2. THE CREDIT CRUNCH CRISIS OF 2008
In October 2008, the world financial system came within a whisker of complete meltdown. In
September 2008, the US government had decided to allow the investment bank Lehman
Brothers to go bust, and in October the UK government nationalized Royal Bank of Scotland
(RBS) and Bradford & Bingley, and forced Halifax Bank of Scotland (HBOS) into a shotgun
takeover by Lloyds funded by government money. Also in October, the US government
nationalized the massive insurance group AIG. Meltdown was avoided, but the world moved
rapidly into recession, with an almost complete shutdown of bank lending and rapidly rising
unemployment.
What went wrong? The seeds of the crisis were sown with the terrorist attacks of 11
September 2001. The US economy was already slowing before the attacks, and Alan
Greenspan, the head of the US Federal Reserve, felt that decisive monetary action was needed
to avoid outright recession. He quickly slashed US interest rates to an unprecedented 1 per
cent, and the Bank of England and the European Central Bank followed, although not to the
same extent. US interest rates were held at this low level for several years.
With hindsight, it is clear that Greenspan went too far, too fast. The economic impact of 9/11
proved to be short-lived, and by 2004, the US economy was back in boom.
In normal circumstances, such a loose monetary policy would have rapidly let to rise in
inflation, but retail prices in the US, the UK and the Eurozone were kept down by the boom in
cheap imports from China. Instead, inflationary pressures built up on asset prices, particularly
house prices.
Mortgage lenders in the US started an aggressive lending programme, buoyed by the
expectation that house prices would continue rising indefinitely. Many specialized in lending
to so-called ‘ninja’ borrowers – no income, no job and no assets – in the so-called sub-prime
market. In the UK the ex-building society Northern Rock followed a similar policy, lending
on mortgages of 125 per cent of the value of the property, financed by its own borrowing
from the wholesale money market. The money markets themselves became contaminated. In
order to spread their risk, the US mortgage lenders packaged up their mortgages (a process
known as securitization), into so-called collateralized debt obligations (CDOs) – a package of
mortgages sold as a bond to other institutions. By 2007, CDOs in the US were valued at US
$1.3 trillion, and this was the tip of an enormous syndicate debt iceberg worth US $14 trillion,
7 per cent of total US GDP. The securitized bundles were so complex that an individual bank
found it almost impossible to assess the risk it was running.
Like any pyramid scheme, the whole thing only worked as long as house prices continued to
rise. Unfortunately, as US interest rates began to rise again, the ninja borrowers were no
longer able to meet their mortgage obligations. US house prices peaked in summer 2006, and
fell 25 per cent over the next year.
The first victim of the crisis was Northern Rock, which failed in September 2007, and was
eventually nationalized by the UK government. In March 2008, the US government rescued
the investment bank Bear Stearns, and in July it rescued the two major US mortgage
3. providers, Fannie Mae and Freddie Mac. As explained above, the crisis then reached its peak
between September and October 2008.
An underlying contributory factor was the very loose supervision of financial institutions in
the UK, and to a lesser extent in the US. As Vince Cable (2009, p13) points out, the Financial
Services Authority ‘to the end remained supportive of Northern Rock’s business model’.
The result of the bank crashes was that inter-bank lending totally dried up, as no bank could
be sure how safe its fellow bank was. This was passed on to the customers, who found it
increasingly difficult to obtain loans. Many totally viable companies with temporary cash
flow needs were forced into bankruptcy. Spending dried up, unemployment rose and the
economy spiraled downwards, rapidly moving into recession (two successive quarters of
GDP). Mervyn King, the governor of the bank of England, described this bank behaviour as
‘individually understandable but collectively suicidal' (Cable 2009, p57).
The UK government’s reaction to the crisis was swift and decisive. HBOS and RBS were
bailed out to the tune of £35 billion. VAT was cut from 17.5 to 15 per cent, interest rates
quickly slashed to 0.5 per cent, and a fiscal expansion package worth 1 per cent of GDP
introduced. The Bank of England also undertook a program of quantitative easing, in effect
printing more money. All these policies were generally applauded, except by the Conservative
opposition, quickly followed by the US and endorsed by the G20. However, each policy had
risks:
The bail-out of the banks risked moral hazard, where in effect the banks were shielded
from the effects of their folly.
The VAT cut was widely seen as minimal and unlikely to stimulate spending.
If interest rates were held down for too long, there was a risk that inflationary
pressures could build up in the long term. The same was true of the quantitative
easing. However, as Keynes said, ‘in the long run we are all dead’.
The fiscal stimulus, coupled with the bail-out of the banks and a natural fall in tax
receipts and rise in government spending due to unemployment, ran the risk of driving
the government deficit to unacceptable levels. However, as the government pointed
out, the UK deficit before the crisis was on the low side compared with the rest of the
G7, and even after all the extra spending would still be relatively low by historical
standards.
Kew, J. , Stredwick, J. CIPD publ. (2010)
4. Table of Contents
1. INTRODUCTION.................................................................................. 1
2. Question1: “As an International HR Manager, identify and critically
evaluate the possible HR issues that have led to this crisis? I order to do this
you may use example(s) of a MNE of your choice realof fictitious either in
America, China or Europe.” ........................................................................ 1
3. Question2: “As an International HR Managerofa MNE as illustrated
above, identify and discuss the challenges faceddue to this crisis. (e.g.
International labour markets, skill shortages, utilisationof available
resources throughthe application of training, development, delegation
opportunities etc.)”....................................................................................... 3
4. Question3: “As an International HR Manager, discuss andjustify your
plan of action to assistthe recoveryprocess ofthis crisis for your MNE, by
taking into considerationHR issues suchas:training & development
opportunities, quality circles, betterintegration – vertical/horizontal,
improved communication channels etc.”...................................................... 4
5. Question4: “Identify any positive outcomes of this crisis, if any from a
HR practitioner’s perspective;(e.g. Areas of consideration:the
international labour market, resources, human capital, development,
mergers, acquisitions etc.)Justify by using appropriate criticalas well as
argumentative stance, in case that there are no positive outcomes to be
discerned.”.................................................................................................... 5
6. CONCLUSION....................................................................................... 8
7. References............................................................................................... 9
5. 1
1. INTRODUCTION
In this report the HR issues which have led to financial crisis will be identified and
critically evaluated by emphasizing the experience of Lehman Brothers on ethics and tone at
the top, talent management, employee training and development, compliance strategy and
financial risk managing strategy before and during financial crisis time. Secondly, the
identified HR issues will be discussed and linked to strategy of Lehman Brothers about `lay
off workers` and leverage and problems will be analysed in regarding the background and real
aim of the company by applying those strategies and the results of them on the business`s run
system. Thirdly, HR methods and errors which could occur by applying them will be
identified and discussed to able to recommend essential points to recover company by
considering crisis management fundamentals for having effective and efficient HR
department and strategy. Lastly, positive outcomes of financial crisis will be identified and
exemplified. The positive outcomes of financial crisis in terms of HR stable business
environment will be critically analysed such selecting, recruitment, development and pay
compensation methods and then the other advantages of financial crisis will be identified and
reviewed which are merger and acquisition strategy of companies around the world. Lastly,
the growth of green environment and investments on renewable energy strategies of countries
due to financial crisis effects will be discussed and analysed.
2. Question1: “As an International HR Manager, identify and critically
evaluate the possible HR issues that have led to this crisis? I order to
do this you may use example(s) of a MNE of your choice realof
fictitious either in America, China or Europe.”
Company`s leaders have to set right tone for equality, ethical behaviour, trust,
reliability to be followed by rest of the organisation and ensured that the process delivered
clearly and transparent. Furthermore, corporate policy, procedures, communications and
behaviours should be coordinated with corporate mission, vision and values (Ernst & Young
2008). The CEO of Lehman Brothers, Dick Fuld was risk taker and Board of Directors had no
effective control over the company just aim to keep Fuld happy (Robyn, Richard and Natalie,
n.d.). It indicate that the ethics and tone at the top notion could lose its position versus the
expectation and command of leader. Furthermore, if the power could not be used in a true
way it may change itself as an ego which in response prevent to see real big picture. Dick
Fuld had lived in his suit by aiming to increase his personal money without concerning
organisation and risks which were being set up (McDonald and Robinson, 2009).
6. 2
Talent management activities are being considered by recruitment, development, retention
and transition of employees and lead overall strategy and objectives of company in serious
situations (Ernst & Young 2008). In addition, talent management focus on “finding right
person for the right job at the right time” (Weng, 2012. p.4). In other words, matching the
certain role with required skills, experience, responsibilities, and qualifications to demonstrate
along corporate mission, vision and values. In Lehman Brothers only two Board of Directors
had directly experience in financial-services industry and they were from a different period
(McDonald and Robinson, 2009). In addition performance based pay strategy focused on
measurement which was selling any cost that it affected to real performance and selling
quality of employees because employees sold more than their capability and credibility level
to not lose their job.
Employee training and development are correlated with talent management and succession
planning continuum under the organisational risks which is in progress mode of strategic
risks. Moreover, this area support hiring, retaining and training to avoid future costs and
failure likelihood to occur within business (Ernst & Young 2008). It was clear that to able to
cope economic situation for Lehman Brothers it was required to practice rightsizing
(Blumberg, 2008). But, the reaction and performance of retained employee would be
determined by (HR) department to avoid latter related issues (Weng, 2012). Also, it indicate
that the importance of crisis management strategy could not be understood or not enough
practiced to able to ready to cope business issues as well as in bad times.
Compliance risk is in the meeting place of strategy and operations and it consist of
discrimination, harassment, safety and compensation (Ernst & Young 2008). In Lehman
Brothers case there was regulatory compliance misalignment because employees had
dismissed without just cause or excuse. In addition, HR practitioners would have known that
if employee(s) lay off without just cause or excuse, they could be reinstated to former
appointment by Director General of Industrial Relations according to s20(1) Industrial
Relations Act ’67 (Gee & Kleiner, 1996). In business strategy should not be applied as a short
term recovery plan for saving costs. In addition human capital was being seen as a best cost
saving methods until financial crisis. However, it was recognised that without human capital
companies could not get advantage in terms of profit, reputation and customer perspective.
HR and finance have mutual concerns about financial risks that evaluate the impact and
likelihood of risks to able to increase efficiency within the business (Ernst & Young 2008).
Value at Risk (VaR) which was complex mathematical model was using by Lehman Brothers
to measure boundaries of risk in a portfolio by assuming normal market conditions. In
addition, VaR consisted of poly-dimensions such diversification, leverage and volatility
(Robyn, Richard and Natalie, n.d.). HR department identified that Delta bond market volatile
but CDO market not volatile even almost riskless due to VaR (McDonald and Robinson,
2009). Subsequently, leverage ratio of Lehman has increased from 26.2 to 1 in 2006 to 30.7 to
1 in 2007 (Hutchinson, 2008). HR risk management allowed leverage ratio to this level which
had to be 20 to 1 according to Wall Street broker-dealers allowance (Hutchinson, 2008).
7. 3
3. Question2: “As an International HR Managerofa MNE as
illustrated above, identify and discuss the challenges faceddue to this
crisis. (e.g. International labour markets, skill shortages,utilisation
of available resources through the application of training,
development, delegationopportunities etc.)”
The one of the major challenge of Lehman Brothers on the eve of crisis was “laid off
workers” situation which was the just one side of the whole causes that have led the company
into financial crisis. The main aim by rightsizing the company was to cope economic
environmental conditions but HR should identify and review this process by considering
retained employees` reaction and its possible impact on their performance (Weng, 2012). HR
strategy should compromise all regulations by considering external and internal environment
of Lehman. (Hartel et al., 2007). In addition, the model pointed out that organisation`s internal
and external movements are related and should be in coordination with decision making
communication and information process management (Huang, 2001). Lehman would take
advantage of having multiple globalisation strategy and sustainable technology to interpret
economic threat for better final decision both for organisation and stakeholders (Weng, 2012).
Court decided that Lehman was seen lax about lay off worker situation according to
employment law (Anderson & Dash, 2008). But, HR practitioner had known that workers laid
off without just cause or excuse could cause to reinstate employees according to s20 (1)
Industrial Relations Act ’67 (Gee & Kleiner, 1996). The reason of rightsizing was related with
HR ability to could not identify and select ideal number of required workers. In turn, it would
cause to wastage of resources and payroll costs which contribute financial crisis. It was
important to recognise relation structure of Kochan and Barocci (1985) throughout Lehman
company because the company`s was performing in vulnerable economic environment and its
responsiveness for its shareholders and stakeholders to satisfy them in terms of money and
service. Moreover, “organisational HR analysis should be able to identify the need for HRM
strategies and policies to adopt and response to both internal and external organisational
changes” (Luoma, 1999, p.113-120). HRM strategies and practices should be performed by
carrying out the requirements of regulations in work place, performance analysis and awards,
and fundamental of recruitment, training and development. Also, HR planning (HRP) and
workplace participants’ rights and responsibility were related with Lehman`s `lay off worker`
situation. In addition, strategic plan focus on main procedures and frames by identifying
necessary programmes for success (Zeffane & Mayo, 1994). Continuous permanent lay off
plan of Lehman originated from `one plan for all situations` and it was not appropriate due to
that market`s environmental conditions which was low-growth and volatile (Weng, 2012).
Also, results of Lehman decision to lay off workers showed that the importance and
essentiality of focusing on internal and external labour market by analysing organisational
objectives, strategies and policies to able to identify and select right quality and quantity of
employees, in the right place at the right time (Hartel et al., 2007). HRP involve to identify
and select right number of worker at the right time in the right place to achieve cost-effective
workers (John & Jeff, 2007).
8. 4
When some organisations faced with issues, they change their HRM method in which human
resource should be controlled to reduce costs (John & Jeff, 2007). Because, reducing number
of staff is seen by some organisation to improve productivity, efficiency and competitiveness
(Cross and Travaglione, 2004). On the other hand, reducing staff number could cause
negative results for company such as loss of skills, knowledge due to experience within the
company and productivity of the company could decrease (John & Jeff, 2007). After
downsizing remained employees could feel guilty, lower motivation and reliability, mistrust
and insecurity in workplace which is called `survivor syndrome` (Thornhill et al., 1997).
Another HR practice which Lehman should focus on and regard was workplace participants`
rights and responsibility. Also, the relationship between Lehman and its employees was
created based on employment contract by considering both side separately (Weng, 2012). HR
could decide to dismiss people by considering employment law as notionally and globally. In
addition, ethics and legal are fundamental determinants by establishing regulations for
employees (van Gerven, 1994).
4. Question3: “As an International HR Manager, discuss andjustify
your plan of action to assistthe recoveryprocess ofthis crisis for your
MNE, by taking into considerationHR issues suchas: training &
development opportunities, quality circles, better integration –
vertical/horizontal, improved communication channels etc.”
Crises could be managed by establishing methods and guidelines before it happens. A
successful crisis management should consist of emergency response, disaster recovery, risk
management communications and business continuity among others. Moreover, crisis
management helps to cope crisis by improving company`s decision reaction mechanism
within organisation and stakeholders` goals. Also company should be ready to cope with
worst situation scenario and practise it, then it can handle well with real circumstance and can
prevent possible catastrophic damage. HR should consider about human side of the crisis and
make provision for reducing its effects. Also, workforce of the organisation is an important
consideration point for planning long-range strategy of organisation and identifying crisis
management. By establishing crisis management some points should be considered otherwise
system could not work properly and fail. Firstly, all possible situations should be analysed and
take into account without thinking `it cannot happen`. The fundamental of risks for business
should be recognised by crisis management. Risk analysis should be correctly analysed and
link to organisation`s operation to identify real effects. Industry and local market should be
monitored and analysed often by considering organisation`s position and history to identify
possible risks and prevent them (Blythe, 2004).
Crisis management is needed for sustainable workplace which constitute of people, company
reputation and the economy. Business should provide reliability among the CEO and the
board within the company, rights for employee and available resources. But, changes in
management practices could reduce ability to cope emerging issues due to flatter
organisations smaller financial ability and insufficient reaction for problems. Also, human
factor was the less important point in analysing crisis management planning that was the one
9. 5
of the error of crisis management. In contrast, organisation could not recover itself without
employees. Therefore, HR has strategic role to introduce and provide trustful leadership for
organisation to reassure employees about their safety. Crisis management should be
recognised and implemented into corporate governance. Corporate reputation which is part of
crisis management plan should be recognised as a valuable asset in regarding stakeholder
loyalty. In addition, public perception of risk interrelated with organisation`s reputation and it
is difficult to re-establish company`s reputation. Employees payroll costs has a big place in
economy and the way to commit crisis planning relevant to consider employees, clients and
the community in locally and globally (Nancy, 2005). Successful crises planning could be
established by HR by considering leader qualities such as strategic thinking, communication,
empowerment, trust and integrity to able to create and support organisation`s trust and
credibility among stakeholders during crisis. Also, if crisis management could be handled
well, business run.
In the case of Lehman there was two issues to be critically analysed and recommended which
are `leverage` and `lay off workers`. Lehman Brothers was MNE organisation where CEO,
board of directors and executives are met regularly to analyse and discuss organisation`s
situations by regarding global and local market. The risk committee had met twice both in
2006 and 2007 according to Lehman’s SEC filings (Berman, 2008). The executive committee
had met 16 times in 2007 (Robyn, Richard and Natalie, n.d.). However, CEO of Lehman was
headstrong character and appetite for risk and the master of ensuring nobody checking his
action. The risk committee was selected and headed by Fuld. In addition, there was
operational risk which involve lack of corporate governance and lack of transparency to Dick
Fuld’s stopping-at-nothing plan for increasing share price. In addition, HR department’s
allowed high level of leverage ratio in regardless Wall Street brokers deal. All this situations
indicate that the risks which was occurred during crises mostly result of leader character and
ego. Subsequently, based on financial issues company faced on financial crisis and decided to
get cost reducing by downsizing. As it was mentioned above, some companies recognise cost
reducing method by downsizing worker quantity in regardless the importance of human
resource in work place and market as a reputation and credibility. Moreover, this decision was
out of employment rights and ethics as well as employment law. Lehman could find
temporary job for workers or apply pay cut strategy for the reputation of organisation and to
sustain commitment with stakeholders.
5. Question4: “Identify any positive outcomes of this crisis, if any from
a HR practitioner’s perspective;(e.g. Areas of consideration:the
international labour market, resources, human capital, development,
mergers, acquisitions etc.)Justify by using appropriate criticalas well
as argumentative stance, in case that there are no positive outcomes
to be discerned.”
Financial crisis caused some positive results by experiencing it. Crisis word in chines
constitute of two character one mean danger and the other mean opportunity. It shows that
crisis could cause good things. However, the point is to recognise and correct failure for better
10. 6
results. Financial crisis helped to create healthy environment within the organisation by
analysing and improving HR management more deeply. Thus, some senior executives
indicated that the total rewards, and HR policies, programs, strategies did not help to
overwhelm with financial crisis (Jay & Patricia, 2012). It means that HR objectives could not
be used efficiently and effectively by organisations to create brand value among corporate`s
mission, vision and values. In addition, after crisis the importance and effects of HR on
business was recognised and then HR was critically analysed and observed for correction and
change. The notion of this change was in terms of long term opportunity for organisations that
helped to be ready for vulnerable economic environment by reviewing current HR methods.
Because some executives claimed that human resources and compensation methods despite of
working well in good times they did not help during challenging business times and it added
that decentralized selling cultures which focus on selling for rewarding and the other culture
which consist of entitlement, paying competitively, automatic base-pay increases caused to
forget business fundamental. It shows that HR and total rewards programs were inadaptable to
cope crisis. Total reward systems were mostly based on best practice and the methods of other
competitive companies to be competitive. After crisis total reward strategies has established
based on more strict and balanced elements which aim to cope business downturn. The
performance pay system which was based on selling at any cost notion has changed and added
another consideration elements such competencies and goals, balanced financial performance,
quality and ethics by supporting better feedback and coaching, management in training,
operational effectiveness (Jay & Patricia, 2012). Work-life benefits for employees has
changed to more emphasis on health-care and retirement benefits. Training and development
methods of HR was revised to identify wrong working or/and improving performance.
Training and development was mostly based on improving skills and competencies of
workers but then this notion reviewed to focus on preparing talent for the new careers and
improving their skills by applying more strategic and developmental systems in the business
(Jay & Patricia, 2012). It believed that this support balanced growth and opportunities within
the organisation. The approach for role of manager changed from decentralized, own people
and organization ideas to role which set standards for organisation, provide feedback to
employees and coach them by aligning talent within the business. In addition high
compensation changed to reasonable compensation by setting examples. All those
consideration indicate that after crisis HR was revised to use human capital more effectively
and efficiently by using basic HR strategies which are mostly based on using talent and skills
in a true way and developing them. However, due to idea of using less human capital but
efficiently and effectively by considering their skills and competencies to prevent possible
rightsizing issues, affected recruitment procedures and companies started to recruit less
workers who are able to multi-role within the organisation.
Except HR revising idea crisis brought out some other opportunities for organisations. Also,
companies started to think new ways of generating income not just expanding the existing
customer and targeting new market as well as exploring new ways for it. In addition,
companies recognised to gain advantages of downturn related with market and suppliers by
acquiring weak competitors or hiring professionals to the company. It indicate that one
company`s opportunity is others` competition. Companies sought to discover cheap resources
11. 7
or supplier to produce cheaper products, so as an effect of globalisation companies acquired
or merger with other bankrupted companies around the world. “Mergers of equals involve two
entities of relatively equal stature coming together and taking the best of each company and
an acquisition involves a much easier process of fitting one smaller company into the existing
acquiring firm” (Ravichandran, 2009. p.1). The difference between 2007 and 2009 of number
of merger and acquisition deals 13%, and the value of deals 35% (Ravichandran, 2009).
Moreover, deals geographic area moved from North America toward Europe and Asia. In
contrast, in October 2008 the merger and acquisition volume and withdrawn deal volume
increased record level which was 30 percent more in 2009 in comparing 2008 that it attributed
to in mid-market deals (Ravichandran, 2009). However, at the same time the decrease of large
merger and acquisition deals was related with lack of liquidity and financial crisis
(Ravichandran, 2009). Consequently, the weakness of US dollar was seen as an opportunity
by European companies and they acquired US companies. After crisis countries have taken
active role in economy to encourage demand and support industry by advocating and
investing in environmental sector which relevant to pollution control, improvement in energy
efficiency, renewal energy production, and decrease in carbon emission. 10 percent of $165
billion economic stimulus package of Japanese Government has been allocated for
environmental measure, United States announced $150 billion budget for renewable energy
by aiming to create 5 million new jobs within 10 year and China`s budget for environmental
measures was $585 million (JETRO, 2010). The response of Europeans countries by
supporting low emission cars. Also, this information shows that the growth of environmental
business create huge international business opportunities. “Major business areas include
photovoltaic (PV) power generation, i.e. conversion of solar radiation into direct current
electricity, as well as power generation from hydro, wind, and geothermal, tidal energy and
biomass sources” (JETRO, 2010, p.48). It indicate that HR departments should regard new
business areas by creating new training and development methods, select and performance
criteria due to requirements of the industry. It may help to recruit and retain employees who
has required skills, performance and to able to add value to the organisation and brand name.
12. 8
(JETRO, 2010. p.61)
6. CONCLUSION
As a result in this report possible HR issues which have led to crisis was identified and
critically evaluated by exemplifying Lehman Brothers` experienced issues then the challenges
of the company was identified and discussed by analysing HR issues within the organisation
as well as in regarding global HR strategies. After that the errors and lacking points of the HR
was critically analysed and compared with after crisis HR strategies than implemented to
company to recover. Finally, the positive outcomes of the financial crisis was identified and
critically analysed from the viewpoint of HR practitioner`s.
13. 9
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