Afterword: Toward Holistic Recovery
(originally published by Booz & Company)This crisis has been a compound failure. It was created not just by managerial and governance lapses, but also by central banks, regulators, and “growth-first” government policies. Enabled by cheap credit, and by the light regulation of their risk and indebtedness, financial institutions have imploded. Very lax mortgage lending and securitization practices took risky assets off the balance sheets of the originating banks and spread the virus around the world. All of this was based on one immense correlated bet, on U.S. residential real estate. Investor appetites led to enormous pressure on managements to grow balance sheets, with asset purchases funded by leverage — raising debt-to-equity ratios of some banks as high as 40 to 1. At the same time, as they were aggressively forced to adopt “mark to market” accounting, a large number of banks ended up speculatively destroying the value of their own assets. Many financial-services institutions neglected basic principles of risk management. The scale of the problem dragged down all but the best banks, wiping out equity capital.
As I write this in January 2009, the stability of the banking system has yet to be restored. Similarly, many industrial and consumer companies have proven vulnerable. As the Wall Street Journal put it on December 9, 2008, in an article about the destruction of wealth: “The crisis has been particularly hard on executives who gambled badly with their business — they got into the wrong industry at the wrong time, took on risky investments, piled too much debt on their companies, or leveraged their own finances to a catastrophic degree.”
Yet there are many exceptions: More conservative banks, and companies that have been managed for steady, long-term, capability-led, customer-focused growth, appear able to weather the storm. To be sure, they confront many challenges — for example, global shortages of credit and liquidity. Time is short, and the pressures are immense. Conventional remedies for surviving a downturn, such as restructuring underperforming assets or reducing working capital, will be inadequate this time.
As all seven of the preceding essays make clear, managers of surviving companies must take a holistic view: reviewing every facet of every business activity for potential efficiency improvements or aggressive change. They must assess their company’s competitive position dispassionately, then act boldly: for example, exiting some segments and competing harder in others, including through acquisition of less well-managed competitors. They must be courageous in challenging the received wisdom of their industries.
There is no foolproof formula for risk mitigation. Managers will have to make many difficult judgment calls, and quickly. But there are clear options to reshape the very basis of competition. Discontinuity really does provide opportunity for managers who see it and seize it. Lastly, governments and regulators will hopefully not draw the wrong conclusion from the data. The dominant policies of the past two decades have led to an ascendancy of market mechanisms, a steady opening of world trade and a retreat from protectionism, lifting millions of people into the middle class around the world. No better solution has been proposed by the critics of these forces. Precisely because this crisis is a compound failure, there are lessons to be learned by all participants — not just corporate management, but governments, regulators, and commentators as well. We will all learn to value the contrarians of this world as we pick up the pieces in the coming months.