Peter Drucker didn't have a whole lot of nice things to say
about those on Wall Street, at one point likening them to "Balkan peasants
stealing each other's sheep."
Given the magnitude of the latest crisis to grip Fannie Mae,
Freddie Mac, American International Group, Lehman Brothers, and their friends,
one can only imagine what kind of acid analogy he might have used today.
Or perhaps he would have simply said, "I told you
so." After all, so much of the trouble that has befallen these giants of
the investment banking, mortgage, and insurance sectors--and that threatens to
"undermine the financial security of all," as President George W.
Bush put it--comes from a foolish disregard for the kinds of fundamental
lessons that Drucker taught about risk, reach, and responsibility.
Some prefer to complicate things. Indeed, there is a
temptation, in certain quarters, to fuzzy up what has happened here--to mask
the basic management failures that are at the root of this disaster by pointing
to the intricacies of credit-default swaps, "naked shorts," and other
Luck Doesn't Last
But as Drucker knew so well, none of this is really very
complex: If you make enough dangerous bets--and amassing your fortune on a
foundation of laughably loose lending standards and mountains of debt is
nothing if not dangerous--you're eventually going to run out of luck.
"No matter how clever the gambler," Drucker
asserted, "the laws of probability guarantee that he will lose all that he
has gained, and then a good deal more." He wrote these words in the 1990s,
as a different group of once-illustrious institutions--Barings, Bankers Trust,
Yamaichi Securities--were felled by their recklessness.
Drucker noted that top management professed to be shocked by
some of the activities that had taken place at these firms, and it won't be
surprising if we hear similar talk this time around--especially if people wind
up going to jail. It was reported that the FBI has opened more than two dozen
probes into possible fraud connected to the financial meltdown, including
investigations at Fannie Mae, Freddie Mac, AIG, and Lehman.
But Drucker didn't buy that senior executives were blind to
their employees' egregious behavior a decade ago, and he wouldn't buy it now.
"In the first place," he wrote, "there is a limit to
coincidences. Such widespread breakdowns cannot be blamed on 'exceptions.' They
denote systems failure."
Too Big to Hide
Besides, Drucker added, "in every single one of these
'scandals,' top management seems to have carefully looked the other way as long
as trading produced profits (or at least pretended to produce them). Until the
losses had become so big that they could no longer be hidden, the gambling
trader was a hero and showered with money."
Of course, the pressure to produce these profits--and, in
turn, prop up a company's share price--has become unrelenting. It used to be,
veteran financial journalist Bob Reed remarked recently, "the stock price
was an important component of something more grand: how well the company was
managed, product quality, innovations, customer satisfaction--you know, the
business." But over time, those pursuits have become largely overshadowed
by just one: maximizing shareholder value.
To Drucker, this mentality was anachronistic. "One
thing is clear to anyone with the slightest knowledge of political or economic
history: The present-day assertion of 'absolute shareholder sovereignty'...is the
last hurrah of 19th century, basically preindustrial capitalism," he wrote
in a 1988 article. "It violates many people's sense of justice."
Perhaps even more important, Drucker said, this lack of
balance is unsettling in a world in which large institutions have such an
enormous effect on so much--on the portfolios of shareholders, yes, but also on
the lives of millions of other people, as we're seeing right now.
In this day and age, "modern enterprise, especially
large enterprise, can do its economic job--including making profits for the
shareholders--only if it is being managed for the long run," Drucker
wrote. "Altogether far too much in society--jobs, careers, communities--depends
on the economic fortunes of large enterprises to subordinate them completely to
the interests of any one group, including shareholders."
All of which leads, in the end, to the biggest thing missing
today on Wall Street and in much of Corporate America: an ethic of
Drucker believed strongly that every business must
contribute to the general health of society. This means doing "good
works" where appropriate. But above all, it means ensuring that the
business itself is well-managed and built to last.
"The institution's performance of its specific mission
is...society's first need and interest," Drucker wrote in his 1973 book Management:
Tasks, Responsibilities, Practices. "A bankrupt business is not a
desirable employer and is unlikely to be a good neighbor in a community. Nor
will it create the capital for tomorrow's jobs and the opportunities for
I often tell people that there are a million reasons to read
and reread what Peter Drucker had to say. This week, it's more like 700 billion.