Sense on Cents

Band-aids, quick fixes, partisan posturing, and the like will do little to address the structural and cultural deficiencies which played into our current economic crisis.

High five to SH for sharing a report (a link to the full report is provided at the end of this post) by Harvard Business School’s William A. Sahlman entitled “Management and the Financial Crisis (We have met the enemy and he is us…).” Sahlman does an outstanding job of pinpointing five critical components of firms and institutions that failed during this crisis. At the end of this post I have provided a link to Mr. Sahlman’s 35-page report, but allow me to provide some highlights. Sahlman writes:

I assert that most of the problems evidenced so prominently during this financial crisis can be traced to failures in five related managerial systems inside each major private and public actor in the financial markets:
 Incentives – how risk and reward are shared; how people behave if they act in their own perceived best interests given the structure of pecuniary and non‐pecuniary payoffs
 Control & Information Technology – how limits are placed on behavior; how information is captured and shared; how risk and reward are measured and how those assessments affect tactics and strategy
 Accounting – how managers choose accounting policies; how managers measure economic profits & losses, as distinct from GAAP profits and losses
 Human Capital – the process by which people with certain characteristics (skill, experience, networks, character, and attitude) are attracted and managed or encouraged to leave any organization
 Culture – the values that guide individual and group decisions

While Sahlman thoroughly reviews these five factors and how they misfired in a number of failed institutions, he goes one step further in addressing why they misfired. I commend him for it. He writes:

Sadly, there seem to be few new lessons from this crisis. What happened recently has happened before though perhaps not at the same scale. There were some unique contextual factors that created and sustained a larger and more pervasive than average financial bubble, but the underlying managerial failures were no different than in previous episodes of financial excess. Managers made dangerous and foolish decisions, consumers and investors engaged in risky behavior, and regulators were ineffective. Greed played a role but the bigger problem was incompetence.

There you go. At long last somebody calling our corporate and political leaders on the carpet for the greatest shortcoming of all, that is, their competence.

Why do you think the incumbents in Washington and state capitols are so nervous? The public is starting to realize and appreciate that many of our so-called leaders in both the private and public sectors are simply not all that competent.

Thank you Mr. Sahlman for telling it like it is, and thank you SH for sharing this piece with me.

LD

Click on image to access pdf document of Mr. Sahlman’s report:

This entry was posted on Monday, November 23rd, 2009 at 12:27 PM and is filed under General, management, Wall Street, Washington D.C.. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.