Lehman Case Writeup
Organizational Power and Influence Lehman Case Analysis Lewis Glucksman who scrapped his way up through Lehman’s unprestigious but increasingly profitable stock-and bond trading department, was able to take control of the firm after a bitter power struggle against its former CEO, Peter Peterson. Glucksman was victorious in the end as he proved himself to be an indispensible part of Lehman’s operations. During the times leading up to the power struggle, the power dynamic within Lehman was steadily shifting as trading profits became increasingly more important to Lehman versus traditional investment banking profits.
Thus, Glucksman was able to step into the spot light and Peterson became more expendable. Peter Peterson’s core strength at the time came from his relationships with investors, however, this appeared to be less and less important as Lehman’s core profit driver shifted from investment banking to trading. As a trader, Glucksman amassed a great deal of power through his rise at Lehman and was eventually he able to take over the company’s day-to-day operations.
Every department reported directly to Glucksman, as Peterson became more or less of a figurehead in the company. Since Glucksman had significantly more power at Lehman Brother’s than Peterson, he was able to push Peterson into retirement.
Glucksman knew that Peterson did not really want to get into a major fght for control over Lehman’s since it would hurt Lehman’s and potentially his public image. Additionally, Peterson could not run the company without Glucksman since it would require him to start running the company’s day to day operations again.
Due to the leverage that Glucksman had over Peterson, he was able to force him into taking an early retirement package without consulting the board of directors. Various structural features of the company and the industry contributed to the outcome of the Lehman power struggle. Unique to Lehman at the time was its power duality. Lewis Glucksman was made Co-CEO with Peter Peterson creating a situation where there were two captains at the helm.
Historically this has always been a formula for disaster. Justifications for the duality were unconvincing.
Peterson was suppose to be the external client facing image of the company whereas Glucksman was suppose to be the internal executioner of operations. The division of duties may seem clear but it does not lead to a clear division of power. At the very top of a major Wall Street company, power must be clearly defined and completely authoritative.
If it is not, then human nature and the nature of an organization will eventually find a way to define power. In this case, power was defined through duties and internal duties won over external duties. existed across the financial industry.
The whole industry is governed and motivated by profits generated through individual contribution irrespective of the firm’s net performance. This particular industry structure results in the classic inter departmental tensions to maximize the individual department’s profits.
To a certain extent, Lehman had to comply with rest of the companies by creating the isolated departmental structure to maintain its top performers. As a result, when a department creates 60-80% of the firm’s profit, the power shifts to the department making the most money.
Lehman could have created an alternate compensation strategy to reduce the potential for power struggle between the departments. For example, rather than calculating the compensation solely based upon the net profit an individual employee or department makes, they should introduce risk-, economy- and cost-adjusted compensation. This ensures that every employee is Judged on their true risk adjusted performance and hence requiring them to take a more long- term approach than the traditional short-term approach. In Addition, the investment banking industry is highly cyclical.
Traditionally, investment banks relied on fostering long term client relationships to generate revenues through fees charged for directly or indirectly financing companies and their projects. Such projects include mergers and acquisitions, and generally take place more often in bear markets when the prices of such acquisitions appear to be attractive. During more recent times, proprietary trading also became a significant profit driver for investment banks. Although such trading profits can be sustained regardless of underlying economic environments, they are usually much larger during bull markets as compared to bear markets.
As a result, leading sources of revenues and profits for investment banks vary with economic and market cycles, leading to shifts of power within firms. Many historical examples support this conclusion, such as the rise in power of the investment bankers during the industrial expansionary era of the United States, and the more ecent rise in power of the real estate and securitization brokers during the sub- prime boom, as well as the rise in power of the traders prior to the power struggle between Glucksman and Peterson at Lehmen brothers.
Without comprehensively considering the long term survivability and profitability of companies, shareholders and other major stake holders of companies may find it hard to remain impartial towards the importance of different functions and camps within companies. From hindsight, Peter Peterson could have been more aggressive in asserting his control over the firm. In 1983, Peterson himself made Glucksman Co-CEO when he sensed that Glucksman was unhappy.
Peterson wanted to ensure that Glucksman had enough of a stake in the company for him not to leave. What Peterson did not realize was that Glucksman was so involved with Lehman that he would have never left; therefore keeping him in his position at the time would have allowed Lehman to take full advantage of his skills without the risk of promoting him beyond his to enter into a power struggle to retain control, surrendered his position and was barely involved in the exchange of power.
Peterson’s sources of power, which he surrendered in the conflict, were his position as CEO, his reputation among the partners and board members and his non- transferable political and social connections.
To give up these sources of power Peterson undermined his position by making Glucksman co-CEO, he cut the board and partners out of the decision between him and Glucksman, and he did not threaten to take his network with him when he left (though his concern for Lehman being what it was, it would have been unlikely that he would have disassociated
Lehman from his connections). Ultimately Peterson was blinded by the possibility of negative public relations repercussions to the firm that he was unable to see that Glucksman was in a tenuous position at best. The CEO of the firm is a managerial function, true, but Peterson should have realized that the CEO should be a visionary, not a micromanager. By allowing Glucksman, who was a micromanager, to take over that responsibility he placed the firm in danger of shortsighted decision making; shortsightedness being one of Glucksmans personality traits.