Was the U.S. economic disaster of the past 18 months a result of lax enforcement of regulations or poor leadership? According to the Times, 150 lenders have failed since mid-2007 and 2200 more are at serious risk of defaulting in the near future because of their business practices. The New York Times writes:
At bank after bank, the examiners are discovering that state and federal regulators knew lenders were engaging in hazardous business practices but failed to act until it was too late…the financial overseers failed to act quickly and forcefully to rein in runaway banks, according to reports compiled by the inspectors general of the four major federal banking regulators.
While the media blame regulators, regulators blame bank leadership. For example, in a recently released audit of the now closed Haven Trust Bank in Duluth, Georgia, the Office of Inspector General of the FDIC concludes:
Haven failed due to bank management’s lack of oversight and failure to control risk in its loan portfolio.
Taxpayers demand and deserve effective oversight of financial institutions. But enforcement of rules and regulations is only needed because of a failure of leadership. Bank executives have acted recklessly, emphasizing short term results at the expense of long term sustainability. In doing so, they have put their banks, and the resources of their customers, in jeopardy.
Bill George, in his timely new book, 7 Lessons For Leading in Crisis, argues that it was this failure of leadership that resulted in the demise of some of the most famous financial institutions. He says that the leaders of these institutions continue to avoid responsibility. He writes:
What shocks me is that leaders are not accepting their responsibility for this fiasco, in spite of the trillions of dollars and millions of jobs that have been lost…Some failed leaders are still in denial, refusing to take responsibility for the missteps that caused their firms to collapse.
Two major leadership themes run through Bill George’s book. One is the notion that truly high performing leaders take responsibility in a crisis. They own the organization’s failures, learn from those mistakes, are transparent about this, and apply that learning to the next crisis. The other theme is that high performing leaders keep an ethical compass pointed at their personal “True North”. This is George’s belief that truly great leaders are guided by a set of values and ethical beliefs that help them make the right decisions, especially in a time of crisis. He does not see this ownership of responsibility and a focus on their True North in the behavior of many financial institution leaders today.
It’s easy to fix blame for the failure of banks on regulators who face a great deal of resistance when they try to enforce rules and regulations. The more fundamental problem is with the failed leadership of banks.