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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Finance Editions
- Sprache: Englisch
The modern business climate demands a new risk management strategy
Mastering Strategic Risk: A Framework for Leading and Transforming Organizations is a comprehensive guide to redesigning organizational systems to better manage the risks and complexities of the modern world. Based on the notion of "Create, Facilitate, and Support," the book provides a roadmap to ensuring optimum performance in even the most challenging circumstances. Whether applied to a system or an entire organization, the ideas presented can help unlock a business's potential and ensure a sustainable advantage.
Modern business leaders face unprecedented challenges, and risk management has become a strategic priority. Traditional management frameworks are outdated, and cannot be re-tooled to effectively account for the demands and complexities of the 21st century. Instead of adjusting old, ineffective models, businesses are better served by implementing an entirely new model custom-built to lead organizations through today's business environment. Mastering Strategic Risk describes this brand new framework, and provides the tools and background leaders need to remain effective in this new age. Topics include:
- The three forces behind customer behavior, competitive advantage, and a culture of discipline
- New major change agents that drive complexity and intensity
- Tools that help identify and mitigate the biggest risks to operations
- A new HR model to drive peak performance and galvanize employees
The book contains well-known real-world examples from Wachovia, Toyota, World-Com, and Citrix, that illustrate key concepts within the new framework and demonstrate the core elements of modern risk management. For the savvy leader looking to push an organization to the next level, Mastering Strategic Risk: A Framework for Leading and Transforming Organizations provides a brand new model for effective management.
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Seitenzahl: 448
Veröffentlichungsjahr: 2014
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Mastering Strategic Risk
A Framework for Leading and Transforming Organizations
JOEL E. MCPHEE, JR.
Cover Design: Wiley Cover Image: (top) Business Direction © iStockphoto/pixhook (bottom) Stock Exchange © iStockphoto/Georgijevic
Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.
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ISBN 9781118757291 (Hardcover) ISBN 9781118772874 (ePDF) ISBN 9781118772867 (ePub)
This book is dedicated to the Past and the Future:
The Past, in memory of my maternal grandfather, Arthur Leon Roach Sr., whose tremendous insight and vision inspires me to this very day
And
The Future, in the form of my wonderfuldaughters, Kimai and Kiori . . . It's a blessing and an honorto be the father of two amazing human beings!
Contents
Preface
Acknowledgments
Introduction: Mastering the Complexities of a New Age
Chapter 1: The Round World, the Square Pegs: Redesigning Organizations to Manage the Risks of a Different World
Righting the Ship: Managing the Complexities of a New Age
The Untold Story of Wachovia’s Demise: The Rise and Fall of an Industry Giant
A Symptom of a Much Larger Challenge
The Burning Platform: Why the Need for Change
Leveraging the Power of People
A World of Patterns: Does Nature Hold the Answers?
References
Chapter 2: The Three Elements: Creating, Facilitating, and Supporting Your Competitive Advantage
A Framework Taken from Nature
The Human Body as an Example
Ecosystems
The Three Elements and Our Marketplace
The Three Elements and the Auto Industry
The Three Elements and Organizations
The Creative Element in Organizations
Information Technology as an Example
Everything Old Is New Again
Summary
Questions
Note
References
Chapter 3: The Three Forces: Mastering Strategic Risk with Repetition, Balance, and Movement
Anticipating Change: Toyota
Three Forces that Dictate Performance in Systems
Movement and Change in Nature
Movement, Balance, and Repetition in Our Marketplace
Change, Balance, and Repetition in Organizations
The Three Elements and Forces and Our System of Government
The Federal Government Supports, Facilitates, and Creates: A Fractal View
The Federal Government and Oversight
A Holistic Approach
Summary
Questions
References
Chapter 4: Transforming the Corporate Agenda: Applying the New Learning to Master Strategic Risk
Aligning the Three Elements and Forces for Impactful Results
The Three Elements as Key Drivers of Organizational Performance
Creativity and Innovation through the Lens of Industry Leaders
Identifying Additional Centers of Creativity and Growth in the Most Unlikely of Places
Growth through Facilitative Functions and Capabilities
Growth through Supportive Functions and Capabilities
Repetition and Operational Excellence
Wachovia and Merger Integration
Managing Movement and Change
The Value of a Transformation and Change COE
The Importance of Measuring Key Controls and Activities
Assessing Key Drivers through the Universal Guide
Summary
Questions
References
Chapter 5: Risky Business: Why the Environment Should Matter to You
Our Self-Centered Interests
The Truth about Systems
Our Commercial Ecosystem
Driving Growth and Shareholder Value through Sustainability
Demystifying the Myth . . . What Really Is a Corporation?
A Lesson on the Environment and Sustainability
Other Factors Driving Commerce
Improving Our Interaction with The Planet
Making the Case for the Environment
The Corporation and the Community
The Realities of Life Downstream
In the End, It’s About the Individual
Summary
Questions
References
Chapter 6: Governance, the Cornerstone of Risk: The True Role of Accountability in Organizational Systems
Governance in Natural Systems: The Human Brain as an Example
WorldCom and the Bernie Ebbers Story
Strategy and Governance
Complacency and Governance
The Role of Accountability in Systems
Accountability at Adulant Technologies
The Importance of Roles and Responsibilities
A Crisis of Corporate Culture: The Story of News Corp.
The Independent Board of Directors
Summary
Questions
Notes
Chapter 7: The Game Changer: Stewardship—Taming the Land Grabbers, Passive Aggressors, and the Mighty Ogre
The Coup D’état
It’s Time for Change
A Profile in Leadership
Summary
Questions
References
Chapter 8: The Risks of Human Capital: Unleashing the Conceivers, Deal Makers, and Sustainers
A New Human Resources Model
The Internet Example
A New Model for Evaluating Teams
The Diversity Trap
The Three Forces and the New HR Model
Summary
Questions
Chapter 9: Waking Sleeping Giants: The Importance of Empowering Employees
The Empowered Employee: The Key to Driving Peak Performance
Citrix Systems Inc.: Cultivating a Culture of Empowerment
Adapting to a Mobile Workforce
Employee Engagement and Its Linkage to Empowerment
A Professional Development Journey
Reinvention and the Individual
The Learning Organization’s Connection to Movement and Change
The Importance of Infusing New Blood into Your Organization
Employees Driving Shareholder Value
Tapping Employee Resources to Enhance Value
Do They Have a Dog in the Fight?: Engagement through Creating a Compelling Vision
Seizing the Opportunity at Hand: A Message to Employees
Summary
Questions
References
Chapter 10: The Shining Moment: Unlocking the Potential and Promise of the Twenty-First Century
Henry Ford: Riding the Wave of Converging Forces
Our World Then and Our World Now
The Call for Transformation
Mastering Change Matters More Now than Ever Before
Enhanced Capabilities Driving Change
Human Beings: Our Greatest Natural Resource
Man’s Coming of Age
What Will Be Our Lasting Legacy?
The Way of the WORLD: REVISITING the Core Elements and Forces
The Emerging Steward: Why Organizations Must Lead from the Edge
The Masters of Our Fate
Summary
References
About the Author
About the Companion Web Site
Index
End User License Agreement
List of Illustrations
Chapter 2
Exhibit 2.1 The Three Elements
Exhibit 2.2 Systems of the Human Body
Exhibit 2.3 Ecosystems
Exhibit 2.4 Marketplace Activities
Exhibit 2.5 Organizational Activities and the Three Elements
Chapter 3
Exhibit 3.1 Movement, Change, and the Corporation
Exhibit 3.2 The Three Elements and Government
Exhibit 3.3 The Three Elements and Forces
Chapter 4
Exhibit 4.1 The Universal Guide of Governance
Exhibit 4.2 Strategic Risk Assessment
Exhibit 4.3 Growth Opportunity Assessment
Chapter 5
Exhibit 5.1 Our Commercial Ecosystem
Exhibit 5.2 Timeline of Human Activity
Chapter 8
Exhibit 8.1 Individual Contributors
Exhibit 8.2 Marketplace Activities
Exhibit 8.3 Functional Personality Types
Chapter 9
Exhibit 9.1
Chapter 10
Exhibit 10.1 The History of Change
Exhibit 10.2 Stages of Human Growth and Development Data Source: Robert V. Kail and John C. Cavanaugh, Human Development,
A Life Span View,
6th Edition, Cengage Learning, January 12, 2012.
Guide
Cover
Table of Contents
Preface
Introduction
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Preface
If you’ve picked up this book, it’s likely that you’re someone who is a lot like the way I was: a senior executive at an organization charged with finding a way to help your group not merely survive but thrive in times of uncertainty. The challenge before us all is daunting. But the great news is that it can be done. And, in essence, nature has already shown us the way for it to happen.
For over 20 years I’ve been at the forefront of solving the critical challenges facing large, complex organizations. I’ve led organizations through troubled waters and changing market dynamics and I can help you lead yours through, too. Having held key executive assignments at industry leaders such as Wells Fargo Inc., and providing consulting services to top global brands, I possess an extensive background in understanding the keys to driving peak performance. Through these experiences I realize that more than ever before companies need new tools to manage the requirements and complexities of our new era. As we move steadily toward the future, I’ve also observed that, as individuals, we struggle to manage the intensity and pace of change we face.
But one of the most important things to realize is this: new challenges bring new opportunities, and markets yet to be culled and discovered. And the transformation of people, resources, and our world now lie within our reach in a way that we may have only dreamed about before.
Mastering Strategic Risk was written with these circumstances in mind. It provides a simple, yet effective solution to these formidable challenges. Mastering Strategic Risk offers a perspective that redesigns organizational systems to manage the risk and complexities of a radically different world. I believe CEOs, executives, leaders, managers, and employees of all types should read this book. So should any other professional or function tied to ensuring optimal corporate performance, including external auditors, consultants, board members, and suppliers of services to companies.
Mastering Strategic Risk is also a book for anyone who desires to understand how our world works and would like to explore new ways of thinking through the opportunities and common pitfalls we face today. My goal is to introduce a fresh perspective, one that provides readers with a new approach. More than just case studies, we will look at how successful companies have navigated challenges and take the wisdom they have learned from these experiences to help you apply it to the challenges you face day-in and day-out. You will be equipped with tangible tools that are relevant and can be applied for immediate results.
I hope you leverage the observations in the book and that these concepts will stimulate new thinking, that these new learnings will enable you to unleash the tremendous resources and promise that lie dormant in your organization. It is also my hope that this fresh new perspective will help you to see the world in a way you’ve never seen it before. That it will further your understanding of how truly integrated and connected as a world we are and why it is critical to manage holistically in these uncertain times.
I also aim to move beyond the typical methods to deliver a compelling new vision. It is a perspective that will enable you to harness our unique opportunity and time, realizing that we live in a truly special era in our modern world. I hope that, armed with this new information, leaders and managers, with a renewed intent, will move forward to consciously shape and mold their companies. We live in a world of amazing capabilities; let this new framework help you as you lead your organization in mastering the strategic risks of our new era.
Acknowledgments
In writing a book there are many people to thank, for you never complete an undertaking of this type without the support of some very special individuals. I would first like to thank my stellar literary agent, John Willig. Without his keen understanding of how to position this work, the publication of this book would not have been possible. A hearty thanks to the amazing team at Wiley. Thanks to Executive Editor Bill Falloon, Senior Editorial Assistant Lia Ottaviano, Editorial Program Coordinator Tiffany Charbonier, Senior Production Editor Stacey Fischkelta, and to Susan McDermott, and Jennifer Macdonald.
I would like to recognize the wonderful team of individuals who came together to assemble critical components of the book: Kristin Everidge of Everidge Designs, Tammy McGee Anderson, James Sokolowski, Mark Little, Stephen Sopher, and Karen Poimbeuf. A special thank you to Tony Elwood and Paul Barrett of Elwood Design. Without Tony’s constant pushing and prodding, I’m not sure I would have written this book. I’d also like to thank Alison Woo for her knowledge and guidance along the way, and Randy Peyser, Kevin Killabrew, Roger Ryan, Brian McCullers and Dr. Ali Solomon. I’d like to thank my publicist Yolanda Harris, and Jonna Palmer and Tommy Pruitt of The Keynote Group.
Last and definitely not least, I’d like to thank my family, who have nurtured and supported me through the years. I would like to first thank my parents: my mother, Dr. Clara McPhee, for being my hero and for providing me with so many important life lessons; and my dad, Mr. Joel McPhee Sr., for teaching me how to live; and to my stepmother, Rosalie McPhee. I’d also like to thank my two wonderful sisters, Cheryl McPhee and Carina McPhee Bridgewater, for their love and support through the years. A special thank you to my brother-in-law Trevor, Sr., and to my nephew and niece Trevor, Jr., and Lauren. I’d also like to thank Sherryl Guthrie McPhee, for her support throughout the years and efforts in raising and co-parenting two wonderful daughters. A special thanks to my deceased and very dear uncle, Tony Roach, who served as a surrogate dad, big brother, and best friend. His impact on my life is immeasurable as his spirit and energy will always be with me! Thanks to my many aunts and uncles for all of your support. A big thanks to my numerous other family members, those past and present including my ancestors on whose shoulders I stand.
In addition to the individuals who worked directly on the book project are other individuals who have contributed in some way to my professional and personal journey. They include advisors and friends such as Dr. Richard Williams; Roy Hollman; Dr. Leon Higgs; John Waddy, Esq.; Michael Ozier, Esq.; Jordan Miller; and others. Other individuals I’d like to recognize include Jean Davis, David Carroll, Elizabeth Williams, Tom Wurtz and Lisa Brinkley. Thanks also for the support given by many dear friends throughout the years and during the writing of this book.
A special thanks to the close family and friends who have supported me through the years, including those in Nassau and Freeport, Bahamas, and those in Rochester, New York, and Columbus, Ohio.
Introduction Mastering the Complexities of a New Age
On a cold and silent January morning I jolted awake. Startled, I sat up and peered through my bedroom window. The darkness engulfed everything, save the light dusting of snow blanketing the treetops and frigid ground below. It was still, and the solitude of the early morning hour seemed deafening—so deafening, those moments reverberate ever so loudly to this very day.
What time was it? As I glanced at my phone lying on the nightstand next to the bed, I saw that it was only 3:00 A.M. Though exhausted from a long week, I was wide awake. I’m not certain what woke me up so suddenly, but my mind was racing at a feverish pitch as a clear image came into full view.
Reflecting on what I saw, I stumbled out of bed, sprang to my feet, and rushed to the dining room table. As a deluge of thoughts poured through my head, I began to furiously map a framework of an idea. Unbeknownst to me, what I saw on that fateful January morning would eventually become the very foundation of Mastering Strategic Risk.
* * *
In contemplating my epiphany, I wonder: Where did it come from? How did these concepts come to me, and why did they come with such clarity? I never, prior to that day, consciously thought of the concepts, let alone aspired to write a book. Only after several months of prodding from a good friend did I take the agonizing step of putting pen to paper. I’ve been writing ever since.
What I do realize is that I was in a state of flux. I was one year removed from a rewarding career at a top financial institution, and carefully parsing through career alternatives. I also deeply desired to understand the enormous change occurring not only in my world but in the world around me. During this time the markets were in turmoil as organizations everywhere contended to survive amidst withering circumstances.
It was January 2009, and since the summer of 2007 the entire planet had been experiencing tremendous change. There was the collapse of the real estate markets, a debilitating credit crisis, government bailouts of the auto and banking industries, and a crippling global recession. Accompanying these conditions were a litany of corporate failures, from Washington Mutual to Lehman Brothers, Blockbuster, AIG’s near collapse, and WorldCom, to name a few.
I also observed firsthand how Wachovia, a company I had grown to deeply admire, ascended quickly to the top of the banking industry, only to experience an equally rapid decline. The state of the economy, when coupled with our geopolitical tensions and environmental and social conditions, also signaled that we were living in unprecedented times.
In observing this sea of change, a common theme emerged. As a civilization we are challenged in managing our most critical systems, and even more so organizational systems. Whether it is on Wall Street or Chicago, in New Delhi or Shanghai, we contend mightily to manage a corporate agenda held captive to an increasingly complex and dynamic world.
As a result, I wanted to know how we could manage organizations more effectively. And if we couldn’t, what would it mean for the future of the markets and our wonderful planet? Now five years removed from that fateful January morning, we still live amidst significant uncertainty and face formidable challenges as we combat a lingering global recession.
Over the past 20 years we’ve also witnessed the failure of numerous organizations as they careened out of control due to the breakdown of fundamental management practices. Examples include the story of Enron and how the failure of critical governance mechanisms led to its eventual demise. Or consider how BP’s catastrophic Deep Horizon spill emanated from its fractious risk management system.
Think of how over the past 12 years banks have failed to learn from the lessons of others, as evidenced by the enormous trading losses they still experience. In 1999 a rogue trader single-handedly took down the United Kingdom’s most storied investment bank, amassing close to $1.4 billion in trading losses. Then, over a decade later, UBS experienced $2 billion in trading losses due to a rogue trader’s activities.
Despite these painful lessons, only two years ago industry darling JPMorgan Chase racked up over $5 billion and counting in trading losses. It was later discovered that these substantial losses were all due to the bank’s failure to activate critical trading controls. To date, the company is still challenged in managing the risks that span its sales and trading activities.
The many examples from our most recent past point to similar yet fundamental challenges facing organizations across industry types. And while we spiral hastily toward the future, we are greatly in need of change.
On the following pages, I will provide you with new information to give you a fresh perspective into the challenges organizations face in this new century. This insight will arm you with the knowledge required to effectively manage the most critical forces that dictate performance in organizations.
For close to 20 years, I have been a leader in large, complex organizations. During this time I’ve either led or been a part of key management teams charged with addressing some of the most critical challenges facing these organizations. Whether it is in the area of the global sourcing of resources (offshoring), large-scale operational efficiency efforts, key disaster recovery and business resumption activities, or helping to shape the strategic vision of a company’s culture, these unique experiences have provided me with the opportunity to understand the critical drivers that underpin corporate performance.
The fundamental components on which this book is based are concepts that are well understood when considered individually in the context of companies and the key drivers of performance. What makes the approach in Mastering Strategic Risk unique is that it extracts patterns and realities in natural systems and applies them to organizational systems. These realities dictate performance in both nature and organizations. They illuminate how the elements and forces in nature are no different than those found in organizations or for that matter the world we’ve created for ourselves.
The intent of this new approach is to provide readers with a compelling guide. It is a new model that outlines how key activities and functions should come together to provide a holistic governance framework. In addition to introducing a new framework, Mastering Strategic Risk underscores how integrated and connected we are, not only in our commercial and social lives, but in the activities and realities that transcend our traditional view of our world.
It is also my hope that you will be inspired by these new learnings, applying them in navigating your organization through the risks and uncertainties of an unforgiving marketplace. Throughout these pages I’ve also distilled what I’ve learned and observed through the years to unveil a new framework in which to govern companies. And while there are many lessons to glean from the mistakes of the past, at such a critical time, there is none more important than for us to move forward with a renewed intent, to consciously shape our world into the type of planet we’ve deeply desired it to be.
Ultimately, I guess I am a teacher at heart; after all, I do come from a family with a rich teaching tradition. It is in this spirit that I share with you Mastering Strategic Risk. Whether you are a leader in a large or small organization, manage shared services or customer facing function, or simply desire to understand the key elements and forces that drive performance in organizations, this is the book for you. It is my hope that armed with this new insight you will thrive in these uncertain times.
Chapter 1The Round World, the Square Pegs: Redesigning Organizations to Manage the Risks of a Different World
The markets are raging! They roar tumultuously toward an uncertain end. Meanwhile, the fates of billions hang in the balance, as we look to the future with fear and trepidation. The truth is that we’ve created a monster, as a beleaguered and mismanaged corporate agenda continues to wreak havoc on cities, sovereign governments, and communities everywhere. There is no doubt that the turbulence we are experiencing was brought on by our very own miscreations; however, the question remains: How do we move confidently toward the future while ensuring we do not repeat the mistakes of the past?
Righting the Ship: Managing the Complexities of a New Age
While we forge steadily toward a future of unlimited possibilities, at the center of these turbulent yet fascinating times sits the corporation. The commercial corporation has been in existence since the seventeenth century, yet, despite its storied history, still struggles to effectively govern its varied activities. Furthermore, the corporation of the twenty-first century is like none other, for it has become a critical aspect of almost every facet of life on our planet.
It is truly the most powerful and ubiquitous force in an unrelenting, high-stakes global marketplace. Think of the many ways corporations play a pivotal role in our society, mainstream culture, and economic lives. Think of the role they play in your very own community.
To make matters worse, government has often needed to step in to provide much-needed oversight of corporate activities. There was the savings-and-loan (S&L) crisis of the 1990s, Sarbanes-Oxley, and now recently enacted Dodd-Frank legislation that was put in place on the heels of the 2008 credit meltdown. While often government intervention is necessary in order to protect the system, it is often reactive and done in order to avert a crisis. Although we must be responsive to a national crisis, shouldn’t we find it indefensible that we’ve grown accustomed to addressing systemic issues from a reactive, knee-jerk posture?
As our beloved guardians at the gate work tirelessly to piece together overnight solutions to address systemic issues, is this reactionary posture the right approach? Moreover, the public outcry for swift and decisive action during a crisis often contradicts and outweighs the need to exercise prudence and good judgment. Government has a formidable role in providing oversight of commercial activities; however, we are at a point in this country where the regulatory agenda has become overly burdensome.
During the past few decades, we’ve experienced a crescendo in the volume and intensity of regulatory oversight. As we move hastily into the twenty-first century we will experience even greater regulatory oversight. From Sarbanes-Oxley to the Basel Accords, from Gramm-Leach-Bliley to Dodd-Frank, the regulatory agenda continues with no end in sight. Think of the tremendous costs these requirements have added to corporate bottom lines.
To make matters worse, these costs are ultimately borne by you and me, the end user and consumer. These efforts, though well intended, will eventually cause the system to buckle under the intense burden of regulatory adherence.
Consider the world in which we now live and how, during the past decade, we’ve experienced such significant change. We live in unique and unparalleled times. Think of how just recently the credit markets were in a tailspin, ushering in an unrelenting and debilitating recession. Of how the auto and financial services industries were on life support, and how the saber rattling between nations, tribes, and people even today continues at fever pitch. When we consider the state of the environment, along with deteriorating health and social conditions across the planet, we attempt mightily to manage the risks and complexities of an ever-changing world.
We also sit at the most critical juncture in Earth’s history: On one hand lies a future of unparalleled promise; on the other, a world filled with tremendous uncertainty. However, the truth is that we can no longer count on the old ways of managing our most critical systems; we must look to new models by which to govern a new age.
In addition to these formidable challenges, corporations continue to struggle to keep pace with an ever-changing world. As change continues at an unprecedented pace, the marketplace will continue to become even more dynamic and volatile. Coupled with this is how quickly we’ve moved into a truly global marketplace. As the Internet and technology have removed geographical boundaries and business has become ubiquitous, many corporations now serve and manage a global footprint. This reality is placing additional strain on corporate agendas and resources as the governance of activities has become more complex, integrated, and dispersed.
The time has come for organizations to change. Companies must change the manner in which they govern internal activities, for the cost is too high for society to bear. Regardless of how ubiquitous and powerful the corporation has become, it has failed to regulate itself. It’s time for corporations to take control of their destinies by transforming within. This change must occur from inside their hallowed walls, rather than being mandated from the external forces of government regulation and political influence. Yes, the time has come for stronger self-regulation. It’s time to rethink business!
The Untold Story of Wachovia’s Demise: The Rise and Fall of an Industry Giant
It was Friday, September 26, 2008, around 11:00 in the evening. It was a clear and cool autumn evening. As I made my way home after entertaining a few out-of-town business guests, my mind began to drift slowly, far away into the distance. I was in a fog! The events of earlier that day created a dark cloud of despair, and a deep sense of anxiety loomed over my head. To make matters worse, a state trooper had just pulled behind me and turned on his lights. After finally realizing what was occurring, I slowly pulled over to the side of the highway and anxiously waited. What could I have possibly done wrong? Why was I being pulled over? The tension and anxiety began to build!
After what seemed like an eternity, I was startled by a pointed tap on the glass. As I rolled down my window, I was greeted by the trooper. With a surprised look on his face, the trooper asked, “Are you okay, sir?” I replied, “Yes, I am.” He then asked, “Are you sure?” In a frustrated and irritated tone, I answered, “Yes, I am, I’m sure, why? What did I do?”
“Well, I’ve been following you for a few miles and you have been swerving repeatedly to the right, as if you were about to drive off of the highway. I’m going to have to give you a few field sobriety tests,” the trooper said. I ended up passing the tests; however, what dawned on me that very moment was how emotionally immersed I had become with the events of the day—so much so that I became overrun with an overwhelming sense of apprehension and fear.
It was that fateful day when the proverbial writing had been written on the wall, as the day’s events signaled the coming demise of Wachovia. That Friday was a crazy day, as I had become deluged with myriad phone calls, conversations, and e-mails concerning the fate of Wachovia. These conversations were with former colleagues, employees, and others who were associated with the bank. Many of them still played significant roles at the bank. We were all anxious.
Those of us who were no longer at Wachovia had similar concerns. We all owned company stock and stock options, and were concerned about our pension. Those who remained were concerned about whether they would have to pack up their boxes in the next few days and be required to leave. We were all worried about whether Wachovia would survive through the weekend as conditions regarding the bank’s financial status were rapidly deteriorating.
This was the Friday right on the heels of the federal government’s intervening to save Washington Mutual by seizing it and arranging the sale of most of its operations to JPMorgan Chase. As news of this transaction spread and as the market was in a tailspin due to instability as a result of the credit crisis, questions began to arise about Wachovia’s stability and liquidity. And remember, Lehman Brothers had just failed a few weeks earlier. On that Friday, Wachovia’s stock was in a free fall.
Rumors that day began to emerge regarding a silent run on Wachovia’s deposits. We would later discover that these rumors were well founded, as many of Wachovia’s commercial customers began to draw down their balances to below the $100,000 limit that the Federal Deposit Insurance Corporation (FDIC) insured. Approximately $5 billion in deposits was lost that day. There were also rumors that Wachovia was in the midst of talks with Citigroup and Wells Fargo.
The concerns were so serious that many wondered if Wachovia would make it through the weekend. These concerns prompted FDIC Chair Sheila Bair to declare that Wachovia was “systemically important to the health of the economy and therefore could not be allowed to fail.” This was no routine announcement, for it was the first time that the FDIC had made this determination since the 1991 passage of a law that allowed the FDIC to handle large bank failures on very little notice. To confirm the state of emergency concerning Wachovia, on the evening of September 28, Blair called Wachovia’s then-CEO, Brian Steele, and informed him that the FDIC would be auctioning off Wachovia’s assets.
Eventually, Wachovia would be purchased by Wells Fargo, with most of its banking operations intact. Although Wachovia technically survived through Wells Fargo’s purchase, its overnight failure evidenced one of the most significant events in banking history.
A Legacy to Be Proud Of
“Come to the mountain called First Union, or if you prefer, the mountain will come to you”! These were the words that bellowed from a deep and enchanting voice in First Union’s newly released commercial. The commercial was especially created to position the bank’s powerful new brand. It was a branding approach that would serve as a key plank of First Union’s strategy to becoming a national player.
CEO Ed Crutchfield desired to quickly build his branch banking network into a power national franchise. And it was his carefully positioned branding effort, coupled with an aggressive acquisition spree, that would serve as the launching pad in its new chapter.
It was the fall of 1998, and I first saw the commercial as a new recruit during the first hour of my orientation into the Finance division. The leaders managing the orientation were proud of the new ad and, more important, First Union’s new strategic direction. The entire company was excited, as it was on the heels of two significant acquisitions, both signaling that the best was yet to come. You could feel the energy in the air while interacting with employees in different pockets of the organization. There was no doubt our future was bright!
Three years later First Union would purchase Wachovia, and the once fledgling interstate banking operation would blossom into a financial services powerhouse!
At its height, Wachovia was one of the largest financial services institutions in the United States, amassing a banking empire that stretched from New York to California. Its banking franchise extended to every major market from Miami to New York and continued throughout the Midwest, South, and all the way to the Pacific Coast. In addition to its extensive network of branch banking operations, Wachovia was well positioned in each major market it served.
Its banking footprint served coveted metropolitan markets such as Philadelphia; Washington, D.C.; New York; New Jersey; Atlanta; and South Florida, to name a few. Wachovia did not merely maintain a presence in these markets but it dominated these major metropolitan centers, often ranking as the number one or two bank.
Wachovia was also a great place to work, and my colleagues and I enjoyed working for such a fine organization. During those glory years, Wachovia had garnered top industry accolades and awards for being a great place to work. There were formidable challenges that we overcame during those years, but Wachovia was on a tear, as we were in the midst of tremendous growth and success. Throughout its storied history, Wachovia had become known as a merger-and-acquisition juggernaut, as over time this strategy served as the cornerstone for its growth. From the early First Union days, its renowned CEO, Ed Crutchfield—or Fast Eddie, as Wall Street would call him—went on an acquisition spree and snatched up more than 70 deals in a span of 10 years. He was a force to be reckoned with as his spirited will served as the driving force behind First Union’s success. Within that period, he took Charlotte, North Carolina’s, third-largest bank and transformed it into the nation’s sixth largest bank, amassing close to $260 billion in assets in 1998.
It was through the efforts of Ed Crutchfield and Bank of America’s legendary leader Hugh McColl that Charlotte, North Carolina, developed into a global banking center. After the landmark 1985 Supreme Court ruling upholding regional interstate banking, their visionary and aggressive efforts served as the catalyst for Charlotte’s emergence onto the national banking scene.
Prior to retirement, Crutchfield selected Ken Thompson to become his handpicked successor. Thompson, as First Union’s newly crowned CEO, would follow in his mentor’s footsteps, orchestrating some of the largest deals in banking during this time. From 2001 to 2007, First Union quickly grew its banking footprint.
In April 2001 it announced a historic merger with in-state rival Wachovia bank. First Union would shed its name in place of the more favorable Wachovia brand. This was a watershed event for both banks, as it laid the foundation for a formidable financial services organization that would soon be catapulted toward the very top of the industry.
The historic merger of Wachovia and First Union was followed by a slew of acquisitions. In 2003 it purchased Prudential Securities, which was quickly followed by the 2004 acquisition of Birmingham-based South Trust Bank. These transactions were followed up by two other significant deals: first the September 2005 purchase of auto finance leader WestCorp, which was followed by the May 2007 acquisition of Golden West Financial. Also in May 2007 Wachovia purchased brokerage industry powerhouse A. G. Edwards.
Wachovia’s meteoric rise, fueled by these transactions, quickly cemented its position as a banking industry leader. It garnered Thompson the coveted Banker of the Year Award in 2005 along with numerous other industry awards, and Wachovia was recognized as Bank of the Year by BusinessWeek in 2002. By the end of 2007 Wachovia had become the darling of the industry. It had become the nation’s fourth-largest bank by asset size, with deposits exceeding $700 billion; boasted one of the nation’s largest brokerage companies, with more than 18,000 registered representatives; and now possessed a banking footprint that stretched from sea to shining sea. Wachovia had also developed a stellar track record of delivering outstanding customer service. It was recognized as the top-rated bank in customer service by the American Customer Satisfaction Index (ACSI), a survey of consumer satisfaction conducted by the University of Michigan Business School, for five straight years. However, things were not all well with Wachovia, as the debilitating credit crisis would soon reveal.
What Went Wrong
What happened? How could such a financial services powerhouse be brought to its knees so quickly? Yes, the credit crisis significantly impacted Wachovia, but was there more to this story? Indeed, there was!
Two fundamental things went wrong at Wachovia, and one would eventually build on the other. The first was Wachovia’s inability to organically grow its core banking business, and the second was its failure to follow its own internal merger due diligence process. However, the pivotal misstep that served as the primary catalyst of Wachovia’s sudden demise in 2008 was ironically tied to its rigorous due diligence process in acquiring banking franchises it purchased.
Wachovia bought mortgage giant Golden West at the peak of the U.S. housing boom. As the course of events would later unfold, the timing of this purchase, coupled with Golden West’s concentration in mortgages and the quality of its portfolio, would prove to be the cause of Wachovia’s final demise. However, Thompson viewed Golden West as a huge prize, as it would not only provide him with a more formidable retail and secondary mortgage business but bring him what he coveted most: a truly national footprint.
The Golden West acquisition gave him a strong presence in the West, and most important, California, a state that provided a thriving and robust economic opportunity for financial services. Although the timing of this acquisition was not the best, there were other, more fundamental core business issues lurking behind the scenes. I might add that these issues are no different than those that arise at other companies regardless of industry.
The catalyst behind Wachovia’s final demise had to do with simple management decisions and the failure to manage critical processes appropriately. The Wachovia story is one that could be told at many organizations, as it highlights the criticality of ensuring that fundamental processes are followed, even for the most routine of activities.
It is no secret that Wachovia’s top brass coveted California and desperately desired to expand west. It was a strategic imperative! So when the opportunity arose to acquire Golden West, Wachovia hastily seized the moment. It was later revealed that Thompson purchased Golden West even though his board of directors was not supportive of the deal. However, because of his overzealous desire, the due diligence process in evaluating Golden West’s assets was less than desirable.
Although Wachovia had built up a strong culture and industry-leading merger and integration capabilities, it failed to follow through in carefully assessing Golden West’s mortgage portfolio. Even more fundamental than the failure to thoroughly assess Golden West’s mortgage portfolio, Wachovia was challenged in its ability to grow organically. This was no secret, as internally we tried desperately to organically grow and build our existing business.
This challenge to organically grow came from the inability to cross-sell products and services to existing customers and garner a larger portion of our customers’ coveted “wallet share,” which, ironically, Wachovia’s successor, Wells Fargo, is a master at doing. Therefore, over the course of several years, Wachovia grew through an aggressive campaign of acquisition and merger.
This is a critical point in that although growth through merger is a formidable strategy, it must be balanced in business by an organization’s ability to leverage its internal assets to fuel growth. Growth in business must be balanced. Further, an overreliance on acquiring growth, regardless of the short-term results, will eventually take away an organization’s ability to build other critical core capabilities.
A Symptom of a Much Larger Challenge
What happened at Wachovia is no different from what has occurred at other high-flying corporations over the past few decades. There was Enron, Lehman, AIG, Burger King, Pan Am, and Blockbuster, to name a few. Although some of these organizations are still a part of our commercial landscape, there are still important lessons to learn from their missteps (I will highlight several of these organizations in Chapters 2 and 3). We also have lessons from the systemic crisis of the S&L failure of the 1990s as well as the mortgage crisis of 2007 to learn.
In observing the fall and eventual missteps of these organizations and our systemic failures, they all were initiated from within. They centered on some very fundamental risk and business themes. These fundamental themes include the failure of internal governance processes, the inability to keep pace with competitors and marketplace trends and realities, and failure to balance critical business activities.
We are moving into an era where we can no longer afford to withstand the type of systemic failures we’ve experienced over the past few decades. We live in a time of unprecedented opportunities. However, with these opportunities comes intense pressure on business to move and operate with great prudence, agility, and speed. Think about what has transpired over the past 25 years and how the Internet and technology have transformed our personal lives and the marketplace.
These changes—and the fact that because of technology we live in a truly global community—have provided unparalleled opportunities. Despite these opportunities, business and the corporation must respond in kind to the new paradigm. No longer can the corporation afford to manage its structure and govern its activities in the same manner it has for the past 50 or so years.
Across industries, organizations of all types, shapes, and sizes do respond to change with success. We find pockets of success that span industries, as very often we can find best practices that propel these organizations to the very top of their industry class. I also realize that, as we speak, many corporations are experiencing record earnings and years of success.
We also find that in times of austerity or market turmoil, organizations struggle to find their footing, often scrambling to implement some efficiency or new revenue initiative. The same can be said in times of prosperity, as history has shown that organizations frequently become victims of their own success and fail to consistently apply a certain discipline and rigor to their internal activities.
I know from my own experience at Wachovia how we struggled to maintain a culture that consistently applied routine processes. In times of prosperity we would spend little time thinking about efficiencies or ways to reduce expenses; however, whenever we predicted a quarterly earnings shortfall or it was forecasted that we had a difficult year ahead, the call would go out for everyone to contribute their portion to “the expense reduction pool.” Or from time to time the CEO would announce a major enterprise-wide expense reduction initiative whose objective was to provide a one-time reduction to expenses, but also signal to the street how serious we were in fostering an environment of efficiency and expense control.
To implement the initiative, he would place a key lieutenant or rising corporate star to “run herd” over the effort. However, these valiant efforts occurred infrequently, and as soon as we completed the exercise and all the contributions were counted, we would settle into the old ways of doing things. And, quite often, many of us would work very hard to protect our very own sacred cows. Observing these efforts firsthand made me wonder: Shouldn’t specific types of activities be an inherent part of an organization’s DNA or culture? Wouldn’t good corporate management ensure that an organization, division by division, has instilled in it a process that would continually seek and evaluate organizational efficiencies? I will provide more commentary on the importance of organizational efficiency in Chapter 5.
Even industry banking leader Wells Fargo, Wachovia’s successor, has trouble fostering a culture of efficiency. In 2011, CEO John Stumph announced a significant cross-enterprise expense reduction effort. Called Project Compass, Wells Fargo hoped the program will drive out $1 billion in expenses from its bottom line within 12 months.
The company has mastered several key business levers, but shouldn’t Wells Fargo, like other corporations, be adept at managing other critical levers or organizational disciplines consistently, rather than a onetime effort? Can’t we observe that pattern here again? We are in a period of austerity—especially banks, as marketplace dynamics and the yield curve have placed intense pressure on banks to grow earnings. As growth is difficult in this environment, cutting costs and reducing expenses is a natural lever. However, shouldn’t these practices be embedded in organizations?
The Burning Platform: Why the Need for Change
The need to change the way organizations manage their activities is being driven by several factors. These include technology, how interdependent and connected we’ve become, globalization, the speed of transactions, and complexity. These factors are all tied to the tremendous change we are experiencing in our world.
Think about how interdependent we’ve become regarding global investment, and how the debts of many foreign nations affect the global marketplace. Consider how individuals, corporations, and sovereign nations alike are investing in corporations and interests across our planet. Or even think about how many of the top-performing corporations have come to depend on revenue and efforts from operations in all corners of the globe.
Along with this dependency on global operations and revenue comes the need to manage and coordinate resources and activities across several continents and time zones. Even if an organization operates solely domestically, the increasing pace of activity is mind-boggling, as technology and the Internet have enabled us to communicate and transact business at lightning speeds. The speed and ubiquity of business have added complexity to internal operations, imposing a greater need to ensure that internal activities and resources are carefully coordinated, consumed, and aligned.
As great an impact as technology is having on business, it is having more of an impact on us as individuals. Technology has affected our lives and transformed our behaviors in many ways. Think of all of the ways technology has transformed the way we interact, transact business, and behave: texting, the iPhone, navigation systems, working remotely, the ability to download movies and music to handheld devices, as well as buying goods and services online. Technology’s impact on our lives hasn’t even reached a crescendo; technology will continue to transform our lives at a dizzying pace, in ways we cannot imagine.
These factors all indicate that we are leveraging square pegs to address the needs of a round-hole world!
Leveraging the Power of People
Our new era also calls for a new way to leverage and lead employees, as the paradigms of the past no longer fit the realities of today. Technology has transformed our lives and will be a key differentiator for those organizations that leverage it to empower their people. Think of the volumes of information now available to us, all at the push of a button; how through our laptops we are privy to a world without boundaries.
Leveraging employees, who are at the epicenter of delivering value to customers and shareholders, will become more of a competitive advantage as technological capabilities continue to advance. Consider the specialized and in-depth knowledge employees have of critical customer preferences, behaviors, and expectations. This also holds true as they have an intimate understanding of how core processes and internal operations really work. Unleashing these critical resources through the power of technology will drive incremental value.
As the marketplace, and more specifically, competitors, access and utilize talent from around the world, building a culture that promotes learning and the building of new capabilities will help to ensure globalization. Also, the battle to recruit and retain the best and most talented resources will continue to intensify, as globalization has provided access to new pools of resources.
