Wednesday, May 05, 2010

Colossal Failure of Common Sense

I have just finished reading a book called A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence McDonald with Patrick Robinson. Although called an “inside story”, this is probably not totally true, as McDonald only worked for at Lehman Brothers for a couple of years, so he did not really have full insight into all aspects of the organisation. As a consequence, he is very supportive of the people that he worked with, while negative about many others. This is not a balanced view, but it is still very interesting.

McDonald’s major theme is that Dick Fuld the CEO of Lehman Brothers Fuld was isolated from reality on the thirty-first floor of his ivory tower, so he was unable to hear warnings from people that things were not right. Fuld rose to the top of Lehmans on the coattails of Lew Glucksman. When Glucksman was joint CEO with Peter Peterson, he had ousted Peterson and seized control of the company. McDonald suggests that Fuld feared the same thing would happen to him, so he surrounded himself people who were not a threat.

Fuld’s isolation meant he was unchallenged as he made numerous mistakes that eventually led to the demise of a healthy business. Several opportunities to sell the business at a high price or to expand the capital base were rejected by Fuld. When the pressure eventually came on, Fuld floundered and failed.

This is a common pattern. Arrogance and isolation lead to failure.

No comments: