10 Management Lessons from Lehman's Demise

The way the failed bank was run violated numerous tenets of Peter Drucker's "scholarship of common sense," writes Rick Wartzman

By Rick Wartzman

Former Lehman Brothers Vice-President Lawrence McDonald has titled his insider account of the firm's demise A Colossal Failure of Common Sense. Peter Drucker, meanwhile, was once said by the London Business School's Sumantra Ghoshal to "practice the scholarship of common sense."

With this sharp contrast in mind a year after Lehman went bust here are 10 management lessons derived from Drucker's insights:

1. Executives who are preoccupied with their company's daily stock price or consumed with quarterly earnings targets don't make very good stewards of the enterprise.

"The most critical management job is to balance short-term and long-term," Drucker declared in a 1999 interview, adding that a "one-sided emphasis" on the former is "deleterious and dangerous."

Ultimately, said Drucker, deciding "whether a business should be run for short-term results or with a focus on the long term is…a question of values. Financial analysts believe that businesses can be run for both simultaneously. Successful businesspeople know better."

2. Tying individual compensation to short-term gains only exacerbates the problem.

It rewards the executive "for doing the wrong thing," Drucker said. "Instead of asking, 'Are we making the right decision?' the temptation is to ask, 'How did we close today?' It is encouragement to loot the corporation."

The Aspen Institute recently urged companies to "define firm-specific metrics of long-term value," and then use these measures "both to communicate with investors" and to "better align executive compensation" with what truly matters. The Federal Reserve is also considering forcing financial institutions to adopt policies that tie pay to long-term performance. Drucker would have lauded this initiative.

3. People don't like it when those who've exhibited the worst cases of managerial myopia get filthy rich in the process.

Inevitably, said Drucker, there is "an outbreak of bitterness and contempt for the super-corporate chieftains who pay themselves millions." Former Lehman Chief Executive Richard Fuld, who enjoyed $40 million in pay and benefits in 2007, recently complained that he has "been pummeled. They're looking for someone to dump on right now, and that's me," Fuld said.

Drucker, it's plain, wouldn't feel sorry for him. "Few top executives," he once remarked, "can even imagine the hatred…and fury that has been created" because of their unjustified pay. "I don't know what form it will take, but the envy developing from their enormous wealth will cause trouble."

4. High profits don't necessarily mean that you're producing anything of genuine value.

Lehman, in fact, reported record earnings in 2005, 2006, and 2007. That may have impressed the investment community. But that's not what counts in the end. "Securities analysts believe that companies make money," said Drucker. "Companies make shoes."

5. Moving money around isn't the same thing as producing actual goods and services.

To be sure, financial instruments have a vital role to play in spreading risk and ensuring the smooth functioning of the global economy. But when Wall Street is generating 40% of U.S. corporate profits, something has gotten way out of whack.

Drucker called this worldwide flow of capital and credit the "symbol economy," as distinct from "the real economy." "Americans," he said, "cannot live in a symbol economy where businessmen play only with numbers."

6. When you buy and sell lots of assets at prices that are considerably higher than the underlying value of what's being traded, the run-up can't possibly last.

"The average duration of a soap bubble is known—it's about 26 seconds," said Drucker. "Then the surface tension becomes too great and it begins to burst. For speculative crazes, it's about 18 months."

Business Exchange

Track and share business topics across the Web.