It is the rare leader who leads beyond what is expected of him.Those who do are often labeled as unfit to lead and dismissed.

There are not that many examples of such rare leaders.  General MacArthur was certainly one.  He stood up to President Truman, who was quite happy to play at war in Korea without winning it, which cost many thousands of lives for no real gain.  Gen. MacArthur’s dismissal by the President was a terrible blow to his honorable record of service throughout World War II, an embarrassment to the Army he commanded, and the beginning of an approach to conflict that has plagued us ever since.  But his dismissal was also completely rational, because he was not working to expectations.

Leaders, who wish to keep their jobs, work to satisfy expectations.

Understanding this is critical to our understanding of what has recently happened in the financial and mortgage markets.

The key here is understanding that leaders lead only with the support of their constituency (i.e. stockholders or boards of directors in the case of corporate leaders or voters in the case of politicians).  A leader cannot get away with major strategic direction that his constituency does not approve, such as running full-bore into selling sub-prime mortgages.  This is not a matter of a few rogue leaders who ran ahead of their organizations without oversight or accountability.  Every head of every organization caught with their mortgages down was in that position with the full knowledge and support of his constituency.  That includes Wall Street, banks, and both GSEs (Fannie Mae and Freddie Mac).

Even the criminal actions of overstating balance sheets in order to gain the huge bonuses being offered had to be done with the knowledge and approval of a constituency.  For instance, Franklin Raines of Fannie Mae could not have gotten away with overstating his balance sheet repeatedly to gain the $90 million he earned over 6 years (as the organization was actually failing) without both his board and the Congressional oversight committee assigned to watch his actions approving of it.  In fact, in 2004, when Armando Falcon, the chief regulator who “blew the whistle” on these shenanigans, went before the Congressional oversight committee, he was all but tarred and feathered for his efforts.  No one seemed interested in hearing about anything untoward, because the objective of increasing mortgages to low-income families was being addressed.  End of subject.

Corporate executives also are being whipped for the “outrageous” sums of money they earn, primarily as a reward for pushing stock prices ever higher.  As I have written many times, the tactics they use to accomplish this are more often than not the death-knoll for the long-term success of the organization, but that doesn’t stop the board of directors and stockholders from applauding their efforts.

The problem comes down to, “Who really cares before the damage starts to show?”  Top executives are not stupid.  Neither are politicians (the few years I worked with Washington politicians proved to me that almost all believe they have the best interests of their constituency in mind).  They know exactly where their support comes from and what that constituency wants from them.  Despite all the worries about sub-prime mortgages that were voiced over most of the past decade, no one really cared.

Why?  Because expectations were being met.  The deceit was in hiding the truth from the constituency.  What made the sub-prime fiasco possible was the fact that risk was being “diluted.”  Every time a package of mortgages was sold to investors, the real hidden risks were lost in the mass.  That effectively removed the effect of what would have been the most vocal constituency: those who would have spoken up by keeping their checkbooks closed had they known the real risk.

The only constituency that really knew what was going on in most cases was the one gaining from it.

The same thing is going on in corporations across the country.  Decisions about how companies are being run are coming from the wrong constituency.  The expectations are being driven by boards of directors and stockholders, who care little about the long-term health of the company as long as short-term gains are good enough to increase their personal portfolios.

So, what is the answer?  Can we expect companies to survive and do the job for which they were created, i.e. job and wealth creation for those who invest their time and money into it, when persons with no long-term interest are defining the expectations for corporate executives?  Can we expect government-overseen organizations or programs to have positive long-term effects, if those defining expectations are only interested in narrow outcomes that can create far greater damage but that provide personal gain for them (even if it is only in terms of pandering to the base desires of their constituencies)?

Leaders lead to expectations.  Isn’t it time we started setting expectations that don’t just “use” an organization for personal success and instead start expecting long-term success that builds the organization creating that success?

We are being asked to take a greater personal role in addressing climate change.  Can’t we also take a greater role in demanding corporate responsibility? If not, we may be witnessing the end of the independently-run corporate model in America.

We are delegating far too many decisions that affect us as long as things seem to be “going right” (no matter how obvious the risks are), and then expecting someone else to make things right.  Isn’t now the time for the real constituency to stand up and make its voice known?

We can do it through our investing.  We can do it through our voting and regular conversations with our political representatives.  We can do it in through an unwillingness to let others speak for us, while we sit back and demand that everything go perfectly right for us.

How would you address this without giving even more control to a constituency that would drive the wrong expectations?

Your comments—priceless

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