happen, and eventually did. This same kind of dynamic can operate for organisations and even governments. For example, Napoleon believed that he lived under a 'lucky star' and that he would be successful in any military campaign. His own experience had shown this to be true. However, when invading Russia, his entire army was almost totally wiped out. He had one too many experiences of success and developed a myopic view of his ability to succeed under all circumstance.

My research has shown that financial risk-taking propensities are partially influenced by genetic factors - over 50 per cent of the differences among individuals in their risk-taking attitudes towards financial investments is based on their genetic make-ups. Thus, executives need to clearly examine their own propensity to take on excessive risks and evaluate it against more conservative alternatives.

There are many other potential repercussions for leaders in the aftermath of the crisis. I hope that leaders will go forward along the lines I posit above.

The author is Professor and Head, Department of Management and Organization, at NUS Business School, National University of Singapore. This is the ninth in a series of 12 articles on the global financial crisis by faculty members of the NUS Business School