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Solomon Brothers Case Analysis
Group A:
Ruby Amey, Nathan Hale, Kara Johnson, Cesar Marrero, Elizabeth Shockley
LEAD505 – Organizational Leadership & Ethics
November 3, 2011
Dr. Jeni McRay
Southwestern College Professional Studies
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Abstract
The Solomon Brothers case is an example of how leadership is separate from ethical
behavior. John H. Gutfreund is an example of how leadership is not synonymous with an ethical
leader. Gutfreund’s and his fellow senior leader’s unethical behavior set the foundation for the
crisis. Deryck C. Maughan and Warren Buffet not only reestablished the credibility of the
organization, but also serves as an example of how leaders establish their reputation as ethical
leadership.
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Solomon Brothers - Case Analysis
This paper is the result of a group study on Solomon Brothers, an investment banking
firm established in 1910 by first-generation immigrants, and their efforts to recover from the
scandalous discovery on August 9th, 1991 of fraudulent financial activity that was allowed by
their senior leadership. The ethical, managerial and legal issues that became the central focus of
the ensuing investigation brought to light the culture of greed that permeated throughout banking
firms. This paper will also highlight Solomon Brother’s efforts to reinstate the public trust,
regain their credibility with government regulators, and make amends to the company
shareholders and their clients around the world. The inspirational leadership efforts of Deryck C.
Maughan and financial luminary Warren Buffet reestablished the company’s trustworthiness
amongst their employees, their critics, and federal government authorities.
Solomon Brothers’ record of unethical behavior started 68 years into its history, when
John H. Gutfreund became Chairman and CEO in 1978. A strong indication that the ethical
culture of the company was being re-written occurred after Gutfreund sold Solomon Brothers to
Phibro in 1982 without consulting the owner and son of the original founders, William “Billy”
Brothers, who mentored Gutfreund throughout his career. This act of betrayal and the attitude of
complete disregard towards the history and culture of Solomon Brothers was one of many acts
performed by the controversial CEO that promoted a culture of excess and disregard for legal,
moral and ethical guidelines that had made the company a respected fixture in the banking
industry. In August 1991, it was uncovered that the company had performed a number of
fraudulent transactions, circumventing federal rules and exposing them to the scrutiny of the
Treasury Department and the Federal Reserve, not to mention their business relations around the
world. Gutfreund’s reaction to the illegal and unethical behavior was to cover it up, trying to
keep any record of unethical wrongdoing away from authorities and public scrutiny at any cost.
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Case Analysis
Company’s Leaders Definition of Ethical Behavior
In an effort to rapidly resolve this scandal, Solomon Brother’s Board of Directors
appointed Warren Buffet as the interim chair, who then announced Deryck C. Maughan would
become the new Chairman and CEO. The first order of business was to take immediate
responsibility for the fraudulent actions, followed by immediately providing full and unfettered
cooperation with authorities. They also opened communication channels with shareholders,
assuring them that the problem was being handled. Next, they cleaned house by firing or
removing all responsible parties, breaking all ties with the guilty executives, suppliers, former
legal counsel, and agents tied to the scandal. They appointed new key leaders that were credible,
hired independent investigators, accountants, and a new legal counsel, and avoided hiring a
public relations firm in an attempt to show transparency and full disclosure during the process.
In addition, the company was forced to reevaluate their assets and determine if there was a
possibility of illegal activity regarding their assets and holdings.
Both Deryck Maughan and Warren Buffet were adamant that the culture at Solomon
Brothers was about to undergo a dramatic overhaul. The culture that Gutfreund created
rewarded profit over anything else and had to be removed, but this would be difficult since the
prevalent practice was to hire employees that shared his views on short-term profits at all costs.
Maughan and Buffet sent letters to employees, shareholders, and authorities that outlined the
sweeping changes they would begin to make in order to restore ethical behavior within Solomon
Brothers. In fact, Warren Buffet himself ordered all executives to report any legal violation or
moral failure perpetuated by any employee. He emphasized the significance of his mandate by
making himself available at any time, providing his private office number (which connects to his
home phone). Finally, Warren Buffet advised employees on the following: “Lose money for the
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firm, I will be very understanding; lose a shred of reputation for the firm, I will be ruthless”
(Forging the New Solomon, pg. 118).
Leading by example, the new corporate management made it apparent that the unethical
practices, lack of responsibility, and culture of greed will no longer be tolerated. Deryck
Maughan redefined the company’s ethical behavior and what was tolerated, stating:
“I lead by example. But when things go wrong, you can’t turn a blind eye.
Leadership must enforce values through punishment. If they don’t exercise that
power, then the values can’t be upheld. People begin to believe the behavior is
ok. … I also mean issues of diversity, the treatment of women, putting customer
interests first, not cutting corners. These things are communicated to employees
in the speeches we make and in our daily routine. And the vast majority of
employees are glad to hear it because they want to work in a quality place.”
(Forging the New Solomon, pg. 128)
After a period of internal reviews done by independent investigators and trusted agents,
the final reports indicated that the wrongdoing performed by the company was only seven
(possibly eight) in the span of 19 months. This finding, which was verified by government
investigators, helped reinstate Solomon Brothers’ position in the banking industry and their
stature in global finances, but the scandal still cost the company greatly.
Company’s Ethical Standards
Once the company was reorganized, they focused on controlling their operational
structure, established strict procedures, identified and eliminated practices and policies that
encouraged misconduct or tolerated infractions, overhauled the entire bonus pay and incentives
system, and closely monitored all of these changes. During a Congressional Hearing, Warren
Buffet outlined their plan to establish a regulatory compliance system that performed checks-
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and-balances that eliminated the possibility of fraudulent activity at any level, implemented
transactional controls that were never in place during the Gutfreund years, and announced the
creation of a board-level compliance committee that would oversee all regulatory procedures.
Deryck Maughan and Warren Buffet provided a clear implementation outline that would
restore the company’s internal ethical standards, and once these changes were set in motion,
Solomon Brothers suffered a huge employee turnover, losing three times the number of workers
than they had originally expected. Undeterred, both men took the exodus as an opportunity to
hire employees that shared their views on ethical behavior and were capable of adhering to
stricter guidelines on financial transactions.
During the entire reorganization process, a systemic problem was identified that was
common in banking institutions of the time. According to Maughan, there was a “money
culture” that turned a blind eye to moral conduct; the egos that Wall Street condoned created an
overwhelming drive to obtain bigger and bigger profits, setting aside any ethical behavior or
common decency. Solomon Brothers decided to take steps to eliminate this culture of greed, to
include widespread changes to the transactional process, reduction of assets, enhanced reporting,
and bolstering the role of their Board of Directors and their access to business information.
Due to the strong guidance of Maughan and Buffet, the company was able to convince
government securities and international business clients that previously left them to return to the
firm. The reorganization, acts of good faith and cooperation during the investigation, and the
influence of these two leaders, helped restore and emphasized the ethical standards that the
company held before “the Era of Gutfreund.”
Ethics Affecting the Organization
One way to explain how the focus on ethics has affected the organization is by John
Gutfreund’s “win-at-all-costs” culture or ethical climate led to unethical and illegal
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consequences” (Brinkmann & Johnannes, 2002, p. 10). This culture of ethics caused the
employees to become aggressive and greedy. John Gutfreund’s problem was that he did not
make long term plans for the company but made short and quick decisions that affected the
company long term negatively. The employees felt that they were under pressure to perform
instantly to make profits without long term critical thinking. In order to change the company
Buffet had to think about how he could use ethical behavior in choices that were made by every
employee including management through plans for long term and profitable outcomes. The
problem with John Gutfreund’s approach is that being overwhelmed by instant decisions can
cause costly mistakes for the company’s revenues.
In order for Buffet to change the unethical practices of the past he is going to have to let
go or lay off certain unethical employees. When going through the big change of implementing
moral and ethical values, one must get rid of the bad behavior in the company by firing them.
This could involve severance packages that will in the long run help the company recover by
hiring new employees who will quickly change the atmosphere that is being portrayed through
the media. Buffet is a man who has dedicated moral integrity and ethical values.
August Disclosures Trigger a Crisis
Because unethical and illegal choices of John H. Gutfreund, Thomas W. Strauss, and
John W. Meriwether not to refrain from their illegal actions the organization immediately lost
credibility. Losing the trust of an overseas company well respected as the Warburg Company
was the heart of the crisis. To demonstrate the high degree of global shock to the August
disclosures one report states, “On Thursday, the day after disclosing senior management’s
knowledge of the Treasury violations, Salomon Brothers was on the front page of virtually every
major newspaper in the world” (Paine & Santoro, 1994, p. 3).
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One reason this news triggered a crisis is the fact three top level executives had
knowledge of the Treasury violations. Knowing this piece of information, people can assume
they not only had knowledge of the actions, but condoned or orchestrated from a leadership
controlling their employees. Immediately clients, creditors, employees, shareholders, and
government officials demanded an explanation. (Paine & Santoro, 1994)
Auction Irregularities
The following statement shows how the auction irregularities were criminal acts. “On
Friday, August 9, Solomon brothers publicly disclosed that it had uncovered ‘irregularities and
rule violations’ in connection with the firm’s bids in three U.S Treasury security auctions” (Paine
& Santoro, 1994, p. 2). To add to their irregularities they appeared to cover up their illegal
behavior by attempting to cover up their actions as an oversight failure. They should have
immediately admitted their illegal activities which would have not added insult to injury.
Management Handles the Crisis
When vice chairman John W. Meriwether found out about the illegal bids that Paul
Mozer and Thomas Murphy made without the permission of the customers, he reported the
behavior to CEO John H. Gutfreund and President Thomas W. Strauss. Both of these members
chose to look the other way and do nothing about this breach of trust between Salomon and its
customers while putting the entire integrity of the company at risk. CEO John H. Gutfreund was
more concerned with securing his position as CEO, so he lied and tried to cover up the scandal.
Outside director and shareholder Warren E. Buffet and Deryck C. Maughan, co-head of
investment banking assumed control over Salomon. They had three main issues to deal with
immediately: Who would run the main businesses; what clients had to be contacted; how the
firm was going to find itself. Buffet sent the firm’s senior leaders a letter informing them that
they were expected to report, instantaneously and directly to him, of any legal violation or moral
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failure on behalf of any employee of Salomon. To ensure the importance of this letter Buffet
provided his private office telephone, which is located in the Omaha home. Buffet stressed to
employees that he can understand a loss of money for the firm but a loss of reputation and
integrity is unforgivable.
Funding was the biggest concern since the crisis because several banks were threatening
to cut credit lines, and creditors were asking Salomon to buy back outstanding unsecured debt.
Two creditors downgraded Salomon’s credit rating future impairing its ability to borrow.
Salomon had $11 billion in core capital, and maintained financial strength. Creditors and clients
were refusing to do business because they lacked confidence in the firm’s leadership and
management. When unsecured creditors balked after the August disclosures, Salomon used its
unencumbered high grade government securities to collaterize repurchase agreements. The shift
in refunding proved to not be enough to help the funding problem. Salomon’s next step was to
sell off assets and reduce the balance sheet. Salomon’s ability to liquefy assets and exploit
alternative funding sources saved the company from going under.
Maughan’s Leadership Responsibility
As Maughan there would be many concerns in assuming leadership of Salomon. There
was the immediate concern of making sure that you clean house and get let go of any employee
that had an involvement in the scandal. By letting everyone involved go it would let the
remaining employees see that this kind of actions and violations of customer trust will not be
tolerated. The next concern would be figuring out what the company was going to do for
funding. When the scandal went public several clients and creditors discontinued business with
Salomon. Other creditors were threatening to lower the amount of credit limits they authorized
Salomon.
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The next concern that Maughan would have to face is how to repair the client
relationships. Maughan could attempt to repair the relationships with the clients that have
already decided to discontinue business with them, but the primary concern was to salvage the
relationships with the ones that were still doing business with Salomon even if it was minimal
business. Maughan also had to repair the concerns that the remaining employees had. Many
employees were contemplating leaving the company because they felt that the future of the
company was shaky. Maughan also had to deal with the government officials and the ongoing
investigation and taking care of all the press releases. Maughan also had to prepare for the
possibility that there would be some private lawsuits from dissatisfied clients and customers.
Maughan also was concerned that the company had a culture problem. He felt that the company
needed to return to the original culture to which the company was built upon. This would mean
that leaders would lead by example and if there was violation in ethics and values punishment
would be administered. Leaders turning a blind eye to these kind of violations would not
become a norm. Along with this culture change all people will be treated equally and everyone
will remember that the customer’s needs always come first.
Treasury Auction and its Major Consequences
“On May 20, 1992, the U.S. Justice Department announced that it would not be bringing
criminal charges against Salomon” (Paine, 1994). The major consequence of the crisis was
having to pay millions in fines. They also lost somewhere around 800 to 900 employees after the
auction disclosures. Salomon also lost somewhere around 40 to 45 managing directors. The
main thing is that the company has to get on board with the same common vision.
Salomon Pleading Guilty to a Minor Criminal Charge
Salomon should have pleaded guilty to a minor criminal charge order to conclude the
Treasury auction matter in November 1991. By pleading guilty it means that they were taking
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responsibility for the illegal bidding that was taking place without the customers knowing. This
illegal act had the entire integrity of the company in question as well as breaking the trust of the
customers. By pleading guilty it would have restored the faith that they customers once had in
Salomon. Showing the customers that yes a mistake was made and the company takes complete
responsibility for the actions shows that the values of the company were still in tack. This would
have more than likely helped to avoid most of the creditors that backed out with doing business
with them and maybe even avoided a few fines. The most important aspect would have been the
customer, employees, and creditors would have regained faith in the company.
Appraisal of New Management’s Ethics Strategy
The new management’s strategy would be one that took each and every area of concern
or question into examination. Reviewing the appraisal of new management’s ethics strategy was
almost like watching an organization flipped upside down and all the things that cause concern
were then put into the spotlight for review. Salomon Brothers would have to make an in depth
effort to not only point out what was unethical and illegal, but how to prevent those actions from
every coming across the table again. The transition of going from the top broker, to now an
organization that was losing all of their big players and having their efforts suspended would
make the new strategies even more necessary. Salomon’s name and culture had been ruined. The
only thing the former employees of Salomon were feeling was success and it didn’t matter how
they went about getting it, as long as it was theirs. “Changing an organization’s culture is more
difficult that developing a new one.”(Brinkmann& Sims, 2002, pg. 327).
The organization would have no choice but to take a look at each and every area because
those who were employed at Salomon Brothers were used to and comfortable with illegal and
unethical activities. When Warren Buffet became acting CEO of Salomon Brothers, he focused
on creating a new culture. Buffet did several critical things during his attempt to clean up the
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“mess” that was left of Salomon Brothers. Buffet took away many of the perks and services that
the employees were once provided. He then went on to communicate that any and all unethical
or illegal behavior, no matter the size or effect, were to be reported directly to him. This action
really put into place Buffet’s expectations of the entire organization. The press and those who
had done business with Salomon before the crisis were reassured by Buffet that their work would
be honest and forthcoming. I think that the simple fact that Buffet is recognizing the failures and
talking about them openly allow for relationships and trust to be rebuilt.
Buffet did an outstanding job of setting the bar high and showing by your actions, words,
and decisions, it is possible to be an ethical leader. Buffet came into a position that dealt with
money coming in and going out. He took a great grasp on where each and every dollar would
end up going to. There was a change overall in how they looked at their money and what they
did with it. Those who worked with Salomon understood and respected their new take on how to
handle the financial part of the relationship. There was a close tie with work performance and
pay. This is something that can be shown by action or even data. If someone did their job the
way it was to be done, they were rewarded. Departmental performance was the new way of
rewarding the efforts made to those who did a job well done. This made the investors feel safe
and respected, as they wouldn’t worry about whose bonuses they would be contributing to.
Buffet worked very hard to clean house and dismiss any and all who were involved with
the scandals and unethical activities. New management’s strategy to fix or create a new ethical
culture was one that showed commitment, no tolerance, and had not secrets. I feel that Buffet
and his team handled the transformation with confidence and almost as if they had nothing to
lose. It was no longer about the money or the fancy name; it was about the customers, the
employees, and the services they provided. There was much about greed, selfishness, and lies
before the new strategy came about. The new leaders served as an open book to all who wanted
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to know and this is what allowed them to continue on with their vision. Buffet had no choice but
to act fast and in doing so, he only enhanced the new and improved Salomon Brother’s ethical
perspective.
Schein’s Five Primary Mechanisms
Schein’s five primary mechanisms include attention, reactions to crises, role modeling,
allocation of rewards and criteria for selection and dismissal. These different components are
created to assist leaders who need to react to crisis. The readings referenced are those that
described how Schein’s mechanisms were utilized to reorganize and reenergize Salomon
Brothers leadership under Buffet. “Schein defines culture as the basic assumptions and beliefs
shared by members of a group or organization.” (Sims, 2000, pg. 66). Robert Sims provided
insight into how changing the ethical culture at Salomon Brothers would be an extremely
difficult process. Schein’s mechanisms are created amongst the foundation of institutional and
individual processes. Schein’s model is very new and takes some time to process, as each step
should be easy to grasp as well as apply. Overall, the mechanisms are very similar to other
processes that can be taken to deal with crises.
The idea of the attention is to be aware that there is an issue. This is on the same level as
knowing your organization and what their capabilities may be. The role modeling piece is
crucial. We as leaders expect great things from those who choose to follow us and work with us.
Any great leader must be a great example of what he wants in his or her organization. “The
behavior exhibited by people the leader decides to reward with pay increases or promotions
signals to others what is necessary to succeed in an organization.” (Sims, 2000, pg. 71). In order
to communicate when someone is meeting or exceeding your expectations, you must be able to
provide them with some type of motivation or reward. This has been a repeated necessity in
many of the examples we have read during this course. Criteria for selection and dismissal are
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types of evaluation tools that many leaders can easily ignore or look over. Nobody wants to be
the bad guy and let go of anyone, but when it comes down to creating a positive, ethical
environment, this must be done. Leader’s often times feel that their job is to safe individuals, this
is the most important or interesting piece to Schein’s mechanism.
Schein’s five primary mechanisms are very similar to other strategic initiatives we have
read about so far in class. The model itself lacks timeliness and a clear picture as far as when the
steps have been completed. The steps to take, attention, reaction to crises, role modeling,
allocation of rewards, and criteria for selection and dismissal all seem very vague. These are all
important concepts but I feel that when you are faced with a crisis in an organization, attention
and reaction should involve clear, precise steps as well as a way to measure their overall impact.
Buffet, however, did exemplify in his actions and words some of these mechanisms. Buffet’s
actions over the course of less than two weeks included announcing Maughan as Chief Operating
Officer, stating to board members and others his job was to “clean up the sins of the past,” and
further announced the firm’s intent to fully cooperate with all investigators and regulators (Paine,
1994). “Buffet’s reaction to the crisis was swift. He began to set the tone for a new corporate
culture” (Sims, 2000). These actions established to both employees and shareholders that
Salomon clearly would not tolerate anything less than ethical behavior (Paine, 1994).
Role modeling, another of Schein’s five mechanisms, was definitely in play when Buffet
was appointed interim chairman. His reputation for integrity combined with a career record of
long term investments helped Salomon’s efforts with regulators and customers. The end result,
according to Sims, was a halt in unethical behavior and a wash of the previous climate that
encouraged short term focus without regard to ethics.
Buffet also overhauled the firm’s compensation and rewards policies. His “pay for
performance” philosophy on employee compensation, combined with a modified departmental
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compensation system based on results linked to shareholder returns, demonstrated he was serious
about this endeavor (Sims, 2000). This is a perfect example of Buffet exemplifying Schein’s
mechanism of allocation of rewards. Yet Buffet was doing this not to please regulators, but to
align the compensation system with the new corporate culture: “In his letter to shareholders,
Buffet addressed the possibility that some employees would leave the firm because of the
announced changes. . .In the end we must have people to match our principles, not the reverse”
(Sims, 2000).
Schein’s criteria for selection and dismissal is something that a leader can use to convey
his or her values to an organization’s employees (Sims, 2000). Buffet, according to Sims, set out
to distance the new firm from its past by firing or enticing resignations from anyone associated
with the scandal.
Lessons Learned (Amey)
The lesson obtained from this study is that leadership and ethics do not equate to the
same thing. Leadership in the context of the Salomon Brothers study is merely a position. A
position is filled by a leader. The leader has the choice of being ethical or unethical. When John
H. Gutfreund behaved unethically, he contributed to the crisis along with his senior managers.
When Warren Buffet took over as the CEO of Salomon, he reestablished the credibility of the
organization. He showed more of an ethical practice in the everyday operations of the
organization.
Lessons Learned (Marrero)
The lesson obtained from the study of Solomon Brother’s crisis, is that leaders cannot
condone an environment of ethical and moral ambiguity. For a company to be successful there
must be an appropriate establishment of standards that ensure regulatory compliance, and there
must be specific checks-and-balances in place that would eliminate the opportunity of
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misbehavior. Warren Buffet’s comment on ruthlessness towards anyone that damages the
company’s reputation is inspirational; his approach is similar to the one I used during my
military career … it simply states that a company’s reputation is more important than individual
gains, and that there will be repercussions if the organizational standards are not upheld.
Lessons Learned (Johnson)
The lessons that I have been most impacted by from the Solomon Brother’s crisis include the
consequences of regaining your reputation, how Schein’s Five Primary Mechanisms walk you
through the rebuilding, and how the new team was able to gain back some of the companies
integrity. If Solomon Brothers were to carry on after all that had taken place and the scandals that
were identified, I feel that it proves that implementing the correct strategy, being ethical with
every decision made, as well as honest does show power. This was not an easy task and there
were eyes watching them from every direction. You must not make mistakes when it comes to
lousy management decisions. You have to set a precedence and you no longer can work at
anything less. Those who stayed with the company did it because they believed in their leader,
they trusted their new leaders. The consequences for making unethical decisions do catch up
with you and will ruin your efforts as not only a leader, but as an individual. You are not only
being watched, but you are also being applauded by those who choose to do the same as you.
When it comes time for the who-did-it, the fingers always point to those in charge. As leaders,
we must model the way and expect others to do the same, no matter what level they are
employed at. Schein’s Five Mechanisms will also come as a tool when our own work situations
become unanticipated and questioned. In order to achieve success, we must not take short cuts
and put forth our best efforts. As a leader, it is not only about us as an individual. We take on the
responsibility of affecting a number of others, and we many never realize it.
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Lessons Learned (Shockley)
The most important idea or concept I have learned from this case boils down to
leadership setting the example, and by so doing establishing the ethical culture of the
organization. I’ve always professed to have known that leaders lead by example, but I didn’t
really think in depth how true this is, especially in the matter of ethics. In conjunction I also
learned that this not only means leadership action, but inaction as well. In other words, a leader
can affect an organization’s culture just as much with his or her inaction as with action (as with
the failure to respond or act in a timely fashion to a crisis such as what occurred at Salomon
Brothers in 1991). According to Sims, unethical behavior can occur in organizations due to
emphasis or focus on success regardless of how that success is achieved (Sims, 2002). Leaders
also establish the “ethical tone” by the example they set. Sims and Brinkman argue, “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 organizational culture” (Sims, 2002).
I also learned that the example set by Warren Buffet soon after the announcement of the
scandal at Salomon Brothers is that of what ethical leadership is all about. Had John H.
Gutfreund, CEO of Salomon Brothers, been leading with an ethical compass like that of Buffet’s
then perhaps reference to Salomon Brothers would not be in the unfortunate context of their
bond trading scandal of the nineties. Specifically, Buffet immediately began taking action which
set the example and sent the important message to all employees where the firm was headed and
that it was focused on reestablishment of trust and integrity, something Salomon had previously
been renowned for before the crisis. One of his first actions as interim chairman was to name the
Chief Operating Officer who was a man by the name of Deryck C. Maughan (Paine, 1994).
Maughan’s selection by Buffet was a significant move to place people with the integrity and
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leadership needed for what Salomon Brothers was facing. Buffet, having been on the ground
only two days, said to an assembly of the press, “My job is to clean up the sins of the past and to
capitalize on the enormous attributes that this firm has…Salomon has to earn back its integrity”
(Paine, 1994). Buffet was making a strong statement that would not mean anything without
actions to back it up. And that is what sticks with me the most is Buffet’s follow up actions to
help the organization rebuild its integrity that was lost so quickly by so few in power. His career
reputation helped those within the company carry on with faith that they could get past this
crisis. As one executive said, “We were tremendously relieved that someone with a good
reputation was taking over” (Paine, 1994).
What leaders pay attention to, as written about by Sims and Brinkman, can set
organizations up for failure if the attention is on short term financial goals at any cost. Such was
the case at Salomon Brothers, where Gutfreund “forced his employees to produce profits
immediately” (Sims, p. 331). On the other hand, leaders actions can also set an organization up
for success, as Buffet did when he communicated to Salomon’s senior managers the expectation
that each would report directly to him “any legal violation or moral failure on behalf of any
employee of Salomon” (Paine, 1994). He further emphasized how important this was to him
when he gave them all access to reach him even at his home. I think that when leaders open
themselves in this way, it gives everyone exposed to it a different level of confidence and also
strengthens the statement being made by the leader. I think this is a very effective means of
conveying the priority.
Sims and Brinkman offered so much more in their article that drove this point home for
me, that leadership example definitely can shape the ethical climate in an organization. To
summarize, role modeling, rewards practices, and the hiring and firing of personnel complete
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Schein’s culture mechanisms. The actions and inactions of Gutfreund clearly follow this model.
I personally have not witnessed a climate of unethical behavior and I hope that I don’t have to.
I plan on applying these principles to how I lead. Even though I have been in leadership
positions in the military since 1993, I am still learning and growing as a leader. I want to be an
ally to anyone who needs support when they may be feeling pressure to do what they know is not
ethical or in the company’s best interest. I want to be able to clearly communicate and articulate
to my team what our business priorities are and that they can and will be achieved without
compromise to integrity or ethics. I want others to see in me the example so that the culture is
sustained or even improved as far as an ethical climate. By applying what I have learned from
the mistakes of a few disconnected leaders at Salomon Brothers, I think I can improve as a leader
and be a better employee because of it.
Conclusion
The unfortunate crisis at Salomon Brothers didn’t happen overnight, but it can be seen
here that it happened as a result of deliberate unethical actions and a corporate climate that
encouraged it. It can also be said that ethics is at the heart of why they got in a crisis and a
strong ethics strategy is what got them through it and on to a new corporate culture. Swift,
deliberate communication (Schein’s Action), followed up with actions that demonstrated the
firm’s willingness to find out exactly what transgressions occurred, combined with a sincere
effort to implement measures to prevent unethical acts in the future (Reaction to Crises), leading
by example (Role modeling), revamp of employee and departmental compensation policies
(Allocation of Rewards), and obvious hiring and dismissal criteria (Criteria for Selection and
Dismissal) were how Buffet turned around the corporate culture at Salomon Brothers (Sims,
2000). This case was one example of how an organization’s leaders can strategically plan and
execute the significant task of changing an organization’s culture.
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The good news for all Salomon Brothers stakeholders is that this crisis was not the end
of an otherwise previously reputable firm. The tenacity of the leaders left with the responsibility
to salvage the firm’s reputation and future helped this strategy to succeed. Establishing a strong
ethical environment and monitoring it along the way is preferred and much easier to accomplish.
According to Sims, “The goal of today’s and tomorrow’s leaders should be to ensure that they
build and maintain a strong ethical organizational culture from the start so that they won’t have
to undertake the challenges of turning around an unethical culture.”
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References
Brinkmann, J. Sims, R. R.; 2002 ‘Leaders as Morale Role Models: The Case of John Gutfreund
at Salomon Brothers’. Journal of Business Ethics 35, 327-339
Johannes Brinkmann & Ronald R. Sims 2002, Leaders as moral role models: The case of John
Gutfreund at
Salomon Brothers. Journal of business Ethics; Feb 2002; 35, 4;
ABI/INFORM Global pg. 327.
Lynn Sharp Paine & Michael A. Santoro, 1994. Case 1 Forging The New Salomon. Building
Organizational Integrity. Copyright @ 1994 by the President and Fellows of Harvard
College Harvard business School case 395-046
Sims, R. R.: 2000. ‘Changing an Organization’s Culture Under New Leadership’. Journal of
Business Ethics 25, 65-78