No scandal in recent memory highlights government regulatory ineptitude quite as clearly as the Security and Exchange Commission’s failure to uncover Bernie Madoff’s Ponzi scheme, a scheme that bilked investors “of an estimated $65 billion” (Shafritz, Russell, & Borick, 2011, p. 362). Madoff, a wealthy, prominent, industry insider, perpetrated his scheme on unsuspecting investors beginning as early as 1992 and the SEC had received and investigated no less than six complaints between 1992 and 2008, when Madoff finally confessed (U.S. Securities and Exchange Commission Office of Investigation, 2009). Why was the SEC so slow to respond to tips and complaints about Madoff? More importantly, what institutional changes have been implemented at the SEC to assure that the regulatory agency is a more effective regulatory body in the aftermath of Madoff? This author finds that while the SEC’s internal investigation has revealed some of the systematic causes of their failure, and has worked to address them, the most notable and enduring failure of the SEC was a leadership failure that remains unaddressed, prompting a call for SEC leaders to adopt the principles of authentic leadership to develop an ethical organizational identity.
On Causes of the SEC Failure
In the wake of the SEC’s failure to catch Madoff, despite the numerous complaints, the SEC conducted an internal investigation to determine why they failed to uncover Madoff’s Ponzi scheme during the course of their many investigations (Wingfield, 2009). The SEC (2009) report found that a) investigations and examinations went uncompleted, b) the agency failed to collaborate both internally or externally, c) the agency lacked resources, d) the agency lacked needed expertise, and e) the agency did not have needed process, systems, or controls. Equally important, the agency found a) no conflict of interest or impropriety in their handling of the case, and b) no attempts by senior SEC officials to influence the investigation (U.S. Securities and Exchange Commission Office of Investigation, 2009). In addition, the report is notable for the focus on the specific SEC transactions with Madoff over the years, rather than investigation of systemic problems within the agency that contributed to the failures. As a result, the SEC (2009) report does not address the role of organizational processes, leadership, or culture, in the failure to uncover Madoff’s scheme, rather it ends suggesting employees involved in the failure should be put on a performance plan.
In light of the SEC’s failure to identify systemic issues, it is worthwhile to review outside criticism of the notable SEC failure. For example, Shafritz, et al. (2011) suggest the SEC was subject to the phenomenon of ‘agency capture’ whereby a government agency is overly influenced by industry economic interests. Galbraith (2009) describes the problem endemic to most government regulatory agencies thus:
Regulatory bodies, like the people who comprise them, have a marked lifecycle. In youth they are vigorous, aggressive, evangelical, and even intolerant. Later they mellow, and in old age – after a matter of ten to fifteen years—they become, with some exceptions, either an arm of the industry they are regulating, or senile. (p. 166)
In the case of the SEC’s examination of Madoff, the mid-level bureaucrats that examined Madoff appeared overly cautious given Madoff’s stature as a giant in the investment world (Shafritz, et al., 2011). In particular, because the career path of many in the SEC is in the very firms they are charged with regulating, the agency is susceptible to the ‘revolving door’ phenomenon (Barkow, 2010). Agency capture, therefore, can be considered an individual choice of self-interest over agency purpose. What, if anything, has the SEC done in the aftermath of their public failure, to reform the agency, and how will the agency address agency capture?
Because of the intense public scrutiny following the SEC’s failure to prevent Madoff’s Ponzi scheme, the agency has published a list of reforms they have undertaken. While the list of reforms is fairly comprehensive, this author will seek to outline reforms pertinent to the discussion in this paper. First, the SEC (2012) reorganized their enforcement division and added industry experts to their staff. Second, the SEC centralized the tracking and distribution of tips and complaints into a computer database (Lynch & Goldstein, 2011; U.S. Securities and Exchange Commission, 2012). Third, the SEC (2012) has put internal process controls and a governance structure in place to assure appropriate follow-up and disposition on examinations. Although, given the tactical nature of the reforms, this author thinks it likely that additional oversight failures are likely, primarily because organizational culture and leadership issues remain.
The Need for Authentic Leadership
The SEC’s failure, in some respects can be considered a failure of leadership and culture. Indeed, if you considered their failure to detect Madoff’s scheme in light of the larger regulatory responsibilities of the agency, the Madoff failure was one notable failure across two decades of similar failures. For instance, the SEC failed to detect the widespread corporate fraud of the late 1990’s as corporate giants like Enron, WorldCom, Adelphia, and Tyco bilked investors and employees out of millions. In addition, the SEC failed to adopt a regulatory position on mortgage lending practices that led to the subprime mortgage crisis. When one considers the regulatory lapses of the SEC (2012) compared with their avowed mission “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation” (p. 1), one can likely conclude the agency is in dire need of change, but change to what?
Change is, by its very nature, a leadership problem. As a regulatory agency that has grown too ‘chummy’ with the industry as a whole, where self-interest appears to override agency purpose, the SEC needs to transform rather than simply reform. Some argue that the institutional design is flawed, and the agency requires a new design to prevent agency capture (Barkow, 2010). While the existing reforms and new institutional design are important, equally important is a leadership transformation. Some would argue that the SEC needs a ‘transformational’ leader to guide them into the future. However, this author would argue that an agency-wide focus on authentic leadership development is more appropriate, because transformational leadership lacks an ethical or moral dimension.
Authentic leadership theory was born out of the corporate scandals of the late 1990s (George, 2006), however the importance of authenticity was described by Lord Polonius in Shakespeare’s Hamlet, “This above all: to thine ownself be true, And it must follow, as the night the day, Thou canst not then be false to any man” (Shakespeare, 1986, p. 676). “Though, the working definition of an authentic leader is true to ones self, there is an expectation that being true to one’s self is also upheld by the overarching morality of society” (Tonkin, 2010). It is in this context, that authentic leadership applies to the problems of ethics and morality in an organization. Moreover, an authentic leader has the opportunity to drive the ethical identity of an organization through a written code of ethics and authentic leadership behaviors (Verbos, Gerard, Forshey, Harding, & Miller, 2007). How then, does one tell the difference between self-interested leaders and authentic leaders?
A Tale of Two Leaders
This author will describe his experience with two organizational leaders to illustrate an example of leadership authenticity. The first leader to discuss is Jon Doe. Jon’s day-to-day leadership was centered on the notion of crisis, real or manufactured, given both scenarios were equally useful to drive change. Insofar as Jon sought to transform the company, using crisis as an enabler, characterized Jon as a transformational leader. Moreover, Jon’s focus on transformation gave the appearance of the consummate executive, working towards the greater good of the company. However, over time, Jon would often switch positions on key topics regarding organizational change, depending on the power of the position relative to other positions. In addition, Jon would reprioritize organizational resources depending on the crisis of the moment, effectively abandoning earlier crisis, irrespective of the state of resolution. This author’s opinion is that Jon was an opportunist that was expert at aligning his self-interest with organizational interest, rather than an authentic leader.
Contrasted with Jon Doe is Jane Doe. Jane was an organizational leader that was several management levels below Jon. Jane worked tirelessly to craft the organizational mission, vision, and values with the team. In addition, Jane aligned word and deed, being the first to live organizational values. In this respect, Jane was truly an authentic leader. As a result, Jane’s organization was poised to make sound, ethical, business decisions even in ambiguous situations. Moreover, Jane’s team had greater organizational commitment and job satisfaction than Jon’s team. In essence, Jane was able to interweave the organization’s business identity and ethical identity with the organizational purpose.
The differences between these two examples highlight the importance of understanding one’s motivation. In dramaturgical terms, an actor or actress seeks to understand a character’s ‘through line’, the overriding motivation that drives the character’s behavior and decision-making. A leader’s understanding of their own ‘through line’ can serve to define organizational values and ethical identity, a situation desperately need at the SEC.
The SEC learned much from their self-examination of the failures that led to the biggest regulatory miss of the last twenty years. However, like any self-examination, there are difficult to reach places and blind spots that led the SEC to reform rather than transform. Most notably, the SEC self-examination did not recognize the contributing and enduring role played by organizational leadership and culture. It remains to be seen whether SEC reforms will have their intended effects, however, without the development of an authentic leadership capability within the agency, and the resulting ethical organizational identity, it appears likely that the SEC will remain an agency captured by the interests of the financial industry, rather than the interests of the public.
Barkow, R. (2010). Insulating agencies: Avoiding capture through institutional design. Texas Law Review, 89(1), 15-79.
Commission, U. S. S. a. E. (2012, July 30, 2012). The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation Retrieved August 19, , 2012, from http://www.sec.gov/about/whatwedo.shtml
Galbraith, J. K. (2009). The great crash, 1929. Boston: Houghton Mifflin Harcourt.
George, B. (2006). Truly authentic leadership. [Article]. U.S. News & World Report, 141(16), 52.
Lynch, S. N., & Goldstein, M. (2011, July 27, 2011). Exclusive: SEC builds new tips machine to catch the next Madoff Retrieved August 19, 2012, from http://www.reuters.com/article/2011/07/27/us-sec-investigations-idUSTRE76Q2NY20110727
Shafritz, J. M., Russell, E. W., & Borick, C. P. (2011). Introducing public administration (7th ed.). Boston: Longman.
Shakespeare, W. (1986). William Shakespeare, the complete works (Original-spelling ed.). Oxford Oxfordshire ; New York: Clarendon Press ; Oxford University Press.
Tonkin, T. (2010). Authentic leadership: A literature review. Research Paper. School of Global Leadership and Entrepreneurship. Regent University. Virginia Beach.
U.S. Securities and Exchange Commission. (2012, April 4, 2012). The Securities and Exchange Commission Post-Madoff Reforms Retrieved August 19,, 2012, from http://www.sec.gov/spotlight/secpostmadoffreforms.htm
U.S. Securities and Exchange Commission Office of Investigation. (2009). Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme – Public Version – U.S. Securities and Exchange Commission Office of Investigation, Retrieved from http://www.sec.gov/news/studies/2009/oig-509.pdf.
Verbos, A. K., Gerard, J. A., Forshey, P. R., Harding, C. S., & Miller, J. S. (2007). The positive ethical organization: Enacting a living code of ethics and ethical organizational identity. Journal of Business Ethics, 76(1), 17-33.
Wingfield, B. (2009, September 2, 2009). New Madoff Report Blasts SEC. The Regulators Retrieved August 19, 2012, 2012, from http://www.forbes.com/2009/09/02/bernard-madoff-sec-business-washington-madoff.html
Defining moments are ridiculously difficult to predict. For example, President Bush attempted to use ‘defining moment’ rhetoric to pressure the U.N. Security Council to pass resolution 1441, calling for Iraq to disarm what later was found to be a non-existent weapons program (CNN, 2003). Later, President Bush attempted to define a ‘defining moment’ for the Iraqi government in their push to rid Basra of militants (Myers, 2008). Of course, the attempts to define the defining moments of a presidency occur on both sides of the aisle. After the killing of Bin Laden, Democrats rushed to a ‘defining moment’ narrative for Obama’s presidency (Warren, 2011). Despite the efforts of political public relations machines, defining moments remain elusive, precisely because they require the passage of time and the resulting perspective that goes with it, and because they must hold symbolic meaning for larger historical narratives. However, most public relations functions continue to use their skills in an attempt to define moments for those they represent, based on the antiquated idea that media has powerful effects on a mass audience, but many do not consider the meaning-making capability of individual audience members.
On May 1, 2003, the American public was greeted with the sight of President Bush, heroically landing on the U.S.S. Abraham Lincoln, fully bedecked in a flight suit, where hours later, under a banner reading ‘Mission Accomplished’, President Bush would announce the end of major combat operations in Iraq (Bash, 2003). While President Bush choose his words very carefully, the banner betrayed the government’s interest in staging a ‘defining moment’ in the U.S. public sphere. Of course, the pseudo-event did become a defining moment, just not in the way it was intended. Rather than ‘mission-accomplished’ becoming a symbol of American military dominance and a capable administration, it became a symbol of an administration out of touch with the reality on the ground in Iraq, and as such, cast doubts on the administration’s ability to win the peace.
Bush staffer’s would later argue that message was mangled, that the press got the meaning wrong, and that the banner was not intended to convey the end of the war, rather the end of a successful deployment of the U.S.S. Abraham Lincoln (Bradley, 2011). However, their objections ring hollow, and the event serves to illustrate a public relations function that continues to operate using the notion of the media as “a great keyboard on which the government can play” (Time, 1933). Shafritz, Russell, and Borick (2011) support the idea that governments continue to use the mass media as a device to influence the public sphere. However, the notion of a mass society easily influenced by a powerful mass media, has largely been refuted in research on media effects (McQuail, 2010). An alternative view of the communication process, is the reception model, which has focused communication research on the role of the individual in the social construction of meaning (McQuail, 2010).
President Bush and the communications staff of the Bush administration sought to shape public perception of the war effort by suggesting that combat operations were successful and complete. The staff chose powerful symbols of American military might, an aircraft carrier, fighter jets, and U.S sailors. In addition, the staff sought to portray President Bush as an accomplished military leader, having the President fly onto the aircraft carrier on a Navy jet, despite the aircraft carrier being within helicopter range. While it remains unclear whether the ‘Mission Accomplished’ sign was intentionally placed behind President Bush, it is difficult to believe the sign escaped the attention of the White House communications staff. However, history demonstrates that the clearly orchestrated pseudo-event did not shape public perception in the way in which it was intended.
Rather, the American public created an altogether different meaning resulting from the public relations disaster. ‘Mission Accomplished’ was not only widely criticized in the press as premature (Andersen, 2007; Bash, 2003; Bradley, 2011), but also widely parodied (Ferell, 2010; The Daily Show with Jon Stewart, 2003). In addition, the phrase became an Internet meme symbolizing incompetence, failure, or disingenuousness (quickmeme, 2012; Urban Dictionary, 2012). The picture that emerges from the widespread use of ‘Mission Accomplished’ demonstrates an altogether different ‘defining moment’ than the one envisioned by the Bush administration.
Therefore, public administrators should consider carefully whether to attempt to stage ‘defining moments’ of their own, for public perception is not so easily shaped. Rather, when framing debates in the public sphere, consideration should be made how pseudo-events will play in the larger context of the public debate. While the mass media is an important tool for public relations, the idea that the mass media exerts a powerful influence over public perception has been refuted in studies of media effects. Instead, public relations staff should consider the meaning-making capability of individual audience members and how the symbols that are used support existing narratives in the public sphere.
Andersen, R. (2007, May 1, 2007). “Mission Accomplished,” Four Years Later Retrieved August, 15, 2012, from http://www.prwatch.org/node/6005
Bash, D. (2003, October 29, 2012). White House pressed on ‘mission accomplished’ sign Retrieved August 15, 2012, 2012, from http://www.cnn.com/2003/ALLPOLITICS/10/28/mission.accomplished/
Bradley, T. (2011, September 18, 2011). Press Missed ‘Mission Accomplished’ Meaning, Says Bush Staffer Retrieved August 15,, 2012, from http://abcnews.go.com/blogs/politics/2011/09/press-missed-mission-accomplished-meaning-says-bush-staffer/
CNN. (2003, Fenruary 7, 2003). Bush: ‘Defining moment’ for Security Council Retrieved August 15,, 2012, from http://articles.cnn.com/2003-02-07/us/sprj.irq.wrap_1_security-council-al-saadi-weapons?_s=PM:US
Ferell, W. (Producer). (2010, August 16, 2012). You’re Welcome America: A Final Night with George W. Bush. Retrieved from http://www.youtube.com/watch?v=5O0WUzU-Kxc
McQuail, D. (2010). Mcquail’s mass communication theory (6th ed.). London ; Thousand Oaks, Calif.
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Myers, S. L. (2008, March 29, 2008). Bush Says Iraq Has Reach ‘Defining Moment’ Retrieved August 15,, 2012, from http://www.nytimes.com/2008/03/29/washington/29cnd-prexy.html
quickmeme. (2012). Bush Mission Accomplished Retrieved August 15, 2012, 2012, from http://www.quickmeme.com/Bush-MISSION-ACCOMPLISHED/?upcoming
Shafritz, J. M., Russell, E. W., & Borick, C. P. (2011). Introducing public administration (7th ed.). Boston: Longman.
The Daily Show with Jon Stewart (Producer). (2003, August 15, 2012). The “Sign” Controversy. Retrieved from http://www.thedailyshow.com/watch/wed-october-29-2003/the–sign–controversy
Time. (1933). Foreign News: Consecrated Press. Time.
Urban Dictionary. (2012). mission accomplished Retrieved August 16, 2012, 2012, from http://www.urbandictionary.com/define.php?term=mission+accomplished
Warren, J. (2011, May 5, 2011). Obama, Osama, and the Problem With Defining Moments Retrieved August 15,, 2012, from http://www.theatlantic.com/politics/archive/2011/05/obama-osama-and-the-problem-with-defining-moments/238394/
On December 25, 1991, the U.S.S.R. was officially dissolved as a state entity after roughly six years of the most ambitious attempt at reinvention of government in modern history. Gorbachev’s policies of Glasnost and Perestroika, openness and restructuring, sought to reform the existing political and economic systems, given the failure of the U.S.S.R’s centrally planned economy (Moss & Thomas, 2010). The inefficiency of the U.S.S.R.’s command economy resulted in the country’s inability to compete as a world power on the global stage with the United States (Shafritz, Russell, & Borick, 2011). The subsequent dissolution of the U.S.S.R serves as a reminder of the important link between a state’s administrative doctrine and the well being of its citizens. Indeed, effective administrative doctrine is essential for the successful public administration of state, given it is a key driver of the effectiveness of state institutions that can positively or negatively affect the well-being of constituents and the survival of the state on the global stage.
Early Soviet administrative doctrine was heavily influenced by Western schools of thought in pubic administration (Cocks, 1978). In particular, the Soviet administrative rationality movement of the 1920s and 1930s, adopted many of Taylor and Fayol’s principles of scientific management (Cocks, 1978). However, the USSR focused on the technical production aspects of scientific management and appeared unable to adopt Fayol’s managerial principles as they dealt with “coordination, control, organization, planning, and command of people” (Shafritz, et al., 2011, p. 231); issues that would affect the landscape of Soviet political power (Cocks, 1978). Rather, “the rationalizers were to deal only with administrative methods; they were not to decide issues of policy and power” (Cocks, 1978, p. 46). The limits placed on rational administrative doctrine by the Soviet party apparatus all but assured the rational movement would be unable to evolve to address the failures of the centrally planned economy.
In truth, while administrative doctrine in the U.S.S.R appeared to be unable to evolve, the history of western organizational theory demonstrates a consistent evolution and adoption of new scientific thought. Shafritz, et al. (2011) note that paradigms in administrative doctrine “overlap both in time and content because they are constantly evolving” (p. 245), in response to scientific advances, technological changes, and changing environments, describing doctrinal development as “inherently cyclical”. Furthermore, Shafritz, et al. (2011) attribute the cyclical nature of administrative doctrine to a competence/incompetence cycle whereby new innovations increase effectiveness until “advancing technologies and changing environments allow the innovation to deteriorate relative to other arrangements” (p. 246), noting striking similarity to the boom and bust cycles of the business world.
Indeed, both the boom and bust cycle of the business world and the competence and incompetence cycle of large organizations share similar roots in human biological and social processes. Raafat, Chater, and Frith (2009) describe herding behavior in humans as “as the alignment of the thoughts or behaviours of individuals in a group (herd) through local interaction and without centralized coordination” and use the herding metaphor to explore the very human proclivity to follow the behavior of others preceding them, particularly should they appear successful. Herding behavior, in this sense, can be used to describe why best practices and even benchmarking are commonplace. Of course, the downside to herding is that individual or groups are unlikely to wander far from the herd, either, resulting in maintenance of the status quo until such time as there is an internal or external shock that creates a need for change to begin the innovation cycle anew.
Of course, the USSR administrative doctrine did not follow the competence and incompetence cycle and as a result, appeared unable to innovate or evolve their approach to public administration. The lack of an evolved Soviet public administration doctrine left the state unable to deal with the changing global landscape, nor able to compete with U.S. economic and administrative power, despite the considerable political power of the U.S.S.R. As the fall of the U.S.S.R demonstrates, effective administrative doctrine is essential for successful public administration of a state, can either positively or negatively affect the well being of constituents, and have implications for the long-term survival of the state.
Cocks, P. (1978). Administrative rationality, political change, and the role of the party. In K. W. Ryavec (Ed.), Soviet society and the Communist Party (pp. xviii, 220 p.). Amherst: University of Massachusetts Press.
Moss, G., & Thomas, E. P. (2010). Moving on : the American people since 1945 (4th ed.). Upper Saddle River, NJ: Pearson Education.
Raafat, R. M., Chater, N., & Frith, C. (2009). Herding in humans. Trends in Cognitive Sciences, 13(10), 420-428.
Shafritz, J. M., Russell, E. W., & Borick, C. P. (2011). Introducing public administration (7th ed.). Boston: Longman.