Page 104 - (DK) The Business Book

102 HUBRIS AND NEMESIS

Continued management arrogance markets pick up, their business
breeds indiscipline; decisions are brilliance will ensure that the
made out of greed and warning company regains market leadership.
signs are ignored. Companies at
stage 2 make indisciplined leaps Now or never
into areas where they have little Stage 3 represents the turning point. The best leaders never
competitive advantage; diversify Many companies reach this stage presume they’ve reached
into areas in which they have no but manage to avert collapse. If ultimate understanding
expertise; or undertake ill-conceived management listens to the views of of all the factors that
mergers and takeovers. The its staff (especially from the front brought them success.
complacency of stage 1 turns into lines, such as sales staff), heeds Jim Collins
the overreaching of stage 2. shareholder concerns, and changes
By stage 3, problems begin to strategy in line with the changing
mount, staff begins to question reality, it is likely to recover. Andy
management decisions, and Grove famously pulled Intel back into
disturbing data suggest things profitability by pursuing this strategy.
might not be all that they seem. However, the same cannot be said
However, as Collins points out, it is for Lehman Brothers. In 2007, with bank and journalists asked
possible to be in stage 3 of decline its stock price at a record high, the questions about its future, Fuld
and not yet realize that it is US investment bank ignored the was reluctant to countenance any
happening. Anomalies in early warning signs of collapse. Even capital infusion. Selling parts of the
performance at this stage tend to be as cracks in the US housing market bank was not an option he felt he
explained away; any problems are became apparent, with subprime could consider. Although Fuld
blamed on “difficult trading mortgage defaults rising to a seven- eventually revoked this decision, it
conditions.” Management holds firm year high, Lehman continued to was too late: the bank declared
in the view that the company is expose itself to mortgage-backed bankruptcy on September 15, 2008.
strong and nothing is fundamentally financial products. Management, The way in which management
wrong. They believe that once the particularly the chief executive, responds to a crisis brought about
Richard Fuld, were blinded by hubris by success and accompanying
and deep in denial. They pressed on hubris is critical. Inevitably, “band-
with ill-conceived strategies and aid” solutions that do not address
quickly found themselves in stage 4. the underlying problems rarely
succeed. Quick fixes based on the
Dealing with disaster same overconfidence that brought
By stage 4 a company’s difficulties crisis in the first place—such as a
become undeniable—even the bold but risky strategy, a hoped for
most headstrong and arrogant blockbuster product, or a “market-
manager has to acknowledge that changing” acquisition—usually
there are problems. The question result in the company moving
now is how to respond. Unfortunately, to stage 5: capitulation to
as the Lehman example shows, irrelevance, or death.
acknowledgment does not always
result in appropriate action. Capitulating to irrelevance
As the global credit crisis In stage 5, reality finally hits home.
erupted in August 2007, Lehman’s Expensive failed strategies erode
stock fell sharply. Having grown financial strength and accumulated
Lehman to become the fourth setbacks damage the individual
“Rogue trader” Jérôme Kerviel
claimed his company, Société Générale biggest bank on Wall Street, Fuld spirits trying to repair the damage.
bank, was aware of his dangerously could not accept that it was time to Key managers generally leave the
large trades, but turned a blind eye adopt a new strategy. When company at this stage, and the few
because they were focused on profits. uncertainty started to grip the customers that remain migrate to