Countrywide: How Artificial Reality Trumped Leadership
by Gael O’Brien
The reason the number of books, articles and consultants providing leadership advice keeps growing – Google delivers over 10,000,000 options in .35 seconds – must be because leadership decisions rarely allow for a do-over.
When Angelo Mozilo succeeded in having Countrywide Financial join Fortune’s list of Most Admired Companies in 2005, and Barron’s named him one of the 30 best CEOs in the world, the then- largest mortgage lender in the country was already on a fast track for derailment – a crash that helped cause the 2008 economic meltdown.
In the spirit of wanting to avoid the all-too-human proclivity for history repeating itself, there continue to be post-mortems and debate over what needs to change in business and regulation to avert another economic crisis.
In the Countrywide autopsy are several clues about the vulnerability of leaders – how personal baggage and ego unchecked can drive unintended outcomes and turn a deaf ear to the very criticism that contains information needed to get back on course.
In the Watergate era, several political operatives who went to jail came out Born-Again Christians. In the aftermath of the economic crisis, no business leader has gone to jail yet; will basic qualities of leadership that foster strong, long-term financial results and thriving cultures come back into vogue?
Weighing a Trade-off
Angelo Mozilo is the first high-profile CEO involved in the meltdown to be held personally accountable. Earlier this month, he settled the Securities and Exchange Commission (SEC) suit that alleged he committed civil securities fraud. Banned from ever serving as an officer or director of a public company, he agreed to pay $67.5 million, of which Bank of America -- which acquired Countrywide in 2008 as it collapsed -- will cover $45 million.
His top lieutenants -- David Sambol, former president, and Eric Sieracki, former CFO -- also settled with the SEC: no one admitted wrongdoing.
In 2007, when the mortgage market problems were well known, an analyst asked Chairman and CEO Mozilo if, knowing what he did then, would he have done things differently at Countrywide in 2005 and 2006? Mozilo replied yes theoretically, but continued: “Our volumes, our whole place in the industry would have changed dramatically because we would have arbitrarily made a decision that was contrary to what everything appeared to be....It would have been an insight only a superior spirit could have had at the time.”
That sounds like the trade-off would have meant losing their artificially-created place in the industry to respond to the reality that their strategy was very vulnerable to changes in the housing boom. It would also have meant owning their mistakes and correcting them.
Actually, there were members of Mozilo’s management team who expressed opposition to his strategy; they were ignored. In 2003 he had announced that Countrywide intended to dominate the mortgage market by increasing its market share from about 10 percent to 30 percent by 2008. His chief investment officer was among the dissenters. In early 2005, the company president warned that the real estate boom was waning and recommended tighter loan restrictions; he was passed over for a promotion and left the company. Mozilo’s 30 percent goal changed the direction of the company by driving ever more aggressive strategies and products. However, privately Mozilo warned in 2005- 2006 internal emails to his lieutenants that these products were toxic and the strategies had huge implications, which was a basis for the SEC suit.
In an interview in 2005, Mozilo admitted he was driven by a chip on his shoulder, saying he hired others with chips similarly driven. An Italian American, son of a Bronx butcher from a poor family, he referred often to his self-made status. He was obsessed with taking market share away from Ivy League types who he thought were snobs looking down on him and the mortgage business.
He became a poster child for excessive executive compensation and defiantly said it was based on his performance and he’d earned it: “nobody called me when I was making nothing for years and years and said ‘can I help.’”
He earned the dubious distinction of being one of the 25 highest paid executives of the decade.
Mozilo’s parents had been too poor to own their own home. He co-founded Countrywide in 1969 with the mission of making home ownership affordable for everyone. He improved Countrywide’s record in lending to minorities and low income families, but ironically, the products promoted after 2003 designed to increase market share, called predatory by Congress and others, resulted in massive foreclosures, hurting the very people the company had originally sought to help.
Lessons and Contrasts
The lessons from Countrywide’s failure are many: The company lost touch with its mission. It got carried away by its own success and grew so fast after 2003 that its culture changed and customers were no longer protected by its lending practices. Its strategy didn’t take into account the consequences of going after 30 percent market share or provide a back up plan if the economy shifted. Ethical considerations didn’t factor into decisions and Mozilo’s leadership seemed increasingly focused on him as the face of the company, achieving his personal goals.
There are many examples of companies that, as a result of their leadership, came out of the crisis positioned to overcome past deficiencies. They stand in stark contrast to Countrywide and Mozilo.
Starbucks was one of the countless companies hurt in the downturn, causing Chairman Howard Schultz to take back the role of CEO in 2008 and architect a turnaround. In a Harvard Business Review interview last summer, he said that Starbucks had suffered from hubris, because they really hadn’t had much competition, and that had caused them to overlook what was coming.
Schultz was asked recently what advice he’d give to a new CEO. He talked about the level of insecurity any new CEO has being a strength if the CEO doesn’t act like he or she has to know everything, be in total control and not show weakness. He commented, “I would say one of the underlying strengths of a great leader and a great CEO – not all the time, but when appropriate – is to demonstrate vulnerability, because that will bring people closer to you and show people the human side of you.”
The economic crisis exposed that the assets touted by Countrywide, other subprime lenders, Lehman Brothers and others couldn’t be counted on in the long term.
Schultz, talking about Starbucks turnaround, said: “The challenge was how to preserve and enhance the integrity of the only assets we have as a company, our values, our culture and our guiding principles and the reservoir of trust with our people.”
Gael O’Brien is a Business Ethics Magazine columnist. Gael is a thought leader on building leadership, trust, and reputation and writes The Week in Ethics.