case study of salomon brothers group d 1 case study ... study of salomon brothers group d 1 . ......
TRANSCRIPT
Case Study of Salomon Brothers Group D 1
Case Study – Salomon Brothers
Group D
Kirk Baringer, Luke Elliot, Joseph Martinez, Kay Metzinger
A Paper Presented in Partial Fulfillment
Of the Requirements of
LEAD505 – Organizational Leadership and Ethics
October 2011
Southwestern College Professional Studies
Salomon Brothers Group D 2
Abstract
Reviewing the Case Study of the Salomon Brothers, the following research defines ethical
behavior, how the company’s ethical standards were maintained, where the Salomon Brothers
leadership turned to crisis for the company, and how they managed this crisis. Exploring the
concerns of this crisis, this paper examines how management of the company changed, with new
leadership taking over with Deryck Maughan, supported by Warren Buffett. The paper also
looks at how the new leadership was able to review and maintain ethical standards, the major
consequences of the Treasury auction, and discusses whether Salomon Brothers should have
pleaded guilty to minor criminal charges. The paper uses Schein’s Five Primary Mechanisms
(1985) and discusses how it relates to the Salomon Case and how leaders can use these
mechanisms in other organizations. Finally, group members will discuss how what they have
learned from this case study and how it relates their personal and professional experiences.
Salomon Brothers Group D 3
Introduction
In this reality show friendly world, financial scandals are entertaining and frightening at
the same time, especially when they involve the fall and stumble of such highly visible leaders
such as Salomon Brothers head, John Gutfreund, and his crew. This is even more engaging when
you see the rise of, Mr. Integrity himself, billionaire Warren Buffett, who came in and saved the
day. But after we stopped looking at this real life drama about Mr. Gutfreund's grievous fall, we
have to go back and investigate the events as to how it happened and why. Four leadership
students from Southwestern College reviewed and analyzed the ethical perspectives of the
Solomon Brother’s case. We have assembled the case data into a logical review while exploring
how we can prevent a blatant disregard for legal regulations in a commerce industry in our own
lives.
This case involves a scandal involving illegal bids worth billions of dollars in the
multitrillion-dollar treasury market. The government brought legal action against the Salomon
Brothers executives who were involved in the illegal bidding in treasury auctions and a series of
securities violations, namely insider trading. By placing these bids, Salomon Brothers was able
to exercise extraordinary control over the marketplace, even though the profits were actually
negligible. We, as the Southwestern College leaders’ Group “D,” will examine this case from an
ethical review outlining how the executive team at Solomon Brothers assessed the quality and
climate of ethics within the firm and how the company’s standards were and could be maintained
through an organizational culture. We will develop an assessment of the problem with the
Solomon Brothers’ leadership and review the ethical crisis and the steps the team used to
emerge. Finally, we will discuss the future of the organization and how it falls within a
Salomon Brothers Group D 4
leadership style spectrum, so we can learn lessons from their moral and ethical challenges and
compare the Solomon Brothers drama with life lessons from within each of Group B leadership
history.
Solomon Brother’s Definition of Ethical Behavior
When analyzing how Salomon’s leadership defined ethical behavior, one must look at
three things. First, it is important to understand how leadership in any firm can define ethical
behavior across an organization. Second, the culture of Salomon prior to the crisis must also be
analyzed. Finally, we must look at the ways leadership was able to define ethical behavior within
the firm after the crisis occurred.
To begin, it must be stated that ethics is an integral part of any organization’s culture
(Sims, 2000). That said, a company’s culture can allow employees within an organization to
come to an understanding that certain behaviors are either tolerated or not tolerated (Sims, 2000).
Leaders should use their own personal values to “set the ethical tone of an organization.
Failure by top leaders to identify key organizational values, to convey those values by personal
example, and to reinforce them by establishing appropriate organizational policies demonstrates
a lack of ethical leadership on their part that fosters an unethical organization culture” (Sims,
2000, p. 327).
At the time when Salomon hit its crisis, the culture in the organization had some flaws
that allowed unethical and illegal activities to be perceived as acceptable. Part of the flaws in this
culture included an aggressively macho environment with relaxed regulations and an extremely
competitive industry (Sims, 2000). The firm was even characterized “as a company that
celebrated clever evasion of rules and trampled anyone standing in the way of profit and a
Salomon Brothers Group D 5
company governed by a ‘culture of greed, contempt for government regulations, and a sneering
attitude toward ethics or any other impediment to earning a buck” (Sims, 2000, p. 66).
This culture promoted an environment where the law was bound to be broken.
Ultimately, the responsibility for the culture of an organization rests with the senior leadership of
the organization. Early into the crisis, Warren Buffett acknowledged this as a potential
leadership failure while responding to a congressional inquiry by stating that it raised questions
about how the leadership defined ethical behavior prior to incident. He basically acknowledged
that how leadership handled the situation raised serious questions on “whether there was a
climate within Salomon that appeared to tolerate or even encourage wrongdoing” (Paine &
Santoro, 1994, p. 127).
Of course, even despite the trader’s gone wild culture, it can also be concluded that the
entire organization was not completely flawed prior to the crisis. Despite the culture, many
employees like Stephen J.D. Posford, co-head of Salomon’s London Office, did not appear to be
operating unethical just because the culture may have promoted it. When Posford first learned of
the behavior, he did not believe it at first. His “disbelief turned to ‘outrage’ when he realized the
full horror’ of what had occurred, putting bids in costumers’ names without authorization was
appalling behavior which flouts the whole integrity of your relationship with clients” (Paine &
Santoro, 1994, p. 116). Another senior leader said the actions were “against the standards of our
business and against the standards of Gutfreund himself preached” (Paine & Santoro, 1994, p.
116).
After the behaviors were made public Buffett and newly appointed chief operating
officer, Deryck C. Maughan implemented many measures to help fix the culture within the firm.
Salomon Brothers Group D 6
One of the first things they did was to provide consistent messaging about the standards that
would be used in the firm in regards to ethics. On assuming his new position, Maughan pledged
“an absolute insistence on the correct moral as well as legal behavior” (Paine & Santoro, 1994, p.
115).
Maughan managed the ethical climate through discipline and leadership. “I lead by
example, but when things go wrong, you can’t turn a blind eye. Leadership must enforce values
through punishment, and if they don’t exercise that power, then the values can’t be upheld, and
people begin to believe the behavior is okay” (Paine & Santoro, 1994, p.128).
After the incident, Buffett and Maughan also helped define how the organization would
behave by implementing new compliance systems that would help “make Salomon a leader in
setting new standards in regulatory behavior in the financial services industry” (Paine, &
Santoro, 1994, p. 127). This new process was taught to employees through training and enforced
ethical behavior in the firm through compliance officers (Paine & Santoro, 1994).
Another tactic Buffett and Maughan implemented to drive ethics in the organization was
a shift in how compensation was given to performers within the organization. This shift aligned
compensation more with the long-term success of the firm. While many did not like the new
system, Buffett believed it kept people onboard who share the firm’s values and vision. “Were an
abnormal number of people to leave the firm, the results would not necessarily be bad. Other
men and women who share our thinking and values would then be given added responsibilities
and opportunities, because in the end, we must have people to match our principles, not the
reverse” (Paine & Santoro, 1994).
Salomon Brothers Group D 7
Leadership is important when defining a culture that will remain ethical. It is not enough
to just say the company will be ethical. Good leadership will also implement safeguard to ensure
that the culture is following the ethical standards set by the leadership.
Maintaining the Company’s Ethical Standards
The birth of an organization’s ethical culture must start at the highest level of
management, its leader. Though ethics should be at the heart of all levels of management, it is
essential that fostering an ethical culture within an organization starts at the top. The values held
by an organization and its overall operating culture greatly depends on proper leadership.
Leadership must first establish the standards of ethics by which all individuals of an organization
will be held accountable. These standards must be fully communicated to all individuals and
must be enforced on daily basis in a way that is fair and equitable. This includes the leader
himself/herself being held to those same standards. A leader must not only be held to those
standards but must exemplify the standards in their lives through personal example. Through
proper communication of an organization’s ethical standards, its leader demonstrated those
standards by personal example, and the reinforcement of those standards the right type of ethical
culture will take root and be sustainable through all levels of management (Sims & Brinkmann,
2002).
Today’s organizations are comprised of multiple levels of management, and considering
this fact, communication is even more important. To add to the importance of communication
today’s organizations are often separated geographically. Properly communicating an
organization’s ethical standards is essential in fostering the right ethical culture. There were
several examples of this sort of communication mentioned in the case of Salomon Brothers.
Salomon Brothers Group D 8
After the crisis of 1991, Warren Buffett assumed leadership of the troubled company. Shortly
after assuming leadership of Salomon Brothers, Buffett sent a letter to the firm’s senior
management expecting them to directly report to him “any legal violation or moral failure on
behalf of any employee” (Paine & Santoro, 1994, p. 117). In meetings that soon followed
Buffett to set out and replace the old ethical culture that encouraged shortcuts and achieving
results at any cost with one that would restore the good reputation of Salomon Brothers. In one
such meeting Buffett told employees if they “lose money for the firm, I will be very
understanding; lose a shred of reputation for the firm, I will be ruthless” (Paine & Santoro, 1994,
p. 118). Buffett’s communication of such expectations not only took place with Salomon
Brothers’ employees but with their customers as well. In September 1991, Buffett sent letters to
its major customers explaining that Salomon Brothers would conduct its future business with
“honesty and candor” (Paine & Santoro, 1994). These changes in conducting of business
included a new compliance system. Buffett expressed to Congress at a hearing in September
1991 that his new compliance system would “make Salomon a leader in setting new standards in
regulatory behavior” (Paine & Santoro, 1994, p. 127). Key employees within the organization
received written materials that outlined the new compliance system, and in October 1991 he
wrote a letter that boasted the success of firm’s new compliance system and how he expected the
firm’s employees to conduct their business in an ethical manner. This letter was sent to
shareholders and published in The Wall Street Journal, The New York Times, The Washington
Post, and The Financial Times (Paine & Santoro, 1994). One of the biggest things Buffett would
do before leaving Salomon Brothers was to make a promise to all those hurt by Salomon
Brothers’ past ethical practices that amends would be made, and the wrongs of the past corrected
(Paine & Santoro, 1994).
Salomon Brothers Group D 9
Some would say a promise is only as good as the person making said promise, but
Buffett’s reputation preceded him prior to assuming his leadership role at Salomon Brothers.
Buffett had a reputation in the United States and throughout most of Europe that most corporate
executives would love to have, and his assumption of the leadership role at Salomon Brothers
helped provide the confidence employees needed to get them through the troubles facing their
organization (Paine & Santoro, 1994). One thing Buffett was known for was his integrity, and it
would be displayed from the very start of his tenure as leader of Salomon Brothers. He was to
display the ethical standards he expected from employees in his own life and, as such, was able
to demonstrate Schein’s primary mechanisms in influencing an organization’s culture (Sims,
2000).
The first mechanism involved Buffett’s attention to the troubles facing Salomon Brothers.
Buffett sought to replace the older culture of misconduct with a short-term focus of becoming a
respected organization practicing sound ethical practices with a long-term focus on employee
conduct (Sims, 2000). The second mechanism involved Buffett’s immediate reaction to the
crisis facing Salomon Brothers. From the very start, Buffett made it clear he would be open and
available to any and all questions. It is noted that this “unprecedented” openness was key in the
organizations dealing with Congress and its clients (Paine & Santoro, 1994). Also, after
assuming control of Salomon Brothers, Buffett severed all ties with Paul Mozer and Thomas
Murphy who were partially responsible for bringing about the crisis.
This helped demonstrate a third mechanism which involved Buffett’s criteria for
selection and dismissal (Sims, 2000). Buffett not only dismissed employees associated with
ethical misconduct but surrounded himself with new employees who shared similar ethical
values. Upon assuming his leadership role at Salomon Brothers, Buffett appointed Deryck C.
Salomon Brothers Group D 10
Maughan as the new chief operating officer of Salomon Brothers. Maughan was referred to as
“Mr. Integrity” by the press and pledged “an absolute insistence on the correct moral as well as
legal behavior” for Salomon Brothers employees (Paine & Santoro, 1994). Buffett’s similar
reputation and demonstration of ethical behavior in his life demonstrated the fourth mechanism
of role modeling (Sims, 2000). The fifth mechanism demonstrated by Buffett involved the
allocation of rewards.
Rewards are a great way to reinforce certain behavior and ethical practices. The last thing
a leader must do to foster and maintain an ethical culture within their organization is to employ a
reward system that reinforces the sort of behavior or performance consistent with organizational
values. The prior compensation system employed by Salomon Brothers produced what Buffett
referred to as “irrationalities” (Paine & Santoro, 1994). The new compensation system put in
place by Buffett tied compensation more closely to performance. Buffett once wrote
“employees, who produce exceptional results for the firm, while operating both honorably and
without excessive risk, should expect to receive first-class compensation” (Paine, & Santoro,
1994). The thought behind such a compensation system would “align the interests of employees
with those of shareholders” and bring about the long-term focus Buffett wanted Salomon
Brothers employees to have (Paine & Santoro, 1994, p. 132).
This long-term focus was essential in changing how employees would conduct their
business. Previous leadership fostered an ethical culture, which focused on the short term while
cutting corners to achieve the greatest results in the shortest amount of time. This type of culture
demonstrated the ethical standards and values held by its leader at the time. From the very start,
Buffett communicated how he expected employees to conduct their business, and this was not
only communicated to all levels of management but to the organization’s employees as well.
Salomon Brothers Group D 11
Buffett’s style of leadership and reputation helped convey the expected ethical standards to those
whom he led, and our discussion of Schein’s primary mechanisms showed how Buffett
demonstrated these ethics through personal example. Lastly, Buffett’s initiation of a new
compensation system brought about the change in how employees would be rewarded for
performance. This change was necessary to align the interest of the employee more to their
customers (Paine & Santoro, 1994). Without all these three key concepts the success of the new
ethical culture at Salomon Brothers would have been doomed from the start. With them the new
ethical culture was able to take root, and be maintained even after the change in leadership from
Buffett to Maughan.
Affects of the Emphasis on Ethics has on the Organization and its Members
The emphasis on ethics affected the organization and its members through loss of trust,
resulting in many leaving the organization and many being removed from employment. At
times, those within an organization are not aware of the unethical developments within an
organization unless their hands are actually involved. The larger the organization the less likely
many within know of the unethical dealings. As those in administrative positions keep from
disclosing information from the operational staff, unethical dealings may not be disclosed or
realized until it is too late. If someone in the organization were to consider the ethics, values, or
morals that have been jeopardized, reporting this could help save those within the organization,
or even the organization as a whole.
Disclosure crisis and Auction Irregularities
When Salomon publically disclosed the “’irregularities and rule violation’ in connection
with the firm’s bids in three U.S. Treasury security auctions” (Paine & Santoro, 1994, p. 110), it
Salomon Brothers Group D 12
set off a firestorm that nearly destroyed the firm. This announcement triggered a crisis for two
main reasons.
The initial kindling to the crisis was the fact that there was a wrongdoing at all. Anytime
there is an illegal activity in the financial industry, it is a big concern for legislators, investors,
and the public. The second reason this was so significant was because it later led to the
acknowledgment that senior leaders of the firm had been aware of this for several months before
coming forward. This is important because they should have raised the flag to the government
regulators as soon as they were aware of the incident. Had they done this, the crisis would not
have been nearly as bad.
The auction irregularities in themselves would probably not have been that big of deal
had they been the only infraction and had they been reported immediately. However, the second
announcement that senior leadership knew of the irregularities for months sent “shockwaves
throughout the worldwide financial community” (Paine & Santoro, 1994, p. 111).
Salomon Brother’s handling of the Treasury Security Crisis
The stakeholders within the Wall Street Firm Salomon Brothers dealt with the Treasury
crisis with an initial slow response that exacerbated the situation by critical failures in a
breakdown in leadership and their ethical commitment to their industry. In the late 1980s and
early 1990s, companies had to develop strategies to deal with the sluggish securities market.
Many Wall Street firms like the Salomon Brothers began merchant banking and dealing in junk
bonds to bolster financial revenue. Although Salomon Brothers entered the junk bond market
after the initial boom, they were still able to capitalize on success in this area by taking
advantage of the 1990 collapse of Drexel Burnham Lambert Inc. This addition of trading junk
Salomon Brothers Group D 13
bonds enabled Salomon Brothers to earn a record $500 million on $1.2 billion in revenues in
1991 (Loomis, 1997). With the highs in life, come the lows. During the same year, Salomon
Brothers reaped the benefit of financial win-falls, but it also saw the birth of a major Wall Street
scandal that almost brought the company to the brink of collapse like their former counter parts
Drexel. This scandal involved United States Treasury rules for auctions, which stated that no
single buyer could bid on more than 35-percent of the total offered auction (Loomis, 1997). This
is where Salomon Brothers went astray. They bid for itself and as a broker for individual clients
up to 35-percent.
In 1991 the Salomon Brothers circumvented the U.S. Treasury rules by submitting a
two-year treasury notes 35-percent bid in its own company’s name and making fake bids up to
35-percent in two of its client’s names at auction. When Salomon Brothers subsequently won
the auction, they then fraudulently sold themselves the notes unbeknownst to the clients. This
resulted in Salomon Brothers seizing control of more than $10 billion of an $11billion auction.
This controlling positioned enabled them to influence market outcomes and charge elevated
prices to marketers making large profits for their firm. The crisis began with one of the clients
whom Salomon Brothers used to bid under their name made a legitimate bid at the same auction
that was in addition to the fraudulent bids that Salomon Brothers made, thereby raising their
clients total bid to more than 35-percent (Fundinguniverse, n.d). Wachtell Lipton investigation
discovered that two government securities traders, namely Salomon’s managing director Paul
Mozer and trader Murphy had broken the Treasury's bidding rules (Department of the Treasury,
1991). The disturbing part was that it happened on more than one occasion during 1990 and
1991.
Salomon Brothers Group D 14
Once Salomon Brothers leadership knew of the violations, they began a damage control
campaign. In late April of 1991, the leadership of Salomon Brothers, President Thomas Strauss,
Chairmen John Gutfreund, and Donald Feuerstein, met to decide a course of action, which was
the first step in trying to manage the pending crisis. During that meeting, Feuerstein asserted that
Mozer's act was most likely a criminal action (Loomis, 1997). The group decided that the New
York Federal Reserve had to be informed of their actions. The positive thing was that they knew
they had to release the information; the negative was that none of them did a thing until July,
three months later.
The first real effective leadership decision the firm engaged in was attempting to
dampen the blow to its stakeholders on August 9 when Salomon Brothers notified its regulators
and sent out a press release disclosing that they had uncovered irregularities and rule violations
with bids the firm engaged in during three U.S. Treasury security auctions (Paine & Santoro,
1994). The next thing that showed leadership promise was when they suspended Mozer and his
cohorts Murphy, Strauss, and Feuerstein. The United State Treasury investigation details
revealed that some of the top leadership including CEO Gutfreund had been told of the
infractions but had done nothing about it. This lack of action showed that he was complicit in
the improprieties and condoned that means of operation. Gutfreund and Strauss were pressured
by Salomon’s senior managers and from government officials to resign for their part in the
scandal (Paine & Santoro, 1994). Their departure from the firm made way for Warren Buffet and
Deryck Maughan to assume the leadership role in the firm to put the company back on the right
path. Buffet was determined to clean up the sins of the past by reestablishing the firm’s integrity
(Paine & Santoro, 1994). In an effort to begin their leadership tour on a transparent footing,
Buffett made the organization available to investigators, promising to release any of the firm’s
Salomon Brothers Group D 15
legal team’s reports and notes pertaining to the trading desk's transgressions (Paine & Santoro,
1994). This magnanimous gesture by the new leadership demonstrated to not only investigators,
but also investors and the members of the firm, that Solomon Brothers was ready to start
rebuilding its reputation.
Maughan’s Primary Concerns Assuming Leadership Responsibility
During that time frame, Salomon Brothers had abruptly lost its momentum. Within one
week Chairman Gutfreund, President Strauss and Meriwether resigned. Their stock was
suspended from trading after its market value severely dropped more than a billion dollars within
a week (Grant, 1992). The banking system wanted to restrict loans while investors boycotted
them. Their top customers suspended targeted business dealings. Finally, the Justice Department
and the Securities and Exchange Commission launched investigations. In the eyes of most
investors all seemed lost, but Deryck Maughan with the support of Warren Buffet was able to see
a path to stopping the hemorrhage. He implemented a process of conformity which established a
foundation that enabled investors and staff to see that the firm could operate transparently using
industry regulations. His calm demeanor also served as a stable force that reassured their
customer base and anxious staff that they will return to a viable firm. Finally, devising a
contingency strategy enabled the organization to liquidate material assets that made it possible to
obtain operating capital that kept the firm alive while industry investors avoided their tarnished
firm.
The End of the Treasury Auction Matter and the Major Consequences
Some would say the treasury auction matter was officially over with the May 20, 1992
announcement by the U.S. Justice Department that Salomon Brothers would not face any
criminal charges. However, in the fall of 1992, the U.S. Justice Department continued to
Salomon Brothers Group D 16
conduct investigations into whether or not “unnamed co-conspirators” had any involvement into
the Salomon Brothers treasury auction matters (Paine & Santoro, 1994). To further draw out the
whole situation, in December 1992, the Securities and Exchange Commission (SEC) settled their
charges against John H. Gutfreund, Thomas W. Strauss, John W. Meriwether, and Donald M.
Feuerstein, the four former senior executives at Salomon Brothers. Still, by the end of 1992 the
case mentioned the fact that Salomon Brothers had yet to settle or even go to trial on the
outstanding lawsuits filed by its customers, shareholders, and other private parties in regard to its
treasury auction matters (Paine & Santoro, 1994).
One could argue further that the company is still facing the reminders of the whole
treasury auction situation and that it might never be over. The immediate consequences of its
actions involved a negotiated settlement, which included a total payment of $290 million, of
which $100 million would go to a fund established to pay for private damage claims; suspension
from trading activity for two months; and agreement to be censured, to maintain procedures put
in place to prevent future misconduct, and to cooperate for a further three years in the
government’s investigation into Salomon Brothers’ securities practices (Paine & Santoro, 1994).
The company further struggled with employee turnover rates and establishment of investment
banking and U.S. equities businesses (Paine & Santoro, 1994). Though the company might have
gotten over the immediate consequences of the matter, the company still had to operate each and
every day with the thought that it cannot and will not repeat the mistakes of the past.
Consequences of Salomon Brothers Pleading Guilty
Though pleading guilty to a minor criminal charge in November 1991 might have ended
the government’s investigation sooner, it would have meant the whole company was corrupt in
its practices. This is why some would say the whole treasury auction matter is not over to this
Salomon Brothers Group D 17
day. Salomon Brothers did right by not pleading guilty to possible criminal charges, and this is
not just true based on the fact they would not have charges brought against them in the first
place. The fact that Maughan was part of Salomon’s Asian business and never would have been
accused of following in the same corrupt practices of former Salomon leadership meant the
corruption was focused on more on key leadership versus the entire company. In fact, Maughan
was confident that the Salomon Brothers was not “endemically corrupt” but required a change in
its culture (Paine & Santoro, 1994). Pleading guilty would have almost certainly made it appear
that the corruption that was brought to light was occurring in all aspects and all areas of the
company.
Outlook of the New Management’s Ethics Strategy
Anyone who reads the comparison between Gutfreund’s and Buffett’s exhibition of
Schein’s primary mechanisms could see how improved the ethics strategy of Salomon Brothers
was and how it improved its daily operations. Buffett put it simply by saying they had “to earn
back its integrity” (Sims, 2000, p.69). Utilizing Schein’s primary mechanisms you can
breakdown all the improvements made by Buffett and Maughan in the way of ethics. Maughan
ethics strategy involved a combination of discipline and leadership. He believed that leaders
must back up their values through the use of punishment (Sims, 2000). Without the exercising of
authority the values of an organization cannot be upheld (Sims, 2000). He said he leads “by
example” and does not “turn a blind eye” when things go wrong (Sims, 2000). His approach is
communicating to employees and backed up in his actions. This strategy of leadership and
discipline has brought about the change in ethics that turned around the future of Salomon
Brothers.
Salomon Brothers Group D 18
Schein’s Five Primary Mechanisms
Schein’s (1985) five primary mechanisms are: attention, reactions to crises, role
modeling, allocation of reward, and criteria for selection and dismissal.
Attention
Attention in organizations relates to those within having the knowledge of the
organization, both in the short and long term. With this, attention is also given to the workings
of the organization in the aspect of the benefits those within are receiving. Benefits within
organizations grow as profit and desire grows. When attention is paid to the benefits, some find
many benefits are only going to the higher ups, and those in the lower level positions are not
gaining as they should. Taking away some benefits from those higher up could save others
within the organization and possibly save the organization, by not spending the additional
monies on these benefits. Cohen (1991) noted when Warren Buffett began to lead the Salomon
organization and began paying attention to the benefits, he started to make changes. He canceled
magazine subscriptions, cars, and drivers, let secretaries go, and cut long-distance phone services
along with health benefits.
Reaction to Crisis
In a crisis situation, followers are able to see what leader’s value. Leaders either chose to
hide and cover up issues, to save themselves, or leaders stand up to the crisis situation and
provide full disclosure of what is happening. This assures those in the organization that the
organization is going to handle the crisis in an ethical and moral way. As a child when you can
sense there is a problem with your parents, but you don’t know what the problem is and they
don’t share it with you, all you can sense is fear. Fear leads to assumptions, and assumptions
Salomon Brothers Group D 19
leads back to fear. If parents help the children understand there is a problem, but it is nothing
they need to worry about, this will help calm their fear. Same with followers in organizations,
bad information within an organization travels fast, and a leader in a crisis needs to keep the
followers informed, no matter what the information is.
Role Modeling
Communicating strong messages to followers about the leader’s values through their
actions is role modeling (Schein, 1985), leading by example. Buffett was a penny pincher. He
ran his business in Nebraska as a thrifty company, directed by only eleven people. Ethical
leaders can be found displaying their values where followers can witness them. Whether it be in
the board room, office, grocery store, or in the community, role modeling is important at all
times.
Allocation of Rewards
The reward system created by a leader indicates what is prized and expected in the
organization (Sims, 1992). Whether pay for performance is considered or pay increase for all on
an annual basis, a reward system needs to explain what is expected for the reward. Bonuses for
positions in sales, is one reward; gratuities for service is another form of reward; and then there
is incentives for production. Over compensating for rewards, is also something leaders need to
be aware of, which ties into paying attention within the organization.
Salomon Brothers Group D 20
Criteria for Selection and Dismissal
Schein’s last mechanism of how a leader shapes a corporate culture is how a leader’s
decisions to recruit, select, or dismiss for the organization, shows their values to the organization
and the followers. If the recruiting, hiring, and dismissal process is vague, this can be confusing,
and misleading for followers. Having this criteria outlined for stakeholders allows everyone to
start on fair ground with responsibilities to uphold and to know the values, ethics, and policies
for the organization (Schein, 1985).
Comparing Schein’s Mechanism to Prior Studies
Comparing the five mechanisms to prior leadership literature about morals and values is
in line with our readings. Attention relates to being aware of your surroundings and knowing
what is happening within your own organization. Reacting to crises relates to leadership values
and the communication skills of leaders. Our literature has helped us to know communication
with followers is essential to assure leaders uphold confidence and their values. Role modeling
is what we have learned from the beginning: A leader cannot expect followers to have great
work ethics, values, and morals if their leader is not leading by example as a role model.
Allocation of reward was presented in a different fashion, but it was relatable to prior readings.
Rewards do not have to be monetary to be effective. Letting your crew know they did a great job
or completed a project ahead of schedule and under budget is a reward by acknowledgement.
Letting them go home early one day, take an extra long lunch hour, or just sit around and visit
freely about their interests without the pressures of work is also a reward. Finally, criteria for
selection and dismissal, was mostly presented in our reading as a view on hiring procedures, and
termination. With this explanation, it helped our leadership skills to understand the need to
Salomon Brothers Group D 21
define the criteria for recruitment and dismissal in the values of the organization to the
stakeholders. This should not be an assumption on the part of the organization to the
stakeholders.
Conclusion of Schein’s Five Primary Mechanisms
These five primary mechanisms would be very useful and applicable to all organizations,
and leaders when evaluating the ethical state of their organization. With these mechanisms in
place, the guidelines would be known for departments to experience and gain knowledge from,
and the stakeholders would have a better understanding of the organization’s work ethics, values,
and morals. Clearly communicating what the organization is expecting upfront helps those they
lead understand their responsibilities and the expectations.
Lessons Learned from the Case
The following will present each group members response for what they lessons they have
learned from the case:
Joseph: To realize the effectiveness of an ethics imposed strategy a new culture has to be
introduced. After assuming the helm of a sinking ship Warren Buffet touts "My job is to clean up
the sins of the past and to capitalize on the enormous at-tributes that this firm has” (Paine &
Santoro, 1994, p.114). His statement set the tone for the new culture that he wanted to create.
Accountability, scrutiny and oversight are the core components that focused on the firm’s
weaknesses. Integrity emanates from the top and Warren knew that the best way to introduce a
culture of business integrity was for him and Maughan to lead by example.
Luke: I once read a quote that said something like courage is grace under pressure. I was
astonished by how Warren Buffett handled this situation. I must admit that I had heard the name
Salomon Brothers Group D 22
Warren Buffett before, and I knew he was a self-made Wall Street guru, but prior to reading
these articles, I really did not know much about his character. I found it amazing how his
integrity and ability to lead through a crisis such as this provided the footing needed to recover
from such a disaster. The biggest thing I took away from this is that Warren Buffett was not just
a famous Wall Street guy, but he was a courageous and admirable leader. I plan to read more
about his life and philosophies following this class.
Kay: Through this case, and our studies, role modeling is the root of progress or failure.
Those who are in the leading roles need to lead by example and be positive examples with
integrity. Warren Buffett was a penny pincher and not only showed this in his personal life, but
also brought this into his professional role by running his businesses as a thrifty company in
Nebraska, directed by only eleven people. Buffett was able to help reconstruct the company,
being the role model and leader this company had been missing.
Kirk: There is a saying that a leader has the job of putting out the fires. The “fires” I refer
to are the crises a leader faces on a daily basis. One of Schein’s primary mechanisms is how a
leader reacts to a crisis. The way a leader deals with a crisis demonstrates to his or her followers
their values, especially because a crisis can be very emotional (Sims & Brinkmann, 2002). There
is another saying often used in the military where a leader is labeled cool under fire. The abilities
of a leader are tested in the face of a crisis, and their true mental and moral fiber is put to the test.
The different ways Gutfreund and Buffett dealt with the crisis at Salomon Brothers showed how
they reacted under fire while putting out the fires set by crisis.
Salomon Brothers Group D 23
How we will use what we have learned personally and/or professionally
Below each group member will provide how they plan to use what they have learned in
their personal and/or professional areas:
Joseph: What I have been able to take away from this case was that strong leadership and
managerial integrity can create a business atmosphere that is credible, reliable, and trustworthy
that can add real value to a firm devoid of an unscrupulous business culture that would be
looking for opportunities to take advantage of the company or customers. In order to utilize my
take ethical always in an application setting versus an academic I would start by using a
transitional leadership to establish a baseline ethical cultural that focuses on the improprieties of
a few can damage the collective and get my team for vest in the culture.
Luke: Another item that I learned from this reading that I plan to take with me
professionally is about the environment leaders create. I guess I never really put a lot of thought
into how a leader sets the tone for what is acceptable or unacceptable behavior. Somewhere in
my naivety, I just imagined good people and bad people. After reading these excerpts, I am
beginning to see the importance of leadership setting clear standards of what is acceptable both
ethically and legally within the organization. Having standards clearly laid out makes meeting
standards more feasible. When I do reach a leadership position, I will certainly use this
information and clearly define what I think is acceptable and not.
Kay: With the information learned through this case, it has reinforced the need to
remember one is always a role model, and when there is frustration, or have someone who has
upset me, I need to not show this or share this with others. Development of this goal has
advanced in my personal life and professional career, but it is still a work in progress. By
Salomon Brothers Group D 24
learning to reword my expectations, the end result is still being said, but in a more acceptable
way. No more using the word ‘want’, as these projects a demand, but presenting needs in a way
of suggestive request, even trying to allow others to help make them bring up the idea has their
own. This case also helped to encourage reward to those involved in getting the job done.
Reward does not have to cost organizations a lot of money; it can be as simple as kind words of
congratulations. Positive reinforcement for a job well done, letting the team know their work has
been appreciated.
Kirk: The way a leader responds to a crisis is one concept I will focus on in leading my
section. I too often show more emotion than other leaders would seem appropriate. The problem
we face with a doing more with less style of operating environment is that it seems like I am one
fireman having to put out an entire wildfire in the state of California. I do get the job done right
when faced with a crisis, but I sometimes wear my emotions on my sleeve.
The text mentioned that how a leader reacts to crisis shows to their followers the values of their
leader. Some people would argue that leaders should show no emotion. I think emotion is
important to show to your followers that you a human. You just have to remember to be cool
under fire.
Similar Experiences in the Workplace or Other Organizations
Each group member shared a similar experience from their workplace or other
organization:
Jose: This is something that I am currently dealing with right now in my work center. My
team had been working under a Laissez-faire or absentee leadership team. They have not had
anyone lead them in an ethical fashion. Once I came on board I brought a minimum standard and
Salomon Brothers Group D 25
it has seemed to catch on to where my folks now see the ethical failures in other department
within my organization. Even though we do not have an ethics code of conduct my team and I
have been able to develop an unofficial ethical working standard. This became a useful cultural
standard during resent issues involving one of our contracted vendors. This vendor fired one of
their long term employees. This employee returned to my work center to conduct business with
us separate from his previous employer. Unknown to us, the management he had been fired
while one of my staff members continued to broker deals with him. In the end it was revealed by
my staff member that this former vendor employee had been undercutting his former employer
and giving a kick back to my staff member. My staff member had be thoroughly reprimanded,
but this only came to light because my staff member felt that his action would reflect on the rest
of the team especially after we have spent so much time on developing an ethically-based work
community.
Luke: I really cannot relate personally to this situation. Fortunately, I have never found
myself in a seriously compromising situation such as this. For the most part, all of the
organizations I have worked for have been pretty upstanding places to work. I must admit
though that I feared situations like this when I first joined the Army. The night before I left for
Basic Training, an old Vietnam veteran friend of mine offered me this advice. “If you ever see
your fellow Soldiers start acting crazy and shooting in the air or worse, grab a gun and act crazier
than everyone else. It will keep you safe.” Fortunately, I think the Army I joined in 1997 was
quite a bit different than the Army of the late 1960s, but I was always a little worried my
brethren would cross the line and put me in a precarious situation of loyalty to them and
maintaining my honor. Fortunately, it never got out of hand. I was even able to deescalate a few
situations to prevent something bad from happening.
Salomon Brothers Group D 26
Kay: I don’t recall a specific experience where I have been involved with this type of
case, although many years ago, living in a community where I was part of the school’s parent
teacher association, the community hired a school superintendent who was not a good fit for the
area. As time went on, his ideas and role modeling did not fit with the community more and
more, therefore, he was asked to resign. He was a well educated man, knowledgeable for the
position, although his changes, demands, and requests were too much for this rural, moderate to
low income area to accept. He was hired by the school board, but this shows the power of those
parents and guardians of the students who gave their input to this situation, having their voice to
be heard.
Kirk: There have been many times during my career where I was faced with a similar
situation that Buffett faced. It might not have been to take over the reins of a company or
organization, but we faced similar challenges. My challenges were on a smaller scale and usually
only involved myself. My leadership saw my abilities and would call on me to go into a section
or kitchen to “clean it up.”
Yes, I did say kitchen. My first career field in the Air Force was in the Services Squadron
where I served as a Launch Control Facility Chef. The Launch Control Facility (LCF) was a
building out in the middle of nowhere that was put in charge of several Minuteman II
Intercontinental Ballistic Missiles (ICBMs). The facility would be manned by a crew of nine
people all supported by a single cook and their kitchen. My leadership saw my abilities in
managing my kitchen and would often send me to a different LCF to get their kitchen back in
order. This would involve inventory control, the cleanliness of the kitchen, and overall quality of
food produced by the kitchen. Once the leadership was happy with the progress I would be sent
back to my primary LCF.
Salomon Brothers Group D 27
After four years in the Services career field I was given the opportunity to enter the field I
work in now, Aviation Resource Management. This career field involves duties just as various
and differing as Services, but the challenges are pretty much the same. Once I spent enough time
in my career field leadership again saw my abilities to turn things around. During the last three
years I have been put in charge of preparing two organizations for a Wing Operational Readiness
Inspection (ORI), and I was tasked with training, and inspecting Unit Control Centers (UCC)
within the organization. I might not be the best trainer, but I can inspect an organization to make
sure they are in compliance with published directives.
The situations I have faced in my career are different than the one faced by Buffett. Both
of us though were faced with an organization in some kind of crisis. Others saw our abilities as
leaders and our capabilities to turn organizations around. It was our capability of turning our
organizations around that earned us our reputations.
Salomon Brothers Group D 28
References
Cohen, L. (1991). Buffett shows though side to Salomon-and Gutfreund. The Wall Street
Journal, (November 8), A6
Department of the Treasury. (1991, October 16). Chronology of events involving Salomon
brothers. Rackspacecloud. Retrieved from:
http://c0403731.cdn.cloudfiles.rackspacecloud.com/collection/papers/1990/1991_1016_C
hronologySalomonT.pdf
Fundinguniverse (n.d). Salomon-inc-company-history. Fundinguniverse . Retrieved from:
http://www.fundinguniverse.com/company-histories/Salomon-Inc-company-History.html
Grant, L. (1992). Taming the bond buccaneers at Salomon Brothers. articles.latimes. Retrieved
from: http://articles.latimes.com/1992-02-16/magazine/tm-4654_1_salomon-brothers
Loomis, C.J. (1997). Warren Buffett's wild ride at Salomon. money.cnn. Retrieved from
http://money.cnn.com/magazines/fortune/fortune_archive/1997/10/27/233308/index.htm
Paine, L. S., & Santoro, M. A. (1994). Forging the new Saloman. Harvard Business School.
110-145.
Schein, E. (1985). Organizational culture and leadership. San Francisco, CA: Jossey-Bass.
Sims, R. R. (2000). Changing organization’s culture under new leadership. Journal of Business
Ethics, 25: 65-78. Kluwer Academic Publishers-Netherlands.
Sims, R. R., & Brinkmann, J. (2002). Leaders as moral role models: The case of John Gutfreund
at Saloman Brothers. Journal of Business Ethics. 327-339.