AI: Let’s start with your book, What to Ask the Person in the Mirror: Critical Questions for Becoming a More Effective Leader and Reaching Your Potential (Harvard Business Review Press, 2007). There are a lot of books that fall into the category of high-level self-help for businessmen. What makes this one different?
RSK: This is a book based on experience. While I do study leadership habits of others, I wrote this book primarily from my own experience as a leader helping other leaders solve their problems. My point of view is a bit unusual, because I’m trying to dispel the myth that good leadership is predominantly about having all the answers, about being strong, directive, knowing what to do. It involves those elements, but a leader must also ask questions and engage others. A strong leader often needs to say, “I don’t know” or “I don’t understand.” Much of what I do to help leaders better run their businesses is to encourage them to open their minds and try new approaches, to show them that going overboard with bearing the weight of the world on their shoulders leads them to make bad decisions. The book is also a bit unusual within its genre in that I spend as much time working with governors and non-profit leaders as I do for-profit business leaders.
AI: Speaking of which, how do you think the previous President, the current President and those threatening to be President next stack up in terms of your assessment of good leadership?
RSK: President Obama was a visionary candidate, a great speaker and more inspiring than John McCain or Hillary Clinton—not because he promised change, but because he promised unification. Many were enthralled with that vision. But he has not been a visionary President, because he has been less effective in articulating a clear aspiration for the country and choosing three or four top priorities to achieve it. I know people in his Administration feel that they’ve had to be more “tactical” because of Republican opposition. However, I would love to have seen more discussion of what he would do if he had a freer hand. A good example would be the Bowles-Simpson presidential commission on the deficit, which was set up with much fanfare. The commission did a great job and achieved some bipartisan support, but the President did not embrace its recommendations—even though it was his commission. Entitlement reform and the budget deficit are the two burning issues of our time, and much of the nation is not clear regarding his view on these matters. As with any leader, Obama can correct this by articulating a clear aspiration and priorities for addressing these issues.
I actually did think I understood George W. Bush’s vision—even if I didn’t agree with some aspects of it. But he appeared to surround himself with people so “smart” and “experienced” that they seemed certain of what they were doing. I have a lot of respect for people like Donald Rumsfeld and Dick Cheney, but they’ve been around for a long time, and they seemed very reluctant to say “I’m not sure”, “I don’t know”, or “I changed my mind.” I think good leaders need to be able to admit such things, or else they’ll eventually get themselves and their boss clobbered.
AI: I think President Bush was a lot more intellectually curious than people gave him credit for, but he had a Texas proletariat sort of way about him that made him reluctant to express that curiosity in public.
Let’s move on to the current crop of presidential candidates. What do you make of them?
RSK: There were three that strike me as leaders, as executives, namely those who decide what they believe and have the courage to act on it. Romney, Huntsman and Perry at least have the experience of accepting imperfections, negotiating compromise and setting priorities. Romney may have the only viable chance of winning, but I am not certain about his vision. He can come up with a 59-point plan for the economy, but what are the three to five most important? When people accuse him of being a flip-flopper, they’re basically questioning whether he has a clear vision. He could comfortably shift positions on discrete issues while staying consistent with his vision, if he clearly expressed one. Since he has modified his positions and hasn’t articulated a clear vision for the country and for the role of government (for instance, what is his position on healthcare reform in Massachusetts?), the shifts appear to be cynical. I’m confident Romney will ultimately whittle down his plan into top priorities in service of an overall aspiration.
AI: And the others?
RSK: Yes, let’s talk about those whom I call “advocate leaders”—that is, they advocate positions but may not be as good at achieving compromise and results—Newt, Santorum, and Paul. Newt appeals to many people because he does articulate a vision, but he sometimes confuses or alarms people when he tries to append details. More generally, however, the problems we’re facing in this country now are different than what came before. We’re out of time. We’ve been increasing our leverage for fifty or sixty years, and the game is over. Now to be a political leader in this country is going to be a lot less fun. Things that were the third rail before now have to be the first rail. We need a President who articulates a clear vision with specific priorities to address these problems.
AI: We at the AI have had an ongoing project called “Nation-Building in America”, and it’s based on the premise that if you want new policies in different social policy areas, one of the prerequisites is rethinking the government structures designed to deliver them. You can’t get new policies with old bureaucracies. It seems to me that we haven’t had a President since Dwight Eisenhower who understood the interplay between policy innovation and government structure.
RSK: Well, I have been a businessman for the past 25 years, and have taught leadership at Harvard for the past six, and I’ve learned a lot during that time. When I teach MBAs and executives I talk about vision, priorities and alignment—namely, how to build an organization that adds value and drives toward achieving its mission. It has to do with the people you hire, the tasks you give them, how you organize and what incentives you lay out. In order to be a leader today of either Congress or the White House, you must be a student not only of ideas but of people and management.
I’m often asked why we don’t have leaders in Washington. I think we have many leaders in this country, but this organization and system design, driven by the media ratings and by PAC campaign money, can suffocate ideas and leaders—and it’s getting worse. Thanks to increasing polarization, Washington, DC is a culture that is more tactical than visionary. Politicians think more about how to get through the next day—let alone the next election cycle—than about the proper course for the future.
AI: The same is true, for slightly different reasons, in the Executive Branch. The transactional costs are so enormous that people don’t have time to think. That’s certainly true, too, in the consultancy culture and among contractors for the Department of Defense, the Department of Homeland Security and many other parts of the government.
RSK: Unlike in government, in business, given enough time and money I can change any organizational design. It may be risky, but I can do it. I can manage from top to bottom. In big institutions, particularly the government, there are various design factors that a leader can’t change.
AI: A good example of government ossification is the Pentagon’s acquisition process. There have been eight commissions, going back to David Packard in the 1970s, examining how to reform acquisitions. All these analyses come up with similar recommendations, but none yielded any major changes because there’s a misalignment between the Congressional, the Executive Branch and the defense industry pieces. In order to get anything done you have to align the interests of all three pieces of the so-called Iron Triangle—but no one seems able to do that on a consistent basis.
RSK: When the economy and GNP was shooting upward we could get away with that inefficiency, but we can’t afford it anymore. Both the public and politicians are extremely frustrated. I’m part of a group called No Labels, and we’ve advanced a proposal for ten design changes in Congress.
AI: I’ve recently joined No Labels, too. Maybe more important, AI chairman Francis Fukuyama is working with Stanford’s Freeman Spogli Institute, trying to think up some new governance reforms. One was a method of dealing with fast-track trade legislation and the BRAC, which did away with amendments—just thumbs-up or thumbs-down votes on legislation. If you put a complicated subject before Congress and let the lobbyists and special interests chew at it, you end up with oatmeal. So you have to create a governance structure more like the British one, where a legislative package is achieved through reconciliation and compromise, but once it comes up for a vote, there’s no screwing around with it. With supermajority requirements in the Senate, to boot, we’re not able to address problems.
RSK: Yes, we’re on a ship that keeps taking in water; the leverage goes up every day. People here very smugly laugh at Europe, but our problems aren’t that different—it’s just that we can print money. I’ve been very impressed with Sarkozy and Merkel, because they’re at least trying to deal with problems head-on. They’re trying to be leaders.
AI: Well, I’m not sure their initial reaction to the Greek crisis qualified as astute leadership. The Germans have been trying in recent months to play brinksman, trying to get other Europeans to promise to act more like Germans. And they got their treaty in December ratifying those promises. In return, the Germans flinched, and now there is liquidity flowing into these banks, thank goodness.
RSK: The European Central Bank has gone above and beyond what the Fed did with the U.S. banks—and I’m glad for that. However, its actions are not a solution. They simply buy some time for fiscal policymakers to address more fundamental problems.
AI: I think we all understand the dilemma here. What the Germans want in the long run is, essentially, virtue. But in order to get there we have to solve the short-term problems; if the Eurozone collapses there is no long-term plan. So this is a case where the demands of the mid-long term and those of the long-long term are at loggerheads. The Germans did the right thing.
RSK: Many people don’t realize this, but what the Fed thinks it has been doing over the past three years is what the ECB is now doing for Germany and Europe: buying them time, and hopefully putting on the pressure for them to get in gear because they can’t keep on indefinitely with hyper-aggressive monetary policy.
AI: There’s no delicate way to say this, but please allow me a personal question. You enjoyed a meteoric rise at Goldman Sachs. Why did you leave?
RSK: I’m asked this question all the time. I had been thinking about leaving for several years before I finally did. I’m a client-oriented person, and spent my career in the client businesses. After business school, I was hesitant to go to New York city (I was hoping to go back to Kansas City). I was attracted to Goldman because of its firm commitment to serving clients’ interests first. I was at the firm for 22 years and had great role models in the firm’s leaders, John Weinberg and John Whitehead. If a banker were to come into my office and ask how much money we’d make from a particular client by giving them certain advice, you’d be reaching for the baseball bat. Instead, we were trained to figure out what would you do if you were in the CEO’s shoes. That’s the advice we should give them. It helped make us a great firm.
Wall Street was historically more balanced between trading business and client business. I ran investment banking and oversaw investment management. But as the trading business got bigger and bigger, the client side made up less of the firm’s overall work. This was going on at every single firm, not just at Goldman Sachs. I began to believe I could add more value in the world by doing something else. It was a difficult decision. However, I realized I had lost some passion for what we were doing, and that’s when I talked to the CEO, Hank Paulson, about leaving. It was traumatic, but I felt like I had to make a change.
AG: The New York Times recently ran a widely read statement by a resigning Goldman Sachs executive who cited similar concerns. What did you make of the piece?
RSK: The firm became a great investment bank because its people lived by and fervently believed in the business principles of the firm. In particular, business principle number one: client interests come first. If clients succeed, our own interests will follow.
The key to the firm’s future is to relentlessly live by these principles.
AI: You’re right that the industry changed. If you do a forensic analysis of what happened in autumn 2008 and before that, you can generate a long list of factors and theories. One that has gained traction both on the Right and among the Occupy Wall Street protesters is that a financial plutocracy is running the country. I’ve always been wary of those kinds of emotionally charged theories, but over the past couple years I can’t ignore the evidence. There is always corruption and influence peddling in society, including in relatively open, market-friendly ones, but it’s kept in balance. Starting in the early 1990s, I’d say, it began to get way out of balance. Can you talk about what you saw of this?
RSK: Let’s start with the big thing staring us in the face. Anything leveraged 35-to-one is at risk of blowing up eventually. Freddie Mac was regulated by 600 people, but there was one little thing they didn’t deal with: It was leveraged sixty-to-one. It justified that leverage based on the certainty that housing prices never go down. The Dodd-Frank legislation has addressed some of these leverage excesses.
A second problem is more intangible but no less important. Again, what is the vision? How do you make a positive impact on the client and the world? I’ve never seen a sustainably successful leader, in private industry or in a non-profit or government, who didn’t articulate and drive forward a clear vision for how to add value to a client and the world. Shrewd people can make a lot of money for a few years, but you don’t build a world-class company based on shrewdness. As trading came to be a bigger part of Wall Street, I noticed that the vision changed. The leaders were saying the same words, but they started to change incentives away from the value-added vision and tilt more to making money first. If making money is your vision, to what lengths will you not go?
AI: Dodd-Frank is raising costs on businesses, but it seems to me that it doesn’t address the fundamental problems of the system’s opacity and offshore shadow banking mechanisms, which amounts to an estimated $24 trillion worldwide. It doesn’t address Freddie and Fannie Mac at all. And we still don’t have a consensus on the Volcker rule to separate the basic banking system from the casino. I find it alarming that we haven’t dealt with the distorted incentive structures that produced the crisis.
RSK: The regulators’ main goals should be to reduce leverage and reduce interconnectedness. To focus on those two things I don’t think you have to regulate everything. We should regulate leverage and interconnectedness. For instance, I was surprised to find that MF Global was leveraged 35-to-one. Regulators can be tougher about insisting that firms limit their exposure to others. The problem is that now they’re regulating seventy other things. My complaint about Dodd-Frank is that it should be slimmed down and focused on two or three top priorities. By trying to do so many things, it may wind up accomplishing less and creating more collateral disruptions.
AI: You’re trying to simplify the mental universe of reform here, and I agree with you. It’s a bad law in part because it leaves too much to the regulators’ imaginations. Paul Volcker himself has explained this. He created his “rule” with three pages of testimony, and when it appeared in legislation it was ten pages. Now, it’s something like 750 pages and still growing.
RSK: If you implemented the Volcker rule as stated, we’d have an enormous loss of liquidity in the markets. I’d rather separate banking from broker/dealers. But he’s laid down so many rules on the trading side—I’m not a fan of his rule as written. We’ll have to see how it evolves after the comment period.
AI: The first round of screwing with banking rules was 1980, the last year of the Carter Administration. That was a bad idea and probably caused the Savings & Loan disaster. Then, of course, there was the repeal of the Glass-Steagall Act. I thought Volcker was trying to recreate some kind of modulation akin to Glass-Steagall, but I’m not sure whether he succeeded.
RSK: I am worried about the collateral damage of some of these rules, particularly on small business. I get many calls from owners of small businesses who report that their banks are pulling their working capital lines and not even willing to give them a secured line for receivables and inventory. It’s because they’re on a watch-list of industries that considered risky credits. The banks are working to increase their capital, and reducing riskier small business loans is one way to do it. We need those institutions now to take risks on small business. Risk isn’t all bad. It worries me that big companies can get still get money, but small ones are being squeezed out as a byproduct of some of these regulations.
AI: I prefer restructured incentives and transparency over regulation. They’re not always mutually exclusive. But the powerful lawyers working for the big companies can always outwit regulators.
RSK: Again, we shouldn’t discourage risk-taking; as government is pared back, private risk-takers have to fill the void.
AI: You make an excellent point, I think. For example, there’s a solution to the country’s infrastructure problem involving risk-taking in the private sector. Engineers have been telling us for years that our infrastructure is falling apart, and of course it’s obviously true. It’s clear given the austerity in the public budget that we can’t now or in the near future finance improvement projects properly. But there’s a huge amount of wealth in this country and a lot of money to be made in this. There are many ways private equity could be used.
RSK: Yes, but the problem is that we’d need big liquid markets to finance it. I am not sure that we understand the market impacts of the Volcker rule. It would be a big experiment.
AI: If you look back in history, it took twelve years or more for us to figure out what had happened in October 1929. Yet there’s always a compulsion just after a crisis to do something before it’s fully understood what happened and why.
RSK: I must say, two wars, large tax cuts and an eroding middle class are also part of the story.
AI: A few months ago we ran a piece by Tyler Cowen that points out how the inequality data shows that the amount of money accruing to the top 0.1 percent has been so huge that they skew the entire data set. Most of the inequality in the middle washes out once you account for the effect of immigration, which always depresses wages, and also for threshold earners. There are more people in the economy today who live alone, who are extending their grad school experience, and who aren’t trying to make much money. About 25 percent of our population are single dwellers—the highest number in history. Those large numbers of people who have no economic pressure to earn money and provide for others has a big impact.
RSK: True, but that doesn’t mean there isn’t real anguish for people falling out of the middle class. I was on the Kansas state health care commission for four years, and we investigated the reasons why people were uninsured. Over the course of 18 town hall meetings across the state, people politely informed me that it was a stupid question—how does a family of four with an income of about $45,000 per year before taxes spend $12–14 thousand on health insurance (assuming they aren’t subsidized by an employer). The fact is that the middle class simply can’t make ends meet anymore.
However, it is dangerous to suggest that corporate interests, in effect, took away the ability of the middle class to make ends meet. I voted for Obama, but I think it is a huge mistake for him to introduce rhetoric that suggests that the interests of corporations and working people are in opposition. I think it’s not true and unhelpful to reviving the economy.
AI: I agree, but I think one ought to distinguish between what corporations do and what people on Wall Street do, between industrial plutocracy and financial plutocracy.
RSK: Fair enough.
AI: So what about a bottom-line leadership analysis of the 2012 race for the White House so far?
RSK: The country needs a real leader. I think the normal politics of attack won’t work this time, in 2012. People just want someone who can do the job.
AI: I hope that goes for the Legislative Branch, too. I think Congress’s behavior over the past year has been stunning—they somehow managed to underperform an already abysmal reputation.
Let me ask just one more thing about our banking and financial system. One of the arguments economic policy mavens made was that after the eurozone began to form, and UBS and DeutscheBank began expanding their services, U.S. banks had to diversify lest their European counterparts eat our lunch. Was that a significant argument?
RSK: I can’t speak to what persuaded Congress to repeal Glass-Steagall, but from a business point of view, if banks had been limited to commercial lending, it would have been a low-return, unexciting business. There was concern that big companies with financial flexibility didn’t need banks anymore, and we lost our pure banking system somewhere along the line.
The crash of 1987 is an instructive contrast. At that time, Jerry Corrigan, then the President of the New York Fed, famously picked up the phone and told the big money center banks to ramp up lending to avoid a credit crunch. And they were able to comply because the markets’ selling-off didn’t erode their capital. If the crash of ’87 had happened twenty years later, it would have been a catastrophe. This time around, the Fed didn’t bother to call anyone, because they lost capital when the market sold off. There wasn’t a single pure bank left. Most of them held 25–30 percent securities and trading assets and off-balance sheet obligations (for example, securitizations). The Federal Reserve is the one pure bank left in this country.
AI: At a conference I attended recently, experts, including some past directors of regional Fed banks, were arguing about how to fix things so that the Fed isn’t the lender of last resort and can go back to doing the things it’s supposed to. In the meantime, however, why is the Fed organizing itself in a way that leads the savings of ordinary Americans to erode while banks make lots of money? And isn’t this cheap money orgy inevitably going to cause another bubble?
RSK: I don’t know if the Fed is completely happy with its current course of action but thinks it a necessary evil. There’s enormous pressure on them. I’m sympathetic to the role they’re trying to play, but I am hoping the next Administration will take some of the pressure off them by addressing fiscal policy. The Fed wasn’t designed to carry this much weight. If the rates on Treasuries start to spike up, they’ll take a big punishment. The only hope is that the leadership in Washington reforms entitlements, raises taxes and makes critical investments in our infrastructure.
AI: With levels of debt like ours there are only three ways out: print money, borrow it, or generate growth—or some combination of the three.
RSK: I think the package is entitlement reform, taxes, some long term investments—and printing money. Then the Fed would have an end point in sight.
Again, as I wrote in the book, the world’s problems have never been more complicated, and we need leaders who can admit what they don’t know so that they can ask intelligent questions.
AI: I hope you sell lots of books. As for me, I’ve learned a lot today, thank you… but I’d still make a terrible banker.
RSK: Yes, this was fun. Thank you!