Page 1

Salomon Brothers Case Analysis 1

Salomon Brothers Case Analysis By Ken Bedell Ben Byo Owen Carter Christopher Robinson Ivy Williams

A Paper Presented in Partial Fulfillment Of the Requirements of LEAD 505 ORGANIZATIONAL LEADERSHIP & ETHICS June 2008


Salomon Brothers Case Analysis 2 History has shown us how sub-standard leadership can bring a successful organization from success to disaster. It has also shown us how good leadership can bring an organization out of the ashes and into success. While we may perceive an organization to be strong and successful, the reality may be that it is self destructing from the inside. If ever there was a case that would substantiate this it would be the Salomon Brother’s case. A leader is an advertisement of his company. Often times they are the face of the company as people will associate an organization with its leader. Therefore anything the leader does or fails to do is a direct reflection of the organization in which they are affiliated. The Salomon Brothers case shows how a leader’s self interest and selfishness brought down an entire company. This case shows how a leader’s lack of integrity had an adverse effect on an entire organization. The integrity of the employees who work for this organization was also compromised as was the company’s reputation. Ultimately, decades of solid performance, dedication, and good business practices were jeopardized by the greed and self serving interest of its leader. Once exposed, the question becomes whether or not the organization can recover from a scandal that compromises the very values in which it was built upon? How do you rebuild the reputation of a corporation that has been destroyed? What steps do you take to place a company back on the winning track? Can it even be done? True leaders should take responsibility for their actions but, as a new leader, where do you start? Warren Buffet believed the reputation of Salomon Brothers could be restored and he started by re-establishing the integrity of the company. This paper will compare and


Salomon Brothers Case Analysis 3 contrast the leadership that led to the demise of Salomon Brothers with the leadership that revived Salomon Brothers. Salomon Brothers Case Salmon Brothers unethical leadership dilemma, as told by Ronald Sims, is the thought provoking tale of how organizational culture can imprint ethical or unethical behavior within the organizational structure. In the case of Salmon Brothers, such behavior resulted in public scrutiny for security and exchange commission violations and the misgivings from a company that was once revered as the epitome of banking and investments in the corporate world. Their sin was quite simple: “bottom line greed.” They placed illegal bids for government securities. Leadership sets the tone and writes the script for every organization and the unethical behavior that resulted in the debacle at Salmon Brothers rests on the shoulders of its leader John Gutfreund, CEO and chairman. As Dr. John Maxwell (1993) says, “Everything rises or and falls on leadership” (p. VIII). When the leaders of an organization participate in unethical behavior it promotes such behavior throughout the organization. The proverbial adage of “when in Rome do as the Romans do” comes to mind. When faced with increased trading competition, traders at Salomon Brothers even sacrificed legal business practices in pursuit of the “bottom line” which, to them, validated their criminal activity. The importance of trust in the financial industry is clearly described in the Solomon’s (2004) article, Ethical Leadership, Emotions, and Trust: Beyond “Charisma” (pg. 98):


Salomon Brothers Case Analysis 4 “Banks have been the target of distrust and abuse by American populist and political activists since the last century. President Andrew Jackson even sought to outlaw them. And yet, the amount of trust taken for granted by anyone who has any business with banking at all is astounding. We trust that the money we deposit will be returned to us as promised. We trust that the bills and most checks we receive are valid and genuine. The fact that we ask for a “bank check” or cashier’s check” for absolute security is further evidence our level of trust in banks, however great our distrust may be on some more abstract level. And yet, we all have seen the consequences of even a minor bank scare. Not just that bank but all banks are suddenly under scrutiny, under suspicion.” Gutfreund withheld information from government regulators and had a questionable agenda when firing others within the organization. According to Ed Locke’s (Avolio & Locke, 2004) letter on leader motivation, Gutfreund would be labeled the typical pragmatic, amoral, “big shot” who tries not to earn money but to get away with some money before he or she gets caught. Gutfreund is one who will hold on until the evidence is so overwhelming that he has no choice but to concede. He was instrumental in sowing the seed of greed in the organization which ultimately led to the sanctions against Salomon Brothers. It is no small wonder that this scandal rocked the banking industry and has left a measure of doubt in not only investors but the general public. Change at Salmon was necessary to resurrect a company that was on the verge of dying. New Managements response


Salomon Brothers Case Analysis 5 Warren Buffett was called upon to resurrect Salomon Brothers and his approach as a leader was the complete opposite of Gutfreund’s. He immediately terminated top managers of the firm. Some left voluntarily while others were forced to resing.. According to Buffett, his job was to clean up the sins of the past and to capitalize on the enormous attributes that the firm had built up over the years; he commented on the fact that the firm had to earn back its integrity, which was destroyed by its previous CEO. To set this in motion Buffett opened Salomon’s doors to government regulators and promised to waive the attorney client privilege by turning over all reports and notes prepared by the firm’s lawyers investigating the government trading desk’s transgressions. With this gesture, Buffett sent a message to all employees that remained with Salomon that the transactional leadership of Gutreund was no longer tolerated in the firm. Transactional leadership is characterized as immobilizing, self-absorbing, and eventually manipulated in that it seeks control over followers by catering to their lowest needs (Burns, 1978). While trying to appease their federal and state investigators, stakeholders, employees and customers, Buffett sent the firm’s senior managers a letter informing them that they were “each expected to report, instantaneously and directly to me, any legal violation or moral failure on behalf of any employee of Salomon” (Paine & Santoro, 1994, p.117). He exempted “only minor…failures (such as parking tickets or nonmaterial expense account abuses by low-level employees) not involving a significant breach of law by our firm or harm to third parties” (Paine & Santoro, 1994, p.117). This letter was intended to reaffirm that all unethical conduct was to be reported immediately.


Salomon Brothers Case Analysis 6 As Buffett started restructuring the firm, he had to deal an increase in employee turnover rate due to the turmoil that the company was currently facing. While many would view the loss of such tenure an unfortunate event, Buffet interpreted this high turnover rate as a good thing as it allowed him the opportunity of ridding Salomon Brothers of the remaining unethical employees. It also allowed him to hire intelligent and ethical new employees that shared similar ethical values and would assist Buffet in changing the stakeholders and publics view of the firm. The reward system that was in place by the previous regime rewarded employees for their wrongdoing, which created a win at all cost culture. Under this system promotion and pay was based on recent performance. Buffett revamped this system by reducing compensation and attaching it in conjunction with department performance. While top performers were still nicely rewarded the rewards were directly tied to the ethical behavior that what necessary to succeed as an organization. Buffett used this reward system for resorting honesty, integrity, and trust to the firm. The final restructure of Salomon was completed in two phrases. Phrase 1 consisted of the creation of a new Executive Committee that included executives from all the firms businesses, local and internal. This was done mainly to keep the firm legally and ethically correct with the stakeholders, employees, customers, and public. Citing Federalist No .10, according to Madison, “there are two ways of curing the mischiefs of faction: one, by removing its causes; the other, by controlling it effects. There are, in turn two ways of removing the causes of faction: the first, by suppressing the freedom of persons to advance their own interests; the second, by persuading persons to share the same interests� (as cited in Ciulla, 2004, p. 156). This Executive Committee was


Salomon Brothers Case Analysis 7 responsible for the firm’s checks and balance system of ethical behavior that would help to ensure that the past would not repeat itself. Phrase 2 concludes with a Risk Management System. This formalized management system addressed not only market risks, but also regulatory risks, credit risks, operational risk, and environment risk. This system was designed to provide senior management with a companywide perspective on exposure prior to execution. Ethical Emphasis Ethics involves moral issues and choices. It is concerned with right versus wrong, good versus bad and many shades of gray in supposedly black and white issues. Moral implications spring from virtually every decision, both on and off the job. Managers are challenged to have more imagination and the courage to do the right thing. In the case of Salomon Brothers John Gutfreund consistently chose to lead and tolerated unethically performance and behavior by with him and employees. The firms ethical codes of conduct and organizational culture, clearly contributed to enhancing the frequency of unethical behavior. Unsuccessful in concealing the misdeed of the firm’s unethical ventures Gutfreund was terminated. Business may be business but ethics set the moral tone in the organization for business leader to abide by a practice that was not in existence at Salomon Brothers. Top managers failed establish key organizational values in the form of policies that reinforces ethical practice and behavior. Schein (1985) noted that leadership is a critical component of the organization’s culture because leaders can create, maintain, or change culture; this would seem to coincide with the fact that leadership is critical to organization ethics.


Salomon Brothers Case Analysis 8 Based on Gutfreund’s demand for short-term financial results, Salomon Brothers exhibited an organization that showed little concern for employees, laws, or ethics. Gutfreund essentially created a win at all cost mentality. The firm’s culture encouraged and rewarded unethical behavior, its managers, and employees acted unethically due to benefits of their short-term financial gains. Trevino and Nelson (1999) noted that if the organization’s leaders seem to care only about short term financial results, employees quickly get that message and act accordingly. Within Salomon Brothers, the decision-making authority was concentrated in the hands of Gutfreund and a few top-level mangers and little authority was delegated to lower level managers. By maintaining this authority, Gutfreund created and atmosphere where getting ahead was the number one priority, and the firm’s commitment to ethical behavior was suspect. To avoid the tribulation of the Salomon Brothers, organizations can become ethically empowered by implementing the following procedures: - Behave ethically themselves. Managers are potent role models whose habits and actual behavior send clear signals about the importance of ethical conduct. - Screen potential employees. Ensure that they bring experience, knowledge, and ethical fortitude to the organization. - Develop a meaningful code of ethics. These codes must be supported by top management, distributed to every employee, and enforced with rewards for compliance and strict penalties for noncompliance. - Provide ethics training. Employees can be trained to identify and deal with ethical issues during orientation and through seminar, and internet training sessions.


Salomon Brothers Case Analysis 9 - Reinforce ethical behavior. Behavior that is reinforced tends to be repeated, whereas behavior that is not reinforced tends to disappear. - Create positions, units and other structural mechanism to deal with ethics. Ethics needs to be an everyday affair, not a one-time announcement of a new ethical code that gets filed away and forgotten. Organizations that wish to define their identity and communicate their values to employees, stockholders, and customers must do more than simply limit legal and public relations problems. A compliance programs will be more successful when connected to positive values with which employees can empathize. For any ethics program to work, the evidence is strong that merely having a formal code is not enough. Any such statement must be synchronized with the company’s organizational structures, its culture, and its leadership. Scholarly Literature Review The Solomon case study raises many of the issues found in the extensive literature on ethics and business. More specifically, the ethical contrasts between John Gutfreund and Warren Buffett offers a historical example that raises many of the issues discussed in the ethics of leadership literature. In this analysis three specific lessons are considered: Top Leaders Set Ethical Tone, All Leadership Decisions have Ethical Implications and Ethical Actions Must Be Based on Long Term Considerations. Top Leaders Set Ethical Tone Kotter (1990) points out that one of the distinctive features of leadership is that “for leadership—keeping people moving in the right direction, despite major obstacles to


Salomon Brothers Case Analysis 10 change, by appealing to basic but often untapped human needs, values, and emotions.” (as cited in Harvard Business Review on Leadership, 1998,p. 41). Badaracco (1998) goes even farther in claiming that a leader is the one who has learned from defining moments and translated that experience into character. In the case of Warren Buffett he came into leadership after having already established a reputation for having personal values and his immediate actions were consistent with his reputation. Gutfreund, on the other hand, was faced with a possible defining moment and he fell back on his previously well honed skills as a manager. The literature on leadership ethics presents different opinions on whether taking the position of enlightened self-interest is ethical moral ground or not. Superficially, it appears that Gutfreund was operating out of an ethic that was “egoistic (selfish)” (Avolio & Locke, 2004, p. 105). However, as things turned out it is now clear that Gutfreund did not realize that the basis of egoistic ethics is the premise that “Their main means of survival is reason.” (Avolio & Locke, 2004, p. 107) It turned out that Gutfreund’s actions were not well reasoned. All Leadership Decisions have Ethical Implications Bass and Steidlmeier (2004) point the ethical implications of all leadership decisions when they discuss the difference between transactional and transformational leadership. They connect transactional leadership with a “world view of self-interest.” (as cited in Ciulla, 2004, p. 177). Their definition fits Gutfreund. Bass and Steidlmeier (2004) claim that this approach is flawed, “the exclusive pursuit of self-interest is found wanting by most ethicists,” (as cited in Ciulla, 2004, p. 177). By their definition Buffett is a transformational leader where leadership decisions “grow out of authentic inner commitment.” (as cited in Ciulla, 2004, p. 177)


Salomon Brothers Case Analysis 11 Ciulla (2004) makes a similar argument when she claims that honesty is the foundation of empowering leadership (p. 60). Ethical Actions Must Be Based on Long Term Considerations Gutfreund was acting as a manager as Zaleznik (1977) points out, “Where managers act to limit choices, leaders develop fresh approaches to long-standing problems and open issues to new options” (as cited in Harvard Business Review on Leadership, 1998, p. 69-70). Common sense favors the argument that ethical behavior of leaders require that they take a long term view. However, critics of transformational leadership are not always supportive of this position. For example, Keeley (2004) argues that “transformational leadership produces simply a majority will that represents the interests of the strongest faction” (as cited in Ciulla, 2004, p. 160). He believes that leaders, even leaders like Buffet need to be held in check by structures that provide for the balancing of powers. What can we learn from the Salomon Brothers Case? When analyzing a case such as the Salomon Brothers it is easy to walk away with “lessons learned.” On one hand, some of these lessons are rather obvious: admitting wrong doings when they happen and not covering up mistakes comes to mind. On the other hand, less obvious lessons such as anticipating how followers may interpret the priorities of their leaders are equally important. This section will focus on some of the less obvious ethical lessons learned from the Salomon Brothers case and the practical application of these lessons. Ronald Sims and Johannes Brinkmann (2002) suggest “the personal values of top leaders, powered by their authority, set the ethical tone of an organization” (p. 327). This


Salomon Brothers Case Analysis 12 statement is, perhaps, the most important lesson that can be learned from the Salomon Brothers case as, at the end of the day, all actions reflect upon the priorities set by executive leadership. Fortunately, the Salomon Brothers case provides an excellent example of the good and bad results associated with the focus exemplified by leadership. John Gutfreund’s desire to show quarterly profits and his special treatment or “under the table” deals laid the foundation for an organization that believed such behavior was acceptable. As previously discussed, Gutfreunds’s behavior ultimately opened the door for unethical behavior by the organization which led to the problems Salomon Brothers faced. Conversely, Warren Buffett and Deryck Maughan’s emphasis on moral behavior, above everything else, saved the Salomon Brothers and rebuilt society’s confidence in the organization. In addition to the emphasis put on the actions of leadership, another lesson learned from the Salomon Brothers case is the idea that leader’s should always be aware of the costs associated with their actions. Gutfreund’s use of rewards is an example of how his actions could unintentionally lead to unethical behavior. Giving Gutfreund the benefit of doubt we could assume he had good intentions by paying extremely high bonuses to those who provided results. Unfortunately, these bonuses provided further incentives to otherwise ethical associates to behave unethically. After all, as Larimer pointed out “you get what you measure and pay for” (as cited in Sims & Brinkman, 2002, p. 333). Another example could be the emphasis put on hiring. Buffett and Maughan’s leadership resulted in a number of associates being dismissed or voluntarily leaving. While some of these associates were Salomon Brothers top performers Buffett and Maughan stood firm in their belief that they could hire newcomers who shared their


Salomon Brothers Case Analysis 13 moral beliefs and would help to eliminate the cultural persistence that remained from Gutfreunds’s leadership. Overall, Gutfreund’s actions sacrificed he morality of the organization in favor of results while Buffett and Maughan’s actions sacrificed some performance in favor of morality. Both leadership regimes took action but only Buffett and Maughan understood the long-term impact of their actions. The final lesson learned from the Salomon Brothers case is the need for top leaders to focus on the future rather than the day-to-day actions of the organization. Sims (2000) suggests Gutfreund’s emphasis on short-term results opened the door for unethical behavior. On the other hand, actions taken by Buffett and Maughan removed the shortterm mindset of the organization. For example, Buffett and Maughan encouraged associates to purchase Salomon Brothers stock that would be redeemable in five years which game them incentive to help ensure the organization is successful over time. While there is no evidence that long-term planning eliminates unethical behavior such incentives certainly help to deter it. While it’s easy to point out the lessons learned in an example such as the Salomon Brothers case we must also consider the application of these lessons in our own actions. First, we must be aware of the things we emphasize and prioritize with our followers and ask ourselves and our followers what behavior our priorities drive. Do we leave work a couple hours early to go golfing without understanding that we’re promoting similar behavior for our followers? Second, we must consider all of the costs associated with our actions. Do we consider the safety of our followers when we cut spending? Finally, we must ensure the long-term stability of our organization. Do we discuss ethics and values with our followers or simply assume they are known? While these questions may appear


Salomon Brothers Case Analysis 14 to be common sense it the common sense behaviors that can led an organization down a path similar to that taken by Gutfreund and the Salomon Brothers. Perhaps Warren Buffett offered a question we should ask ourselves in any situation that makes us question our morals, ethics, or values: when “contemplating any business act, an employee should ask himself whether he would be willing to see it immediately described by an informed and critical reporter on the front page of his local paper, there to be read by his spouse, children and friends” (as cited in Paine & Santoro, 1994, p. 131). Conclusion The Salomon Brothers case is a story of two different leaders and two different leadership styles. The unethical practices of one leader, John Gutfreund, were driven by selfishness and self interest which compromised the integrity of the organization. His leadership style forced his followers to focus on the short term success objectives. Although the name on the door said Salomon Brothers it was clear that the company was being run by John Gutfreund. Unethical practices and short cuts were acceptable as long as the end result matched his intent. Those who would comply with these practices found rewards for their loyalty. Those who did not agree found themselves out of a job. John Gutfreund’s leadership style change and tainted the culture and perception of a once stellar company. His ego and his self ambitions led to the down fall and embarrassment of the Salomon Brothers. He placed his organization’s entire focus on the next quarter’s profits. When the unethical practices were discovered, Gutfreund attempted to cover it up. By doing this he furtherdestroyed the reputation of the company as the morals of the company were shattered. Gutfreund left this company in a state of emergency. This crisis would not only affect the Salomon Brothers but everyone who


Salomon Brothers Case Analysis 15 had conducted business with them as well. How do you fix a scandal that appears to be impossible to recover from? Enter Warren Buffet. Here is a leader whose self interest was not self centered but rather sought to change the culture and image that had been tainted by previous leadership. His arrival in itself was a step in the right direction. Buffett’s focus on morals and ethics was critical in the restructuring of the culture and atmosphere within the company. Buffet chose to lead by example. His character was above reproach as he sought to change the face of the company. His immediate dismissal of all those involved in unethical behavior sent a positive message throughout the company that these unethical practices were a thing of the past. This company would now take on the personality of Warren Buffet. His transformational style combined with a few transactional practices helped to rebuild the reputation of the company. Whereas one leader focused on amoral practices the other leader sought to build a solid ethical climate through integrity and good moral character. Gutfreund’s leadership practices placed the Salomon Brothers at risk. Buffet’s practices brought the Salomon Brothers back to respectability. His arrival brought credibility back to the firm. In conclusion, the ethical practices of a leader will effect an organization in many different ways. Short term objectives will always have a long term effects as is evident in this case. The short term focus of an unethical leader severely wounded the integrity of the firm but the long term ethical plans and actions of an ethical leader ultimately helped to rebuild the reputation of that firm.


Salomon Brothers Case Analysis 16

References Avolio, B.J. & Locke, E.E. (2004). Should Leaders Be Selfish or Altrusitice? In J. Ciulla (Ed.), Ethics, the Heart of Leadership, West Port, CT: Praeger Publishers. Badaracco, Jr., J.L. (1998). The Discipline of Building Character. In Harvard Business Review on Leadership, Boston, MA: Harvard Business Press. Bass, B.M. & Steidlemeier, P. (2004). Ethics, Character, and Authentic Transformational Leadership Behavior. In Ethics, the Heart of Leadership. West Port, CT: Praeger Publishers. Ciulla, J. (Ed) (2004), Ethics, the Heart of Leadership. West Port, CT: Praeger Publishers. Kotter, J.P. (1990). What Leaders Really Do. In Harvard Business Review on Leadership, Boston, MA: Harvard Business Press. Keeley, M. (2004). The Trouble with Transformational Leadership: Toward a Federalist Ethic for Organizations. In J. Ciulla (Ed.), Ethics, the Heart of Leadership, West Port, CT: Praeger Publishers. Maxwell, J.C. (1993). Developing the Leader Within You, Nashville, Tennessee: Thomas Nelson, Inc. Paine, L. P. & Santoro, M. A., 1994. Forging the New Salomon, Harvard Business School case 395-046. Schein, E. (1985). Organizational Culture and Leadership, San Francisco, CA: JosseyBass. Sims, R (2000). Changing an Organization’s Culture Under New Leadership. Journal of Business Ethics, 25, p. 65-78. Sims, R.R. & Brinkman, J. (2002). Leaders as Moral Role Models: The Case of John Gutfreund at Salomon Brothers. Journal of Business Ethics, 35, p. 327-339). Solomon, R.C. (2004). Ethical Leadership, Emotions, and Trust: Beyond “Charisma.” In J. Ciulla (Ed.), Ethics, the Heart of Leadership, West Port, CT: Praeger Publishers. Trevino, L.K. & Nelson, K.A. (1999). Managing Business Ethics: Straight Talk About How To Do It Right, New York: John Wiley & Sons, Inc. Zaleznik, A. (1977). Managers and Leaders. In Harvard Business Review on Leadership, Boston, MA: Harvard Business Press.

Org Leadership & Ethics Group Project  

LEAD 505 Group Project

Read more
Read more
Similar to
Popular now
Just for you