Companies & Industries

The Financial Crisis: What Drucker Would Have Said


Peter Drucker would have had plenty to say about the recent turmoil on Wall Street, beginning simply with: "I told you so"

Peter Drucker didn't have a whole lot of nice things to say about those on Wall Street, at one point likening them to "Balkan peasants stealing each other's sheep."

Given the magnitude of the latest crisis to grip Fannie Mae, Freddie Mac, American International Group, Lehman Brothers, and their friends, one can only imagine what kind of acid analogy he might have used today.

Or perhaps he would have simply said, "I told you so." After all, so much of the trouble that has befallen these giants of the investment banking, mortgage, and insurance sectors—and that threatens to "undermine the financial security of all," as President George W. Bush put it—comes from a foolish disregard for the kinds of fundamental lessons that Drucker taught about risk, reach, and responsibility.

Some prefer to complicate things. Indeed, there is a temptation, in certain quarters, to fuzzy up what has happened here—to mask the basic management failures that are at the root of this disaster by pointing to the intricacies of credit-default swaps, "naked shorts," and other arcana.

Luck Doesn't Last

But as Drucker knew so well, none of this is really very complex: If you make enough dangerous bets—and amassing your fortune on a foundation of laughably loose lending standards and mountains of debt is nothing if not dangerous—you're eventually going to run out of luck.

"No matter how clever the gambler," Drucker asserted, "the laws of probability guarantee that he will lose all that he has gained, and then a good deal more." He wrote these words in the 1990s, as a different group of once-illustrious institutions—Barings, Bankers Trust, Yamaichi Securities—were felled by their recklessness.

Drucker noted that top management professed to be shocked by some of the activities that had taken place at these firms, and it won't be surprising if we hear similar talk this time around—especially if people wind up going to jail. It was reported that the FBI has opened more than two dozen probes into possible fraud connected to the financial meltdown, including investigations at Fannie Mae, Freddie Mac, AIG, and Lehman.

But Drucker didn't buy that senior executives were blind to their employees' egregious behavior a decade ago, and he wouldn't buy it now. "In the first place," he wrote, "there is a limit to coincidences. Such widespread breakdowns cannot be blamed on 'exceptions.' They denote systems failure."

"Too Big to Hide

Besides, Drucker added, "in every single one of these 'scandals,' top management seems to have carefully looked the other way as long as trading produced profits (or at least pretended to produce them). Until the losses had become so big that they could no longer be hidden, the gambling trader was a hero and showered with money."

Of course, the pressure to produce these profits—and, in turn, prop up a company's share price—has become unrelenting. It used to be, veteran financial journalist Bob Reed remarked recently, "the stock price was an important component of something more grand: how well the company was managed, product quality, innovations, customer satisfaction—you know, the business." But over time, those pursuits have become largely overshadowed by just one: maximizing shareholder value.

To Drucker, this mentality was anachronistic. "One thing is clear to anyone with the slightest knowledge of political or economic history: The present-day assertion of 'absolute shareholder sovereignty'…is the last hurrah of 19th century, basically preindustrial capitalism," he wrote in a 1988 article. "It violates many people's sense of justice."

Perhaps even more important, Drucker said, this lack of balance is unsettling in a world in which large institutions have such an enormous effect on so much—on the portfolios of shareholders, yes, but also on the lives of millions of other people, as we're seeing right now.

Long-Term Thinking

In this day and age, "modern enterprise, especially large enterprise, can do its economic job—including making profits for the shareholders—only if it is being managed for the long run," Drucker wrote. "Altogether far too much in society—jobs, careers, communities—depends on the economic fortunes of large enterprises to subordinate them completely to the interests of any one group, including shareholders."

All of which leads, in the end, to the biggest thing missing today on Wall Street and in much of Corporate America: an ethic of responsibility.

Drucker believed strongly that every business must contribute to the general health of society. This means doing "good works" where appropriate. But above all, it means ensuring that the business itself is well-managed and built to last.

"The institution's performance of its specific mission is…society's first need and interest," Drucker wrote in his 1973 book Management: Tasks, Responsibilities, Practices. "A bankrupt business is not a desirable employer and is unlikely to be a good neighbor in a community. Nor will it create the capital for tomorrow's jobs and the opportunities for tomorrow's workers."

I often tell people that there are a million reasons to read and reread what Peter Drucker had to say. This week, it's more like 700 billion.

Rick Wartzman is the director of the Drucker Institute at Claremont Graduate University and an Irvine senior fellow at the New America Foundation.

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