When the media frenzy dies down from pundits that have never built a company, hired employees, or developed a mission statement about what Dick Fuld should have done; thousands of people will have lost their jobs and the issue will be what can you learn from this?
Lehman went down and it was evident in April. Why? Because of what didn’t happen…
David Einhorn asked a simple question of Lehman’s CFO, Erin Callan during a conference call with Wall Street analysts in March, 2008. Einhorn happened to be on the phone and asked a legitimate question. Answers weren’t forthcoming. So a dance began. Various people tried to tarnish Einhorn’s reputation, a month later Lehman’s shares plunged 40%. What did Fuld do? He sued a Marubeni a Japanese trading company 35 billion yen in unpaid fees.
In April, Einhorn announced he was shorting Lehman stock. Callan called Einhorn and asked for a copy of his speech and he complied. And Callan? She spent her time badmouthing Einhorn. Why would you do that? Try to deflect attention from issue and blame someone else? Something was drastically wrong. Lehman shorts stock too. It didn’t make any sense. But Fuld did nothing. The stock dropped 40% and he did NOTHING!!!
What should have happened?
At this juncture, Dick Fuld should have gotten out in front of his investors, his clients, the market and he didn’t.
Study history…what did similar companies do in this situation?
When in a corporate crisis I often wonder why executives don’t study Johnson & Johnson and look to Jim Burke for leadership. Jim Burke, J&J’s Chairman learned a women in Westchester, NY died when her Tylenol capsule was laced with cyanide on February 10, 1986. This was the second crisis to occur…
In the fall of 1982, seven people died in Chicago with cyanide laced Tylenol capsules. J&J recalled the Tylenol and introduced a triple-sealed, tamper-resistant package.
This time, by Feb. 13 the Food and Drug Administration discovered a second bottle of cyanide laced capsules and warned consumers nationwide. J&J began a recall in Westchester and asked retailers nationwide to remove the capsules from the stores. J&J canceled all television ads for Tylenol and established a toll free hotline. The stock dropped $4 a share on February 14 and on Feb. 17 the company began a nationwide recall and announced the end of all nonprescription drugs sales in capsule form.
On February 18, Jim Burke went on the Donahue program and discussed the Tylenol crisis. Burke went on a national media tour even though he’s a private man and abhors the spotlight. Jim was going to do whatever needed to be done to save J&J…meetings with five other executives were confrontational because they needed to forge consensus.
Johnson & Johnson lives it’s credo, it’s ingrained in the culture of the organization, I know because I worked there. It’s not lip service. It is safety above profits. The Tylenol crisis cost about $150 million after taxes, but consumer safety that mattered most. Within the span of four years, J&J experienced two major crisis’s and what did they do?
J&J figured out enlightened self-interest. If you respect your clients, your customers–tell them the truth, look out for their interests, they’ll give you a second chance.
Wall Street can learn from Lehman and Johnson & Johnson.
All Dick Fuld had to do was get out in front of this in April, address the financial situation, support his CFO, develop a new plan of action, if there were mistakes admit them, and be realistic. He could written down his percentage of the 62 trillion notional credit default swaps (herein lies the problem–the credit default swaps!). And for those of you who haven’t read a 10K…Morgan Stanley’s and Goldman’s leverage went from 23.6 to 30.7. And Lehman brought their leverage down.
For those of you who think Lehman was “worthless” and don’t know any better, BlackRock bought a large chunk of Lehman stock in June. They wouldn’t have done that if Lehman was worthless. Not BlackRock. For those of you not in the industry, BlackRock is a preeminent asset management firm known for their risk management. The problem was Dick Fuld’s refusal to understand what Lehman was worth! He thought it was worth more than it was.
He should have sat down with his lieutenants and asked the question, what are our options? Instead Fuld demoted Callan, in June after raising $6 billion in new capital, after disclosing a $2.8 billion loss the quarter before, then fired a long time lieutenant and friend Joseph Gregory. Then the stock fell. What message did he send to his customers and investors?
You need to be 750 times more committed to your customers, clients and owners than anyone else to be successful. You must have integrity to your owners, your stockholders and Fuld didn’t do that.
When you are a public company your fiduciary obligation is to your stockholders, your customers and your employees. As a hedge fund your fiduciary obligation is to your investors and your employees…it’s not all about you.
How do you make sure you and your firm don’t end up like Dick Fuld and Lehman?
1. Surround yourself with good people that challenge you to mitigate executive hubris (Dick Fuld’s problem in negotiating Lehman’s worth).
2. When there is a crisis, emulate other companies that have successfully managed through a crisis
3. The minute a crisis begins, hire a consumer research company to start polling consumer and client perceptions about your organization. Order continuous polling throughout the crisis which will help you avert a crisis of consumer confidence.
4. Identify five executives on your “crisis team”.
5. Develop a risk scenarios and contingent plans.
6. Identify a Public Relations expert who can help you through the crisis (before the crisis not during!).
7. Create a culture that is committed to challenging one another.
8. Create a board of director’s that has at least one “naysayer” on it. If they’re all yes people, you’re in trouble.
9. Make sure someone on the board has P&L expertise, preferably an entrepreneur. (forget about cronies, you see how far that got Fuld).
10. Recognize your weak spots.
11. When there is a problem, develop a plan and get out in front of the issue right away. Don’t procrastinate, which includes a media plan.
12. When people’s livelihood’s depend on you, don’t let it be about your ego, you need to serve the greater good.
ev nucci
