Financial Crisis 2.0?
Is the collapse of Silicon Valley Bank and subsequent troubles at other regional banks like First Republic foreshadowing another financial crisis like we experienced in 2008? At this point, I don’t think so. Much has been written about that question by various pundits, some knowledgeable, some with an axe to grind.
I’d like to add a different perspective. First of all, it is fair to say that situations like this always come down to a pivotal question – Who is to blame? Is it the regulators, some government agency, or certain politicians? Or is it business executives or financial institutions who are to blame? But, even more foundational are these questions – What role does risk play in our economy, how should it be evaluated, who benefits from it, and who pays the price when things go awry?
Risk must be discussed in the context of an economic system where there is freedom to engage in a relatively untested business endeavor that has the potential to produce a desirable financial gain, but also the potential to incur an undesirable financial loss. Both upside and downside have to exist and in most cases they are symmetrical. In other words, an endeavor with considerable upside also tends to have considerable downside. Alternative endeavors with very little downside will likely have very little upside.
When government regulators, legislators, and politicians fail to understand this important symmetrical relationship between risk and return, all kinds of problems occur. But this mistake seems to happen over and over again. The promise from the government always seems to be that more regulation can produce an asymmetrical economy, with significant upside, but absent significant downside. It is an empty promise at best.
The challenge to evaluate the behavior of business executives and their institutions is a bit more complex, in my opinion. A few key points. First, in a market driven economy there will always be business people who will figure out the loopholes to their advantage. No matter how many rules or regulations there are, business people will figure out how to use them to their advantage as long as there is the potential for outsized financial rewards. When greed becomes the primary motivating factor behind business decisions, then prudent risk management falls by the wayside. I believe this occurred in the financial crisis in 2008 and with SVB more recently.
Remove the potential upside and behavior will change. Less risk will be taken. But removing the upside means the economy won’t grow, making this solution undesirable. Again, government bureaucrats believe more regulation will be a panacea, but this never works.
So, the questions that are never asked let alone answered are these – Is there a different decision process model that would eliminate, or at least control greed, and elevate more desirable characteristics, while still promoting acceptable financial reward and economic growth? What might be these desirable characteristics that we would like to see in our business leaders and decision makers?
The answer to the first question is yes. It’s called servant leadership. A true servant leader will have these characteristics:
· He will keep the best interests of the organization first and foremost as he makes decisions. He will do his best to avoid greed and self-centeredness.
· A servant leader, relative to his position within the organization, should be the most underpaid individual.
· He will be motivated less by monetary reward and more by the legacy he builds. The how and the why become more of a focus than the what.
· A servant leader will live a life of integrity in word and deed. He will honor his promises even when doing so produces a financial or business setback.
I don’t know of any Fortune 500 company that talks openly about servant leadership being central to their overall management decision process and culture. Why is that?
Stay tuned to my next post.
Michael Kayes
*These views are my personal opinions and are not the viewpoints of any company or organization.