Recent crises have led me to wonder what some leaders see when they look in the mirror.

Sometimes a distorted reflection can be the result of leaders isolating themselves, choosing to be surrounded by people who gain the most by taking viewpoints the leaders most want to hear. In a political arena that could help explain why Hosni Mubarak so badly misread his leadership crisis.

However, in the aftermath of some recent corporate crises, I think self deception, no matter how a leader might arrive there, reflects an image that allows leaders to disengage and disconnect from their actual impact on others.  Aside from the damage it does to those affected, it creates an understandable gap in trust, which is the very thing leaders want to re-build after a crisis.

This disconnect is seen as insensitive, a detachment from people and human suffering, and reminds me of a sick joke that has enjoyed popularity for decades. Maybe you’ve heard it?

“So, other than that, how did you like the play Mrs. Lincoln?”

Attributed to a New Yorker cartoon, a Bob Newhart comedy routine and other origins, the line dismisses the assassination and moves on to what really matters.

That joke came to mind when I read a comment BP CEO Bob Dudley made about BP’s safety strides in the last decade : “If you put aside this Macondo incident, 2009 was the best year we’d had, and 2010 was also heading in that direction.”

Macondo is the well in the Deepwater Horizon drilling rig disaster that dumped 206 million gallons of oil in the Gulf of Mexico that set off a chain of events Gulf residents, families, businesses, and communities continue to address ten months later and will for the foreseeable future.

So what if you aren’t able to compartmentalize and “put aside this Macondo incident”? Dudley’s comment echoes the need some leaders have to ensure you get the point that yes bad things happen, but we want credit for what we are doing right.

While it is an understandable public relations strategy, the disconnect here is that BP’s failure, a failure in reducing risk in process safety, just happened to lead to the worst off- shore oil spill in the world, the environmental implications of which are still unknown.

Then there is the statement that recently became public made by Angelo Mozilo, co-founder and former CEO of Countrywide Financial, to the Financial Crisis Inquiry Commission. Mozilo said, “Countrywide was one of the greatest companies in the history of this country and probably made more difference to society, to the integrity of our society than any other company in the history of America.”

However, the tens of thousands of families who became customers and weren’t protected by the company’s lending practices and lost their homes in foreclosure would likely not see Mozilo or Countrywide that way.  Bank of America, which bought Countrywide in 2008, has been busy settling lawsuits that keep coming. Time Magazine ranked Mozilo as one of the “25 People to Blame for the Financial Crisis”.

Rounding out the integrity issue is the fact that Mozilo had to pay the SEC out of his own pocket a record $22.5 million to settle charges he misled investors as the subprime mortgage crisis unfolded.

As the causes of crises in companies and industries continue to be analyzed to avoid history repeating itself, I’d cast my vote to expose the debilitating effects of self deception so leaders can avert crisis in the first place.

Solving a crisis is never one easy fix, because crises generally are a collection of problems by the time they erupt. However, as self deception is the inability to see you have a problem in the first place, Leadership and Self-Deception,  originally published in 2000, with a new edition last year, by the Arbinger Institute offers useful insights.

The book talks about how we can betray ourselves by acting contrary to our own sense of what is appropriate. When that happens we protect ourselves by seeing the world in a way that justifies our self betrayal; and, as part of that self-justification, we blame others.

This gives us a distorted view of reality and in the process, the book points out, we start seeing others as objects, not having the same needs, worries, hopes, and desires as our own. The more we see them as objects and not just like us, the more important what we need, think, and believe is and the more distorted our reality.

One of the realities of crises is that they evoke emotion in those impacted – including trauma, fear, pain, grieving, anger, and worry. If leaders don’t see into the faces and hearts of the people affected by a crisis their company caused (whether subcontractors were also to blame or not) then they risk seeing only the part of reality that serves them, like for example that a safety record was making great strides. They then get further out of touch with stakeholders they most need to reach.

A byproduct of the focus on the reality one sees affecting oneself is former BP CEO Tony Hayward’s oft-cited gaffe “I want my life back” insensitive at best given the 11 men who died in the rig explosion, the thousands of birds and sea life destroyed, and the incomes and way of life upended in Gulf states.

About that play Mrs. Lincoln.....

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.

It's been over three years since credit markets started shaking with the early tremors of the subprime crisis, and two years since that spread into a marketwide collapse. Prosecutors, regulators, Congress and journalists have spent the year uncovering the financial shenanigans that brought the market to its knees. It's been marked by a few blockbuster settlements and more revealing investigations -- as well as by some noticeable inaction in the reckoning.

Let's start at the ground level, with selling risky mortgages to homeowners. Nobody symbolized the subprime market -- from its growth to its downfall -- better than former Countrywide CEO Angelo Mozilo. This fall, the Securities and Exchange Commission reached a $67.5 million settlement with Mozilo in its only major case against a financial executive. The SEC charged Mozilo with praising Countrywide to investors while internally doubting its lending standards. As part of the settlement, Mozilo admitted no wrongdoing.

Moving up the finance chain, we come to the banks that sold mortgage deals to investors. Much of the scrutiny focuses on a type of mortgage deal called collateralized debt obligations, or CDOs, which are essentially bundles of other mortgage bonds that were sold off to investors.

Though nearly every bank is rumored to be under investigation, the year was marked by one major case looking at the CDO business. In April, the SEC accused Goldman Sachs of creating a mortgage deal that was designed to fail. The SEC's argument was that Goldman's hedge-fund client helped design the deal specifically to bet against it -- without Goldman explaining the relationship to investors. In July, Goldman settled for $550 million (or about two weeks' worth of profit), admitting a "mistake" but no wrongdoing.

The idea of betting against deals lies at the center of a number of other investigations as well. The SEC is looking into whether JPMorgan Chase allowed a hedge fund named Magnetar to choose assets for a mortgage deal without disclosing Magnetar's role in selecting what went into the deal. As ProPublica reported in April with the radio programs This American Life and NPR's Planet Money, Magnetar encouraged banks to put together riskier deals and bought the riskiest bond slices that otherwise may have been unsold. Magnetar then bet against some of those deals, standing to make far more by shorting its losses on those risky slices if the housing market went south.

U.S. prosecutors are also looking into whether Morgan Stanley created a series of CDOs that its own trading desks bet against, the Wall Street Journal reported in May. A few months later it reported on how Deutsche Bank also bet against the souring housing market at the same time it was marketing new mortgage deals.

The SEC is also looking into whether Citigroup improperly encouraged an independent manager to stuff a deal with leftover pieces of other deals that it couldn't sell in the market. In September, ProPublica and NPR's Planet Money reported on self-dealing among CDOs, showing how banks structured deals to buy portions of each others' often leftover inventory of hard-to-sell pieces. This created a daisy-chain of investments that manufactured demand, thereby prolonging the housing bubble. The SEC has said it is investigating one independent management firm and looking into about 50 others.

The year ended with rumors of mass settlements, where banks and the SEC settle broadly over their CDO practices rather than battling over individual deals, according to the Wall Street Journal.

Deal-by-deal fights may flame up in courts, however, with investors pushing banks to buy back sour deals, egged on by new evidence that banks may have known the mortgages underlying the deals were flawed. With such complicated shenanigans going on behind the scenes, investigators also want to know how banks hid their exposure to these risky securities from investors. The investigations are looking into various tactics, from general misstatements, like the Citigroup's $75 million settlement with the SEC for not disclosing $40 billion in subprime risk, to accounting maneuvers that moved certain deals off bank balance sheets.

In the spring, a court-appointed examiner in the bankruptcy of failed investment bank Lehman Brothers shined a light on a practice known as "Repo 105," where Lehman moved $50 billion in assets off its books right before it had to submit investor reports. Last week, the New York attorney general filed civil charges against the accounting firm Ernst & Young, saying it had "substantially assisted" Lehman's "house-of-cards business model" that misled investors. Executives from the now-bankrupt Lehman have not been charged.

Despite revelations coming up and down the financial spectrum, there have been no major criminal charges and almost no civil charges against executives. And while the SEC and some government prosecutors have been active, federal bank regulators have so far been quiet.

This all comes as Congress passed the Dodd-Frank financial reform bill this summer, seeking to overhaul the oversight of everything from mortgage securities to how banks make bets with their own money. As regulators hammer out the rules of the reforms, the devil may lie in the hotly contested details.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

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.

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BOOKS: Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions

by John Gillespie and David Zweig

Reviewed by Michael Connor

If you’re one of the many trying to determine where blame might lie for the financial and economic crises of the last two years, John Gillespie and David Zweig would suggest you look in the corporate boardroom. Their new book - Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions – is rich with unfortunate detail:

• Stanley O’Neal, former CEO and president of Merrill Lynch, was paid $48 million in salary and bonuses in 2006, in large part because of the firm’s apparent success in selling mortgage-backed securities.   When the company’s failures made headlines, O’Neal was allowed by his board to “retire” with an exit package worth $161.5 million.  Within three months, O’Neal was back in a boardroom, “this time as a director of Alcoa, serving on the audit committee and charged with overseeing the aluminum company’s risk management and financial disclosure.”
• Countrywide Financial, a leader in the subprime mortgage market, paid each of its directors from $344,988 to $538,824 in 2006, more than twice the average for the five hundred largest U.S. corporations, while CEO Angelo Mozilo himself made $48 million, not including gains on stock options. In the two years prior to the housing market crash, independent board members cashed out more than $24 million in stock gains.
• The board of Lehman Brothers included “a theatrical producer, the former CEO of a Spanish-language television company, a retired art-auction company executive, a retired CEO of Halliburton, a former rear admiral who has headed the Girl Scouts and served on the board of Weight Watchers International, and until two years before Lehman’s downfall, the 83-year-old actress Dina Merrill.”  In a September 2008 conference call, Lehman CEO Dick Fuld told analysts: “I must say the board’s been wonderfully supportive.”  Four days later Lehman filed for bankruptcy.  Lehman shareholders, represented by the board, lost more than $45 billion.

Unfortunately, in the annals of modern corporate governance, those are not isolated cases.  Gillespie (an investment banker who has worked at Bear Stearns, Lehman Brother and Morgan Stanley) and Zweig (a journalist who has worked at Time Inc. and Dow Jones), put forth an abundance of evidence to support the stereotype of a modern-day corporate director – typically an over-compensated, under-challenged former corporate executive (or former government official) who never argues with management and votes to reward CEOs and senior executives with multi-million dollar salaries and bonuses even as the companies themselves all-too-often spiral into oblivion, damaging the lives of real people, including employees and shareholders.

The subject is truly anger-inducing, and rest assured Money for Nothing will make you angry (or reinforce your existing anger) about the current state of corporate governance.  But if policy-makers and the business community are going to set a corrective course for the 21^st century corporation, it’s critical that we get beyond the anger and begin to pick apart issues while creating new definitions for accountability.  Money for Nothing succeeds at that as well.

(Listen to Money for Nothing co-author John Gillespie on a Business Ethics podcast.  You can download an MP3 audio file of the program here.)

Defining the Job

Corporate directors have existed, and been criticized, for hundreds of years; forty years ago  Harvard Business School professor Myles Mace characterized them as “nothing more or less than ornaments on the corporate Christmas tree.”   More recently – in the wake of scandals at Enron, WorldCom, Tyco and others - the Sarbanes Oxley Act of 2002 introduced a number of reforms aimed at improving the effectiveness of boards for U.S. companies.

In fairness, most large global enterprises consider governance a top priority - IBM and Coca-Cola are among those that come to mind – and work hard to improve the performance of their boards.  And these days, especially with the threat of litigation, directors who take their jobs seriously can sometimes confront a formidable task.  Increasingly, report executive recruiters, the best director candidates don’t want the job.

Perhaps most disconcerting for directors themselves, Gillespie and Zweig suggest, is the intense public debate about the role of corporate governance in the modern-day corporation.  Should directors be encouraging management primarily to increase shareholder value?   If so, how important are near-term profits and short-term stock performance?   What about long-term sustainability of the enterprise? And how does one incorporate the many demands of multiple stakeholder groups, including employees, local communities and a panoply of activist groups dedicated to particular causes?   Juggling those priorities requires directors with a far-sighted mind-set and ethical core that allows for day-to-day constancy and the ability to make difficult decisions amidst extraordinary circumstances.

In Search of Solutions

The authors recommend a number of solutions aimed at changing boardroom culture. The most radical might be the creation of a new class of directors – “public directors” – an idea first proposed in the 1930’s by William O. Douglas, then head of the Securities and Exchange Commission (and later a U.S. Supreme Court Justice) and adopted more recently by some experts in governance.  Public directors would be identified as such by a government entity, independent of the company, and constitute a minority of the board.  To ensure objectivity, the authors suggest, independent directors might even be paid independently, maybe by an assessment on large companies or even publicly.

Other suggestions include creating a director training consortium; insisting on greater diversity of board members; imposing term limits; limiting directors to serving on three or fewer boards; and requiring that directors “put skin in the game.”  This latter recommendation, which has been proposed before (by governance expert Charles Elson and others) would require directors to have a “meaningful percentage” of their net worth invested in companies they serve – maybe to 6 percent, depending on the number of directorships they hold.

Probably the biggest check on board behavior, though, is the power of shareholders.  Among other recommendations, the authors suggest allowing shareholders to call an Extraordinary General Meeting in which a majority of those voting may remove directors.  It’s a practice allowed in the United Kingdom and other countries, but difficult to imagine being implemented in the U.S.

Despite the horror stories they report, in their final analysis Gillespie and Zweig seem reasonably optimistic about the future. “Boards can play the single most effective role in advancing the future opportunities and prosperity of our families, our communities, and our country,” they write. “If we expect and demand more of them, they will rise to that challenge and answer that call.”