Emotional intelligence: Value and limitations in leadership communication


Presentation on the use of Emotional Intelligence instruments for leadership development.

ORG423 Week 7 Critical Thinking Richard Rock


The SEC and Madoff: The Need for Authentic Leadership in Regulatory Agencies


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?


 

SEC Reforms

            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.

Conclusion

            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.

References

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


Constructive Conflict: A Leadership Moment


Conflict is inherent in sports, as individuals and teams compete against one another to win.  In football, hockey, and boxing, people intentionally hit each other to gain an advantage.  Even in basketball, where there are distinct rules to avoid contact, there is significant contact “in the paint”, and players often injure each other as they vie for advantage.  Despite conflict’s central role in sports, “on the court” conflicts are not usually considered the type of conflict that is resolved using communication-based conflict management techniques.  However, there is often considerable conflict “off the court”, at times the result of a complex array of needs and expectations amongst various actors including parents, athletes, coaches, and fans.  Poole (2012), describes one such conflict, between a player and coach, a result of differing expectations of playing time between the actors.  The case highlights how relationship uncertainty, attribution without communication, and relationship economics work to keep the conflict in the initiation phase, whereas relationship-centered communication is a leadership opportunity to collaboratively resolve the conflict and improve the team.

Background

The case study revolves around a conflict between the coach and one of the players, where the player seeks a greater role during games, while the coach is confident in their decision-making and appears unwilling to meet the player’s expectations of more playing time (Poole, 2012).  Poole (2012) describes the conflict from the point of view of the player:

You go to practice and work as hard as anyone else, and know all the plays. You previously went to your coach and asked why you weren’t playing in the games. You felt that he had favorite players, and since they didn’t include you, you weren’t receiving the opportunities that you should as a member of the team. The coach replied that since he picked the team, he owned it, and he would decide who played. He suggested that you quit if you didn’t like it. (p. 1)

The case describes a conflict that appears to be stuck in the initiation phase, without an obvious path forward to resolution, given the apparent finality of the discussion.  Failure to bring the conflict to resolution has inherent risks for the player, the team, and the coach, insofar as the conflict has the potential to lead to a confrontation avoidance cycle.  In particular, the relationship may suffer from the chilling effect, where “one person in the relationship withholds grievances from the other, usually due to fear of the other person’s reaction” (Abigail & Cahn, 2011, p. 29).

According to Abigail and Cahn (2011), the chilling effect can lead to decreased level of communication, decreased commitment, and eventual death of the relationship.  The possibility that the relationship between player and coach could suffer from the chilling effect is apparent, given the coach appears willing to end the relationship, rather than work to resolve the conflict.  Of course, the player has an equal role in the conflict, insofar as the player does not appear to consider the needs of the coach or the team.  To fully understand the perspectives of both actors, this author will first analyze the situation from a theoretical perspective, before arriving at a recommendation.

Theoretical Perspective

To analyze the theoretical perspectives that may be at work in the conflict, this author will adopt Goffman’s (1956) dramaturgical perspective, looking at the conflict from the perspective of the player and coach roles.  The player is concerned that they are not receiving an appropriate amount of playing time based on their sense of fairness and as recognition of their effort.  In addition, the player appears to attribute the lack of playing time to favoritism on the part of the coach, an inference that may or not be reflective of the situation.  “Attribution theory states that people act as they do in conflict situations because of the inferences they make about others based on their behavior” (Abigail & Cahn, 2011, p. 216).  Moreover, people may respond aggressively when one person seeks to constrain another’s alternatives, when the act appears to intentionally do harm, and when the act appears illegitimate (Abigail & Cahn, 2011).  The coach’s role is a difficult one, as the coach must balance the goal of winning, with the needs of every player and a variety of additional actors, including parents, administrators, and fans.  Balancing these perspectives, the coach may have legitimate reasons for not playing the player, however, because the player attributes the coach’s behavior to favoritism, the player does not attempt to understand the coach’s decision-making.  In turn, the coach may believe the player is seeking to illegitimately constrain the coach’s choices, perhaps influencing the coach’s response.  While attribution theory provides insight into the behavior of both the player and coaching, social exchange theory may offer additional insight.

“Social exchange theory states that people evaluate their personal relationships in terms of their value, which is created by the costs and rewards associated with the relationship” (Abigail & Cahn, 2011, p. 220).  In the player coach relationship depicted in the case study (Poole, 2012), differing perspectives on value may be the source of conflict, as the player clearly values personal playing time, while the coach’s value orientation is opaque.  However, by adopting the role of coach, this author may infer the coach’s value orientation to provide further insight.  As such, this author believes the coach likely values winning, while also valuing team play, player development, and perhaps even their job.  The case highlights how differing value orientations can form the basis for conflict.  The coach’s willingness to end the relationship suggests that the rewards of the relationship fall below the comparison level standard perceived by the coach, likely a result of the coach’s perception of the player’s teammates, where the alternative of ending the relationship with the player is preferable when compared with the costs of meeting the player’s expectation.  Of course, the coach’s willingness to end the relationship likely creates considerable uncertainty for the player.

Uncertainty can occur both in a relationship, and within a conflict relationship, and is often the result of insufficient information (Abigail & Cahn, 2011).  The player clearly does not understand the coach’s motivation for selecting the player line-up, nor does the player know specifically what they need to do in order to realize the opportunity for additional playing time.  The uncertainty in the situation and the ambiguous motives of each actor in the case, combine to create a potential chilling effect, where the player may be unwilling to address the conflict in a productive way, given the potential implications.  The coach’s willingness to let the player leave the team introduces further uncertainty into the player’s perception of the likelihood of future play.  Moreover, the coach’s attitude may undermine the player’s level of esteem.  Maslow (1943) identifies esteem as a fundamental human need associated with confidence, achievement, and respect.  Because the coach is likely concerned with player development, the coach’s communication with the player, whether intended or not, may be incongruent with the coach’s value orientation and role as a leader.  Furthermore, given the role of coach is a leadership role, the coach has a responsibility to understand the nature of the conflict and use the conflict constructively to provide value in the leader-member exchange (LMX).

Leader-member exchange theory is a leadership theory that focuses on the dyadic social exchange process in the relationship between the leader and member (Graen & Uhl-Bein, 1995).  According to Graen and Uhl-Bein (1995), a LMX is the basis of social exchange between leaders and members, and leadership behavior can lead to high quality LMX relationships.  Moreover, high quality LMX can improve organizational commitment and improve organizational citizenship behavior (Cropanzano & Mitchell, 2005).  The case study highlights a missed opportunity on behalf of the coach to use the conflict constructively to benefit both the player and the team.

Recommendation

Had either, the coach or the player, taken a constructive view of the conflict, the situation could be very different.  However, as a leader, the coach has an overriding responsibility to use conflict constructively as an opportunity to help players reach their goals, while improving team outcomes.  Irrespective of responsibility, both actors in the conflict drama have the opportunity to use the conflict as an opportunity to collaborate to resolve the conflict while improving both personal and relationship growth (Abigail & Cahn, 2011).  Collaboration is a relationship-centered approach to conflict that seeks to resolve conflict and create win-win scenarios (Abigail & Cahn, 2011).  Had the player, or the coach, sought to understand each other’s needs, empathized with each other, or emphasized their common purpose, the actors may have found opportunities to collaborate.

For example, the coach, being concerned with player development, could have used the opportunity to communicate the specific improvements required of the player to increase their playing time.  Conversely, the player could have asked what specifically they needed to improve to increase playing time, rather than attribute the lack of playing time to favoritism.  However, this author suggests the responsibility largely rests with the coach.  The conflict was a coaching opportunity that could have motivated the player to improve, and provided support via future leader-member exchanges oriented toward the players development.  While it is unclear whether the player would meet the coach’s expectations of future performance, Bandura (1997) notes that expectations are the best predictor of success.

Conclusion

While conflict can be a source of angst and uncertainty, conflict is equally an opportunity to improve personal and relationship outcomes when used constructively.  Moreover, when conflict occurs in the leader-member exchange, constructive conflict is a leadership moment, an opportunity for a leader to teach, influence, and raise expectations of performance.  To take advantage of the leadership moment, the leader must adopt a relationship-centered approach to understand the members needs, and actively collaborate to help the member achieve their goals.  While both actors share the responsibility to initiate collaboration, the leader has a greater responsibility.  After all, leaders choose to lead.