Why managers tighten the reins when under threat

Never waste a good crisis, is sometimes said. But after the fall of Lehman Brothers and the great recession that followed, leaders have hardly changed, according to research by Professor of Leadership Janka Stoker and Professor of Economics Harry Garretsen.

More on this research findings

• in our podcast Leadership and crisis: why managers tighten the reins when under threat (hosted by Traci White, editor at the Northern Times)
• and the publication Tightening the leash after a threat: A multi-level event study on leadership behavior following the financial crisis in The Leadership Quarterly

Worldwide recession

The 2008 financial crisis started ten years ago. The fall of Lehman Brothers on 15 September 2008 impacted on the entire global business world, and was the trigger for the so-called Great Recession. Economists have been racking their brains about the causes and effects of this crisis, resulting in several important books like This time is different by Reinhart and Rogoff (2009) and more recently Crashed by Tooze (2018). All of them give their own analysis of the causes and consequences of the financial crisis and provide a largely macro-perspective.

How does a shock like this affect organizations and their leaders?

However, we still know very little about the impact that the financial crisis had within organizations. How does a shock like this affect organizations and their leaders? Very little information on this subject is available in the literature about leadership. This is because, to answer the question, international and comparable data about leadership behavior are needed. And as you can probably imagine, information like this is hard to come by.

Nevertheless, the consultancy firm Korn Ferry Hay Group gave us access to unique data on over 20,000 managers in 980 organizations across 36 countries. Employees working for these managers answered all kinds of questions about their bosses, providing information relating to both before and after the 2008 crisis. This information enabled us to ascertain whether the financial crisis led to changes in leadership behavior.

Changes in behavior

The results show that changes in behavior certainly did take place when one compares the years just before and after the 2008 crisis (Stoker, Garretsen & Soudis, 2018):

• The crisis caused a significant increase in directive leadership behavior – managers were stricter, reduced autonomy and exercised more control
• This effect was stronger in the manufacturing sector and surprisingly was not present in the financial sector
• The effect was also stronger in countries with a high power distance. In countries and cultures where unequal social relations are more common and strong hierarchies are the norm, this style of leadership became even more explicit
• The effect of the crisis was temporary. The level of directive leadership behavior returned to normal, that it to say its pre-crisis level, again within one or two years of the crisis

The crisis reflex of managers

These results teach us about the crisis reflex of managers. Regardless of whether an organization does or does not benefit from a more directive style of leadership, the temporary nature of the change is particularly striking. Some two years later, managers no longer showed any signs of having been through a crisis. In fact, in the financial sector, the crisis had no significant effect on leadership behavior whatsoever. It seems that organizations failed to take advantage of this golden opportunity to think more fundamentally about the necessary changes within their organizations and in the behavior of their managers, while it is known that change always starts with the behaviors of leaders (Stoker, 2005).

The old adage ‘never waste a good crisis’ doesn’t seem to apply to the 2008 crisis. At most, this crisis caused a ripple of different leadership behavior. Thus ten years after the collapse of Lehman Brothers and despite all the fine words and even such measures as the Bankers’ Oath, very little seems to have changed. If an unprecedented shock like the 2008 crisis isn’t enough to cause fundamental change, we can only hope (and probably in vain) that change will start from within.

About the authors                      

Prof. Janka Stoker, Professor of Leadership and Organizational Change, and Prof. Harry Garretsen, Professor of International Economics and Business, both head of the In the LEAD centre of expertise on the effectiveness of leadership at the University of Groningen.

References

• Reinhart C. M., & Rogoff, K. S. (2009). This Time is Different: Eight Centuries of Financial Folly. Princeton: Princeton University Press
• Stoker, J.I. (2005). Leiderschap in verandering. Gedrag en organisatie, 18(5), 277-293
• Stoker, J.I., Garretsen, H. & Soudis, D. (2018). Tightening the leash after a threat: A multi-level event study on leadership behavior following the financial crisis. The Leadership Quarterly
• Tooze, A. (2018). Crashed: How a Decade of Financial Crises Changed the World. Penguin Publishing Group

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