Implications of the financial crisis for the practice of good management

What are the implications of the financial crisis for the practice of good
management?


The recent financial crisis has shaken the people off their slumber of the dream run (growth) and has re-opened the Pandora’s box of woes, like increase in unemployment, decrease in demand, slumbering growth (events that are generally associated with each of the times of turmoil of the past century). With parallels being drawn between the recent financial crisis and the Great Depression of the 1930s and the ongoing prognosis of the causes, and concerns voiced for the longevity and the dreaded impact, perhaps it would seem that all is not well here. But there is a silver lining to the entire episode of gloom. The valuable lessons we learn from this.

Like any other cycle of downturn, it is the management that gets caught in the blame game and people try to assess the faults in same.

The current crisis has its origins in too bad management. The crisis has demonstrated that management has failed in its most basic tasks. There has been a lack of control, understanding and an unwillingness to take heed of warning signals. Managerial decision-making has centered on personal enrichment and even now, most culprits have ensured that they will not be the ones who suffer the consequences. There is no evidence that the huge fortunes made by executives are linked to the levels of business performance (bankrupt companies using bailout money used to pay bonuses).

As the sub-prime crisis unravels, casino capitalism has exposed itself. A powerful financial sector has crowded out other industries and made the economy dependent on short-termism and fast-buck making deals that are rarely in the interest of sustainable business and long-term growth.

The share of wages in national income in many counties has fallen in the last 30 years whilst the already affluent are taking larger shares of the slice that goes to wages. The “trickle down” effect peters drastically as you descend the income ladder. Greed is bad, stupidity is bad, but bad management is the worst of all.

The current financial crisis, like any of the other periods of downturn, does augur well for the practice of good management. For one thing, it reinstates the fact that Good Management is essentially predictive and not reactive. The fact that the crisis has left so many CEOs lurching for alternatives to overcome the crisis is a testament to the poor management and poor planning done for difficult times. For one thing, good management would entail serious planning for times uphill / difficult times. There are some companies (like Infosys Technologies) that have been able to wade off the difficult times successfully, without compromising on its values, thanks to the prudent planning done for such grim times, wherein a large chunk of revenue was reserved as cash to help them sail through difficult times, a trick learnt and mastered after the dot com bubble burst. So, amongst other things, the planning for disaster times should be at the helm of the good management practices.



The cause of the financial crisis can be traced to the insatiable human greed for more, at any price. The full stock of the risks involved was not taken and in some cases was neglected, like banks, increasing their exposure to risk and lenders increasing the short term, cash based lending to attain a BETTER, HIGHER return. Good management practice would entail taking proper account of the risks involved and ensure that the growth rates are not attained at the cost of the high risk. This would be achieved by planning for profit on a risk adjusting basis, as it provides more meaningful information about profit ability and it also, reduces the incentive to take excessive risk in order to increase profits. A more comprehensive disclosure practice would go a long way for this.


The growing economy did not give us a chance to think twice about how and why we were growing at such an unforeseen pace. All that mattered to all of us was / is the results / profits of a company. According to me, the single most important thing to remember about any enterprise is that results only exist on the outside. The result of a business is a satisfied customer. The result of an investment bank is a wealthier client. The result of a hospital is a healed patient. The result of a school is an educated learner who becomes a productive member of society. Inside the enterprise, there are only costs. It is no accident that Goldman Sachs which of all the investment banks is the one that appears to value management the most has best survived the crisis. Perhaps it would be a good management practice for managers to think about policies with an outlook of the long-term sustainability and growth of the enterprises while making administrative decisions, instead of being lead solely with the goal of maximizing short-term profits. Perhaps it is this long term vision that has created companies like IBM, GE, and Proctor & Gamble.

While analyzing the crisis, one would feel as if a common system is operating around the same principles and the same is in use by each of the institutions, and each enterprise copying each other's methods, making the same mistakes and exposing themselves to each other's risks. It seems some sort of a tacit understanding between the involved parties was the cause of the mess we are in. A hallmark of good management would be setting one’s own standards and not being led / guided by the standards of others. Typical hoard mentality / cartelization, does not augur well for a healthy competition.

I would conclude by saying that perhaps a candid acceptance of the responsibility of all that goes / went wrong by the management and a desire and an ability to learn from the mistakes made, amongst other things, are qualities of a good manager and a good management would essentially be a collection of such good fellows.