Running head: LEADERSHIP MOMENT CASE 7 Leadership Moment: John Gutfreund Loses Salmon Inc. UMUC HCAD 670_9040_2165 Sequoia Bacon July 24, 2016 BACON 1 LEADERSHIP MOMENT CASE 7 BACON 2 Executive Summary John H. Gutfreund is the CEO and chairman of Salmon Inc. in New York. In 1991, one of Salmon's bond trader, Paul Mozer, committed outsized biding in the month of February and May, and Gutfruend is now faced with reporting the transgression with the federal regulators of the Treasury auction. Gutfreund delayed reporting the offense to the federal regulators for three months and it turn into a big public scandal that lead to him resigning. To ensure that Salmon could rebuild their reputation in Wall Street, Warren Buffet was recommended to become the acting CEO. Under his leadership, Salmon was able to restore their reputation because Buffet used great judgement and remain cool under fire to make difficult decisions need for the firm's survival. This paper will discuss the differences in leadership style of Gutfreund and Buffet and the action I would have taken if placed in the same situation. LEADERSHIP MOMENT CASE 7 BACON 3 Leadership Moment: John Gutfreund Loses Salmon Inc. John H. Gutfreund is a brilliant bond trader and power banker, who is the chairman and CEO of Salmon Inc., and is also known as the \"King of Wall Street\" according to Business Week magazine. Bond trading is the sustenance of Salmon's operation, for it counts as a fifth of their revenue. In 1991, Gutfreund and Salmon experience continuous success in the Treasury auctions until Gutfreund was informed by John W. Meriwether that a bond trader, Paul Mozer, did two improper bids, in February and May, during the U.S. Treasury auction on behalf of multiple customers without their knowledge or consent. Gutfruend is now faced with reporting Mozer's illegal trading to the federal regulators or remain silent and hope that the regulators will not find out, and confront Mozer about his future at Salmon. Unfortunately, Gutfruend waited three months before reporting Mozer's transgressions to federal regulators, which lead to Salmon having to pay over $400 million in penalties and almost risk the federal regulators to pursue criminal action, such as indictments. Due to shame and public humiliation, Gutfreund resigned as the chairman and CEO, and appointed Warren Buffet as his successor until a new permanent CEO is assigned. Gutfruend and Buffet had a friendly relationship over the years because Buffet has accomplished great financial success in his own company, Berkshire Hathaway in Omaha, and he uses Buffet as an advisor over the years. Therefore, Gutfreund recommended Buffet to take his place because he admired Buffet's willingness to put consumers' welfare ahead of the company's interest. Buffet, with the help of Deryck C. Maughan, the head of Salmon's investment banking, and Robert Denham, Salmon's general counsel, ran the firm and together they guided Salmon's damaged business reputation back to health until it was acquired by Travelers Group in 1997. LEADERSHIP MOMENT CASE 7 BACON 4 Key Leadership Issues There are two major issues with Gutfreund's leadership style that facilitated Mozer's unauthorized bids: being indecisive and not exercising authority to ensure accountability with the firm. Because Gutfreund fostered an organizational culture that high-stakes risk taking is the way of doing business and rewarding those employees who represent this belief, Mozer did not see his decision to deliberately ignore federal regulations would negatively impact the firm. For example, Buffet's found out through his own investigation that Salmon gave Mozer's $10 million in bonuses prior to the 1991 incidences despite his various open feuds with federal regulators regarding auction policies. I believe that if Gutfreund would have taken some form of disciplinary action, such as suspension without pay or immediate termination, immediately when he know of Mozer's fatal error, that it would have instilled self-responsibility amongst the firm. The lack of Gutfreund not exercising his authority allowed Mozer to make multiple outsized bids, so there was no sense of professional accountability to prevent organizational liability. However, in order to enforce accountability, management should be decisive in their leadership. Decisiveness is an important attribute of a leader because it shows the leaders ability to make decisions quickly and effectively, especially during a crisis. Gutfreund avoidance to report Mozer's indiscretions showed his indecisiveness and unwillingness to take action in a crisis. Gutfreund knew the repercussions of not responding swiftly and still did not informed the other board members or federal regulators until months later after the fact. I believe that if Gutfreund had informed the federal regulators of the violations sooner and cooperated with their demands, he could have remained as the chairnman and CEO and the penalties wouldn't have been so high. Nevertheless, Buffet took a more direct and honest approach, which save Salmon from making another \"billion-dollar error in judgement\" (Useem, 1998, p. 195). Despite Buffet being a more LEADERSHIP MOMENT CASE 7 BACON 5 aggressive leader than Gutfreund in handling a crisis, there are some advantages and disadvantages to how he forged a new culture at Salmon Inc. Leadership Strength and Weakness Gutfreund did the right thing by electing Buffet as his replacement, for Buffet's biggest asset was his willingness to take action. Buffet understood that full cooperation with the federal regulators would help them from not take any further criminal action, but mainly to keep Salmon from permanently closing its doors and having to layoff thousands of devoted employees. Buffet also did good in redesigning the organizational structure by forming a board compliance committee, made self-monitoring of compliance the employees responsibility, and completed much needed changes to departmental operational functions. By making these changes, Buffet exercised his authority and made the employees accountable for the firm's long-term business future. Nonetheless, the action that Buffet took that could have negatively impacted the restoring of Salmon's credibility in the business market is micromanaging the staff. One of the first course of action that Buffet did once he accepted his new position at Salmon was dispatching an office memo that expected all employees to report any legal violation or moral failures done on behalf of Salmon. This set the stage that all employee performance will be reviewed and monitor, which created an environment of micromanagement. Research has shown that micromanaging can result in employee disengagement and have negative impact on employee morale. For example, Delgado, Strauss, and Ortega (2015) discussed the use of micromanagement in the healthcare industry in the U.S. and discovered that micromanaging can lead to employee disengagement due to a deplete sense of autonomy. The authors also found that micromanaging can have a deleterious impact on employee morale because in crisis situations employees may not be willing to sacrifice their own time or resources to address the problem LEADERSHIP MOMENT CASE 7 BACON 6 they believe that management should take full responsibility and credit for managing during the crisis (Delgado, Strauss, and Ortega, 2015, p.772) Personal Reflection In examining the actions that Gutfreund and Buffet took leading up to and handling the legal crisis at Salmon, I would have taken Buffets leadership approach. Once it was brought to my attention that an employee's action would lead to organizational liability, I would have immediately addressed that individual and based on his/her response, will determine if he/she would still have a future at the firm. For example, if the individual expressed remorse and was sincerely regretful for their actions, I would demote the individual, with opportunity to advance based on work performance, and sanction a financial penalty, such as no bonuses for the next few years. But if the individual took no responsibility for his/her actions and boast about his/her contribution to the firm's success, I would immediately terminate his/her employment because he/she will be a repeat offender. As a result, the disciplinary actions brought upon the individual will set an example of what will happen if other employees fails to report any legal violation or moral failures. Like Buffet, I would have also changed the organizational structure and culture to make sure that the staff is held accountable for their actions and understand its impact on their future at the firm. I believe that authority needs to be exercised because without it incidents like Mozer's will become a habit if gone unpunished or not reprimanded. Additionally, I would have given explicit cooperation, contributed to the completion of the investigation, and accepted responsibility of my subordinate behavior to restore the firm's reputation. As a leader, I set the standard of professionalism and code of ethics. Therefore, I cannot expect high performance and LEADERSHIP MOMENT CASE 7 BACON 7 work to be completed based on a code of ethics of my subordinates if it is not demonstrated on all professional levels. In conclusion, Gutfruend's lack of decisiveness and delayed report of Mozer's outsized bids to federal regulators cause him to resign as chairman and CEO of Salmon. Salmon also had to pay millions of dollars in penalties that could have led to their demise. Nonetheless, Gutfreund recommendation to was appoint Buffet as acting CEO until Maughan and Denham fulfilled their leadership roles kept Salmon's future alive. Buffet did a fantastic job of repairing Salmon reputation with his willingness to act and cooperating with the federal regulators investigation. But in hindsight, Buffet's micromanaging style could have had negative impact on changing the cultural code at Salmon because it could have led to employee disengagement and low employee morale. However, I would have taken Buffet's same approach to resolve the crisis facing Salmon future because an example had to be made and set in order to instill appropriate professional and code of ethics into the employees of Salmon to prevent future lability at the firm. LEADERSHIP MOMENT CASE 7 BACON 8 References Delgado, O., Strauss, E. M., & Ortega, M. A. (2015). Micromanagement: When to avoid it and how to use it effectively. American Journal of Health-System Pharmacy, 72 (10), 772776. DOI: 10.2146/ajhp140125. Useem, M. (1998). The leadership moment. New York: Random House Inc. Running Head: GUTFREUND AND BUFFETT AT SALOMON: A LEADERSHIP REVIEW Gutfreund and Buffett at Salomon: A Leadership Review Fredah Horani 24 July 2016 UMUC HCAD 670 1 GUTFREUND AND BUFFETT AT SALOMON: A LEADERSHIP REVIEW 2 Abstract In August of 1991 CEO and chairman of Salomon Inc., John Gutfreund, faced up to the greatest leadership failure of his career. After being informed of rule breaking by one of his top bond traders, Gutfreund failed to act and allowed the wrong-doings to throw Salomon into crisis. Gutfreund made the best decision he could at the time and stepped down as leader of the organization that he positively influenced for so long. This decision, and the strong leadership qualities of Warren Buffett, helped Salomon Inc. avoid bankruptcy and allowed the company to survive. An analysis of these leadership traits will show why decisiveness, candor, and the ability to critical think under pressure, are all vital components of any administrator. GUTFREUND AND BUFFETT AT SALOMON: A LEADERSHIP REVIEW 3 Background The Wall Street collapse of 2008 brought the topic of financial corruption into the public spot light, yet misdeeds were occurring long before the heavily publicized time period in American history. In 1990 Salomon Inc. was renowned as a profitable and reputable investment banking organization. Buying and selling U.S. Treasury bonds was a valuable source of income for the organization. \"In 1990, its trading of securities had accounted for a fifth of Salomon's $5.9 billion in revenue\" (Useem, 1998). Yet the delicate balance of moving such vast sums of money was left in the unscrutinizing hands of select leaders. These key players at Salomon included chairman and CEO, John Gutfreund, president Thomas Strauss, vice chairman John Meriwether and investor/friendly advisor to the CEO, Warren Buffett. Gutfreund lead Salomon through a highly profitable period in the early 80's with his \"bite the ass off a bear\" attitude [Use98]. While his assertive approach to banking and businesses seemed to work for the company, it also carried heavy risk. Top on his resume was his leadership of Salomon Inc. through the stock market crash that occurred on October 19, 1987. Known as \"Black Monday\Gutfreund Loses Salomon Inc. 1. Do you think Gutfreund did the right thing in resigning? Should he have stuck it out and tried to fix the mess he created? If he had not resigned, do you think he would have been forced out? Why or why not? 2. What leadership attributes did Warren Buffett display in his handling of Salomon Inc.? Do you think Buffett handled the "reworking" of Salomon appropriately or was he too aggressive? How was he able to so quickly turn around Salomon so it did not have to file for bankruptcy? 3. How should Mozer's actions have been handled? Who should have taken the appropriate actions (Gutfreund, Strauss, senior colleagues, someone else)? What major leadership failures led to Mozer's indiscretions falling through the cracks? 4. If you were CEO of Solomon, how would you have handled the situation once informed of Mozer's misdeeds? Would you have waited on a press-release until after things were figured out with the Fed? Or would you want to inform the public immediately to prevent a possible leak, and if so how would you tell the public about the company's misdeeds