Tuesday, December 30, 2008

Dusting Off the Bookshelf

One of the dustiest parts of my library is the business book section, and that's probably because most of these volumes are not worth rereading and have a short half-life. I'm getting better at not spending money on these "made for flight delays" books. However, I found one that I have always liked, "Memos from the Chairman," by Alan C. Greenburg of Bear Stearns. The foreword to the book is by Warren Buffett.

A 1984 memo to all general and limited partners contains the following advice from Haimchinkel Malintz Anaynikal--Greenburg's imaginary mentor. It resonates with me every time I read it:

1. Stick to thine own business
2. Watch thy shop
3. Limit thy loss
4. Watch thy expenses like a hawk
5. Stay humble, humble, humble
6. When dealing with a new account, know thy customer and know thy customer's money is up.

Reflecting on 2008's rubble of corporate and financial debacles, I think Haimchinkel's tenets could have helped stave off disaster. Banks didn't stick to their traditional lending businesses and standards and got involved with market segments, customers and instruments that they didn't understand. Nobody was watching the shop, and that means managements, internal and external auditors and boards of directors. Number three has been turned upside down in the world of exotic derivatives. Expenses were irrelevant, as the size of the book was all that mattered.

To talk about humility in financial markets or in corporate board rooms seems "New Age," but when I read Greenburg's book in 1996 it was really refreshing. I never thought of Alan Greenburg as a soft and squishy type of executive, but he lived his beliefs and expected Bear Stearns employees to do the same. Somehow, as the culture of Bear Stearns evolved after the retirement of the charismatic Greenburg, all of this sound thinking was abandoned.

Corporate cultures are not immutable. Instead, they seem to radiate downward from the C-suite and seem to be inextricably associated with one individual. This can create what Nikita Khruschev called the "cult of personality." When the personality departs, the culture does as well, which means that the culture was really not something alive and durable. In the case of Bear Stearns, the management succession process was not able to preserve the culture and values cherished by Greenburg. Pity.

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