Another View: Curbing ‘Mobocracy’ With Competence

Jeffrey Sonnenfeld, senior associate dean of the Yale School of Management, offers this view of the Obama administration’s role in the bonus uproar.

Update on March 26: Mr. Sonnenfeld posted a reply addressing many of the comments on this post.

President Obama has wisely said that he will not lead in fits of anger, but his administration’s maladroit handling of the mess at the

American International Group has helped stoke the flames of anger.

On Tuesday night, Mr. Obama addressed the administration’s tardiness to act on an inquiry into A.I.G.’s bonuses, even as Attorney General Andrew M. Cuomo of New York took swift action as the bonus news broke. Mr. Obama stated, “It took us a couple of days because I like to know what I’m talking about before I speak.”

Sure, he has a more daunting “to-do” list than any person alive, but five months after election, a president amid a historic crisis cannot hide behind the luxuries of a normal chief executive’s schedule for taking charge.

Recent research at West Point on crisis leadership tells us that people need confidence in the competence of their leaders — not last month’s scare tactics, last week’s likability through late-night levity on television or this month’s diffusion of responsibility, with the buck stopping in some other guy’s office.

How is it that every political leader except the president “knew the issues’” around these old bonus battles and was ready to act? This sluggish White House response was costly in that the void was filled with dangerous grass-roots demagoguery that Congress had to vent through another carnival of hearings.

As Mr. Obama and his advisers chafed at the paradoxical posturing by a partly culpable Congress, they could no longer merely treat their plight as an inherited legacy from the Bush administration. These “new kids on the block” now have some ownership over the simmering economic civil war. As the comic-strip character Pogo used to warn, “We have met the enemy and he is us.”

The aroused citizenry has justification for outrage. The haves and have-nots have grown wider apart — with the have-nots now seemingly supporting their overpaid profligate neighbors. When I became a professor in 1980, the top 1 percent of the nation’s affluent population controlled 8 percent of the nation’s wealth. Now that top 1 percent controls 25 percent of the nation’s wealth. With half a million jobs lost each month and taxpayers burdened to bail out banks, the injustice is felt deeper.

Responding to a virulent populist outcry across the nation, Congress demanded testimony from Treasury Secretary Timothy F. Geithner and Ben S. Bernanke, the Federal Reserve chairman, and provided tough grilling and legislative grandstanding — all the while sidestepping any culpability itself. Certainly, Congressional political shielding of

Fannie Mae and

Freddie Mac from timely oversight — along with other relaxations of financial regulatory reform — helped exacerbate our economic distress. Last week, Congress’s own hasty, ill-conceived punitive tax efforts to recapture undeserved A.I.G. executive bonuses further demoralized and confused high-performing financial professionals.

Initially, the White House created a carefully balanced pay-for-performance incentive plan whereby the top executives of financial institutions that received government bailout money would not be paid substantial bonuses until taxpayers were paid back. Financiers, legislators and shareholder activists applauded this concept.

Then, Senator Christopher J. Dodd of Connecticut undid that diplomatic triumph by adding a midnight amendment to the economic stimulus package that put a broad-based ceiling on bonuses — which would have led to talent flight from American banks. Dispatched to fix this damage, Mr. Geithner managed to actually accomplish the seemingly impossible — inserting language that made things still worse.

Meanwhile, longstanding concerns over inappropriate rewards to the leaders of the failed A.I.G. financial products group went unaddressed until they blew up. Mr. Geithner knew about the compensation plans in September when he, as president of the New York Fed, and then-Treasury Secretary Henry M. Paulson Jr. ousted A.I.G.’s newly arrived turnaround leader, Robert B. Willumstad, and replaced him with a former insurance executive, Edward M. Liddy — who served on the

Goldman Sachs board when Mr. Paulson headed that firm. Mr. Willumstad earned an astounding $22 million after just three months on the job, but out of integrity he surrendered that bonus while the news media asked Mr. Geithner and Mr. Paulson about the other $400 million in A.I.G. bonuses.

Mr. Geithner seemed to have forgotten that — as well as his exchanges in Congressional testimony this year about these bonuses. He even discussed these specific numbers on March 3 in response to questions from Representative Joseph Crowley, Democrat of New York. Somehow, Mr. Geithner forgot all this — claiming for days he did not know about the bonuses until a day before they were paid. Mr. Geithner was disingenuous to suggest he did not know the issues and was misinformed to say that no alternatives to full payment were possible — thus missing the chance to consider litigation over performance failures invalidating these retention bonuses, negotiation, arbitration or, finally, the moral suasion that ultimately worked with most of the top earners. Thus, the critical time to consider legal options before inflaming the public was lost.

Democrats in the White House and Congress accused each other of protecting moneyed interests, while sworn antitax, free-market Republicans in the House raced to endorse the highest marginal tax increase in world history. Caught up in its own crowd-pleasing popularity, the Obama administration is dangerously close to spending down its popular good will as it has inadvertently turned allies against one another.

Mr. Liddy, A.I.G.’s dollar-a-year chief executive, did not create this problem by dutifully if unimaginatively following the guidelines demanded by his board, nor did the admittedly greedy bonus recipients. This debacle has created the monster of angry mobs chasing bonuses recipients, with the distracting appeasement of vigilantism becoming the greatest current threat to our economic crisis. The inflamed American citizenry has led to governmental confusion and finger-pointing in the effort to obtain long overdue accountability and transparency.

Sure, this has all made for far more interesting television coverage than technical budget details of interest primarily to policy wonks. Some media figures and political pundits have appeared to welcome the drama, drawing upon quaint pitchforked imagery of a populist revolt of Main Street righteousness against the greed and corruption of Wall Street.

But the populist movement was not as benign or romantic as some may think. The populists were more than merely a brand of agrarian American socialists; they were reactionary, violent mobs attacking technological advances, Catholics, Mormons, Jews and other minorities in a crusade to return America to a mythic rural age. As the Yale historian C. Vann Woodward noted, the populist leaders of the early 1900s were “the most ignorant, bigoted and reactionary forces in American life.”

Similarly, hate-mongering Nazi demagogues filled leadership voids in Germany in the 1930s when such legitimate political leaders as President Paul von Hindenburg failed to resolve underlying economic problems despite a reformed tax and monetary system and a rebuilt rail system.

Political extremism in the legislature helped undermine constructive democratic problem-solving. The lessons of many Victorian horror classics were that the unfamiliar creatures were not initially the threat to public safety but that the self-protection of the Frankenstein monster, the Phantom or the Hunchback mirrored the true evil beast: the unchecked rage of uninformed mobs.

Hendrik Ibsen, an advocate of early European democratization, became discouraged over what he termed “mobocracy” in which sluggish leaders allowed mass stampedes over individual rights. The close of his play “Enemy of the People” celebrates those who challenge the mob, stating, “The strongest man in the world is the man who can stand alone.”

Campaign pep rallies were fun, but it is time to stop inflaming angry mobs as the tool for governing.

Jeffrey Sonnenfeld is the Lester Crown professor of management practice as well as senior associate dean of the Yale School of Management.

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