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Sociopathic CEOs and Malleable Boards: Dick Fuld’s Failed Triumph at Lehman Brothers

September 12, 2010
Federal Reserve Bank of NY, 33 Liberty Street

Federal Reserve Bank of New York

Is Your Boss a Psychopath? appeared in Fast Company in July 2005, featuring a relatively unknown retired criminal psychologist from the University of British Columbia. Well respected by the international law enforcement community for his Psychopathy Checklist and insightful advice, Robert Hare, Professor Emeritus from UBC, was speaking in 2002 to a group of police officers on the other side of Canada in Newfoundland. What made the conference noteworthy was the application of his work to the corporate world. At the time, such reviled figures as World Comm’s Bernie Ebbers and Enron’s CFO Andrew Fastow would shortly be handed long jail sentences.

Although the events surrounding such corrupt corporate heads occurred only a few years ago it seems like much longer, given the massive turbulence the economy and financial system have just undergone. The collapses and near collapses of a variety of American financial companies, not to forget GM and Chrysler, had their own cast of characters. One favorite villain is Lehman Brothers Dick Fuld, whose scowling visage has adorned many a media site.

Well, Dick was back in Washington at the beginning of September to defiantly assert to the Financial Inquiry Crisis Commission that the US Federal Reserve was to blame for the bankruptcy of Lehman Brothers. Had only the Fed propped up Lehman, like it did with Morgan Stanley and Goldman Sachs, all would have been well. Yes Lehman made some mistakes, Fuld argued, but so, too, did its competitors and government officials.

In his prepared statement Fuld said: “I am proud to have spent my entire business career of 40 years at Lehman Brothers and am more proud to have been CEO for 14 years. I take full and total responsibility for the decisions that I made. I made them with the information available to me at the time. That’s the only way we can ever make decisions…. Capitalism works within a finite range of standard deviations of volatility. When I talk about uncontrollable market forces, we were way outside that range in 2008. Had the Fed totally ignored everything, and Treasury ignored everything, in a pure capitalist free market, not only would you have lost Lehman, but Morgan Stanley quickly, and Goldman Sachs thereafter.”

Naturally, government officials quickly rejected Fuld’s statement. And in every interview I’ve watched and every business article I’ve read, no one supports Fuld’s view. He’s very much on a deserted island.

Indeed on March 10, 2010, court-appointed law firm Jenner & Block released a 2,200 page report (replete with a 38 page table of contents) on the collapse of Lehman Brothers. Over the course of a year the firm examined 34 million pages of company information, along with conducting 250 interviews. Its noteworthy findings included Lehman’s use of 2,600 different systems and applications, and an accounting practice called Repo 105 that allowed the firm to temporarily reduce its leverage (a major part of the financial meltdown).

Robert Hare’s distinguished career has been focused on law enforcement, not rich, corrupt CEOs. In fact, one of the uses of his psychopathy checklist is to identify potential psychopathic tendencies among new police recruits (a good idea, I might add). His expertise is sought out worldwide. From what I’ve read about him, he’s not terribly enthused about the use of the term “sociopathic” CEOs. However, I find it quite fascinating that the public’s revulsion towards corrupt CEOs and malleable boards of directors in the past 10 years has produced a new pseudo discipline of trying to figure out just what goes on in the narcissistic swelled heads of corporate chiefs. Inside the Mind of a Sociopath by Martha Stout provides some helpful information.

It’s no secret that a form of tacit collusion emerged in many companies, in which boards of directors and company CEOs scratched one another’s backs, facilitating obscene remuneration packages for those leading corporations. In Lehman’s case, the board of directors at one time included a former American admiral and an actress.

It’s important to stress that boards of directors play an important role in capitalist societies. They are the highest governing authority within the management structures of publicly traded companies. In the United States and Canada, their emphasis is on protecting the firm’s assets and ensuring a decent return on shareholders’ investments. However, in Europe their orientation is to first protect employees and then shareholders.

It would not be unreasonable to argue that one of the major factors undermining the performance of many American companies in recent years has been the distortions stemming from the cozy relationship between CEOs and their malleable boards. Sure, Dick Fuld and a number of others were responsible for taking their companies down the road to ruin. Their combined leadership and management approaches were nothing short of disgraceful incompetence. However, it’s time to reclaim the vital role that boards of directors play in our capitalist society. Government regulation has a role, but first corporations need to get their own houses in order.

Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men. (John Emerich Edward Dalberg, 1834-1902)

Download my free leadership e-book:Becoming a Holistic Leader: Strategies for Successful Leadership Using a Principle-Based Approach

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