Dearth of True Leadership

A new class of MBA students at UCLA Anderson, and those around the country, are engaging in new leadership foundation courses in an attempt to better understand how to become effective leaders. Maybe our nation's leaders should enroll too. Just as we've witnessed from the poor planning of the Iraq war and the debacle of Hurricane Katrina, the current financial crisis and presidential election have only increased the transparency that the U.S. truly lacks effective leadership. This extends from the CEOs on Wall Street to our current President, both party nominees, and members of congress.

There has been significant debate as to who is truly to blame for the current market downturn. Fingers point to the regulators who didn't impose sufficient oversight, to the firms who bought and consolidated overly risky assets into investment portfolios, to the consumers who purchased homes that far exceeded their wealth and income. Regardless of which constinuency played the greatest role in the problems the economy faces, it has to be the participating firms and governing bodies who are responsible to fix the problems.

Instead, our leaders did a great job of living in a state of denial for most of 2008 trying to instill public trust without taking the necessary precautions to avoid a complete market crash. Now this isn't entirely true. The Fed did continue to lower interest rates, down to 2%, in order to maintain sufficient growth despite the possible issue of inflation due to high oil and commodity prices. However, they failed to address the necessary changes to ensure the market didn't continue to deteriorate and gain public trust.

You may argue...didn't they come in and take over Bear Sterns to prevent a market meltdown? No one could have imagined the problems extended so deep across so many players. True, they did intervene and foster the BS takeover for JP Morgan. But for experts whose job it is to assess risk, why would they make the assumption, this was the only firm with a high percentage of worthless assets on their books. No, this was the time they should have required complete transparency into the financials of all the brokerage and insurance firms holding mortgage assets. Again, in response...isn't that too incrimidating of the government or reglating body to go into the books of these firms? Sure, that's too much...let's not do that, let's wait then be forced to take on these assets with $700 billion of taxpayer money six months later.

This points to the two fundamental flaws of nearly all of our current leaders. First, they are short-sighted and focus on result only when they are in power, without considering the long-term impact of these decisions. Secondly, they are reactive, not predictive in their assessment of making decisions. CEOs have a relatively short tenure as do certain government officials, such as the President. They are incented to maximize positive impact for only their time as a leader. This explains why firms often fail to make the necessary investments for long-term growth and instead try to do more with less to hit quarterly earnings results. This is not innately bad, since to some extent it drives effiiciency and small-scale innovation. However, it can also impede innovation that requires significant resources or spans across multiple earnings periods.

Think of Alan Greenspan and his tenure as the Fed chair. Now, armed with only an undergrad economics degree from Northwestern and one year of business school at UCLA Anderson, I don't even want to pretend to have the expertise to prove any of Greenspan's decisions have led to the current market conditions. However, we do know that his rate decisions and reluctance to increase regulation (you can argue if this was truly his responsibility) were made to ensure growth continued while he maintained his position. Likewise, Bernanke and Paulson spent much of 2008 trying to put "band aids" on the economy, even at the cost of long-term effects. This of course only lasted until it was too late and a full-blown overhaul became necessary.

This then ties to the second postulate, that leaders only react. Now I am a huge fan of "The Black Swan" (possible post on this specific topic to come), and don't believe anyone has the capabililty of predicting future events. However, because it is impossible to know what will happen next, that makes measuring and managing risk even more important. Unfortunately, that isn't often the case.

When did President Bush address terrorism...after 9/11; financial problems...after the failure of major institutions. Will this same trend continue for issues such as climate change, national infrastructure, and social security and medicare? That is a dangerous game to play. Some of these key issues will only give us signals when it is too late to react and will have permanant effects. Our leaders need to think strategically about these issues, convene with industry experts, and communicate honestly with the public.

Instead, this past week gave us a presidential address coming one week too late to allay economic fears and a presidential candidate, who by the way has no formal role in creating a bailout plan, suspending his campaign and attempting to cancel the first general election debate. This is the time when leaders truly step up, they work to build plans to will succeed to address complex problems and articulate this plan to constinuents in a way that expands trust and confidence. How can John McCain truly avoid the debate? Do you want a leader who appears scared to confront questions about issues he will need to solve?

As a member of Generation Y, and innately impatient individual, I believe that experience, while important, should be considered along with skills, intelligence, integrity, ethics, and networks. So when a candidate refuses to demonstrate these traits, it makes me rather suspect of his or her ability. On the same side of the aisle so many people have jumped against Palin due to her lack experience. Yet, she can't overcome this argument because she refuses to address any of these other traits that may offset her limited resume.

Now is the time when leaders need to move to the forefront, develop solutions for all stakeholders across a meaningful timeline. According to HBS professor John Kotter, effective leadership requires moral judgement and a keen sense of all people or groups who are affected by the decisions of a particular firm or organization. Let's have an honest dialogue about what solutions need to be implemented and what risks need to assessed, regardless of the short-term pain points necessary to get there.