Current economic and financial problems have been caused by systematic failure of macho, short-term leadership

What we are encountering in the global economy isn’t just a credit crisis and looming melt-down of various financial institutions. It goes deeper than that. We are daily faced by clear proof that, in the past few years, many corporate leaders tried to increase short-term profits by engaging in amazingly risky activities and passing off the risk as immaterial. And that at the root of it all has been the failure of the type of “market-driven,” macho leadership that has been in vogue for the past decade or so.

I’ll let the facts speak for themselves.

The leaders of a good number of banks and once highly-rated finance houses made the most obvious mistake of every amateur: they invested heavily in things they didn’t understand — because doing so was the current vogue, everyone else was doing it, and other people told them to. Yet these people are not supposed to be amateurs. They’re paid big bucks because they claim to be professionals.

They showed no concern for the long-term stability and security of their businesses. They revealed no signs of independent thought; nor any willingness to question fashionable assumptions. They acted as leaders only in the sense that they lead the charge towards inevitable doom.

Instead of managing and controlling risk, leaders like this multiplied it through the use of leveraged approaches. Investors aim to make returns by lending their capital to businesses who can use it to good effect. Gamblers “invest” money in wagers on unknowable future events. Only fools gamble with borrowed money and react to losses by doubling up their bets. In some cases, the bets these “leaders” allowed their organizations to make represented more than 50 or 60 times their actual capital.

Leaders are required to be good stewards of organizational resources; not use them to play in high-stakes gambling games where one failure risks the whole business.

Today’s leaders focused on the shortest of short-term objectives. Some connived in the manipulation of company accounts to further elevate quarterly returns. Many ignored threats to the long-term well-being of both company and employees, in order to boost their own rewards and star status.

Leaders need to be role-models. The pattern these people showed to those aspiring to become leaders in their turn has been both foolish and unethical. In some cases, it has also appeared to reward dishonesty.

As the errors came to light, they tried first to dismiss them as minor, then cover them up, and finally turned to the only remaining source of capital: government — despite having loudly called for “free” markets and the removal of regulation and government involvement until the last few months.

Real leaders accept responsibility for their actions and face the consequences. These people tried to enrich themselves first, then run.

I believe there is more than enough evidence that the leaders of organizations who either encouraged such actions as those listed above, tolerated them, or were totally blind to what was going on, betrayed their trust. Whichever of the explanations for their action is correct, it still amounts to a systematic failure of the prevalent type of leadership.

How did we get into this mess?

As companies have become larger, more complex, and more technically challenging to run, the demand for leaders has far outstripped supply. Today’s mega-corporations are “all chiefs and no indians.” Our obsession with formal qualifications has also shut off the previously rich supply of people working their way into leadership positions, despite starting in lowly-paid jobs.

In an effort to bridge the gap, leaders have been trained to a formula, instead of being given the time and discipline needed to develop a full understanding of what the demands on them are likely to be. We have accepted one version of “leadership” and excluded nearly all the others.

Formulaic leadership can only ever be based on what seemed to work in the past — that’s the only source of formulae. Given the necessary time-lags in the education system, that “past” is often quite a long time ago. Any education system stretched to the limits — and hamstrung by political interference and budget cuts — can only do so much; especially when it too is short of leaders and the requisite number and quality of teaching staff.

As events change, formulaic leaders become further and further adrift from current realities. Since few have either the ability or the understanding to do more than parrot the formulae they were taught, they stick with it. And in a situation where all the candidates for leadership positions have been much the same — all taught to the same formulaic standard — choices come to be made on extraneous factors, such as whether people look like leaders, have the right contacts, and fit in with the current people at the top.

As a result, pushy, self-aggrandizing people came to the fore and the system became self-perpetuating.

What can we do about it?

I think there are some important questions all of us need to ask of those in charge of corporations and government:

• Do we need so many leaders? Most systems of so-called job evaluation are too easily manipulated to produce the required answer. Leadership used to be defined by the complexity of thinking required and the extent to which the role demanded a long-term vision of objectives and strategies. Of late, leadership positions have been indicated primarily by the number and hierarchical status of those supervised. The result is that you get to be a leader by inflating the status of your subordinates.
• How can we increase the supply of true leaders and replace those who have been grossly over-promoted? Once they gain status, however ill-deserved, people fight to hang onto it.
• What should be the training regime for future leaders? There’s certainly a need to get away from encouraging people to fixate on short-term returns and mere numerical ratios. How about going back to teaching the fundamentals of creating and sustaining a viable business over the long term?
• How can we get back to the point where leaders have to prove themselves before getting responsibility, not just look and sound good, or have powerful backers?
• Can we afford to allow the current generation of leaders to see out their time? Some have been proved to have little idea what is going on in their organizations; they are liabilities waiting to cause still more problems.

Leaving the definition and teaching standards for leadership to “market forces” and prevailing fashion has failed miserably. It’s time to get back to a robust debate about what leadership needs to be to bring about the greatest benefit for the greatest number.

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