Authors: Tutor:
Subject:
Level and semester:
Analysis of Financial Crisis through Leadership
Perspective
Aistė Kuodytė,
Andreia Dias Dos Santos
Dr. Pr. Philippe Daudi Leadership
Master Level
‘When you really want something, all the universe conspires in helping you to achieve it.’ – Paul Coelho, ‘Alchemic’
We want to dedicate this Master thesis and say infinite thank you from all our hearts to our amazing families and all the
people who always make us happy!
...you are our wonderwall...
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ABSTRACT
The purpose of this Master thesis is to analyze, understand and evaluate current financial crisis from the leadership perspective. In order to achieve this aim we made literature analysis, conducted interviews, analyzed failure case of Lehman Brothers and case of NYSE Euronext Lisbon. Furthermore, we created a questionnaire which was sent to the biggest companies in Europe. According to our investigation, we found out that the most suitable methodological view for our research is a combination of analytical and system views. Analysis of our findings shows that financial crisis was highly caused of the failure of leadership in the financial sector. We found out that leaders have to be aware of these main problems: nowadays word is extremely interconnected and one variable can affect the whole system, huge short-term returns cannot marginalize long-term foresight, risk has to be measured and estimated, leaders has to pay a lot of attention to their strategies, plan, rethink and if it is necessary reshape them. Moreover, leaders now face more and more challenges: they have to react at the moment, to deal with world full of paradoxes and to take actions in order to increase level of confidence which creates more and more instability and chaos in the society.
Keywords: financial crisis, failure of leadership, leadership strategies, leadership trends, Lehman Brothers, NYSE Euronext Lisbon
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ACKNOWLEDGEMENT
The way of writing Master thesis was very meander and full of challenges. It was not always easy to find the shining star in the dark sky. However, we had a huge support from a big team, which was always with us and in our hearts. We agree with Jack Welch that “It is all about people” and we want to dedicate our first but not the last acknowledgement to the following people.
We take immense pleasure to say ‘merci beaucoup’ to our tutor, Dr. Pr. Philippe Daudi.
First of all, for giving us possibility to choose a topic which is very interesting and challenging for us. Secondly, for his insightful consultations, inspirations, motivation, discerning feedbacks during all the program of ‘Leadership and Management in International Context’. You helped us to find an exit in a labyrinth. We say frank ‘tack så mycket’ to Terese Jahansson for her shining eyes, smiles, hugs, endless and sincere help, support which we got during all the year. You made this year much easier and we always felt very welcome. Moreover, we say huge thank you to Dr. Pr. Philippe Daudi, Terese Johansson and Daiva Balčiūnaitė for all the support, great help and all time which you spent. Without you I (Aistė) would not be here now, kind thank you! I will not forget this.
We wish to express our deep sense of gratitude to all Linnaeus School of Business and Economics for giving amazing opportunity to conduct interviews and expand our horizons going to Portugal and Germany. Without your scholarship this would be hardly possible.
We say from the whole heart infinite ‘Obrigada’, ‘Ačiū’ to our wonderful families and friends which could not be with us in Sweden but they always were in our hearts and we felt their strong backing, care and trust. We would never ever forget to say ‘Vielen Dank’,
‘Zikomo’, ‘Muchas gracias’, ‘Merci beaucoup’, ‘Tack så mycket’, ‘Khawp khun kha’,
‘Danke dir’, ‘Xièxiè’ to all our friends, classmates which were much more for us than we expected. You became our family, only with you period in Kalmar was so amazing and unique experience, only because of you we were and are so crazy happy..
We want to say thank you to each other for this incredible time together. We became more than classmates or team members, we became ‘soul sisters’. We will not say more because sometimes silence says much more than words…
Once again, only because of all of you it is so hard to leave everything.. We will not come back the same, because we grew up a lot not only us students, but mostly as individuals, as persons. Thank you all from the whole heart, we do not say good bye, because you are always in our hearts and for true feelings distance is irrelevant!
With love and happiness, Aistė & Andreia
iv Table of Contents
Introduction ... 1
1.1 Choice and justification of the research topic ... 1
1.2 Aim of the Thesis ... 2
1.3 Context and scene ... 2
2. Methodology ... 4
2.1 Research question ... 4
2.2 Research design ... 5
2.3 Data Collection Methods ... 6
2.3.1 Primary Data ... 6
2.3.2 Interviews ... 7
2.3.3 Questionnaires ... 8
2.3.4 Secondary Data ... 9
2.3.5 Case Study ... 9
2.4 Survey Design ... 10
2.5 Scientific Research ... 11
2.6 Qualitative and Quantitative Research Approaches ... 12
2.7 Methodological Triangulation ... 16
3. Theoretical framework ... 17
3.1 Introduction ... 17
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3.2 Definition of leadership ... 19
3.3 Why leadership differs from management? ... 20
3.4 Towards a new paradigm of leadership ... 22
3.5 Crisis Leadership ... 24
3.5.1 Crisis Life-Cycle Model ... 25
3.5.2 Performance of a leader during an adaptive phase ... 28
3.6 Challenges for the XXI-st century Leader ... 30
3.6.1 Embracing Organizational Learning with Strategic Leadership……….………30
3.7 Strategy ... 31
3.8 Leadership trends………. ... 34
4. Analysis and Empirical Illustration ... 37
4.1 The players involved in the financial crisis ... 37
4.2 Financial crisis, leaders and failure of prudence ... 41
4.3 Peter Drucker: Managing Oneself ... 43
4.4 Theory of foresight and paradox between short term and long term decisions...47
4.5 Quantitative Empirical Results ... 50
4.5.1 Main causes of the Financial Crisis ... 51
4.5.2 Characteristics of the Leader ... 54
4.5.3 Relation between leadership and the Financial Crisis……...56
4.6 Case study: Lehman Brothers………...…...59
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4.6.1 History………....…60
4.6.2 For failure of Lehman Brothers, who are to be blamed?.60 4.6.3 Drucker’s Managing Oneself test application………..62
4.6.4 Balanced Scorecard………..64
4.7 Case study: NYSE Euronext Lisbon………...…….66
.. 4.7.1 History of NYSE Euronext………..………66
4.7.2 Interview with the director of NYSE Euronext Lisbon…..66
4.7.3 Comments, inspirations from an interview………..69
5. Conclusions………...70
References……….….72
APPENDIX 1 Guideline of the Interview………..…77
APPENDIX 2 The Financial Trust Index……….….78
APPENDIX 3 Questionnaire……….…79
Table of Figures and Charts Table 1 Comparison of quantitative and qualitative research approaches…………14
Table 2 Differences between leaders and managers……….21
Figure 1 Crisis Life-Cycle Model………...26
Figure 2 Organizational Adaptation……….…..28
Figure 3 Common elements in successful strategies ……..………...33
Figure 4 Leadership trends from 1980……….……..34
vii Figure 5 Answers into survey question ‘What would you indicate as the main causes of the current financial crisis?’………...52
Figure 6 Leaders’ Characteristics………...54 Figure 7 Histogram of the answers into the survey question ‘To what extent do you agree that financial crisis was caused by failure of leadership?………..56 Table 3 Correlations between ‘Leaders communication’ and ‘Employee performance’………...57 .
Figure 8 Relation between Leader’s communication and employee performance.58 Table 4 Correlations between Performance of a leader and negative effect of a
crisis...59 Figure 9 Balanced Scorecard...64
1. Introduction
1.1. Choice and justification of the research topic
The impact of the current financial crisis has had a massive impact on economies, industries, and companies around the world. The failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity is just few consequences caused by this crisis. Despite the fact that the world had a lot of big crisis before (The crash of 1929; US savings and loan scandal, 1985; The crash of 1987; The dot.com crash in 2000 and so on.) with the bankruptcy of the Lehman Brothers the biggest financial crisis since the Big Depression in 1930 has started.
Besides the causes of the current financial crisis to be mainly well known as a “Subprime Crisis”
there were the economical factors such as the mortgages subprime lending conditions, the partnership between organizations in order to afford to all Americans home ownership by the end of the century. The “creative financing” methods and innovative (“toxic”) derivates (Over-the- Counter Derivatives, Collateralized Debts Obligations and Structure Investment Vehicles) played an important role and was also appointed as a main cause of this crisis the failure of regulation in financial institutions. Therefore, it is extremely important to figure out how the role of the leaders and their actions reflected in the context of the financial crisis. Moreover, there are statements which demonstrate that current financial crisis was caused due to a leadership failure not only in the financial institutions but also by regulators of these institutions.
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1.2. Aim of the Thesis
The current financial crisis has had a cascade effect on the society as its negative impacts are spread not only in the financial institutions but also in the real economic sector, affecting the business, Government, and society spheres. Therefore, it is our aim to analyze the impact of leadership actions on the recent financial crisis as well as what led to such economic downturn since this crisis has already been considered the most serious financial crisis over the past century.
With this research issue we intend to relate the decisions of individuals who led those financial institutions to its collapse with a failure of leadership. Therefore, taking into account a leadership perspective rather than an economic one, it will be investigated the significant changes made in strategy in the business model or in the organizational structure as a result of the financial crisis.
Considering this crisis as a leadership crisis, our purpose is to apply the theory and understand how leaders of financial institutions can overcome this recent turmoil which has affected both economic and social sectors.
1.3 Context and Scene
The financial crisis had its beginning in mid-2007 on the occasion of the American mortgage market collapse along with the ruin of the market of complex structure finance assets. One crisis of such dimensions has necessarily huge impacts worldwide thereby American; Asiatic, Australian, and European investors have been affected by the financial downturn. The massive repercussions of this credit crisis are not precisely evaluated; nevertheless the losses could attain a trillions US dollars.
3 In the first half of the decade the interests’ rates and loan default rates displayed a low rate. Along with this fact, the high profits presented by the companies and the rising of stock prices instigated the creation of innovative financial instruments in order to foster the rise of their yields
.
As financial institutions were eager for huge amounts of profits, and also because of the incentives that were given to the CEOs in order to stimulate risky investments, these events led to the rise in risky assets such as subprime mortgages. The higher demand of such assets led to the mortgage securitization in the sense that enabled then turning low rated investments or collateral pool into triple-A, and warrant liquidity to these complex structured products. The extremely liquidity of the markets and also the shift towards a ´´originate-to-distribute´´ business model by the banking sector caused a huge influence for the development of these assets. Therefore, there was a massive run in order to buy these “profitable” assets since 2001 until 2006. The process of acquire a house was based on low teaser rates in the first years; furthermore people did not pay the principal in these years with the additional option of refinancing their credit with rising houses prices. On the occasion of the end of the teaser rates period, investors could either refinance their mortgage loan for another teaser rate period or if the borrower was not able to refine the loan was able to default the mortgage. Hence the losses were not faced by the borrowers but rather by the “Vehicles” that through securitization of these defaults mortgages would sell to new investors.
The issue around the subprime mortgage market arose when the house pricing began to decrease and the low default rate started to increase (2006), and along with this fact consumers were not able to pay their loans since they were considered creditworthy meaning that these borrowers were highly leveraged and without any possibility to pay the principal to banks. Consequently, the risky assets were no more profitable as before creating a perfect storm around the financial market.
Banks started to face insolvency with high levels of leverage along with the huge amount of defaults loans that have influenced the credit marks all around the world (Atkinson et al, 2008, Reavis, 2009).
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2 Methodology
2.1 Research Question
About current financial crisis all of us heard more than would like to hear. Usually economists, financial analysts enumerate a lot of complicated financial indicators, indexes in order to explain the situation, causes but on the other hand, finance is not only numbers, we believe that financial sector is not an exception and leadership has a great importance and impact. For this reason with our Master thesis we have a main purpose to analyze, understand, and evaluate the role of the leadership in the financial sector putting it (leadership) in the current financial crisis context. This question is broad, therefore, we have divided it into smaller topics, questions which we have to answer and later to put and join all the parts of the puzzle into one picture.
Our Master thesis has two main keywords – leadership and financial crisis. Therefore, first of all, we have to define what the leadership and financial crisis is, give a deep understanding of the context in which we are making our research. Only after this step we can seek to find out if leadership decisions (failure of leadership) could lead us to the biggest global crisis since 1930.
Therefore we hypothesize that “Main reason for the current financial crisis was lack of good leadership decisions”. This hypothesis arise more topics which we believe are highly important, relevant, interesting and have to be analyzed: where have (and if) leaders of the financial institutions failed that we are in the current global crisis situation?, make a research about which strategic decisions were implemented in the financial institutions, why, what is an outcome of this and what (or if) strategic actions should be changed?
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2.2 Research Design
According to Strauss and Corbin (1990), to seek a research based on qualitative research the starting point is to find out a topic or a broad question by which concepts could be identified and constructed from data. The chief feature of the qualitative analysis is the possibility to make discovers thus new concepts. The sources of problems in this form of research can derive from a suggestion of a professor doing research in the area, from some gaps or contradictions found in technical and non technical literature, from personal professional experience carry out by the researcher, or just by the research itself. To elaborate a research question is important as it, on the one hand, helps the researchers to determine the researches methods, on the other hand enable to establish boundaries in the study. Contrarily to the quantitative analysis, the qualitative research seeks explanatory studies rather than testing data (Strauss & Corbin, 1990).
Basically a research has to brainstorm, ”try out different ideas, eliminate some, and expand upon others before arriving at any conclusions” (Fisher, p.46).
In our research we will chiefly base the analysis on two distinct approaches, the analytical view and system view, meaning that our purpose is to combine both procedures in one single direction.
(Bjerke 1997) In the first case we strive to elaborate some hypotheses relating with the failure of leadership and the financial crisis; on the other hand, with the systems view we intent to make a case studies relied on two specific organizations - Lehman Brothers, which has been appointed by analysts as the main cause of the beginning of the financial crisis and NYSE Euronext Lisbon.
Yet linked with the analytical view, it is important to mention that there are several existing theories and techniques given a priori, thus they allow us to pursue the verification and falsification of the hypothesis which were elaborated before. Hypothesis can be described as “a proposition, condition, or principle which is assumed, perhaps without belief, in order to draw out logical consequences and by this method to test its accord with facts which are known or may
6 determined” (p. 83). If these hypotheses are verified or falsified, they make evident objective facts that make part of the objective reality. In our particular case the hypothesis which we want to verify is: “Failure of leadership has caused the financial crisis”. In the explanation of our topic is our purpose to reproduce causal relations in order to explain the effects through the founded causes (Bjerke, 1997).
Regarding with causal relations we have as cause the failure of leadership and as an effect the financial crisis, therefore the more arguments we could find out, the more reliable will be the explanation.
2.3 Data Collection Methods
The next step after the development of a theoretical framework is the process of collecting and analyzing data through different research methods, which further will open the gates to the interpretation of empirical findings (Fisher, 2010).
Therefore, the process of collecting data is based on two different sources of information; in the one hand, we collected new data through interviews, questionnaires and samples (primary data), on the other hand, we gathered information previously collected by others authors applied for other researches (secondary data) (Bjorn, 2005).
2.3.1 Primary data
The most commonly data collections methods based on primary information in business and management survey research are interviews, questionnaires, and direct observation of individuals and events (Sekaran, 2003). Following it will be explained each of different data collection methods employed in our research.
7 2.3.2 Interviews
In the business research, interviews are considered to be the most flexible and efficient method in terms of time, costs, and energy. An interview can take different forms depending on the degree of openness and structure thereby interviews are applied in both qualitative and quantitative analyses.
Thus a structured interview provides to the research a uniform data collection as the interviewer asks the same questions with the same order to every interviewee. Moreover, these structured techniques can be directed by face-to-face interviews or by telephone interviews. On the other side, there are unstructured interviews when there is a low degree of standardization in the questions and semi-structured interviews. The semi-structured interviews comprise both components in the sense that allow the interviewer to have a plan of the interview but at the same time provide a certain degree of freedom in the respondent’s answers (Blackmon and Maylor, 2005).
The process of making interviews portrays an efficient tool towards the research process mainly in the case of face-to-face interviews whereby the interviewer can adapt, modify, or clarify the questions depending on the interviewee’s reactions. Furthermore, the researcher is able to pick up information not only from the verbal communication but also from the nonverbal actions.
However, the process of interviewing also displays some issues concerning firstly with the problem of different meanings perceived by the researcher and interviewee that are likely to occur both in answers and questions of the interview. Along with the “meaning problem”, there is the respondent bias issue, which depicts several interviewees’ behaviours that might influence the final results. Such cases happen when the respondents have a certain tendency to answer according with the “social desirable” opinion rather than their own opinions (Bell and Bryman, 2003).
8 2.3.3 Questionnaires
The second applied data collection method was questionnaires not only because of the fact that this method allows overcoming the limitations of the interviews, but also because our intention was to pursue a statistic analysis.
The easiest and fastest way to cover a large number of data and information regarding one specific topic is employing questionnaires as data collection method. Likewise interviews, questionnaires can depict different forms regarded with their structure and nature of questions. When the questions are previously designed and the respondent is just taken charge of choose from a list, we are facing closed-ended questions, whereas when is given freedom of answering to the respondent we have open questions (Sekaran, 2003).
In a research survey it is commonly appointed the trade-off between the two techniques. If on the one hand in the questionnaires questions are limited to certain extend in objectivity, on the other hand, in the case of structured interviews it is possible to get additional insights and information as a researcher is interacting directly with the interviewer. Additionally, although in questionnaires the cost of including 100 questionnaires more is residual, there is no possibility to clarify if there were any misunderstandings concerning questions. Nevertheless, in order to surpass this issue it is recommended to include a final question “Any other comments” (Blackmon and Maylor, 2005).
Sampling
After collecting data through the previously described methods it is crucial to select the most suitable individuals, events, or objects in a research in order to carry out a reliable study. Thus this process entails the choice of the right samples, which in turn will support the statistical analysis (Sekaran, 2003).
A sample has a purpose to select smaller portions out of a totality named population in order to achieve a description of the totality taking into account this small number of units. In order to
9 display a reliable sample is required to have validity in the sense that there is no systematic bias, and due to the fact that a sample is not able to represent all reality if there was any deviation it must be random. The units that are selected to form this sample must be independent from each other (Bjorn, 2005).
The samples that we intended to apply are based on data that derived from the techniques for collecting data such as interviews and questionnaires.
2.3.4 Secondary data
The secondary information is applied in a research analysis whether other academic researchers collected data which is necessary to achieve researcher’s purpose or if they intent to research within a specific social unit in which they are not able to access information (Blackmon and Maylor, 2005).
As a result, the main sources of secondary data looked upon were: Companies and Government archieves, academic research results, business newspapers, and internet sites.
Sekaran (2003) argues that secondary information has as main advantages the fact of saving time and low cost compared with primary information. Nevertheless, the seeking of secondary data discloses two main problems for its use, on the one hand, you cannot be sure if the compatibility of those data will represent the work; on the other hand, there is no warrant that the past data is correct (Bjorn, 2005).
2.3.5 Case Study
One of the most important and challenging research designs in the conduction of a business research is the study of a “single, bounded entity, studied in detail, with a variety of methods, over an extended period” (p. 243) defined as a case study. This specific technique is not considered a
“pure” research method thereby it embraces several data collection methods as well as both qualitative and quantitative analysis. The benefit which carries out a case study is that it enables
10 researchers who do not have control over a specific situation or in the case of limited budget and time (Bell and Bryman, 2003).
Consequently two different units of analysis (financial companies) were selected in order to conduct our research project:
1) A study case based on the bankruptcy of Lehman Brothers as a consequence of the financial crisis.
2) A study case relied on the impacts of financial crisis in the stock market exchange – NYSE Euronext Lisbon.
The procedures evolved around the cases studies were:
• Definition of the case to be analyzed: one successful case (NYSE Euronext Lisbon) and also an unsuccessful case (Lehman Brothers deriving from the financial meltdown.
• Determination of the data to be collected: interviews as primary data and surveys, reports and archival research as secondary data.
• Decision about the presentation of the facts: organize a narrative according to a chronological scheme; a focus on people and processes around the organization.
2.4 Survey design
As was mention before, our research is based on qualitative and quantitative analysis. Accordingly the data collection methods based on primary information chosen to conduct our research design were the interviews and questionnaires. In this line, our purpose was to employ interviews as a tool to guide our study, and besides that to support our analysis in the case study of a global financial company, NYSE Euronext Lisbon.
11 On the other side of the coin, the quantitative nature of questionnaires opened the gates to a deeper analytical view along with a statistical approach based on SPPS software. Therefore, subsequently to the elaboration of a questionnaire, our task was to send 300 questionnaires taking the form of Email Survey for both financial companies and non financial companies. The main purpose was to collect data in order to estimate what were the mainly impacts of the financial crisis over the result and performance of the company. Furthermore, specific questions were made regarded with the importance leadership role inside an organization. These questions took the form of closed-ended questions, which enabled us to track a quantitative analysis, and also open questions in which gathered with the interviews contributed to the qualitative interpretation.
To sum up our research design can be depict the following way:
• Interviews and empirical observation in the financial company NYSE Euronext Lisbon, aiming at developing a case study.
• Web Email Questionnaire sent to all sort of industries and companies. The set of questions includes open and closed ended questions. The design of the questions were based on the 13th Annual Global CEO Survey Setting a smarter course for growth - Q&A: Telling the CEO survey story by PricewaterHouseCoopers report and on our insights got from the literature review.
• Interviews and emails to financial leaders and books authors as Bill George and Druckman Institute, which main advices complemented our theoretical framework.
2.5 Scientific Research
Scientific research can be described as a scientific exploration which has these characteristics:
• Searches for answers into the questions
• In order to answer the question consistently applies settled procedures
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• Gathers proof, arguments
• Generate information, facts which were not précised before
• Gives results which could be applied over instantaneous borders of the analysis (Qua).
2.6 Qualitative and Quantitative Research Approaches
Most of the researchers differentiate that there are two broad qualitative and quantitative methodology paradigms for collection of the information for the research purposes. (Charoenruk)
The first type of scientific research is qualitative research which has all the characteristics of scientific research described above and besides them it wants to realize research topic using different attitudes of the involved population. The strong characteristic of qualitative research is that it gives multiplex characterizations how different individuals empathize set investigation issue.
Very important advantage which is included in the qualitative research is that it identifies that the nature of social relationships is naturally not objective. Humans interprete, assess actions, behaviour of other people using their own lens of perception which are very subjective because they are constructed from individual frames of reference. According to the Olsen (2004), interview can be described as an action where two subjectivities meet each other. Besides this, Olsen (2004) argues that subjectivity has to be accepted and deeply analyzed therefore it means that objectivity is impossible. Moreover, knowledge which we got during own experiences, unstructured interviews, open-ended questions can be analyzed only with qualitative tools. Part of the researchers believe that information gained through qualitatively way is more valuable than quantitative data.(Olsen, 2004)
13 There are three main and the most popular qualitative research methods each of them is especially suitable for gathering a peculiar type of data.
• Participant observation – very useful if researcher wants to collect information, data from natural behaviour in usual environment, context.
• In-depth interviews – the best choice in order to get knowledge about personal experiences, points of view, stories.
• Focus groups – usually used to elect data about group’s cultural values and to generate broad understanding to the represented groups/subgroups.
The second type of research approaches is quantitative research. The origins of quantitative research are in biology, physics, chemistry and other natural sciences. This type of research is used to make investigations about things which researcher is able to watch and make measurements. Moreover, it is important to emphasize those observations and measurements which were done by one researcher can be repeated by another and outcome of this would be the same or almost the same result. (Charoenruk) Therefore, this type is usually characterized with words “hard”, “fixed”, “objective” (Losch, 2006 p. 3)
For better understanding how qualitative and quantitative research approaches differs it is valuable to make a comparison (Table 1).
14 Table 1 Comparison of quantitative and qualitative research approaches
Source: Qualitative Research Methods: A Data Collector’s Field Guide, Module 1, Qualitative Research Methods Overwiev, Family Health International, p. 3
From the Table 1 we can see that quantitative research methods have a lot of differences not only in general framework but also in analytical objectives, question, data format and flexibility in study design. Looking at the distinctions which occur from the general framework we behold that quantitative research method is used in order to confirm hypotheses using very structured methods (questionnaires, surveys) and structured observation. Conversely to quantitative methods, qualitative methods are flexible and the aim is to research, investigate phenomena applying semi-
15 structured methods (in-depth interviews, focus groups, etc.) Another group of differences between these two methods is in the analytical objectives part. If quantitative methods wants to quantify variation, make predictions of causal relations and describe population’s characteristics, qualitative research methods pay a lot of attention to description of the variation, relationships, individual experiences and group norms. Therefore, it is logical that quantitative method has closed-ended question format and numerical data format but qualitative method has open-ended question format and textual data format.
On the one hand, our research requires to use quantitative methods because one of our chosen ways to analyze the role of leadership in the financial crisis perspective is to investigate answers, predict causal relations, describe characteristics of a sector, etc. using questionnaire which was sent to the leaders from the financial institutions. On the another hand, it is relavant to use qualitative research approach because our aim is also to explore, get knowledge, understanding using semi-structured methods such as taking an interviews. Moreover, we seek to define variation, experiences, explain relations. Besides this quantitative research method is very useful because in order to get more inspirations, information we have to be flexible doing an interview, react at the moment, modify questions taking into account information which was said before it means that in contradistinction to quantitative research approach where participant does not have impact to the order of the questions, in the qualitative research approach participant has a very strong impact to the order, formulation of the questions. As we can see, our research cannot be done using only one approach. In order to join these two different approaches, reduce risk to use inappropriate method, increase validity of the project and get the best results it is useful to use methodological triangulation technique. (Losch, 2006)
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2.7 Methodological Triangulation
Triangulation in social science is described as a combination, mix of data, methodological approaches, theoretical perspectives or analytical methods “that diverse viewpoints or standpoints cast light upon a topic.”(Olsen, 2004 p. 3; Thurmond, 2001) Methodological triangulation is the method of using two or more methods, usually and in our case qualititative and quantittative research approaches, to route the same problem of an inestigation. Triangulation method is very efficient if one approach is not adequate for the whole research and only using a combination of different methods the problem can be solved. Because of our chosen methodology traingulation is the most suitable approach.
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3. Theoretical Framework
Good research requires strong and deep theoretical background which we got reading books, articles, internet sources.
3.1 Introduction
The financial crisis and its negative effects have had a massive impact in the economies and societies worldwide, thus as was mentioned in the previous sections our intent is to track a research that relates the lack of leadership in the financial institutions with the financial crisis.
There are several causes mentioned by researches of all areas including the economic, management, business, sociology, and psychology field. Therefore, taking this variety of statements into account our purpose is to conduct a research based on one specific cause stated by diverse authors – the leadership failure during the financial crisis.
Kirkpatrick (2009) claims that the failure and weakness of corporate governance within the financial companies was at certain extent one of the main causes of the financial turmoil. In his work it is argued that more than computational models failure there was another problem - lack of risk management procedures and board responsibilities. Additionally, the author states that there was not an adequate foresight strategy mainly in the monitoring and management risk and also that the incentives towards systems remuneration and bonuses instigated the risky activities taken especially by senior managements.
Crotty (2008), focus his argument on the “New Financial Architecture” (NFA) as the primordial cause of the financial crisis. According to the author, the current financial economics paradigm based on the efficiency of capital markets have contributed for the spread of baking conglomerates
18 also known by “shadow banking” of investment banks, Structure Investment Vehicles (SIV) and hedge funds. Furthermore, the NFA have contributed for the seriously misleading regulatory framework, the widespread of incentives that encouraged the excessive risk taking in unknown and complex financial instruments such as the mortgage-backed securities. The last argument defended is that NFA contributed to the high leverage and high systemic risk that by way of contagion channels spread from the US subprime mortgage market to worldwide economies.
Mourougane and Fuerceri (2009) claim in a report provided by the World Bank that the root of the financial crisis was due to a partnership created between the State, GSEs (Government Sponsored Entities) and lobbies that developed – The National Homeownership Strategy (1994) - which had as target to give the opportunity of “affordable housing” to all Americans by the end of the century. Together with this strategy were created two different institutions the Federal Housing Administration (FHA) and also the GSEs such as Fannie Mae and Freddie Mac in order to facilitate and make available the home mortgage funds to low and moderate income families to facilitate the purchase of their first house. Furthermore, these incentives and credit facilities were extended to minorities, which for the first time in their lives faced an opportunity to have their own house. At the same time, the leaders of banks were taking advantage of the lack of knowledge of unqualified home buyers in order to obtain more profits selling “toxic” products. In US, the expansion of home ownership and home building was regarded as a stimulus to the growth of the economy. One can say that in US before the Subprime Crisis there were two messages embodied by mortgage lenders, if on one hand the Americans were instigated to afford a house; on the other hand, due to their difficulties in access to the credits the bank identities gather with the Government pursued in “creative financing” ways for anyone was excluded to follow the
“American Homeownership Dream”.
Crouhy et al. (2007) propose as main causes of the financial crisis, on the one hand the role of the credit rating agencies who forecasted low financial losses for the sub-prime market even though the clear existence of signs of an economic downturn. Additionally, the Basel Agreement placed a
19 high importance in the role of the rating agencies, which in turn encouraged the investment in very risky assets.
In a recent report of Heidrick & Struggles (2009), is argued that the financial crisis was generated by a “systematic leadership failure” at all levels of players involved in the crisis, namely the Government, financial institutions, homeowners, investors, and regulators. Besides the factors mentioned the argument is focused on the individual decisions and behaviours thereby is questioned the character (greed, corruption behaviours) of current financial leaders.
In this sense a new model of leadership is required in order to meet the new challenges coming from the new economic paradigm. Therefore, first of all we aim to develop a theoretical framework based on the Leadership Theory, Leadership Trends, Leadership Strategy, and Leadership in a Crisis Context.
3.2 Definition of Leadership
The ultimate measure of a man is not where he stands in moments of comfort, but where he stands at times of challenge and controversy.
- Martin Luther King, Jr., Strength to Love, 1963
The role of the leadership in the society perhaps has never been so questioned as nowadays.
Besides the existence of full panoply of leadership concepts and approaches, this concept should be in an ongoing and upgrade change.
Therefore, taking into account a variety of definitions of leadership, there are three aspects common to all of them:
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• Leadership implies the existence of a group as to leadership make sense is required the presence of a leader and followers. In this sense, it entails interpersonal persuasion or influence.
• Because of being a goal directed activity, leadership is applied in order to achieve desired goals or influence to guide the followers. Thus has a vital role in organizations and groups.
• The presence of a leader within the organization takes place in the hierarchy of the company. In some cases it could be institutionalized and the position well defined whereas in other cases it is informal and more flexible.
In this way, “a leader is defined as any person who influences individuals and groups within an organization, helps them in the establishment of goals, and guides them toward achievement of those goals, thereby allowing them to be effective” (Nahavandi 2003, p.4).
3.3 Why leadership differs from management?
As it is well known among academic and businessmen in general, leadership differs from management. There are several arguments that illustrate this difference, for instance, Bennis and Nanus (2003) mention that management is “to bring about, to accomplish, to have charge of or responsibility for, to conduct” (p. 20), whereas leadership is regarded with “influencing, guiding in direction, course, action, opinion” (p. 20).
21 Likewise Georgiades and Macdonell (1998) point out the main differences among Leading and Managing. Leaders are focused on personal domains in order to reach their goals. They put a part of themselves towards the desired end and also stimulate others in ways that enable them to realize their goal into reality. Normally leaders are not associated with titles once they tend to be more flexible and behave in an empathic and intuitive way. On the other side of the coin, Managers aim at achieving goals in an interpersonal way and not driving the goals towards themselves.
Contrarily to leaders, they need titles and their position is formal in the hierarchy of the organization. They strive to command their job based on the organization of resources and they see the people as a vehicle to accomplish the goals.
Leaders Managers Focus on the future Focus on the present
Create Change Maintain status quo and stability
Create a culture based on shared values Implement policies and procedures Establish an emotional link with followers Remain aloof to maintain objectivity
Use personal power Use position power
Table 2 Differences between leaders and managers Source: Nahavandi, 2003, p 15
Nahavandi (2003) reports similar results (Table 2) and shows that leaders are focused on long- term and future oriented activities while at the same time they are concerned about affording a vision towards their followers that it would go beyond what anyone could predict or even known.
On the other side, Managers rely on short term perspectives and are considering more about the routine issues within their environment such as their department or groups. Moreover, they attempt to display the order and consistency in the organization through formal settings. The procedures taken by a manager can take a form of controlling, planning, and budgeting. A leader would demand a charismatic attitude thereby will create a sense of orientation through a vision and mainly providing excitement, motivation and stimulus towards their followers.
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3.4 Towards a new paradigm of leadership
Jesen and Scherr (2007) reached a conclusion that an effective model of leadership should include four main aspects: Vision, Enrollment, Breakdown, and Managing Breakdown. Thus as applied through a creation of an organizational and cultural environment where these aspects are strongly embodied and valued by all members, there will be a positive outcome towards the success of leadership. The four aspects are the following:
• Vision
To develop a vision towards the future is one of the key aspects of leadership as, on the contrary of management, leadership tends to use a long term perspective and furthermore, embodies an unpredictable component. This vision to the future entails the application of methods, techniques, and strategies that have never been in any circumstance or goes beyond all assumptions or predictions made before within the company.
Nevertheless, to have a vision towards the future is not enough once it is of upmost importance to have the ability and tools to convey the message to the followers. Georgiades and Macdonnell (1998) claim for the importance of having a personal vision, and the way that a vision has to influence and stimulate others. Therefore, the authors enumerate three main ways of how to convey a Sense of Vision. The vision can be communicated through Words such as Text, Slogans, and Drama, whereby excellent rhetoric skills are also required. Another way to convey the vision is through Visuals having the form of Images, Icons or Graphs. At last it could be transmitted with the support of Metaphors, Stories, Songs, or Dance. Regardless the way chosen the most important is to make the followers to remember and embody the conveyed message. Hence the vision should embrace hope, a certain degree of idealism, and a sense of endless opportunities to the followers.
The visions that are considered more powerful and effectiveness are the ones which combine a range of characteristics such as Appropriateness in the sense that fits in the organization culture,
23 history and values; Utopianism as it deploy to a certain extent values of high excellence and even high ideals; Clarify Purpose is important because the vision is focused on what the company committed to achieve and also on the functions that everyone should pursuit with a final end of
“hope and promise of a better tomorrow” (p.129).
• Enrollment
Leadership comprises the “Enrollment” characteristic when a leader conveys its vision through the creation of a personal commitment, which attempts to gather the most skilful and able people in order to accomplish the vision. Therefore, this process evolves two distinct steps, which are the act of communication the vision to the followers by adopting a way that enable them to feel engaged and above all feel rewarding for embrace such opportunity. The more excited, enrolled, and engaged was the vision statement, the wider will be the acceptance and individual personal commitment towards the accomplishment of the mission. Moreover, each person should be invited to take part of the mission and choose freely if he intends to accomplish or not the activity announced. This option of choice is vital in order to create a truly environment where people are authentically committed to attain a common purpose. Thus the authors believe that leadership is able to develop an effective group team with aim to achieve a common vision. Furthermore, a leader should display to a certain extent willingness to accept or even negotiate the new visions which they believe are indispensable to the accomplishment of the vision as the probability of the mission to be successful increases (Georgiades and Macdonnell 1998).
• Breakdowns and a leadership tool to manage them
As a vision towards the future is far from being foreseen, the risen of breakdowns is often an unavoidable event. Thus a breakdown can be defined as an event that is confronted with unexpected barriers, which in turn may stem the failure of the vision by the committed people.
Acknowledging the existence of a breakdown within an organization is of upmost importance as it can drive the organization towards an innovative and breakthrough path. Hence, once an effective
24 leadership displays a powerful tool in the sense that it constitutes a valuable vision mainly due to the fact that can instigate others to make a personal commitment to attain the vision, further it is able to develop a management tool which can detect the eminent failures and consequently contribute to turn them into a breakthrough. To achieve that state there are some procedures that should be taken thereby the first step will be the identification, acknowledgment and communication of a breakdown. The action of hiding or covering up such event could have dramatic consequences for the execution of the vision. In the second place, if an organization exhibits an environment which is not ready to deal with breakdowns, it is an important task for a leader to set a new organizational culture, which contrarily to the previous make people believe that a breakdown can in turn depict a “opportunity for breakthroughs”. To create such culture of resistance and make sure that the breakdown will not occur again, two important measures should be taken into consideration. Concluding, first and foremost, it should be developed and implemented a management system, which enable them to predict breakthroughs in an earlier phase whereby the remaining time will be spent to attempt and solve the problem. In second place it would be rewarding to build a culture that welcomes and acknowledges not only the bad side of the breakdown but also the good side that it could provide. To be successful in that, the message should be efficaciously transmitted in such a way that could commit the maximum amount of people to gather their efforts to resolve the issue (Georgiades and Macdonnell 1998).
3.5 Crisis Leadership
When the economy recovers, things won’t return to the normal – and a different mode of leadership will be required.
- Ronaild Heifetz et al, Harvard Business Review, 2009
A crisis symbolizes both unpredictable and unavoidable events that can occur at anytime and anyplace. The fact that we are living in a globalized world with substantial political issues makes corporations more vulnerable to organizational crisis (Klann, 2003).
25 Furthermore, the concept of an organizational crisis has been developed. Thus, for instance, James and Wooten (2004) suggest that “an organizational crisis is a low-probability, high-impact event that threatens the viability of the organization and is characterized by ambiguity of cause, effect, and means of resolution, as well as by a belief that decisions must be made swiftly” (p. 6).
According to them, when a crisis such as the recent financial turmoil comes across towards an organization it is extremely important to understand what leadership strategies can be employed in order not only to face and adapt to the crisis, but also to take advantage from its challenges.
3.5.1 Crisis Life–Cycle Model
Braden and others (2005) claim that the application of a leadership strategy during a period of organizational crisis resulted from an unexpected, dramatic, and often unprecedented event that force an organization into chaos and may destroy the organization without urgent and decisive action (Braden et al. 2005 p.1). Hence the authors introduce the Crisis Life – Cycle Model (Figure 1) in order to settle key strategies which has to be employed by a leader.
The model depicts a simplification of the reality as just one single event is analyzed, whereas in organizational life manifold crisis and conflicts may occur. The variables displayed are time in the horizontal axis and disequilibrium in the vertical axis. The disequilibrium component embraces the amount of chaos and stress felt inside a corporation by its members, and can be divided into three zones: the comfort zone, the learning zone, and the danger zone. The comfort zone is, as the name suggests, the area where leaders and organizations prefer and tend to be, also called the status-quo zone or state of equilibrium. The graph also illustrates that in order a organization pursue a change is required a certain degree of stress (above the line “Minimum Amount of Stress an Organization Can Tolerate”) as the more we move upward the more tension and conflicts will rise, further the bigger Learning Zone. Additionally, the organizations that disclose a high level of stress and chaos are the ones which have better ability to handle conflicts.
26 In a situation of crisis it is often reached the Danger Zone, entailing a high amount of stress within the organization thereby it is in this moment especially important that the leader would “take in”
and drive the organization to the Learning Zone.
Figure 1 Crisis Life-Cycle Model Source: Braden et al. 2005
On the other side, the horizontal axis stresses three distinct phases, the Preparation Phase, the Emergency Phase, and the Adaptive Phase. The Preparation Phase is concerned with the period prior a crisis. This moment is crucial for leaders as they should be aware of possible threats and signs that might exist inside the organization. Moreover, it is required for the leader to implement a safe environment and show credibility in order to make people feel safe when the change takes place. Yet it is important to understand the inevitability of change, and also the core purpose of the organization in order to make sense to them about the strategy adopted and the changing environment. The moment of changing towards the Emergency Phase is delimited by point A (Figure 1) where there is a formal warning of a crisis, thus it is the moment of the eruption of a crisis. Moreover, among all measures taken by a leader is of upmost importance to wane the prompt threats and avoid long term disequilibrium. It is common in a situation of chaos that leader
27 employs rapid solutions in order to keep stress levels and disorder lower from the Disorder Zone, nevertheless, at the same time it is important to be acquainted with the uncertaint environment surrounded the organization and to weigh the quick decisions taken with the core values of the organization. Leaders should manifest towards the members of the organization a confident, humble and relaxed attitude while displaying to a certain extent openness to say what have been doing and what strategies will change onwards. The Adaptive Phase happens when the situation is already stabilized. In this phase the actions should be weighted in order to avoid crisis alike jointly with a careful analysis of the root of the crisis. The process of adaptation takes place when a leader has the possibility to change the organizational culture, adopt new procedures and chiefly to grow and learn from the crisis (Braden et al, 2005).
In addition, Senge‘s (1990) work suggests that increasing adaptiveness is only the first stage in moving toward learning organizations (p.506), providing a clear distinction between adaptive and generative learning as well as a new conception of leadership roles. While adaptive learning is defined as a “copy” of past ideas and conceptualizations, generative learning seeks to find new ways of looking at the reality in the sense which attempts impulse to learn and to expand capacities.
James and Wooten (2002) argue that when a leader faces the Learning Zone he should embrace a new strategy for the organization, and doing so, some questions should be accomplished in order to adapt successfully to the new environment. These questions are the following:
• What did the organization learn from the crisis?
• Did leadership reflect in on the past behaviour and mistakes?
• Has the organization change behaviour to prevent future crisis?
• Has the organization developed a memory to prevent future crisis?
28 3.5.2 Performance of a leader during an adaptive phase
It’s not the strongest who survive, nor the most intelligent, but the ones most adaptable to change.”
Charles Darwin - 1859
Adaptive leadership often urges in a moment that an organization faces a turbulent and volatile environment (political and economic turmoil, technical changes) rather than in stagnant and predictable one. Therefore, the performance of a leader will be strongly influenced by the external environment. Whatever the type of change taking in place, doubtless the changes will affect the course and mission carry out by the company. In this way, changes require the acknowledgment of existing opportunities and threats, and above all the willingness to adapt to the new environment (Figure 2). “Adaptation is enhanced by accurate interpretation of information about the environment; collective learning by members; knowledge management; flexibility of work processes; and availability of discretionary resources” p. 78). In such environments it is common that innovative processes arise not only in response of those threats and opportunities but also as a measure of competitive strategy (Yukl 2004).
Figure 2 Organizational Adaptation
Source: http://www.cambridge-leadership.com/index.php/adaptive_leadership/
29 According to Heifetz et al, (2009), the recent bursting in the global economy had such negative impacts within the organization that involved an urgent need to define a new model of leadership relying on adaptive leadership. Therefore, in order to tackle an approach to take the best advantages and opportunities from a crisis, three very important measures should be embraced by a leader:
• In the first place, the leader will face a dual challenge, and as a matter of fact, drastic and efficient measures should be taken in short run. Nevertheless, at the same time a long term perspective is demanded to map out the new strategies taking place in the new atmosphere, and above all in a shifting world. As a result of this new context, the “old” and “ill”
practices have to be replaced by the ones that suit in the changing environment of the organization. Thus a leader has a task to “Foster adaptation”.
• In the second place, a leader should be able to produce a “Productive Zone of Disequilibrium”, that is, to create a balanced atmosphere between an inevitable situation of fear and conflicts and an emergency situation of changes and urgency within the organization. A new culture of dialogue among bottom-up members of the organization as well as a negotiation among all of them towards the achievement of best solutions would be praise to the organization. Hence, in order to thrive in this commitment, the leader has to “Embrace disequilibrium”.
• Last but not the least; once leaders are not able to produce the best choices by themselves, they have to acknowledge the importance of the connection and to a certain extent the interdependence which exists among all employees. Therefore, a leader should mobilize all members in order to attain the most efficient solutions. If one claims for innovative ideas, a wider range of different people with different backgrounds will be essential. This commitment among all members of the institution will be easier if a certain degree of authority will be relinquished. Consequently, “Generate Leadership” would not only
