1. Introduction Lehman Brothers was founded in1844 by Henry Lehman, an immigrant from Germany, in Montgomery Alabama. Priorto the bankruptcy in 2008, Lehman Brothers was a role model of growth andprofit generation (Azadinamin, 2013).
This management report will try toaddress the influence of individuals, organisational, business environment andethics on operation decision making, moreover to find the relationship betweenorganisational and strategic decision with the help of Lehman Brothers as areal-life example. 2. Therole and function of individuals, groups and other organisational andenvironment influences shaping operational decisions2.1 Individual Accordingto Nahavandi (2003): “a leader is defined as any person who influencesindividuals and groups within an organization, helps them in the establishmentof goals, and guides them toward achievement of those goals, thereby allowingthem to be effective”. Richard Fuld, the Chief Executive Officer (CEO)of Lehman Brothers, was the leader on the top.
Darling and Leffel (2010)created a framework for leadership styles. Base on the leader’s assertivenessand responsiveness, the framework categorized four different styles including: analyser,director, creator and connector (Darling, 2010). The figure below shows thetraits of each style. (Figure – InteractiveDimensions and Strengths of Leadership Styles. Source: (Darling, 2010)According to thecharacteristic of each style, Richard Flud fall into the director-type andanalyser-type in this framework. When Richard Fuld stepped up and take chargeof the company in 1994, he quickly analysed the problems at Lehman Brothers thusdeveloped the solutions for it.
Flud developed a culture of teamwork toeliminate the internal feuds which was one of the main reason for LehmanBrothers demise in 1984 (Wharton, 2007). The equity award system was introducedto motivate and tighten the relationship with the employees and moreover allowthem to think as owners (Wharton, 2007). The director style in Richard Fludleadership came from his characteristic: an aggressive and independentbusinessman (Stein, 2013). Flud was described as the Gorilla of Wall Street forhis fierce and intimidating business style. Flud and Lehman’s success was fuelled by his massive ego thus Fludconsider building the company himself by his great willpower (Stein, 2013). However,Richard Flud’s aggressive and narcissistic approach to business was alsothe main reason for the bankrupts of Lehman Brothers in 2008. The Times (2010)describe him as “an unapologetic mogul of Wall Street, a straight talker, butnot so practiced at straight listening, he deluded 25,000 all over the worldstriving for Lehman”.Fuld’s director style andanalyser style couldn’t help him to overcome the crisis.
As mentioned, Fuldwasn’t a good listener as in Lehman Brothers, most of the critics against himwas quickly eliminated (Latifi, 2014). The managers and staffs in the LehmanBrothers tried to explain and warn him about the major trouble that they wereheading toward to but none of those was taken or addressed (McDonald, 2009).For example, Mike Gelband – the global head of fixed income department of LehmanBrothers – tried to analyse and bring up the awareness about the threatincoming got ignore by the authorities in the firm thus believed he haddeveloped some kind of attitude problem (McDonald & Robinson, 2009).In 2008, Richard Fuld told ajournalist about his opinion that he would not ever sell the firm (Gowers, 2008).This result in the failure of Lehman Brothers in selling themselves as aninfusion of capital from Warren Buffet nor arranged a deal with Morgan Stanley,Goldman Sachs and Bank of America (Story, 2008; Sorkin, 2009). Overall,individual, in this case is Richard Fuld being overconfidence, greed for money,lack of listening ability played a huge role in shaping Lehman Brothersoperational decisions which lead to the bankruptcy of the firm.2.2 BusinessEnvironment Many different authors agreedthat Lehman Brothers independence on the subprime mortgage market was mainreason for the collapse of the firm (Ferrell, 2009; Adu-Gyamfi, 2016; McDonald,2009).
Subprime mortgages can be defined as the loans extended to customers whowould otherwise not be accepted for credit due to their poor credit score (Adu-Gyamfi,2016). The fact that Lehman Brothers’s business was heavily reliance on subprimemortgage indicate that the firm doesn’t seems to be aware that the subprimemortgage market could eventually crash. In theory, if the mortgage pricesremain high, Lehman Brothers can be benefiting from the interest rate and theywould not be affected much by re-mortgage it to other borrowers (Adu-Gyamfi,2016). As it seems to be a terrific way to earn profit without any relativelyrisk, most of Lehman Brothers strategies were directed toward increase thecommitments in subprime mortgages (McDonald, 2009; Adu-Gyamfi, 2016).The falling in price ofhousing in America was a surprise for the whole market, including LehmanBrothers. However, the assurance from the executives and high profit they areenjoying make investors and the firm believe that the drop in housing pricewould not affect them to a large extent. The result of huge losses from LehmanBrothers proved the opposite as high interest rate plus the low prices ofproperty lead to a gigantic debt.
By this situation, the Lehman Brothers lostthe trust from the hedge funds and other investment banks which later on leadto the firm couldn’t get any bailout to rescue the crisis they faced.When Lehman Brothersimplementing its strategy toward subprime mortgage, there were limitedregulation could be taken to decrease the risk facing by them. It also worthmention the huge confidence of Lehman Brothers and other financial institutionin that period on a support from the United Stated (US) Government if they wentinto any crisis. This lead to the unlimited risk Lehman Brothers were takingwhen they invest in the subprime mortgage market. However, unfortunate for thefirm, this time the US Government decided not to save them. This come from thefact that if US Government decision is to save Lehman Brotherss; they areencouraging financial firms to blindly taking risk thus the government are notgetting any money if financial firms is doing business successfully.
Moreover,the decision of US government in the Lehman Brothers case can be discussfurther but it would not fit the purpose of this report. 2.3 Shortconclusion Overall, individual andbusiness environment play a huge role in shaping the firm operational decisionas can be proved by the impact of Richard Flud’s leadership and personality;the changed in market and the influence of the government in the case of thefailure of Lehman Brothers in the 2007-2008 period. 3. Therelationship between operational and strategic decisions. Strategic decisions areprimarily considering about the external issues of the firm rather than theinternal one.
We can define strategic decision as “a decision represents a commitment to aparticular course of action” (Hoang, 2014). Strategicdecision tends to answer the firm’s objectives and goal; in which direction,which area should the firm grow, how vigorously should they grow (Hoang, 2014). Operationaldecisions usually take most of the firm’s energy and attention.
Maximizing efficiencyof the firm’s resources, in other words, to maximizing profitability of currentoperations is the main objective of operational decision. The major decisionareas are resource allocation (budgeting) among functional areas and productlines, scheduling of operations, supervision of performance, and applying controlactions (Jalan, 2004). In 2006,a significant change was made in Lehman Brothers’ business strategy. Fromtraditional investment banking activities, Lehman Brothers started to massivelyinvested in securities. From a moving business, they changed into a storagebusiness (Valukas, 2010) bystoring the securities instead of trading them.
As a result of this strategicchange, Lehman Brothers now making long term investment, allocating theircapital to increase the investment. This lead to a rise in asset position andshort term debt in their balance sheet (Valukas,2010). Further into this, as the subprime crisis happen, follow the countercyclical growth by crisis to be temporary, Lehman Brothers decided to investtheir money in buy properties with a much lower price compare to the realmarket value. The assets they purchase were categorize into mortgage basedsecurities. However, because of the subprime mortgage market taken too long tocome back to its normal state, Lehman Brothers suffer very hard which end up inbankruptcy in 2008 (Valukas, 2010).
Before the change in businessstrategy happen, the Commercial Real Estate, Leveraged Loans and Private Equitydivision in Lehman Brothers were in a small size and carry limited low riskcompare to other division in the firms and therefore stress tests weren’tconducted for these division (Valukas, 2010). However, after the change,when these divisions now expose to higher risk, the stress tests still remainnot conducted. This fail in operational management lead to the unawareness ofupcoming risk that Lehman Brothers were facing, therefore later strategicaldecisions are incorrect such as the aggressively pursue in the subprime marketwith the expectation that the market will turn around (McDonald, 2009). In2008, only near the time when Lehman Brothers went bankrupts, the stress testswere performed. The result showed that the majority of risk and threat thebusiness were facing is from these three divisions.Moreover, the change in LehmanBrothers’ business strategy – funding long term positions using short termloans – was very risky (Valukas,2010; Zingagles, 2008). The fact that this strategy got carry outand performed must be influence largely by the moral hazards created by thecorporate governance structure of the banks.
In another word, more risk meant ahigher potential upside and would generate enormous profits if the marketturned in their favour, and would in turn provide large bonuses for topexecutives. The fact that by seeing the bailout of Fannie and Freddie or BearStearns in that periods, Lehman Brothers authorities have a belief that theyare too big to fail and they will have the cover from the government ifanything went bad (Zingales, 2008). In another word, this mean they will not beresponsible for the risk Lehman Brothers is taking.
The firm risk limit was notfollowed either. When the risk limit was breached, instead of loweringpositions of risky assets, the risk limit was raised as shown in the figurebelow(Risk Level of Lehman Brothers– source (Valukas,2010) As the risk of the strategy isnow neglected, further operational decision such as the increase in amount ofinvesting in the subprime market or the controversy repurchase agreement (Repos 105) withthe intend to manipulate the financial statement of the company (Taylor, 2007;Jeffers, 2011) thus hide the real condition of the company was taken.Overall,operational decision and strategic decision have a dependent relationship. Thiswas illustrated by the example of Lehman Brothers.
As the strategical decisionwas made, the operational decision follow were to support and maximise theefficiency of the strategic decision. By the fact that there was not intentionto reduce the risk of the business strategic decision, the followingoperational decisions only focus on how to exposure the risk therefore lead tothe failure of the Lehman Brothers.4. Therole of ethics in organisational and operational decision making.
When Richard Fuld was the CEOof Lehman Brothers, the developed a strong culture in the firm with hisheavy-handed fist (McDonald,2009). The staff in Lehman Brothers were very talented, however,the communication between them and the authorities were not effective. Anycriticism about the aggressive growth strategy of the firm will not be permitas it will be ignored or taken down quickly.
Even though something went wrongis noticed in the operation, managers in the couldn’t raise the awareness of itdue to the communication got stifled (McDonald, 2009). As theauthorities made the decision on their own, and the voice of staff are notrespected, it create an unethical communication culture which further lead LehmanBrothers into a crisis where none of the risk or threats were consider in thedecision making process.In thecode of Ethics in Lehman Brothers, they mention: “compete aggressively infurthering the interests of the firm” and “We must always do business in amanner that protects and promotes the interest of our clients” (Steven, 2008).
Sincethe massive growth from 1994 till the collapse in 2008, the firm’s strategybecame more and more aggressive (Greenfield, 2009). As mentioned, the awarenessof moral hazard created from the corporate governancestructure of the banks put the bank into a lethal situation. Despite the hugerisk the business is undertaking, firm’s authorities keep expanding it fortheir personal interest (the bonus) with the belief of a bailout from governmentwould save them if anything went bad. Finally, they couldn’t protect norpromote the interest of clients, they end up put the firm on bankruptcy andfurther created a global financial crisis.Overall, ethic play a largerole in the organisation and the operation decision making as it directlyinfluence on how the company function and how the company make its decision.
5. Conclusion To sum up, by analysing LehmanBrothers a real life situation, the report had demonstrated that individuals,organisational, business environment and ethics play a major role and have hugeinfluence on operation decision making. Moreover, operational decision and strategicdecision have a dependent relationship.