JOHN GUTFREUND CASE SUMMARY
John Gutfreund, "a person of great integrity" (p. 197), winds up having to resign his position as chairman and CEO of Salomon Inc. because of unethical behavior on the part Salomon employees and a long delay in reporting the transgressions to the authorities: How does this happen? There are a number of contributing factors to this situation both personal and organizational.
Emotional Intelligence Two important components of emotional intelligence that are applicable to Gutfreund are self-awareness and self-regulation. Goleman (1998) tells us that part of self-awareness is being aware of one's values and goals. Although Gutfreund did not likely intend to allow unethical behavior to continue, it does not seem that he is strongly aware of his values concerning such behavior. I suspect if you asked him what he valued, his espoused theory-of-action (Argyris, 1991) would include something about the importance of ethical behavior in his organization. However, Gutfreund does not seem to be aware that his theory-in-use (Argyris, 1991) differs from his espoused theory-of-action until it is too late. It also seems that Gutfreund is not a man to reflect on whether or not this is the case. He has a "grueling" schedule, and being a man who wakes up each morning "ready to bite the ass off a bear" it is unlikely that he took the time to reflect on this situation.
Argyris (1991) suggests that a discrepancy between theory-of-action and theory-in-use often results from a tendency to avoid the pain associated with reflecting on and recognizing that we are not doing what we are saying. Colvin (1997) makes a similar argument and suggests that we often use a pain avoidance model (PAM) that is hard-wired into our brain. Fortunately, the higher levels of our brain can short-circuit this response, but it takes a conscious effort. This is where self-regulation comes in.
Self-regulation is the ability to control impulses. When faced with pain, one natural impulse is to avoid it. A person with skills in self-regulation will be able to avoid acting on impulse, in this case the impulse to avoid pain, and provide a more reasoned response. In the case of Gutfreund, we can imagine that he must have understood the consequences of delaying the decision to inform regulators about the transgressions in the firm. Why then would he delay? The answer to this lies partly in the organizational system, but partly in Gutfreund's emotional intelligence.
Gutfreund had been with the company for thirty-eight years and felt "all my life is here [at Salomon]" (p. 188). We can only assume that he fully understood the consequences of Mozer's actions but chose, consciously or unconsciously, not to take immediate action. He knew that taking action would cause pain for the company and likely himself. Instead of facing the pain, the impulse to avoid pain took over. He rationalized his inaction and became caught up in defensive reasoning (Argyris, 1991). His grueling schedule diverted his attention. Instead of taking responsibility to address the difficult situation personally, he assumed that someone else would discipline Mozer. Then, instead of being proactive and setting a meeting with regulators, he decided to wait until he ran across them at a meeting or reception. He rationalized this behavior partly by focusing on the fact that the transgressions were not technically illegal, i.e., the meeting could wait. But as Useem points out, the longer one waits, the greater the anxiety in actually raising the issue. As the delay grew, making the issue public became more embarassing, thus, it became more and more difficult to take decisive and appropriate action on the issue. Instead, an internal investigation was launched. This provided the air of legitimate action while simultaneously avoiding the pain that would be associated with going public. As is usually the case, avoiding the pain only comes back to haunt you. When, finally, you can no longer avoid the issue, the pain is multiplied. In this case, Salomon was almost shut down and Gutfreund lost his position at Salomon.
In the past weeks we discussed reflection. Often, we see reflection as looking back on what we did and learning from our mistakes, this is called reflection-on-action. This is an important part of reflection, but we should not forget another important aspect, understanding what we are doing while we are doing it, i.e., reflection-in-action. Emotion is a powerful source of data for reflection. When we feel emotion we need to understand the message it is telling us. When we behave to minimize the emotion, we need to ask what we are avoiding. Often, the correct path of action, as Colvin (1997) points out, is to move toward the pain. This does not come easily, and often takes a lot of introspection and emotional intelligence. Oshry calls this process "feeling the system" (p. 51).
Organizational Factors
The behavior of Mozer and others fits the high-stakes culture that permeates Salomon. Bond trading is a high-stakes activity and was the "lifeblood" of Salomon. To make the most money for Salomon, and thus himself, Mozer would resort to practices that went against the treasury rules for bond trading. Mozer, thus, could not control his impulse to bend the rules for personal gain and there were few indications that the corporation did not want the rules bent. In fact, Mozer's bonus was tied to his success at trading bonds and was not affected by his earlier activities. When he found out that Lawrence Hilbrand had earned a much greater bonus than he, he was that much more determined to increase his dominance and evidently saw no reason not to continue with the status quo.
The leaders of the organization send a message about what is acceptable and what is not. When Mozer submitted bids for greater than 35% of the available government notes, he was asked to stop by Michael Basham, Deputy Assistant Treasury Secretary. Mozer ignored him and Salomon did nothing. When the Mozer/Basham rule was instituted to stop the practice, Mozer once again could not resist temptation. When his excess bid was detected, he instructed his staff to cover up. Only when he could no longer hide his transgression did he confess. He made an excuse that it was an oversight and he went undisciplined. The message is becoming clear, Salomon is not very concerned with his activity, so predictably, he does it again. Furthermore, they are not very concerned with the message he is sending his underlings. It is not surprising that the internal investigation revealed additional transgressions, one being the result of a "practical joke gone awry" (p. 187).
As Badaracco (1998) points out, leaders have a responsibility to the organization. Although Gutfreund and the other top managers did not explicitly condone the illicit behavior, they did so implicitly through their inaction. The inaction is partly rooted in an impulse to seize the goodies, i.e., money to be made from the bond trading practices, and simultaneously the desire to avoid the pain associated with both examining differences between their espoused theory-of-action and their theory-in-use, and taking decisive action to expose and stop the transgressions. The inaction on the part of top executives created conditions in the organization that made it ripe for undesired behavior to occur.
Enter Warren Buffet
When Buffet took over, the situation had already reached crisis proportions so it is difficult to say what he would have done if he were in charge prior to reaching a crisis. Nevertheless, we can see a very different approach to handling the transgressions. The first order of business was to prevent Treasury Secretary Brady from shutting Salomon down. The currency Buffet used to influence Brady was his understanding of Brady's desire not to create an economic collapse. Buffet pointed out that suspending Salomon from trading might have a domino effect on the market. The ability to understand the emotions and needs of others is an element of emotional intelligence, i.e., empathy. Buffet also made a power move when he "threatened to step out of Salomon if Brady did not step back" (p. 190). Buffet could make this move and get away with it because he had credibility—a currency that is built up over time. In a time of crisis a leader's credibility is a currency that makes all the difference. If, as a leader, you sacrifice your credibility, as Gutfreund did, you will most likely not be able to lead in a time of crisis.
Buffet's approach to the situation was to immediately notify all Salomon officers they were to "'report, instantaneously and directly to me, any legal violation or moral failure on behalf of any employee of Salomon.' He listed his personal telephone number and added that among the only reporting exceptions would be parking tickets" (p. 191). There were no mixed messages and no intermediaries. He would be personally involved and assigned himself the role of chief compliance officer. He also created clear guidelines for action, if you wouldn't want it to appear in the newspaper, then don't do it. Salomon would achieve "superior returns [by] playing aggressively in the center of the court, without resorting to close-to-the-line acrobatics" (p. 191). His message and his actions were in sync.
In addition to creating a clear message about acceptable behavior, Buffet managed the emotions in the organization. It is not hard to imagine that people were anxious and concerned about the future of the company. Buffet understood this and created an upbeat and positive vision. He framed the situation as an opportunity to "preserve all the strengths of the past and have people look at us with a new eye" (p. 192) and suggested that "in the end you'll be more proud of this company than ever before" (p. 192). He also understood that people may be concerned or confused about how aggressively they should be in their pursuit of making money for the firm. He addressed this anxiety by reinforcing the message that being aggressive and taking risks is fine as long as it does not harm the image of the company. Thus, we see that being able to understand and intelligently work with emotions is not only important for avoiding crises but for leading through a crisis. And, as Goleman (1998) points out, it is a crucial skill for effective leaders, crisis or not. Empowering employees requires us to examine our sense of power. Reflection requires us to be honest with ourselves. Motivating employees requires us to empathetic and understand their needs. Pursuing goals requires us to manage the impulse to be self-serving. Leading systems requires us to be aware of our emotions and feel the system. Change requires the courage to break out of the status quo. And on it goes.