Case Study of Salomon Brothers Group D 1 Case Study ... Study of Salomon Brothers Group D 1 . ......

Case Study of Salomon Brothers Group D 1

Case Study – Salomon Brothers

Group D

Kirk Baringer, Luke Elliot, Joseph Martinez, Kay Metzinger

A Paper Presented in Partial Fulfillment

Of the Requirements of

LEAD505 – Organizational Leadership and Ethics

October 2011

Southwestern College Professional Studies

Salomon Brothers Group D 2

Abstract

Reviewing the Case Study of the Salomon Brothers, the following research defines ethical

behavior, how the company’s ethical standards were maintained, where the Salomon Brothers

leadership turned to crisis for the company, and how they managed this crisis. Exploring the

concerns of this crisis, this paper examines how management of the company changed, with new

leadership taking over with Deryck Maughan, supported by Warren Buffett. The paper also

looks at how the new leadership was able to review and maintain ethical standards, the major

consequences of the Treasury auction, and discusses whether Salomon Brothers should have

pleaded guilty to minor criminal charges. The paper uses Schein’s Five Primary Mechanisms

(1985) and discusses how it relates to the Salomon Case and how leaders can use these

mechanisms in other organizations. Finally, group members will discuss how what they have

learned from this case study and how it relates their personal and professional experiences.


Introduction

In this reality show friendly world, financial scandals are entertaining and frightening at

the same time, especially when they involve the fall and stumble of such highly visible leaders

such as Salomon Brothers head, John Gutfreund, and his crew. This is even more engaging when

you see the rise of, Mr. Integrity himself, billionaire Warren Buffett, who came in and saved the

day. But after we stopped looking at this real life drama about Mr. Gutfreund's grievous fall, we

have to go back and investigate the events as to how it happened and why. Four leadership

students from Southwestern College reviewed and analyzed the ethical perspectives of the

Solomon Brother’s case. We have assembled the case data into a logical review while exploring

how we can prevent a blatant disregard for legal regulations in a commerce industry in our own

lives.

This case involves a scandal involving illegal bids worth billions of dollars in the

multitrillion-dollar treasury market. The government brought legal action against the Salomon

Brothers executives who were involved in the illegal bidding in treasury auctions and a series of

securities violations, namely insider trading. By placing these bids, Salomon Brothers was able

to exercise extraordinary control over the marketplace, even though the profits were actually

negligible. We, as the Southwestern College leaders’ Group “D,” will examine this case from an

ethical review outlining how the executive team at Solomon Brothers assessed the quality and

climate of ethics within the firm and how the company’s standards were and could be maintained

through an organizational culture. We will develop an assessment of the problem with the

Solomon Brothers’ leadership and review the ethical crisis and the steps the team used to

emerge. Finally, we will discuss the future of the organization and how it falls within a


leadership style spectrum, so we can learn lessons from their moral and ethical challenges and

compare the Solomon Brothers drama with life lessons from within each of Group B leadership

history.

Solomon Brother’s Definition of Ethical Behavior

When analyzing how Salomon’s leadership defined ethical behavior, one must look at

three things. First, it is important to understand how leadership in any firm can define ethical

behavior across an organization. Second, the culture of Salomon prior to the crisis must also be

analyzed. Finally, we must look at the ways leadership was able to define ethical behavior within

the firm after the crisis occurred.

To begin, it must be stated that ethics is an integral part of any organization’s culture

(Sims, 2000). That said, a company’s culture can allow employees within an organization to

come to an understanding that certain behaviors are either tolerated or not tolerated (Sims, 2000).

Leaders should use their own personal values to “set the ethical tone of an organization.

Failure by top leaders to identify key organizational values, to convey those values by personal

example, and to reinforce them by establishing appropriate organizational policies demonstrates

a lack of ethical leadership on their part that fosters an unethical organization culture” (Sims,

2000, p. 327).

At the time when Salomon hit its crisis, the culture in the organization had some flaws

that allowed unethical and illegal activities to be perceived as acceptable. Part of the flaws in this

culture included an aggressively macho environment with relaxed regulations and an extremely

competitive industry (Sims, 2000). The firm was even characterized “as a company that

celebrated clever evasion of rules and trampled anyone standing in the way of profit and a


company governed by a ‘culture of greed, contempt for government regulations, and a sneering

attitude toward ethics or any other impediment to earning a buck” (Sims, 2000, p. 66).

This culture promoted an environment where the law was bound to be broken.

Ultimately, the responsibility for the culture of an organization rests with the senior leadership of

the organization. Early into the crisis, Warren Buffett acknowledged this as a potential

leadership failure while responding to a congressional inquiry by stating that it raised questions

about how the leadership defined ethical behavior prior to incident. He basically acknowledged

that how leadership handled the situation raised serious questions on “whether there was a

climate within Salomon that appeared to tolerate or even encourage wrongdoing” (Paine &

Santoro, 1994, p. 127).

Of course, even despite the trader’s gone wild culture, it can also be concluded that the

entire organization was not completely flawed prior to the crisis. Despite the culture, many

employees like Stephen J.D. Posford, co-head of Salomon’s London Office, did not appear to be

operating unethical just because the culture may have promoted it. When Posford first learned of

the behavior, he did not believe it at first. His “disbelief turned to ‘outrage’ when he realized the

full horror’ of what had occurred, putting bids in costumers’ names without authorization was

appalling behavior which flouts the whole integrity of your relationship with clients” (Paine &

Santoro, 1994, p. 116). Another senior leader said the actions were “against the standards of our

business and against the standards of Gutfreund himself preached” (Paine & Santoro, 1994, p.

116).

After the behaviors were made public Buffett and newly appointed chief operating

officer, Deryck C. Maughan implemented many measures to help fix the culture within the firm.


One of the first things they did was to provide consistent messaging about the standards that

would be used in the firm in regards to ethics. On assuming his new position, Maughan pledged

“an absolute insistence on the correct moral as well as legal behavior” (Paine & Santoro, 1994, p.

115).

Maughan managed the ethical climate through discipline and leadership. “I lead by

example, but when things go wrong, you can’t turn a blind eye. Leadership must enforce values

through punishment, and if they don’t exercise that power, then the values can’t be upheld, and

people begin to believe the behavior is okay” (Paine & Santoro, 1994, p.128).

After the incident, Buffett and Maughan also helped define how the organization would

behave by implementing new compliance systems that would help “make Salomon a leader in

setting new standards in regulatory behavior in the financial services industry” (Paine, &

Santoro, 1994, p. 127). This new process was taught to employees through training and enforced

ethical behavior in the firm through compliance officers (Paine & Santoro, 1994).

Another tactic Buffett and Maughan implemented to drive ethics in the organization was

a shift in how compensation was given to performers within the organization. This shift aligned

compensation more with the long-term success of the firm. While many did not like the new

system, Buffett believed it kept people onboard who share the firm’s values and vision. “Were an

abnormal number of people to leave the firm, the results would not necessarily be bad. Other

men and women who share our thinking and values would then be given added responsibilities

and opportunities, because in the end, we must have people to match our principles, not the

reverse” (Paine & Santoro, 1994).


Leadership is important when defining a culture that will remain ethical. It is not enough

to just say the company will be ethical. Good leadership will also implement safeguard to ensure

that the culture is following the ethical standards set by the leadership.

Maintaining the Company’s Ethical Standards

The birth of an organization’s ethical culture must start at the highest level of

management, its leader. Though ethics should be at the heart of all levels of management, it is

essential that fostering an ethical culture within an organization starts at the top. The values held

by an organization and its overall operating culture greatly depends on proper leadership.

Leadership must first establish the standards of ethics by which all individuals of an organization

will be held accountable. These standards must be fully communicated to all individuals and

must be enforced on daily basis in a way that is fair and equitable. This includes the leader

himself/herself being held to those same standards. A leader must not only be held to those

standards but must exemplify the standards in their lives through personal example. Through

proper communication of an organization’s ethical standards, its leader demonstrated those

standards by personal example, and the reinforcement of those standards the right type of ethical

culture will take root and be sustainable through all levels of management (Sims & Brinkmann,

2002).

Today’s organizations are comprised of multiple levels of management, and considering

this fact, communication is even more important. To add to the importance of communication

today’s organizations are often separated geographically. Properly communicating an

organization’s ethical standards is essential in fostering the right ethical culture. There were

several examples of this sort of communication mentioned in the case of Salomon Brothers.


After the crisis of 1991, Warren Buffett assumed leadership of the troubled company. Shortly

after assuming leadership of Salomon Brothers, Buffett sent a letter to the firm’s senior

management expecting them to directly report to him “any legal violation or moral failure on

behalf of any employee” (Paine & Santoro, 1994, p. 117). In meetings that soon followed

Buffett to set out and replace the old ethical culture that encouraged shortcuts and achieving

results at any cost with one that would restore the good reputation of Salomon Brothers. In one

such meeting Buffett told employees if they “lose money for the firm, I will be very

understanding; lose a shred of reputation for the firm, I will be ruthless” (Paine & Santoro, 1994,

p. 118). Buffett’s communication of such expectations not only took place with Salomon

Brothers’ employees but with their customers as well. In September 1991, Buffett sent letters to

its major customers explaining that Salomon Brothers would conduct its future business with

“honesty and candor” (Paine & Santoro, 1994). These changes in conducting of business

included a new compliance system. Buffett expressed to Congress at a hearing in September

1991 that his new compliance system would “make Salomon a leader in setting new standards in

regulatory behavior” (Paine & Santoro, 1994, p. 127). Key employees within the organization

received written materials that outlined the new compliance system, and in October 1991 he

wrote a letter that boasted the success of firm’s new compliance system and how he expected the

firm’s employees to conduct their business in an ethical manner. This letter was sent to

shareholders and published in The Wall Street Journal, The New York Times, The Washington

Post, and The Financial Times (Paine & Santoro, 1994). One of the biggest things Buffett would

do before leaving Salomon Brothers was to make a promise to all those hurt by Salomon

Brothers’ past ethical practices that amends would be made, and the wrongs of the past corrected

(Paine & Santoro, 1994).


Some would say a promise is only as good as the person making said promise, but

Buffett’s reputation preceded him prior to assuming his leadership role at Salomon Brothers.

Buffett had a reputation in the United States and throughout most of Europe that most corporate

executives would love to have, and his assumption of the leadership role at Salomon Brothers

helped provide the confidence employees needed to get them through the troubles facing their

organization (Paine & Santoro, 1994). One thing Buffett was known for was his integrity, and it

would be displayed from the very start of his tenure as leader of Salomon Brothers. He was to

display the ethical standards he expected from employees in his own life and, as such, was able

to demonstrate Schein’s primary mechanisms in influencing an organization’s culture (Sims,

2000).

The first mechanism involved Buffett’s attention to the troubles facing Salomon Brothers.

Buffett sought to replace the older culture of misconduct with a short-term focus of becoming a

respected organization practicing sound ethical practices with a long-term focus on employee

conduct (Sims, 2000). The second mechanism involved Buffett’s immediate reaction to the

crisis facing Salomon Brothers. From the very start, Buffett made it clear he would be open and

available to any and all questions. It is noted that this “unprecedented” openness was key in the

organizations dealing with Congress and its clients (Paine & Santoro, 1994). Also, after

assuming control of Salomon Brothers, Buffett severed all ties with Paul Mozer and Thomas

Murphy who were partially responsible for bringing about the crisis.

This helped demonstrate a third mechanism which involved Buffett’s criteria for

selection and dismissal (Sims, 2000). Buffett not only dismissed employees associated with

ethical misconduct but surrounded himself with new employees who shared similar ethical

values. Upon assuming his leadership role at Salomon Brothers, Buffett appointed Deryck C.


Maughan as the new chief operating officer of Salomon Brothers. Maughan was referred to as

“Mr. Integrity” by the press and pledged “an absolute insistence on the correct moral as well as

legal behavior” for Salomon Brothers employees (Paine & Santoro, 1994). Buffett’s similar

reputation and demonstration of ethical behavior in his life demonstrated the fourth mechanism

of role modeling (Sims, 2000). The fifth mechanism demonstrated by Buffett involved the

allocation of rewards.

Rewards are a great way to reinforce certain behavior and ethical practices. The last thing

a leader must do to foster and maintain an ethical culture within their organization is to employ a

reward system that reinforces the sort of behavior or performance consistent with organizational

values. The prior compensation system employed by Salomon Brothers produced what Buffett

referred to as “irrationalities” (Paine & Santoro, 1994). The new compensation system put in

place by Buffett tied compensation more closely to performance. Buffett once wrote

“employees, who produce exceptional results for the firm, while operating both honorably and

without excessive risk, should expect to receive first-class compensation” (Paine, & Santoro,

1994). The thought behind such a compensation system would “align the interests of employees

with those of shareholders” and bring about the long-term focus Buffett wanted Salomon

Brothers employees to have (Paine & Santoro, 1994, p. 132).

This long-term focus was essential in changing how employees would conduct their

business. Previous leadership fostered an ethical culture, which focused on the short term while

cutting corners to achieve the greatest results in the shortest amount of time. This type of culture

demonstrated the ethical standards and values held by its leader at the time. From the very start,

Buffett communicated how he expected employees to conduct their business, and this was not

only communicated to all levels of management but to the organization’s employees as well.


Buffett’s style of leadership and reputation helped convey the expected ethical standards to those

whom he led, and our discussion of Schein’s primary mechanisms showed how Buffett

demonstrated these ethics through personal example. Lastly, Buffett’s initiation of a new

compensation system brought about the change in how employees would be rewarded for

performance. This change was necessary to align the interest of the employee more to their

customers (Paine & Santoro, 1994). Without all these three key concepts the success of the new

ethical culture at Salomon Brothers would have been doomed from the start. With them the new

ethical culture was able to take root, and be maintained even after the change in leadership from

Buffett to Maughan.

Affects of the Emphasis on Ethics has on the Organization and its Members

The emphasis on ethics affected the organization and its members through loss of trust,

resulting in many leaving the organization and many being removed from employment. At

times, those within an organization are not aware of the unethical developments within an

organization unless their hands are actually involved. The larger the organization the less likely

many within know of the unethical dealings. As those in administrative positions keep from

disclosing information from the operational staff, unethical dealings may not be disclosed or

realized until it is too late. If someone in the organization were to consider the ethics, values, or

morals that have been jeopardized, reporting this could help save those within the organization,

or even the organization as a whole.

Disclosure crisis and Auction Irregularities

When Salomon publically disclosed the “’irregularities and rule violation’ in connection

with the firm’s bids in three U.S. Treasury security auctions” (Paine & Santoro, 1994, p. 110), it


set off a firestorm that nearly destroyed the firm. This announcement triggered a crisis for two

main reasons.

The initial kindling to the crisis was the fact that there was a wrongdoing at all. Anytime

there is an illegal activity in the financial industry, it is a big concern for legislators, investors,

and the public. The second reason this was so significant was because it later led to the

acknowledgment that senior leaders of the firm had been aware of this for several months before

coming forward. This is important because they should have raised the flag to the government

regulators as soon as they were aware of the incident. Had they done this, the crisis would not

have been nearly as bad.

The auction irregularities in themselves would probably not have been that big of deal

had they been the only infraction and had they been reported immediately. However, the second

announcement that senior leadership knew of the irregularities for months sent “shockwaves

throughout the worldwide financial community” (Paine & Santoro, 1994, p. 111).

Salomon Brother’s handling of the Treasury Security Crisis

The stakeholders within the Wall Street Firm Salomon Brothers dealt with the Treasury

crisis with an initial slow response that exacerbated the situation by critical failures in a

breakdown in leadership and their ethical commitment to their industry. In the late 1980s and

early 1990s, companies had to develop strategies to deal with the sluggish securities market.

Many Wall Street firms like the Salomon Brothers began merchant banking and dealing in junk

bonds to bolster financial revenue. Although Salomon Brothers entered the junk bond market

after the initial boom, they were still able to capitalize on success in this area by taking

advantage of the 1990 collapse of Drexel Burnham Lambert Inc. This addition of trading junk


bonds enabled Salomon Brothers to earn a record $500 million on $1.2 billion in revenues in

1991 (Loomis, 1997). With the highs in life, come the lows. During the same year, Salomon

Brothers reaped the benefit of financial win-falls, but it also saw the birth of a major Wall Street

scandal that almost brought the company to the brink of collapse like their former counter parts

Drexel. This scandal involved United States Treasury rules for auctions, which stated that no

single buyer could bid on more than 35-percent of the total offered auction (Loomis, 1997). This

is where Salomon Brothers went astray. They bid for itself and as a broker for individual clients

up to 35-percent.

In 1991 the Salomon Brothers circumvented the U.S. Treasury rules by submitting a

two-year treasury notes 35-percent bid in its own company’s name and making fake bids up to

35-percent in two of its client’s names at auction. When Salomon Brothers subsequently won

the auction, they then fraudulently sold themselves the notes unbeknownst to the clients. This

resulted in Salomon Brothers seizing control of more than $10 billion of an $11billion auction.

This controlling positioned enabled them to influence market outcomes and charge elevated

prices to marketers making large profits for their firm. The crisis began with one of the clients

whom Salomon Brothers used to bid under their name made a legitimate bid at the same auction

that was in addition to the fraudulent bids that Salomon Brothers made, thereby raising their

clients total bid to more than 35-percent (Fundinguniverse, n.d). Wachtell Lipton investigation

discovered that two government securities traders, namely Salomon’s managing director Paul

Mozer and trader Murphy had broken the Treasury's bidding rules (Department of the Treasury,

1991). The disturbing part was that it happened on more than one occasion during 1990 and

1991.


Once Salomon Brothers leadership knew of the violations, they began a damage control

campaign. In late April of 1991, the leadership of Salomon Brothers, President Thomas Strauss,

Chairmen John Gutfreund, and Donald Feuerstein, met to decide a course of action, which was

the first step in trying to manage the pending crisis. During that meeting, Feuerstein asserted that

Mozer's act was most likely a criminal action (Loomis, 1997). The group decided that the New

York Federal Reserve had to be informed of their actions. The positive thing was that they knew

they had to release the information; the negative was that none of them did a thing until July,

three months later.

The first real effective leadership decision the firm engaged in was attempting to

dampen the blow to its stakeholders on August 9 when Salomon Brothers notified its regulators

and sent out a press release disclosing that they had uncovered irregularities and rule violations

with bids the firm engaged in during three U.S. Treasury security auctions (Paine & Santoro,

1994). The next thing that showed leadership promise was when they suspended Mozer and his

cohorts Murphy, Strauss, and Feuerstein. The United State Treasury investigation details

revealed that some of the top leadership including CEO Gutfreund had been told of the

infractions but had done nothing about it. This lack of action showed that he was complicit in

the improprieties and condoned that means of operation. Gutfreund and Strauss were pressured

by Salomon’s senior managers and from government officials to resign for their part in the

scandal (Paine & Santoro, 1994). Their departure from the firm made way for Warren Buffet and

Deryck Maughan to assume the leadership role in the firm to put the company back on the right

path. Buffet was determined to clean up the sins of the past by reestablishing the firm’s integrity

(Paine & Santoro, 1994). In an effort to begin their leadership tour on a transparent footing,

Buffett made the organization available to investigators, promising to release any of the firm’s


legal team’s reports and notes pertaining to the trading desk's transgressions (Paine & Santoro,

1994). This magnanimous gesture by the new leadership demonstrated to not only investigators,

but also investors and the members of the firm, that Solomon Brothers was ready to start

rebuilding its reputation.

Maughan’s Primary Concerns Assuming Leadership Responsibility

During that time frame, Salomon Brothers had abruptly lost its momentum. Within one

week Chairman Gutfreund, President Strauss and Meriwether resigned. Their stock was

suspended from trading after its market value severely dropped more than a billion dollars within

a week (Grant, 1992). The banking system wanted to restrict loans while investors boycotted

them. Their top customers suspended targeted business dealings. Finally, the Justice Department

and the Securities and Exchange Commission launched investigations. In the eyes of most

investors all seemed lost, but Deryck Maughan with the support of Warren Buffet was able to see

a path to stopping the hemorrhage. He implemented a process of conformity which established a

foundation that enabled investors and staff to see that the firm could operate transparently using

industry regulations. His calm demeanor also served as a stable force that reassured their

customer base and anxious staff that they will return to a viable firm. Finally, devising a

contingency strategy enabled the organization to liquidate material assets that made it possible to

obtain operating capital that kept the firm alive while industry investors avoided their tarnished

firm.

The End of the Treasury Auction Matter and the Major Consequences

Some would say the treasury auction matter was officially over with the May 20, 1992

announcement by the U.S. Justice Department that Salomon Brothers would not face any

criminal charges. However, in the fall of 1992, the U.S. Justice Department continued to


conduct investigations into whether or not “unnamed co-conspirators” had any involvement into

the Salomon Brothers treasury auction matters (Paine & Santoro, 1994). To further draw out the

whole situation, in December 1992, the Securities and Exchange Commission (SEC) settled their

charges against John H. Gutfreund, Thomas W. Strauss, John W. Meriwether, and Donald M.

Feuerstein, the four former senior executives at Salomon Brothers. Still, by the end of 1992 the

case mentioned the fact that Salomon Brothers had yet to settle or even go to trial on the

outstanding lawsuits filed by its customers, shareholders, and other private parties in regard to its

treasury auction matters (Paine & Santoro, 1994).

One could argue further that the company is still facing the reminders of the whole

treasury auction situation and that it might never be over. The immediate consequences of its

actions involved a negotiated settlement, which included a total payment of $290 million, of

which $100 million would go to a fund established to pay for private damage claims; suspension

from trading activity for two months; and agreement to be censured, to maintain procedures put

in place to prevent future misconduct, and to cooperate for a further three years in the

government’s investigation into Salomon Brothers’ securities practices (Paine & Santoro, 1994).

The company further struggled with employee turnover rates and establishment of investment

banking and U.S. equities businesses (Paine & Santoro, 1994). Though the company might have

gotten over the immediate consequences of the matter, the company still had to operate each and

every day with the thought that it cannot and will not repeat the mistakes of the past.

Consequences of Salomon Brothers Pleading Guilty

Though pleading guilty to a minor criminal charge in November 1991 might have ended

the government’s investigation sooner, it would have meant the whole company was corrupt in

its practices. This is why some would say the whole treasury auction matter is not over to this


day. Salomon Brothers did right by not pleading guilty to possible criminal charges, and this is

not just true based on the fact they would not have charges brought against them in the first

place. The fact that Maughan was part of Salomon’s Asian business and never would have been

accused of following in the same corrupt practices of former Salomon leadership meant the

corruption was focused on more on key leadership versus the entire company. In fact, Maughan

was confident that the Salomon Brothers was not “endemically corrupt” but required a change in

its culture (Paine & Santoro, 1994). Pleading guilty would have almost certainly made it appear

that the corruption that was brought to light was occurring in all aspects and all areas of the

company.

Outlook of the New Management’s Ethics Strategy

Anyone who reads the comparison between Gutfreund’s and Buffett’s exhibition of

Schein’s primary mechanisms could see how improved the ethics strategy of Salomon Brothers

was and how it improved its daily operations. Buffett put it simply by saying they had “to earn

back its integrity” (Sims, 2000, p.69). Utilizing Schein’s primary mechanisms you can

breakdown all the improvements made by Buffett and Maughan in the way of ethics. Maughan

ethics strategy involved a combination of discipline and leadership. He believed that leaders

must back up their values through the use of punishment (Sims, 2000). Without the exercising of

authority the values of an organization cannot be upheld (Sims, 2000). He said he leads “by

example” and does not “turn a blind eye” when things go wrong (Sims, 2000). His approach is

communicating to employees and backed up in his actions. This strategy of leadership and

discipline has brought about the change in ethics that turned around the future of Salomon

Brothers.


Schein’s Five Primary Mechanisms

Schein’s (1985) five primary mechanisms are: attention, reactions to crises, role

modeling, allocation of reward, and criteria for selection and dismissal.

Attention

Attention in organizations relates to those within having the knowledge of the

organization, both in the short and long term. With this, attention is also given to the workings

of the organization in the aspect of the benefits those within are receiving. Benefits within

organizations grow as profit and desire grows. When attention is paid to the benefits, some find

many benefits are only going to the higher ups, and those in the lower level positions are not

gaining as they should. Taking away some benefits from those higher up could save others

within the organization and possibly save the organization, by not spending the additional

monies on these benefits. Cohen (1991) noted when Warren Buffett began to lead the Salomon

organization and began paying attention to the benefits, he started to make changes. He canceled

magazine subscriptions, cars, and drivers, let secretaries go, and cut long-distance phone services

along with health benefits.

Reaction to Crisis

In a crisis situation, followers are able to see what leader’s value. Leaders either chose to

hide and cover up issues, to save themselves, or leaders stand up to the crisis situation and

provide full disclosure of what is happening. This assures those in the organization that the

organization is going to handle the crisis in an ethical and moral way. As a child when you can

sense there is a problem with your parents, but you don’t know what the problem is and they

don’t share it with you, all you can sense is fear. Fear leads to assumptions, and assumptions


leads back to fear. If parents help the children understand there is a problem, but it is nothing

they need to worry about, this will help calm their fear. Same with followers in organizations,

bad information within an organization travels fast, and a leader in a crisis needs to keep the

followers informed, no matter what the information is.

Role Modeling

Communicating strong messages to followers about the leader’s values through their

actions is role modeling (Schein, 1985), leading by example. Buffett was a penny pincher. He

ran his business in Nebraska as a thrifty company, directed by only eleven people. Ethical

leaders can be found displaying their values where followers can witness them. Whether it be in

the board room, office, grocery store, or in the community, role modeling is important at all

times.

Allocation of Rewards

The reward system created by a leader indicates what is prized and expected in the

organization (Sims, 1992). Whether pay for performance is considered or pay increase for all on

an annual basis, a reward system needs to explain what is expected for the reward. Bonuses for

positions in sales, is one reward; gratuities for service is another form of reward; and then there

is incentives for production. Over compensating for rewards, is also something leaders need to

be aware of, which ties into paying attention within the organization.


Criteria for Selection and Dismissal

Schein’s last mechanism of how a leader shapes a corporate culture is how a leader’s

decisions to recruit, select, or dismiss for the organization, shows their values to the organization

and the followers. If the recruiting, hiring, and dismissal process is vague, this can be confusing,

and misleading for followers. Having this criteria outlined for stakeholders allows everyone to

start on fair ground with responsibilities to uphold and to know the values, ethics, and policies

for the organization (Schein, 1985).

Comparing Schein’s Mechanism to Prior Studies

Comparing the five mechanisms to prior leadership literature about morals and values is

in line with our readings. Attention relates to being aware of your surroundings and knowing

what is happening within your own organization. Reacting to crises relates to leadership values

and the communication skills of leaders. Our literature has helped us to know communication

with followers is essential to assure leaders uphold confidence and their values. Role modeling

is what we have learned from the beginning: A leader cannot expect followers to have great

work ethics, values, and morals if their leader is not leading by example as a role model.

Allocation of reward was presented in a different fashion, but it was relatable to prior readings.

Rewards do not have to be monetary to be effective. Letting your crew know they did a great job

or completed a project ahead of schedule and under budget is a reward by acknowledgement.

Letting them go home early one day, take an extra long lunch hour, or just sit around and visit

freely about their interests without the pressures of work is also a reward. Finally, criteria for

selection and dismissal, was mostly presented in our reading as a view on hiring procedures, and

termination. With this explanation, it helped our leadership skills to understand the need to


define the criteria for recruitment and dismissal in the values of the organization to the

stakeholders. This should not be an assumption on the part of the organization to the

stakeholders.

Conclusion of Schein’s Five Primary Mechanisms

These five primary mechanisms would be very useful and applicable to all organizations,

and leaders when evaluating the ethical state of their organization. With these mechanisms in

place, the guidelines would be known for departments to experience and gain knowledge from,

and the stakeholders would have a better understanding of the organization’s work ethics, values,

and morals. Clearly communicating what the organization is expecting upfront helps those they

lead understand their responsibilities and the expectations.

Lessons Learned from the Case

The following will present each group members response for what they lessons they have

learned from the case:

Joseph: To realize the effectiveness of an ethics imposed strategy a new culture has to be

introduced. After assuming the helm of a sinking ship Warren Buffet touts "My job is to clean up

the sins of the past and to capitalize on the enormous at-tributes that this firm has” (Paine &

Santoro, 1994, p.114). His statement set the tone for the new culture that he wanted to create.

Accountability, scrutiny and oversight are the core components that focused on the firm’s

weaknesses. Integrity emanates from the top and Warren knew that the best way to introduce a

culture of business integrity was for him and Maughan to lead by example.

Luke: I once read a quote that said something like courage is grace under pressure. I was

astonished by how Warren Buffett handled this situation. I must admit that I had heard the name


Warren Buffett before, and I knew he was a self-made Wall Street guru, but prior to reading

these articles, I really did not know much about his character. I found it amazing how his

integrity and ability to lead through a crisis such as this provided the footing needed to recover

from such a disaster. The biggest thing I took away from this is that Warren Buffett was not just

a famous Wall Street guy, but he was a courageous and admirable leader. I plan to read more

about his life and philosophies following this class.

Kay: Through this case, and our studies, role modeling is the root of progress or failure.

Those who are in the leading roles need to lead by example and be positive examples with

integrity. Warren Buffett was a penny pincher and not only showed this in his personal life, but

also brought this into his professional role by running his businesses as a thrifty company in

Nebraska, directed by only eleven people. Buffett was able to help reconstruct the company,

being the role model and leader this company had been missing.

Kirk: There is a saying that a leader has the job of putting out the fires. The “fires” I refer

to are the crises a leader faces on a daily basis. One of Schein’s primary mechanisms is how a

leader reacts to a crisis. The way a leader deals with a crisis demonstrates to his or her followers

their values, especially because a crisis can be very emotional (Sims & Brinkmann, 2002). There

is another saying often used in the military where a leader is labeled cool under fire. The abilities

of a leader are tested in the face of a crisis, and their true mental and moral fiber is put to the test.

The different ways Gutfreund and Buffett dealt with the crisis at Salomon Brothers showed how

they reacted under fire while putting out the fires set by crisis.


How we will use what we have learned personally and/or professionally

Below each group member will provide how they plan to use what they have learned in

their personal and/or professional areas:

Joseph: What I have been able to take away from this case was that strong leadership and

managerial integrity can create a business atmosphere that is credible, reliable, and trustworthy

that can add real value to a firm devoid of an unscrupulous business culture that would be

looking for opportunities to take advantage of the company or customers. In order to utilize my

take ethical always in an application setting versus an academic I would start by using a

transitional leadership to establish a baseline ethical cultural that focuses on the improprieties of

a few can damage the collective and get my team for vest in the culture.

Luke: Another item that I learned from this reading that I plan to take with me

professionally is about the environment leaders create. I guess I never really put a lot of thought

into how a leader sets the tone for what is acceptable or unacceptable behavior. Somewhere in

my naivety, I just imagined good people and bad people. After reading these excerpts, I am

beginning to see the importance of leadership setting clear standards of what is acceptable both

ethically and legally within the organization. Having standards clearly laid out makes meeting

standards more feasible. When I do reach a leadership position, I will certainly use this

information and clearly define what I think is acceptable and not.

Kay: With the information learned through this case, it has reinforced the need to

remember one is always a role model, and when there is frustration, or have someone who has

upset me, I need to not show this or share this with others. Development of this goal has

advanced in my personal life and professional career, but it is still a work in progress. By


learning to reword my expectations, the end result is still being said, but in a more acceptable

way. No more using the word ‘want’, as these projects a demand, but presenting needs in a way

of suggestive request, even trying to allow others to help make them bring up the idea has their

own. This case also helped to encourage reward to those involved in getting the job done.

Reward does not have to cost organizations a lot of money; it can be as simple as kind words of

congratulations. Positive reinforcement for a job well done, letting the team know their work has

been appreciated.

Kirk: The way a leader responds to a crisis is one concept I will focus on in leading my

section. I too often show more emotion than other leaders would seem appropriate. The problem

we face with a doing more with less style of operating environment is that it seems like I am one

fireman having to put out an entire wildfire in the state of California. I do get the job done right

when faced with a crisis, but I sometimes wear my emotions on my sleeve.

The text mentioned that how a leader reacts to crisis shows to their followers the values of their

leader. Some people would argue that leaders should show no emotion. I think emotion is

important to show to your followers that you a human. You just have to remember to be cool

under fire.

Similar Experiences in the Workplace or Other Organizations

Each group member shared a similar experience from their workplace or other

organization:

Jose: This is something that I am currently dealing with right now in my work center. My

team had been working under a Laissez-faire or absentee leadership team. They have not had

anyone lead them in an ethical fashion. Once I came on board I brought a minimum standard and


it has seemed to catch on to where my folks now see the ethical failures in other department

within my organization. Even though we do not have an ethics code of conduct my team and I

have been able to develop an unofficial ethical working standard. This became a useful cultural

standard during resent issues involving one of our contracted vendors. This vendor fired one of

their long term employees. This employee returned to my work center to conduct business with

us separate from his previous employer. Unknown to us, the management he had been fired

while one of my staff members continued to broker deals with him. In the end it was revealed by

my staff member that this former vendor employee had been undercutting his former employer

and giving a kick back to my staff member. My staff member had be thoroughly reprimanded,

but this only came to light because my staff member felt that his action would reflect on the rest

of the team especially after we have spent so much time on developing an ethically-based work

community.

Luke: I really cannot relate personally to this situation. Fortunately, I have never found

myself in a seriously compromising situation such as this. For the most part, all of the

organizations I have worked for have been pretty upstanding places to work. I must admit

though that I feared situations like this when I first joined the Army. The night before I left for

Basic Training, an old Vietnam veteran friend of mine offered me this advice. “If you ever see

your fellow Soldiers start acting crazy and shooting in the air or worse, grab a gun and act crazier

than everyone else. It will keep you safe.” Fortunately, I think the Army I joined in 1997 was

quite a bit different than the Army of the late 1960s, but I was always a little worried my

brethren would cross the line and put me in a precarious situation of loyalty to them and

maintaining my honor. Fortunately, it never got out of hand. I was even able to deescalate a few

situations to prevent something bad from happening.


Kay: I don’t recall a specific experience where I have been involved with this type of

case, although many years ago, living in a community where I was part of the school’s parent

teacher association, the community hired a school superintendent who was not a good fit for the

area. As time went on, his ideas and role modeling did not fit with the community more and

more, therefore, he was asked to resign. He was a well educated man, knowledgeable for the

position, although his changes, demands, and requests were too much for this rural, moderate to

low income area to accept. He was hired by the school board, but this shows the power of those

parents and guardians of the students who gave their input to this situation, having their voice to

be heard.

Kirk: There have been many times during my career where I was faced with a similar

situation that Buffett faced. It might not have been to take over the reins of a company or

organization, but we faced similar challenges. My challenges were on a smaller scale and usually

only involved myself. My leadership saw my abilities and would call on me to go into a section

or kitchen to “clean it up.”

Yes, I did say kitchen. My first career field in the Air Force was in the Services Squadron

where I served as a Launch Control Facility Chef. The Launch Control Facility (LCF) was a

building out in the middle of nowhere that was put in charge of several Minuteman II

Intercontinental Ballistic Missiles (ICBMs). The facility would be manned by a crew of nine

people all supported by a single cook and their kitchen. My leadership saw my abilities in

managing my kitchen and would often send me to a different LCF to get their kitchen back in

order. This would involve inventory control, the cleanliness of the kitchen, and overall quality of

food produced by the kitchen. Once the leadership was happy with the progress I would be sent

back to my primary LCF.


After four years in the Services career field I was given the opportunity to enter the field I

work in now, Aviation Resource Management. This career field involves duties just as various

and differing as Services, but the challenges are pretty much the same. Once I spent enough time

in my career field leadership again saw my abilities to turn things around. During the last three

years I have been put in charge of preparing two organizations for a Wing Operational Readiness

Inspection (ORI), and I was tasked with training, and inspecting Unit Control Centers (UCC)

within the organization. I might not be the best trainer, but I can inspect an organization to make

sure they are in compliance with published directives.

The situations I have faced in my career are different than the one faced by Buffett. Both

of us though were faced with an organization in some kind of crisis. Others saw our abilities as

leaders and our capabilities to turn organizations around. It was our capability of turning our

organizations around that earned us our reputations.


References

Cohen, L. (1991). Buffett shows though side to Salomon-and Gutfreund. The Wall Street

Journal, (November 8), A6

Department of the Treasury. (1991, October 16). Chronology of events involving Salomon

brothers. Rackspacecloud. Retrieved from:

http://c0403731.cdn.cloudfiles.rackspacecloud.com/collection/papers/1990/1991_1016_C

hronologySalomonT.pdf

Fundinguniverse (n.d). Salomon-inc-company-history. Fundinguniverse . Retrieved from:

http://www.fundinguniverse.com/company-histories/Salomon-Inc-company-History.html

Grant, L. (1992). Taming the bond buccaneers at Salomon Brothers. articles.latimes. Retrieved

from: http://articles.latimes.com/1992-02-16/magazine/tm-4654_1_salomon-brothers

Loomis, C.J. (1997). Warren Buffett's wild ride at Salomon. money.cnn. Retrieved from

http://money.cnn.com/magazines/fortune/fortune_archive/1997/10/27/233308/index.htm

Paine, L. S., & Santoro, M. A. (1994). Forging the new Saloman. Harvard Business School.

110-145.

Schein, E. (1985). Organizational culture and leadership. San Francisco, CA: Jossey-Bass.

Sims, R. R. (2000). Changing organization’s culture under new leadership. Journal of Business

Ethics, 25: 65-78. Kluwer Academic Publishers-Netherlands.

Sims, R. R., & Brinkmann, J. (2002). Leaders as moral role models: The case of John Gutfreund

at Saloman Brothers. Journal of Business Ethics. 327-339.

http://c0403731.cdn.cloudfiles.rackspacecloud.com/collection/papers/1990/1991_1016_ChronologySalomonT.pdf�

http://c0403731.cdn.cloudfiles.rackspacecloud.com/collection/papers/1990/1991_1016_ChronologySalomonT.pdf�

http://www.fundinguniverse.com/company-histories/Salomon-Inc-company-History.html�

http://articles.latimes.com/1992-02-16/magazine/tm-4654_1_salomon-brothers�

http://money.cnn.com/magazines/fortune/fortune_archive/1997/10/27/233308/index.htm�

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