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: (more…)