CHAPTER  |  THIRTY-SIX

What to Do When an Organization Faces a Crisis

Peter Drucker didn't predict economic or financial crises, or say what to do about them—at least after 1929. As I've mentioned elsewhere in this book, the last time he attempted to analyze and predict an economic situation was that year, when he claimed there would be continual economic expansion and good times in the coming decade. A few weeks later, the bottom fell out of the market, resulting in the Great Depression. To the best of my knowledge, he never again made any predictions having to do with the stock market.

Drucker's Infallible Predictions

Chapter 34 mentions Drucker's near infallibility in predicting major political, social, and business developments, and what to do about them. As noted, he foresaw the rise of Hitler at a time when practically every European political analyst had written him off as inconsequential.

Importantly, Drucker predicted the rise of the “knowledge worker,” a term he created to describe the new worker who performed more with his mind than his body. He envisioned that the day of “carrot or stick” management as prime motivator would be over. He anticipated the rise of the healthcare industry; the tremendous expansion of executive education; the impact of technology on business and education, especially the Internet; and the major contribution that online education would make in the future.

For years he railed against the unreasonably high salaries paid to executives. He pointed out that in the United States the ratio of highest paid executive in a company to its lowest paid worker was the widest in the world, better than 300 to 1. Drucker said it shouldn't be more than 20 to 1. He was against golden parachutes. He warned that we would pay a terrible price for these gifts to retiring executives, and, of course, that is exactly what has happened.

Many of the things Drucker pointed to were controversial and difficult to swallow, perhaps all the more so because they were so accurate. If Drucker's wisdom had been applied in the past, it would have prevented crises in many companies, organizations, and countries. But consider this: What if a crisis occurs anyway?

Face the Difficult Facts and Take Action

A leader must expect positive results with new initiatives, or he'd never take the necessary risks; the alternative is to achieve little but mediocrity. However, when bad things happen, and a crisis is pending as a result, the negative facts need to be faced squarely and dealt with on that basis. Positive action needs to be taken.

Positive action means confronting the truth about a situation and immediately letting those affected know what has happened, as well as what actions can be taken. In almost every instance of ultimate failure, the problem could have been fixed, or at least the negative outcomes significantly mitigated, if the responsible individuals had faced the facts, taken positive action, and kept others informed.

Do What's Right

A good many of the problems we face in our current financial crisis are due to the actions of people who should have known better, but did not just do what's right. It may have started with a potential borrower who knows he can't afford a house, and maybe hasn't even saved the money for a down payment. You recall the advertisements: NO MONEY DOWN. This borrower justified the loan in thinking that housing prices would keep going up—forever. And the mortgage broker didn't much care, since he wasn't making the loan, anyway. He still got his commission, so he might not have checked that potential borrower as closely as he should have. In any case, what was the difference, since housing prices would always go up? And the bank made the loan, since it would eventually pass it on to an investment firm for bundling as investment securities sold on Wall Street. And anyway, didn't the government say that every American should be able to afford his or her own home, and had loosened the restrictions on borrowing to permit this to happen?

Housing prices would always go up. That was what people all told themselves, at every level, to justify actions that they knew were wrong. Wall Street bankers could create an investment fund with all these mortgages, good and bad, and sell the fund to “sophisticated” institutional investors, insurance companies, and the like. Even if forewarned that some of these loans were marginal, they assumed that not all of the loans in a package would go bad. Wall Street, too, knew better, but the experts figured that real estate would always increase in value. In short, everybody involved at every level justified his or her actions on the basis of the belief that the value of housing would always increase. But just like any Ponzi scheme, the bubble eventually bursts and, when it does, there are severe consequences. This is an example of not doing the right thing.

It's too late to “walk the cat” back. So, now what? Doing what's right now won't automatically get the country out of a mess or save an individual homeowner or a bank or small business. But it will get us back on track, and it will help restore confidence in a system that has gone awry. Doing the right thing will also help with other crises that have not yet occurred. So, do what's right in your business dealings. That may not always be easy, but it will contribute toward getting things turned around.

Had Enron's Kenneth Lay admitted the situation when he realized what had been going on in his company, and had he taken true corrective action instead of telling the world everything was fine while dumping his own stock, the company and its employees would still have suffered, but they may have survived, and so might have he.

Share the Pain

Suppose you are in a position of responsibility, with supervision of subordinates. Drucker's lesson regarding crises is to share the pain. Consider another man named Ken. Ken Iverson was CEO of Nucor, a steel company, the third largest in the nation. It consistently racked up high profits even in a declining industry. Nucor's 7,000 employees were the best-paid workers in the steel business, yet they had the industry's lowest labor costs per ton of steel produced. Although Nucor was a Fortune 500 company, only twenty-four people were assigned to corporate headquarters, and there were only four layers of management, from the CEO to the frontline worker.

Then a major recession hit the steel industry. The total number of steelworkers dropped almost overnight industry-wide, by 50 percent. At Nucor, they had to cut production in half. However, Iverson didn't downsize anyone. Instead, he shared the pain. Iverson insisted that management take large pay cuts. The department heads took pay cuts of up to 40 percent. The company officers cut their salaries up to 60 percent. At a time when some Fortune 500 CEOs were taking home much more money, Iverson cut his own pay from $450,000 to $110,000—a salary cut of more than 75 percent. Nucor got through three years of industry-wide depression without laying off a single worker.

The Leader Is Always Responsible

Drucker emphasized that leadership was essential. In fact, in 1947, before people understood that there was a distinct difference between management and leadership, Drucker had declared that in an article in Harper's magazine: “Management is leadership,” he wrote.¹

This was about the importance of leadership. Toward the end of his career, Drucker wrote that leadership was a “marketing job.” He said this partly because so much of being a good leader has to do with persuasion. Also, he pointed out that both concepts are so broad that they overlap significantly.

Consider the financial crisis that started late in 2008. The Bush administration got our attention about the crisis and President Bush immediately moved to introduce a solution, taking measures to stave off complete collapse. So far, so good. But bringing the problem to our attention and initiating action is only part of what constitutes leadership. As Drucker noted, a leader needs to do even more. No one explained satisfactorily what would happen if a $700 billion bailout wasn't immediately agreed to by Congress, or how it would work, or how the figure was arrived at, or even if other alternatives had been considered. A bailout of Wall Street firms was hardly attractive to most people, dealing with their immediate credit problems. It wasn't their fault. What difference would it make if “the fat cats” or “the greedy ones” paid for their errors? Let Wall Street bail itself out or fail, if that's how the chips fell.

In fact, with little effort made to explain or persuade the constituents, these voters across the country wrote their congressmen thirty to one against approving the bailout. Of course, the legislation was passed anyway. Was it the right thing to do? The wisdom of the bailout is still being debated. The point is that leadership and marketing, including precise goal setting and selling (persuasion), are always needed but never provided.

The Bush administration is not the only guilty party in its coping with this crisis. Certainly the Obama administration that followed has had plenty of opportunity to provide leadership through goal setting and persuasion. It also has dropped the ball in some cases, such as in explaining the expansion of healthcare. It is equally obvious in both administrations how much leadership is linked with other activities and how difficult it is to get things done, regardless of political party, popularity of the leader, or changing situations. Leadership is not easy, especially in a crisis. Nevertheless, it is the leader's responsibility, for better or worse.

Example: A General Takes Charge

I was always impressed by the actions of then Lieutenant General Bernard L. Montgomery, when he took charge of the British Eighth Army in Africa during World War II. Montgomery faced major problems. The Eighth Army had been defeated repeatedly by the German General Rommel and his Afrika Korps. After finally winning a victory, Montgomery's predecessor, General Auchinleck, had been persuaded to attack. Unfortunately, he had done so prematurely and had been defeated.

There was the possibility of an immediate counterattack by Rommel. The Eighth Army had made withdrawal after withdrawal. Orders were sent to prepare for yet another withdrawal; morale was at an all-time low. It was at this time that Montgomery was sent in. Here's what Montgomery did during his first day in charge:

• He canceled all previous orders about withdrawal.
• He declared that even in the event of enemy attack, there would be no withdrawal. The Eighth Army would fight on the ground they held. Or, in Montgomery's words, “If we couldn't stay there alive, we would stay there dead.”
• He appointed a new chief of staff.
• He formed a new armored corps from “various bits and pieces.”
• He changed the basic fighting units from brigade groups and ad hoc columns to full divisions. (Drucker called any reorganization “major surgery,” so Montgomery had performed major surgery on his first day while his troops feared an enemy attack.)
• He initiated plans for an offensive, saying, “Our mandate is to destroy Rommel and his army, and it will be done as soon as we are ready.”

Speaking later of the events of this first day being in charge, Montgomery said, “By the time I went to bed that night, I was tired. But I knew that we were on the way to success.”² He was.

Sure, Montgomery faced different challenges, a different situation, and different authority to get others to do what he thought was necessary. But neither President Bush nor President Obama had to face the fact that whatever he did would cause immediate casualties, even death, based on his decision.

How Leaders Should Face a Crisis

Let's summarize Drucker's lessons about handling a crisis: No matter your level of work or management, the basic idea is to be a leader. A real leader does the things that lesser leaders refuse to do:

• They face the difficult facts and take action.
• They do the right thing.
• They share the pain.
• They take action.

Applying these leadership principles to your work will mark you as a real leader and help relieve the suffering in any crisis.