The Financial Crisis, Early Warning Systems and the Leader’s Role

Crises just don’t happen.

As with any difficult time, the challenge is always how to learn from the experience to assure that it doesn’t happen again. Clearly, there will be some very provocative analysis. Some will attribute the root cause to greed. Others will state that the lack of regulatory oversight contributed to this problem. However, I feel that the very root cause may be elsewhere.

Every business leader must install four components by which they can operate their company.

The first is, of course, a strategy and operation plan. Strategy, as we already know, provides the corporate direction and the operational plan provides that tactics that we are to follow that will get is to the strategic destination. Together, they tell our organization what we must do.

If the strategy and operational plan detail the “what,” then it is the management philosophy that details the “how.” Every business begins and ends with people and their behaviors. A company must recognize the mutual opportunities and responsibilities with its customers, employees, stockholders, suppliers, communities and the public.

This recognition leads us to believe that it is desirable to have a common philosophy. The company’s philosophy should be the basis for actions by managers at all levels of the organization.

An effective management philosophy details

  • What the company is and what it will become
  • How the business will be managed
  • The basic responsibility for each employee
  • The human values that we will live by
  • The company image

The third pillar that must be in place is the compensation program. It should motivate people to properly deliver on corporate tactics consistent with the management philosophy. It serves as a means by which employees will wish to stay within the organization.

Finally, a set of steering mechanisms must be in place. Think of it as more than key performance indicators. It is the dashboard that illustrates how the business is “flying” in all areas and allows for early recognition of difficulties so that course corrections may be easily made and made as early as possible.

So , from a management and leadership perspective, what likely went wrong that caused this crisis?

It is likely that the failures that triggered this crisis are a result of deficiencies in all of the above areas.

  • The strategic and tactical plan may have been flawed in that it took on too much inappropriate risk.
  • The management philosophy may have either ignored or encouraged the achievement of short-term profits at the expense of long-term growth and therefore encouraged irresponsible behaviors and actions.
  • The compensation program may have rewarded results that were produced without consideration to proper behaviors.
  • The steering mechanisms may have been ignored at the earliest stages and therefore corrective actions could not be taken soon enough

The management lesson for all of us then is to place and actively reinforce these elements within our business. It is surest way to avoid catastrophe and the friendliest path to growth and success.

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