learning team reflection / What role did Lehman’s executives play in the company’s collapse? Were they being responsible and ethical? Discuss.
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week_6_team_paper.docxWeek 6 Team Paper
Read Case Application 1, "Lessons from Lehman Brothers: Will We Ever Learn?" at the end of Ch. 5 of Management.
Discuss the scenario with your team.
Discuss the second, third, and fifth discussion questions at the end of the case with your team.
Answer each question based on your team's discussion in no more than 350 words per question.
On September 15, 2008, financial services firm Lehman Brothers filed for bankruptcy with the U.S. Bankruptcy Court in the Southern District of New York. 95 That action—the largest Chapter 11 filing in financial history—unleashed a “crisis of confidence that threw financial markets worldwide into turmoil, sparking the worst crisis since the Great Depression.” The fall of this Wall Street icon is, unfortunately, not a new one, as we’ve seen in the stories of Enron, WorldCom, and others. In a report released by bankruptcy court-appointed examiner Anton Valukas, Lehman executives and the firm’s auditor, Ernst & Young, were lambasted for actions that led to the firm’s collapse. He said, “Lehman repeatedly exceeded its own internal risk limits and controls, and a wide range of bad calls by its management led to the bank’s failure.” Let’s look behind the scenes at some of the issues.
One of the major problems at Lehman was its culture and reward structure. Excessive risk taking by employees was openly lauded and rewarded handsomely. Individuals making questionable deals were hailed and treated as “conquering heroes.” On the other hand, anyone who questioned decisions was often ignored or overruled. For instance, Oliver Budde, who served as an associate general counsel at Lehman for nine years, was responsible for preparing the firm’s public filings on executive compensation. Infuriated by what he felt was the firm’s “intentional under-representation of how much top executives were paid,” Budde argued with his bosses for years about that matter, to no avail. Then, one time he objected to a tax deal that an outside accounting firm had proposed to lower medical insurance costs saying, “My gut feeling was that this was just reshuffling some papers to get an expense off the balance sheet. It was not the right thing, and I told them.” However, Budde’s bosses disagreed and Okayed the deal.
Another problem at Lehman was the firm’s top leadership. Valukas’s report was highly critical of Lehman’s executives who “should have done more, done better.” He pointed out that the executives made the company’s problems worse by their conduct, which ranged from “serious but nonculpable errors of business judgment to actionable balance sheet manipulation.” Valukas went on to say that “former chief executive Richard Fuld was at least grossly negligent in causing Lehman to file misleading periodic reports.” These reports were part of an accounting device called “Repo 105.” Lehman used this device to get some $50 billion of undesirable assets off its balance sheet at the end of the first and second quarters of 2008, instead of selling those assets at a loss. The examiner’s report “included e-mails from Lehman’s global financial controller confirming that the only purpose or motive for Repo 105 transactions was reduction in the balance sheet, adding that there was no substance to the transactions.” Lehman’s auditor was aware of the use of Repo 105 but did not challenge or question it. Sufficient evidence indicated that Fuld knew about the use of it as well; however, he signed off on quarterly reports that made no mention of it. Fuld’s attorney said, “Mr. Fuld did not know what these transactions were—he didn’t structure or negotiate them, nor was he aware of their accounting treatment.” A spokesperson from Ernst & Young (the auditor) said that, “Lehman’s bankruptcy was the result of a series of unprecedented adverse events in the financial markets.”
Discussion Questions
2. What was the culture at Lehman Brothers like? How did this culture contribute to the company’s downfall?
As the organization grew, especially in the mid-90s, the executive management became more isolated, hindering the ability to effectively communicate throughout the organization.
Because of the ambiguity concerning ethics, employees were unsure what actions constituted unethical behavior. It seemed that employees and managers latched onto the phrase “compete aggressively in furthering the interests of the firm”. Without explanation from top executives, this conceptual statement drove managers to engage in ever growing financial deals without regard for risk. It was these high risk financial transactions that led to Lehman Brothers downfall (Stevens & Buechler, 2013).
While Lehmann Brothers did have a published “code of conduct”, there simply was no ethical culture. To be effective, ethics must be part of the core corporate culture, not simply a piece of paper handed down from the top of the organization. Because ethics was not ingrained in the corporate culture, an environment that enabled unethical behavior was established and festered until it was too late. At one time, Lehman Brothers set a benchmark for success in banking. Now it is synonymous with failure.
Stevens, B., & Buechler, S. (2013). An Analysis of the Lehman Brothers Code of Ethics and the Role It Played in the Firm. Journal of Leadership, Accountability and Ethics, 10(1), 43-57.
Lehman Brothers Code of Ethics. Retrieved May 12, 2015 from
http://public.thecorporatelibrary.net/ethics/eth_13734.pdf
3. What role did Lehman’s executives play in the company’s collapse? Were they being responsible and ethical? Discuss.
5. After all the public uproar over Enron and then the passage of the Sarbanes-Oxley Act to protect shareholders, why do you think we still continue to see these types of situations? Is it unreasonable to expect that businesses can and should act ethically? (Robbins 147-148)
Robbins, Stephen P., Mary Coulter. Management, 11th Edition. Pearson Learning Solutions, 12/2010. VitalBook file.
