Tom Lloyd - Business at a Crossroads: The Crisis of Corporate Leadership

Tom Lloyd

Tom Lloyd 2010

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First published 2010 by

PALGRAVE MACMILLAN

Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS.

Palgrave Macmillan in the US is a division of St Martin's Press LLC, 175 Fifth Avenue, New York, NY 10010.

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Palgrave and Macmillan are registered trademarks in the United States, the United Kingdom, Europe, and other countries.

ISBN-13: 978-0-230-23094-1

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Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

This book is dedicated to the memories of my mother Maggie, my sister Judy, and two great friends, Peter Bielby and Ray Heath

This book has been germinating for several years during which time the way I see business has been influenced by many people. They include two turnips, as my wife calls them (they're Swedes), my friends and ex-colleagues, Karl-Erik Sveiby and Ronald Fagerfjall, John Curtis, Andrew Bull, Anne Murphy, Jon May, Anne Deering, Tony Rowland, Danny Barr, James Ramsden, Mike Hainsworth, Adrian Pryce, Richard Miller, Peter McAllum, Peter Robinson, and David Hurst. Thanks to all of you for the stimulating conversations that have led me to conclusions some of you will, no doubt, disagree with.

A number of other people have helped me to put what I have learned into the words that follow by contributing ideas and reviewing and criticizing drafts. They include Peter Duffy, Rich Foggio, Vince Darley, John McNulty, John Stansell, and Neil Marshman. Very special thanks go to my two most diligent and helpful reviewers, James Page and Antonie Reichling.

Thanks also to Palgrave Macmillan's Stephen Rutt, for taking a chance with the book, and his colleague Eleanor Davey Corrigan, for her helpful comments and guidance.

I would also like to thank Rose Lewis for her light and accurate editing.

The evolution of the liberal capitalist system ground to a halt in 200708. The default of the apocryphal subprime mortgage borrower in America's mid-west, a mere flutter of butterfly wings, caused a hurricane of fear to rage through the securitized debt markets and sent the world's banking system into cardiac arrest.

With the help of blood transfusions from central banks, the system regained a semblance of life, but emerged from the trauma a pale shadow of its former self. The hunger for ever riskier lending was transformed into extreme risk aversion. Banks, fearing their peers were even more exposed than themselves to the subprime securities market, stopped lending to each other and lenders dependent on the interbank market collapsed.

When the troubles spread to Main Street a bonfire of all Wall Street's vanities engulfed the Masters of the Universe, as novelist Tom Wolfe had dubbed investment bankers and securities dealers at the time of a less dramatic crash two decades earlier. What were they thinking? That securitizing loans to people on welfare made them less risky? That making a market in risk and moving it about would reduce its virulence? That the magic wand of economic growth would transform sows' ears of subprime debt into prime silk purses?

In the firestorm of recrimination and accusation that followed the crash, the trust ordinary people had in the powers that be those who had been running the liberal capitalist system, company chief executive officers (CEOs) and their Wall Street allies and their tolerance of their astronomical pay packets, were consumed.

The system was broken. Its fragility was exposed. There was a flaw in the complicated array of risk management devices and securities those erstwhile masters of the universe had designed to juggle the gravely mis-measured risks of their lending binge.

Perhaps there was a flaw in liberal capitalism itself.

It was up to governments and central banks, which were held partly to blame for what, with hindsight, was seen as their reckless deregulation of financial markets before the crash, to deliver first aid. It is up to us, the ultimate architects of political-economic systems, to decide the kind of society we want to live in, and the kinds of organization we want to work for.

A vote, whether cast with hands or feet, is no small thing, and at a time like the present, when long-held beliefs and previously unquestioned assumptions can no longer be taken for granted, a vote becomes a very large thing. In choosing political parties, by ticking boxes, and choosing the kinds of organization we work for, by walking away from some and toward others, we can reshape our society and its institutions.

Let us choose reform and restoration. The alternative is too awful to contemplate. I fear Yeats's Second Coming; the second coming of socialism. The return, to the political debate, of Marx's blank and pitiless slogan: From each according to his ability, to each according to his need.

It would be a rational choice in many ways. The system that failed was manifestly unfair. It was producing gross and rapidly growing inequalities. Ordinary people were already bemused and angered by the huge sums paid to hedge fund managers, investment bankers and CEOs before the crash. They were incensed by the enormous golden parachutes paid to the ex-CEOs whose strategies had contributed to the meltdown. They became apoplectic when, faute de mieux, their money had to be used to rescue the banks that had precipitated the crisis.

The financial crisis also exposed a profoundly unfair asymmetry in the system. In a rising market, bank lending magnifies gains which enrich a few hedge fund managers, investment bankers and top level executives. But in a falling market, it magnifies losses which are carried by everyone when banks are bailed out by the taxpayer. In this way, boom and bust act like an inequality ratchet. Gains during the boom are captured by the privileged few, losses during the bust are paid for by everyone and, cycle after cycle, inequality grows.