What to Do About the Economic Crisis

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William Cohen, Ph.D.
10/08/2008

Peter Drucker didn’t predict economic or financial crises or say what to do about them, at least after 1929. The last economic situation he attempted to analyze and predict was that year. A few weeks later the bottom fell out resulting in the Great Depression. Drucker had predicted continual economic expansion and good times over the coming decade. He never made economic predictions again.

However, Drucker was almost infallible in predicting major political, social and business developments and upheavals and what to do about them. He predicted the rise of Hitler at a time when Hitler was at his nadir and practically every single political analyst in Europe had written him off and assured everyone not to worry.

Drucker predicted the rise of the "knowledge worker," a term he created, and that the day of "carrot and stick" management as the prime motivator for workers was over. He predicted the rise of the healthcare industry, the tremendous expansion of executive education, the impact of technology—especially the Internet—and a major shift to online education for the future.

For years he railed against unreasonably high salaries paid to executives. He pointed out that in the United States the ratio of the highest paid executive in the company to the lowest paid worker was the highest in the world, better than 300-to-1. Drucker said it shouldn’t be more than 20-to-1. He was against "golden parachutes." He warned they, and we, would pay a terrible price for this.

Many of the things Drucker wrote about were controversial and difficult to swallow, perhaps more so because they were all too accurate.

Face the Difficult Facts and Take Action

A leader must expect positive results with new initiatives or he’ll never take necessary risks and will achieve little but mediocrity. However, when bad things happen negative facts need to be faced squarely and dealt with on that basis. Part of that positive action means facing the truth and immediately letting those affected know what has happened and what actions the leader proposes to take. In almost every instance of ultimate failure that eventually must be reported, the problem could have been fixed, or at least negative outcomes significantly mitigated, if the individual had faced facts, taken action and informed others.

Do What’s Right

A good many of the problems we face in our current financial crisis are because of people who should know better but just did not do what’s right. It may have started with a potential borrower who knows he can’t afford a house and maybe hasn’t even saved the money for a down payment. Do you recall the advertisements promising "no money down"? This borrower justified his loan in that housing would keep going up…forever. The mortgage broker didn’t much care since he wasn’t making the loan anyway. He still got his commission so he might not have checked the potential borrower as closely as he should have. In any case, what was the difference if housing prices would always go up? The bank made the loan since it would eventually pass it on to an investment firm on Wall Street. And anyway, didn’t the government say that every American should be able to afford his own home and had loosened restrictions on borrowing to permit this? In any case, housing would always go up. That was what people told themselves at every level to justify actions that they knew were wrong. Wall Street could create an investment fund with all these mortgages, good and bad, and sell the fund to "sophisticated" institutional investors, insurance companies and the like. Even if forewarned that some of these loans were marginal, they assumed not all of the loans would go bad. Wall Street knew better, but assumed real estate would always increase in value. Every level justified their actions in that the value of housing would always increase. But just like any Ponzi scheme, the bubble eventually bursts, and when it does there can be severe consequences. This is an example of not doing the right thing.

So now what? Doing what’s right won’t get the country out of this mess or save an individual homeowner or an individual bank or company. But it will get us back on track and help restore confidence in a system that has been allowed to go very much awry. It will help with other potential crises that have not yet occurred. So do what’s right in your business dealings. It may not always be easy, but it will do much toward getting things turned around. Had Ken Lay of Enron admitted the situation when he realized what had been going on in his company and taken true corrective action instead of telling the world all was fine while dumping his own stock, the company and his employees would still have taken a beating, but may have survived, and so might have he.

Share the Pain

If you are in a position of responsibility with subordinates, Drucker’s lesson is to share the pain. Consider another man named Ken. Ken Iverson was CEO of Nucor, the third largest steel company in the nation. It consistently racked up high profits even in the declining industry. Nucor’s 7,000 employees were the best-paid workers in the steel business, yet they had the industry’s lowest labor costs per ton of steel produced. Although a Fortune 500 company, only 24 people were assigned to corporate headquarters, and there were only four layers of management from the CEO to the front-line worker.

Then a major recession hit the steel industry. The total number of steelworkers dropped almost overnight industry-wide by 50 percent. At Nucor, they had to cut production in half. However, Iverson didn’t "downsize" anyone. Instead, he shared the pain. Iverson insisted that management take large pay cuts. Department heads took pay cuts of up to 40 percent. Company officers lowered their salaries up to 60 percent. At a time when some Fortune 500 CEOs were taking home much more, Iverson decreased his own pay from $450,000 to $110,000, a salary cut of more than 75 percent. Nucor actually got through three years of industry depression without laying off a single worker.

Exercise Leadership

Drucker always said that leadership was essential. Toward the end of his career he wrote that leadership was a "marketing job." This is because so much of leadership has to do with persuasion. Unfortunately there has been a failure to recognize this. Here are a couple of examples.

The administration got our attention with the current economic crisis and immediately moved to introduce a solution. So far, so good. But bringing the problem to our attention and initiating action is only part of leadership. As Drucker noted, a leader needs to do even more. No one explained what would happen if Congress didn’t immediately approve a $700 billion "bailout," how the bailout would work, and how the administration arrived at that astronomical figure. A Wall Street bailout was hardly attractive when most of us hadn’t approved marginal loans. It wasn’t our fault. What difference would it make if "the fat cats" or "the guilty" had to pay for their errors? Let Wall Street bail themselves out! With no effort at explanation or persuasion, as this was written, voters across the country were writing their Congressmen 30-to-1 against passing the "bailout." Maybe it’s the answer. Maybe. The point is, most of us don’t know.

It isn’t only the administration that failed this test. Let’s assume that those in Congress had been persuaded. They would still have a difficult time voting for this bill with elections coming soon and so many of their constituents against it. So the vote would be close, and it would be essential to get every member of both parties on the same team. That’s the time for leadership by the Speaker of the House. That’s the time to "rally the troops" and make a speech talking about bipartisanship and bringing both sides together for the common good. Unfortunately, the exact opposite occurred, and after a divisive speech, it should be no surprise that 133 Republicans and 95 Democrats voted against the $700 billion bill. The Drucker lesson is that all of us must exercise leadership—no matter where you sit or what the crisis you face.

To summarize Drucker’s lessons about what to do in a crisis—no matter your level of work or management—the basic idea is to be a leader. A real leader does things that lesser leaders refuse to do: