Corporate leadership responses to the 2008 financial crisis in banking and auto industries

Leadership played a substantial role in the recent economic troubles. The banking industry suffered from leadership that was incentivized to pursue high-risk short-term policies that resulted in high levels of return but subjected the entire economy to substantial risk. In the automobile industry, leaders failed because they did not adequately anticipate industry trends and did not adjust the corporate culture soon enough to respond to changes in the external environment (Davis, 2009). The insurance industry suffered as the banks did from taking on too much risk, the result of leadership more concerned with short-term results that with long-term growth.

In order to select leaders to guide them out of the abyss, these companies must find leaders with different traits -- in the case of banking and insurance a more conservative mindset and in the case of automobiles a more progressive one. The shareholders should ultimately take responsibility for their investments, as the U.S. federal government did in appointing a new CEO for its General Motors subsidiary. The leaders of AIG, GM and Citibank were not effective leaders, as they led their companies to the brink of bankruptcy. Agency theory holds that these leaders are supposed to act on behalf of shareholders, yet those shareholders saw the value of their holdings eviscerated under the stewardship of these leaders. An effective leader of any of these companies would have sufficient understanding of the external environment to know the best strategy and would have the courage and ability to execute the strategies that flow from that understanding. Effective leaders are not always self-evident. They often must be identified, and this is done by understanding the type of leadership that he or she offers and comparing that to the type of leadership that the firm requires. I am an effective leader, but my leadership style is not going to work under all circumstances. There is an element of fit that is required.

1. Fielder (1996) explains that leadership can be selected on the basis of a number of different criteria. Prior to 1945, the conventional belief was that leadership was something that could be measured on the basis of traits. Someone either had these traits and was a good potential leader or that someone did not have these traits and therefore had limited leadership potential. Leadership has moved beyond this limited view to encompass a number of different theories about the nature of leadership, and this increased knowledge has helped to understand the different ways in which leaders can be identified and cultivated.

Fielder acknowledges that there is no one dominant leadership trait, behavior or personality. Leadership, therefore, is dependent on the situation. Good leaders are likely to be chosen from a given group based on their ability and some aspects of their personality. Typically, good leaders are the same people viewed as good followers, according to Fielder. "The most effective leaders are those whose personality, abilities and behaviors match the situation in which the leader operates," and this implies that the ideal leader for a given situation is entirely subjective. Therefore, selecting the best leader requires an in-depth understanding of the situation at hand and the organization's leadership requirements with respect to dealing with that situation.

Gandossy and Guarnieri (2008) outline some of the techniques that top firms utilize to help them identify potential leaders. Many firms today employ data-driven processes to help them identify potential leaders from among their staff. Surveys and other data-gathering programs are employed at least every year in order to assess the leadership potential within the staff. The data typically blends qualitative and quantitative measures, with the objective of identifying which members of the staff are ready for assignment today, and which ones will be ready down the road.

These analytical techniques for identifying leaders are used by firms such as General Mills. This company tries to narrow down every year ten potential CEO candidates, in order that it builds the best possible pool. It does this because it recognizes that leaders develop their skills at different rates and in different ways. It is imperative, therefore, that firms have large pools of leadership candidates so that when they need a new leader they are able to access the best candidate for the company from within their existing leadership stock.