Lehman Brothers’ Story 1

Lehman Brothers’ Story: Lessons of Ethics in Business

Michael Vinning

Northcentral University
Lehman Brothers’ Story 2

Introduction

Ethical standards should be a part of every business. Through standards organizations are

able to develop structures that will provide clear effective guidance in the day to day operation,

safeguard the interests of stakeholders and customers, while supporting a positive work culture

(Myers, 2003). According to Valentine, Varca, Godkin, & Barnett, (2010), organizations that

have an ethically structured environment experience increased retention of employees, and those

employees behave more ethically. Whereas, Lipman (2013) believes that ethical stands are

important in every organization, but supports a strong and effective program for reporting fraud

as a tool to help organizations maintain ethical standards. Unfortunately, Lehman Brothers was

an organization that failed to abide by its ethical structure and investment policies it had

established. As a result, developed a poor ethical culture within its upper management. Had there

been a fraud reporting system in place things might be different. It was their inability to maintain

ethical standards that was the primary reason they are no longer in business. On the other hand,

their demise has left a lasting impression and lesson for everyone within the business

community.

Summary of Mr. Lee's concerns

Matthew Lee had been a senior vice president at Lehman Brothers with 14 years of

experience in 2008 and had been in charge of the firm's global balance-sheet and legal-entity

accounting department (Jennings, 2012). Mr. Lee had worries that high-ranking management

appeared to have violated the ethical policy of the organization through the use of an accounting

method known internally as Repo 105 which hides the firm’s true value to investors and

regulators (Jennings, 2012). According to Corkery (2010), Repo 105 was an accounting ploy
Lehman Brothers’ Story 3

which temporarily moved billions of dollars of debt off Lehman Brothers’ balance sheets. Mr.

Lee believed that the multiple billions of dollars in uncorroborated balances, at best, were non-

performing or, worse case, could be bad (Corkery, 2010). Mr. Lee first brought his concerns to

the attention of Martin Kelly, the former Global Financial Controller. Mr. Kelly then elevated the

same concerns to upper executives. As a result of making his concerns known to upper

management, Mr. Lee was demoted. Two months later, in May of 2008, Mr. Lee formalized his

concerns in a letter to Erin Callan, the Chief Financial Officer at Lehman Brothers and Chris

O'Meara the Chief Risk Officer. This time upper management decided that Mr. Lee's accusations

were unfounded and terminated him (Corkery, 2010). Later, Ernst & Young LLP, the auditors

for Lehman, would refer to Mr. Lees’ letter as a "whistleblower letter" (Corkery, 2010). Clearly,

Mr. Lee, was the victim of retaliation for bringing the ethical and securities law violations to the

attention of Lehman's upper management. More importantly, Mr. Lee’s story underscores the

importance of defining the ethical framework of an organization’s business behavior in a global

business setting and the need for protection of employees who report unethical behavior. Without

an ethical framework, organizations will face difficult times and significantly diminish the

chance of their continued existence (Stadtländer, 2006).

What are sensing mechanisms and why are they important

Sensing mechanisms are methods used by an organizations’ management to stay touch

with the environment within a place of business. There are different methods to gain employees’

opinions, ideas, or suggestions as well as to develop an understanding of their attitudes and

culture of the company: a complaint or suggestion box located in a central location for employee

access is a quick and easy idea, but this approach lacks a personal touch. However, it does
Lehman Brothers’ Story 4

provide anonymity, which allows individuals to express themselves openly. Other ideas include

the use of an employee hotline which could cover a variety of employee issue from safety

concerns to ethical issues. Next, holding open discussions where feedback is instantaneous.

Finally, a very common approach is the open door policy in which an employee can meet with

upper managers in private. According to Jennings (2012), walking around the plant or business

and interfacing with employees is one of the most effective forms of gaining employee feedback.

MBWA (Management By Walking Around), as it is referred to by Jennings (2012), reduces the

fear employees might have of speaking with top management. Jennings (2012) believes that by

walking around managers become more approachable by employees, which leads to spontaneity

and to insights about the condition of the company and its employees. The key to any sensing

mechanism is to understand its primary purpose: opening lines of thoughtful, meaningful, and

insightful communications between employees and upper management. Had that communication

occurred between Lehman Brothers top management and its employees, particularly Matthew

Lee, perhaps the Lehman Brothers’ story would have ended differently. The bottom line is

whichever sensing mechanism is used it must enable the transfer of information from individuals

who possess it to others who can take action on it.

Concept of humble firm and how it encourages ethical behavior

A humble firm begins with humble leadership, which consists of humble people. But how

does one define a humble person, let alone a humble leader? According to Toftoy and Jabbour

(2007), a humble leader is a modest person who tends to shy away from public praise. Through

inclusion and delegation of responsibilities to employees, he is able to motivate others by

establishing and reaching high standards for the business. Using this approach employees tend to

feel they are promoting the success of the organization, not just one person. Another quality of a
Lehman Brothers’ Story 5

humble leader is "He looks in the mirror, not out the window" and assumes responsibility when

things do not turn out as planned (Toftoy and Jabbour, 2007). According to Sharon Walker, the

former Vice President of Corporate Development at Enron Corporation, in an article entitled

“What went wrong?” published in Time magazine on June 5, 2005, p. 35, she defines a humble

leader as follows:

“A humble leader listens to others. He or she values input from

employees and is ready to hear the truth, even if it is bad news.

Humility is marked by an ability to admit mistakes.”

The above descriptions clearly fall within Jennings’ (2014), definition of a humble firm: an

environment which allows and supports employees of the company to speak openly and address

ethical challenges. Also, based on the above description of a humble leader, it appears that he

would be altruistic in nature, which is great because, according to Steinbauer, Renn, Taylor, &

Njoroge (2014) ethical leaders define what is normal, acceptable, and appropriate ethical

behavior while providing a meaningful work environment. Therefore, one can conclude that

humility, within leaders of an organization, is a good thing and has a positive effect on the

ethical values of that organization.

What lead to the behaviors at Lehman and other companies that eventually collapsed?

Perhaps it is the pressure to perform, to deliver at the highest level possible, not once, but time

and time again, which is the root cause of behavior that is not ethical. Everyone wants to be seen

as a winner: someone who can deliver results. Whereas, failure to deliver has consequences:

stock values could drop; demotion or replacement is possible; and employee layoffs may have to

be performed. Weeks & Nantel (1992) believe that business people are frequently faced with

ethical dilemmas where they must compromise their personal ethical values in order to achieve
Lehman Brothers’ Story 6

business objectives. Lipman (2012) states that there is a common theme in many corporate

failures. The typical claim is the board of directors did not have the information needed to

perform their duties, even though members of upper management had the information. Lipman

(2012) goes on to state that in countless cases of corporate failure many boards claimed they

were deceived by the CEO or CFO. In the cases of Tyco, Enron, Lehman Brothers, and

WorldCom creative financing was the tool employed by upper management to make the

company’s performance look better than it was in reality and, in each case, the board had no

idea. However, within each organization there were individuals who knew what was going on,

but, for an assortment of reasons, were unable to make their voice heard. Lipman (2012) believes

that the lack of information in the right hands is due to a corporate governance failure,

specifically, the failure to institutionalize a whistleblower system as part of the organization’s

sensing mechanisms. Jennings (2012) points out that employees, who realize that something is

wrong, are faced with a tough decision and torn between their loyalty to the company,

coworkers, and concern for their livelihood, or doing the right thing, which may negatively

impact the company, coworkers, and their livelihood. Perhaps had there been a reporting system

in place in each of the organizations ethical values may have prevailed. According to Weeks &

Nantel (1992), if an organization lacks virtues, it is quite possible that these types of behaviors

will occur within the organization and lead to its failure.

Why are managers unable to only rely on their ethics hotlines?

In 2002, Congress passed the Sarbanes-Oxley Act. The act mandates that publicly traded

companies provide a mechanism for employees to report fraud while remaining anonymous

(Buckhoff, 2003). However, according to Lipman (2013), there are some problems with the

use of a hotline:
Lehman Brothers’ Story 7

1. Top management’s attitude regarding a hotline is closer to toleration than

support.

2. Employees receive no compensation for exposing fraud or other issues.

3. The inability to follow-up with questions of an anonymous caller.

4. Protecting the anonymity of an employee does not always occur.

5. Using company employees to investigate reports does not give the

appearance of being independent.

Lipman (2013) goes on to indicate that there may be ramifications for employees who use

the hotline. As he puts it, “Whistleblowers are almost never recognized as employees of the

month” (Lipman, 2013). Additionally, Lipman (2013) cites a survey by the Institute of Internal

Auditors, which found that most employees are not aware of a hotline as it is typically not well

publicized by organizations. Finally, according to Lipman (2013) the number of employees

reporting fraud in larger U.S. companies has dropped since the enactment of the Sarbanes-Oxley

Act. He views the decline in reports as an indication that the employee protection aspect of the

act is inadequate and employees who make reports continue to be ostracized and experience a

negative career impact for their actions.

Conclusion

The world around us continues to shrink as more companies become multinational

organizations, the impact they will have on economies and peoples’ lives will continue to grow.

Lehman Brothers, WorldCom, Enron, and UBS are all examples of how much of an impact the

failure of a large organization can have on an economy. It is through careful analysis of each

failure by governing bodies that lessons are learned, policies are developed, and legislation

passed in an effort to prevent similar events from occurring: the Sarbanes-Oxley Act is such an
Lehman Brothers’ Story 8

example. Nonetheless, several issues remain to be addressed: the pressure to perform, to deliver

at the highest level possible, not once, but time and time again and greed, which are the causes of

unethical behavior. Until such time that these issues no longer impact individuals or businesses

ethical challenges will continue to exist.

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