Lehman Brothers was founded in
1844 by Henry Lehman, an immigrant from Germany, in Montgomery Alabama. Prior
to the bankruptcy in 2008, Lehman Brothers was a role model of growth and
profit generation (Azadinamin, 2013). This management report will try to
address the influence of individuals, organisational, business environment and
ethics on operation decision making, moreover to find the relationship between
organisational and strategic decision with the help of Lehman Brothers as a
role and function of individuals, groups and other organisational and
environment influences shaping operational decisions
to Nahavandi (2003): “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”. 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 assertiveness
and responsiveness, the framework categorized four different styles including: analyser,
director, creator and connector (Darling, 2010). The figure below shows the
traits of each style.
(Figure – Interactive
Dimensions and Strengths of Leadership Styles. Source: (Darling, 2010)
According to the
characteristic of each style, Richard Flud fall into the director-type and
analyser-type in this framework. When Richard Fuld stepped up and take charge
of the company in 1994, he quickly analysed the problems at Lehman Brothers thus
developed the solutions for it. Flud developed a culture of teamwork to
eliminate the internal feuds which was one of the main reason for Lehman
Brothers demise in 1984 (Wharton, 2007). The equity award system was introduced
to motivate and tighten the relationship with the employees and moreover allow
them to think as owners (Wharton, 2007).
The director style in Richard Flud
leadership came from his characteristic: an aggressive and independent
businessman (Stein, 2013). Flud was described as the Gorilla of Wall Street for
his fierce and intimidating business style. Flud and Lehman’s success was fuelled by his massive ego thus Flud
consider building the company himself by his great willpower (Stein, 2013).
Richard Flud’s aggressive and narcissistic approach to business was also
the 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, but
not so practiced at straight listening, he deluded 25,000 all over the world
striving for Lehman”.
Fuld’s director style and
analyser style couldn’t help him to overcome the crisis. As mentioned, Fuld
wasn’t a good listener as in Lehman Brothers, most of the critics against him
was quickly eliminated (Latifi, 2014). The managers and staffs in the Lehman
Brothers tried to explain and warn him about the major trouble that they were
heading toward to but none of those was taken or addressed (McDonald, 2009).
For example, Mike Gelband – the global head of fixed income department of Lehman
Brothers – tried to analyse and bring up the awareness about the threat
incoming got ignore by the authorities in the firm thus believed he had
developed some kind of attitude problem (McDonald & Robinson, 2009).
In 2008, Richard Fuld told a
journalist 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 an
infusion 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 Brothers
operational decisions which lead to the bankruptcy of the firm.
Many different authors agreed
that Lehman Brothers independence on the subprime mortgage market was main
reason for the collapse of the firm (Ferrell, 2009; Adu-Gyamfi, 2016; McDonald,
2009). Subprime mortgages can be defined as the loans extended to customers who
would 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 subprime
mortgage indicate that the firm doesn’t seems to be aware that the subprime
mortgage market could eventually crash. In theory, if the mortgage prices
remain high, Lehman Brothers can be benefiting from the interest rate and they
would 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 relatively
risk, most of Lehman Brothers strategies were directed toward increase the
commitments in subprime mortgages (McDonald, 2009; Adu-Gyamfi, 2016).
The falling in price of
housing in America was a surprise for the whole market, including Lehman
Brothers. However, the assurance from the executives and high profit they are
enjoying make investors and the firm believe that the drop in housing price
would not affect them to a large extent. The result of huge losses from Lehman
Brothers proved the opposite as high interest rate plus the low prices of
property lead to a gigantic debt. By this situation, the Lehman Brothers lost
the trust from the hedge funds and other investment banks which later on lead
to the firm couldn’t get any bailout to rescue the crisis they faced.
When Lehman Brothers
implementing its strategy toward subprime mortgage, there were limited
regulation could be taken to decrease the risk facing by them. It also worth
mention the huge confidence of Lehman Brothers and other financial institution
in that period on a support from the United Stated (US) Government if they went
into any crisis. This lead to the unlimited risk Lehman Brothers were taking
when they invest in the subprime mortgage market. However, unfortunate for the
firm, this time the US Government decided not to save them. This come from the
fact that if US Government decision is to save Lehman Brotherss; they are
encouraging financial firms to blindly taking risk thus the government are not
getting any money if financial firms is doing business successfully. Moreover,
the decision of US government in the Lehman Brothers case can be discuss
further but it would not fit the purpose of this report.
Overall, individual and
business environment play a huge role in shaping the firm operational decision
as 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 the
failure of Lehman Brothers in the 2007-2008 period.
relationship between operational and strategic decisions.
Strategic decisions are
primarily considering about the external issues of the firm rather than the
internal one. We can define strategic decision as “a decision represents a commitment to a
particular course of action” (Hoang, 2014). Strategic
decision 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).
decisions usually take most of the firm’s energy and attention. Maximizing efficiency
of the firm’s resources, in other words, to maximizing profitability of current
operations is the main objective of operational decision. The major decision
areas are resource allocation (budgeting) among functional areas and product
lines, scheduling of operations, supervision of performance, and applying control
actions (Jalan, 2004).
a significant change was made in Lehman Brothers’ business strategy. From
traditional investment banking activities, Lehman Brothers started to massively
invested in securities. From a moving business, they changed into a storage
business (Valukas, 2010) by
storing the securities instead of trading them. As a result of this strategic
change, Lehman Brothers now making long term investment, allocating their
capital to increase the investment. This lead to a rise in asset position and
short term debt in their balance sheet (Valukas,
2010). Further into this, as the subprime crisis happen, follow the counter
cyclical growth by crisis to be temporary, Lehman Brothers decided to invest
their money in buy properties with a much lower price compare to the real
market value. The assets they purchase were categorize into mortgage based
securities. However, because of the subprime mortgage market taken too long to
come back to its normal state, Lehman Brothers suffer very hard which end up in
bankruptcy in 2008 (Valukas, 2010).
Before the change in business
strategy happen, the Commercial Real Estate, Leveraged Loans and Private Equity
division in Lehman Brothers were in a small size and carry limited low risk
compare to other division in the firms and therefore stress tests weren’t
conducted for these division (Valukas, 2010). However, after the change,
when these divisions now expose to higher risk, the stress tests still remain
not conducted. This fail in operational management lead to the unawareness of
upcoming risk that Lehman Brothers were facing, therefore later strategical
decisions are incorrect such as the aggressively pursue in the subprime market
with the expectation that the market will turn around (McDonald, 2009). In
2008, only near the time when Lehman Brothers went bankrupts, the stress tests
were performed. The result showed that the majority of risk and threat the
business were facing is from these three divisions.
Moreover, the change in Lehman
Brothers’ business strategy – funding long term positions using short term
loans – was very risky (Valukas,
2010; Zingagles, 2008). The fact that this strategy got carry out
and performed must be influence largely by the moral hazards created by the
corporate governance structure of the banks. In another word, more risk meant a
higher potential upside and would generate enormous profits if the market
turned in their favour, and would in turn provide large bonuses for top
executives. The fact that by seeing the bailout of Fannie and Freddie or Bear
Stearns in that periods, Lehman Brothers authorities have a belief that they
are too big to fail and they will have the cover from the government if
anything went bad (Zingales, 2008). In another word, this mean they will not be
responsible for the risk Lehman Brothers is taking. The firm risk limit was not
followed either. When the risk limit was breached, instead of lowering
positions of risky assets, the risk limit was raised as shown in the figure
(Risk Level of Lehman Brothers
– source (Valukas,
As the risk of the strategy is
now neglected, further operational decision such as the increase in amount of
investing in the subprime market or the controversy repurchase agreement (Repos 105) with
the intend to manipulate the financial statement of the company (Taylor, 2007;
Jeffers, 2011) thus hide the real condition of the company was taken.
operational decision and strategic decision have a dependent relationship. This
was illustrated by the example of Lehman Brothers. As the strategical decision
was made, the operational decision follow were to support and maximise the
efficiency of the strategic decision. By the fact that there was not intention
to reduce the risk of the business strategic decision, the following
operational decisions only focus on how to exposure the risk therefore lead to
the failure of the Lehman Brothers.
role of ethics in organisational and operational decision making.
When Richard Fuld was the CEO
of Lehman Brothers, the developed a strong culture in the firm with his
heavy-handed fist (McDonald,
2009). The staff in Lehman Brothers were very talented, however,
the communication between them and the authorities were not effective. Any
criticism about the aggressive growth strategy of the firm will not be permit
as it will be ignored or taken down quickly. Even though something went wrong
is noticed in the operation, managers in the couldn’t raise the awareness of it
due to the communication got stifled (McDonald, 2009). As the
authorities made the decision on their own, and the voice of staff are not
respected, it create an unethical communication culture which further lead Lehman
Brothers into a crisis where none of the risk or threats were consider in the
decision making process.
code of Ethics in Lehman Brothers, they mention: “compete aggressively in
furthering the interests of the firm” and “We must always do business in a
manner that protects and promotes the interest of our clients” (Steven, 2008). Since
the massive growth from 1994 till the collapse in 2008, the firm’s strategy
became more and more aggressive (Greenfield, 2009). As mentioned, the awareness
of moral hazard created from the corporate governance
structure of the banks put the bank into a lethal situation. Despite the huge
risk the business is undertaking, firm’s authorities keep expanding it for
their personal interest (the bonus) with the belief of a bailout from government
would save them if anything went bad. Finally, they couldn’t protect nor
promote the interest of clients, they end up put the firm on bankruptcy and
further created a global financial crisis.
Overall, ethic play a large
role in the organisation and the operation decision making as it directly
influence on how the company function and how the company make its decision.
To sum up, by analysing Lehman
Brothers a real life situation, the report had demonstrated that individuals,
organisational, business environment and ethics play a major role and have huge
influence on operation decision making. Moreover, operational decision and strategic
decision have a dependent relationship.