Why we need a paradigm shift in leadership

Reading time: 5 minutes

18 Dic
18/12/2013
Foto del profilo di Markus Venzin

by Markus Venzin

SDA Professor of Strategic and Entrepreneurial Management

Are you happy with how things are going in society, politics and business?

The 2013 Edelman Trust Barometer is at a historical low and indicates that times demand that leaders should behave differently. Take the financial services industry as an example: The global economic decline and the liquidity crisis are often dated to various events, including when BNP Paribas terminated withdrawals from three hedge funds (2007), the U.S. subprime mortgage crisis and the bursting of the U.S. housing bubble, the plummeting of the values of securities tied to U.S. real estate pricing, and the overall damage of financial institutions globally

The reasons for the crisis were manifold: excessive financial leverage (including the use of off-the-balance-sheet financial vehicles), ill-considered acquisitions, diversification based on dubious synergies, flawed risk management and governance systems, as well as problems of vertical and horizontal coordination along the wider banking value network. The economic side effects cascaded globally, impacting the European sovereign debt crisis, which created high levels of household debt, trade imbalances, and record-high unemployment, thus imposing severe austerity measures.  In the financial industry, many banks have lost more than 90% of their share price, scores of banks were foreclosed, and of those that survived, many have yet to fully recover.

Leaders

The 2007-8 global financial crisis illustrates not just the technical difficulties of modelling risk, but it also raises the question of whether such risks may be inherently un-modelable. It appears that commerce and management policies that were guided by short-term profitability objectives have led to the development of ever more complex, opaque and difficult to evaluate financial systems and banking instruments. The problem of risk measurement turned into a problem of risk mismanagement. The speed with which trading in ‘toxic assets’ brought the interbank lending market to a standstill revealed the inadequacy of ex post volatility as a proxy for ex ante volatility, and also a basic truth: as conditions change, the future is often different from the past.

The financial crisis as well as the sovereign debt crisis have shown that firms need to create more robust business models. However, it seems that the task of developing resilience—a firm’s ability to adapt, endure, quickly bounce back, and then thrive despite a catastrophic event—appears on most managers’ strategic issue list only after a shock has occurred. It is like restarting with the back exercises your doctor has prescribed you after you had another acute lumbago problem. For how long will you do the exercises this time? Most likely until you forget the pain and your physiotherapist is not controlling you anymore.

Leadership_buildMany managers seem to have forgotten the pain the financial services crisis caused to banks, investors, clients and the economic and social system at large. Of the 20 largest US bankruptcies in the past 2 decades, 10 occurred in the last 2 years. As a consequence, regulators are forcing banks to reduce their financial leverage, limit bonuses and link them to long-term results. This is a good start. But without the willingness of bank executives to manage their businesses in a more responsible way, they will always find ways to return to old schemes – and there is evidence supports that this is already happening.

We need a public debate about responsible leadership – and not just in banking – that includes issues of maintaining personal and professional integrity, building public trust, and ensuring that ethical standards are respected. Responsible leaders create resilient firms. They have started to go back to old business practices and as a consequence some of them have also reached again higher profitability levels. Similar to big global social issues we need some brave managers and their stakeholders to renounce to higher levels of short-term profitability for the sake of increased resilience and persistent superior performance.

 

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3 risposte
  1. Foto del profilo di Massimo
    Massimo says:

    I agree with the analysis, and probably also with the prospected solution. But the perception as “man in the street” is that those who are not acting ethically are still having the higher pay back… Often Rulers and Irresponsible Leaders are the same “entity”. Look at what is happening in Bankitalia…

  2. Foto del profilo di Markus Venzin
    Markus Venzin says:

    Dear Massimo – glad you point out that a change in leadership will not be easy. I like the following quote by Niccolò Machiavelli:

    “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries … and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.”

    In other words, change is difficult. But is giving up an alternative? Have a look at a short video (you may want to start at minute 4) that features Malala Yousafzai, a 14-year old girl that fights for the right for education of women in her country. We all need a little bit of her energy to change things we believe in.

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