Poor Leadership decisions led us to the subprime loan financial crisis

In this part 2 of 3, I  critique the leadership decision making role in the subprime loan financial mess.In part 1 of 3 blog, I gave a summary of the subprime fiasco and the risks it posed to both lenders and borrowers.In part 3 of 3 blog, I will also evaluate subprime loans with the idea of social responsibility and then compare and contrast the evolving consequences for these actions. Finally I will highlight the measures that were taken after and other measures taken so as to avoid similar crises in the future.

According to Alfred Sloan, it is individuals that make decisions not organizations (Gilbert, 2011).Organizations only provide a framework, on which decisions can be made in an orderly manner. Therefore people are to blame for the subprime mortgage mess not organizations. But who specifically is culpable? According to Gilbert (2011), borrowers, mortgage brokers, lenders, securitizers, rating agencies and investors that bought unfamiliar fiduciary instruments are the possible culprits.

Policy making and implementation is done by the leaders in an organization (Gilbert, 2011).According to Gilbert (2011), individuals at any level in the organization can implement policy decisions which have already been decided on. However policy making is made at a managerial level and the higher the managerial level is in the company, the wider the scope of the policy.

The decision to offer adjustable rate mortgages (ARM) to unqualified individuals, who will likely default on the loan when the rate increases in the future, represents is an ethical issue (Gilbert, 2011).Individuals who actually set a policy, whose likely result is predictable are involved in an ethical scenario even if they do not recognize it, according to Gilbert (2011), however they are consequently responsible for the results. Thiel, Bagdsarov, Harkrider, Johnson & Mumford (2012) argue that organizations should take a proactive role in developing leaders’ sense making abilities so that they can comprehensively understand ethical quandaries and consequently make more ethical decisions.

According to Muller-Kahle & Lewellyn (2011), board of director tenure versus subprime lending specialization and board gender diversity versus subprime lending showed strong negative relationships. Moreover, they discovered a strong positive correlation between outside director preoccupation and subprime lender specialist. These factors of director tenure, board diversity and outside director preoccupation are core to corporate governance and consequently to the decision making process in an organization. Muller-Kahle and Lewellyn (2011) concluded that corporate governance played a major role in the decision to get involved in the subprime lending.

References

Gilbert, J. (2011). Moral duties in business and their societal impacts: The case of the subprime lending mess. Business & Society Review (00453609), 116(1), 87-107. doi:10.1111/j.1467-8594.2011.00378.x

Thiel, C., Bagdasarov, Z., Harkrider, L., Johnson, J., & Mumford, M. (2012). Leader ethical decision-making in organizations: Strategies for sensemaking. Journal of Business Ethics, 107(1), 49-64. doi:10.1007/s10551-012-1299-1

Muller-Kahle,M.I & Lewellyn, K.B.( 2011). Did board configuration matter? The case of US subprime lenders. Corporate Governance: An International Review, 19(5): 405–417