The cure to financial shenanigans

So, I’m riding the train heading back to The City from Washington. I was in town helping a friend with a lawsuit…(more on that later…maybe). I’m reading in the current issue of New York Magazine about Meredith Whitney and her new financial research and advisory firm. For those of you who don’t know, Meredith was formerly an analyst with Oppenheimer & Co. In 2007 she was one of the first analysts to call the beginning of the financial services industry meltdown due to the problems banks were going to need to address as a result of the sub-prime mortgage debacle. I don’t know Meredith personally but from what I’ve seen one TV and read of her work, I think she’s really smart and obviously ambitious. And as always I’m a huge fan of people starting their own businesses. One thing she wants to do with her new firm is advise banks on restructuring and acquisitions. And, herein lies the problem for me. Let me explain by positing a theory for you: I’m going to suggest to you something that will seem like common sense after you’ve read it but as the next few minutes pass (as you read on) I want you to think back to this time and try to remember if you “knew” this as a basic truth.

I’m going to suggest that the foundational problems we’re facing with the collapse of our financial institutions, have very little to do with the nature of financial transactions, balance sheet health, leverage ratios and AAA ratings on securitized mortgage products. These tactical outcomes that lead to the technical depletion of wealth and technical collapse of the credit markets were the results of cultural deficiencies inside the banks and financial institutions. Some (not all) players inside these institutions are perpetuating a culture of greed that has long been and is now the staple and measure of Wall Street success. The mindset of “increasing shareholder value” is one that infects these organizations with a cultural myopia that has proved to be deadly. I think Meredith Whitney is probably a brilliant financial analyst. And I would also bet that what she knows about transforming organizational cultures could roll around in a thimble for a year. The future of the financial service industry won’t be written by those you can best analyze a balance sheet. It will be written by those who understand that a new mindset, one that tends to the needs of a broad range of stakeholders (customers, employees, community, partners..), will lead us away from a culture of greed towards a culture of caring that actually creates real and sustainable wealth for everyone involved.

Now don’t get me wrong, this isn’t a Meredith Whitney trash piece. I think she’s dead on about some of the tactical things that need to happen to get this economy back on track. She’s right about giving regional banks more capital so they can pick up the slack on lending and she’s right about how the big banks need to sell of assets and retrench. But what needs to happen strategically is that our commercial institutions, banks and service companies, manufacturers and technology companies, all need to get out of the quarter-to-quarter, shareholder value mindset (as Jack Welsh says, this is not a strategy) and move towards a real business strategy of caring for the needs of all stakeholders as a means for creating long-term, sustainable value. Mergers, acquisitions, restructurings don’t fail or succeed because the financial engineering piece of the equation was executed correctly, they fail because of the marriage of incompatible cultures or because of the lack of a real organizational strategy. Successful strategies, the strategies that will thrive in the future, are those that recognize that the true path to sustainable value lies in engaging and inspiring employees to put customers needs above all; in developing win-win partnerships with suppliers and not treating them as indentured servants; in contributing to your local communities who give you “public license” to operate. The companies that operate like this will not only return excellent value to shareholders but because of their stakeholder mindset they are infinitely less likely to engage in the financial shenanigans that got us into this mess in the first place.