Communication Failure Led to the Collapse of Lehman Brothers - Case Study Example

Management Communication Name: Tutor: Course: Date: Introduction Language is a platform that people use to share values, meaning, images, attitudes and beliefs. In business circles, communication uses language to communicate intention, actions and strategies. Moreover, there is verbal and nonverbal communication which can be used to communicate between employees, management, customers, regulators and financiers. However, failure by the sender, in written language, to incorporate key aspects of grammar and facts may lead to miscommunication. On the other hand, spoken language requires use of speech to persuade, inform and demonstrate. Lehman Brothers at the height of its collapse showed the urgency to use both written and spoken communication to reach its key stakeholders. As language and words have meaning at different situations, using them to communicate determines the trust and sustainability of the business. While an attention statement is just enough to cause panic to investors, punctuality in communication dispels rumors and false claims. During financial crisis, markets are jittery and investors are likely to withdraw their funds in fear of a possible collapse. At this time, appropriate messages and facts are required to keep the company at a realistic point of view. This essay highlights the use of communication and language to accurately report the position of a company during financial crisis. Communication failure led to collapse of Lehman Brothers Companies experience communication failures when the sender and the receiver do not share meaning or understand each other. This failure has often led to conflicts or total collapse of some of the leading companies around the globe. Lehman brothers before its collapse in 2008 were one of the biggest financial services providers in the United States. The Securities and Exchange Commission (SCE) supervised the Lehman parent company and its core subsidiaries, securities broker-dealers. Although the Federal Reserve had no authority to supervise Lehman, it employed its statutory lending powers to demand financial information from the company on ongoing basis (Posen, 2009). While Barclays Bank was interested in salvaging the institution, it required government funds of which the UK or US government could not commit. Elliot and Treanor (2009) point out that the collapse of Lehman Brothers was due to a breakdown in communication between the UK and US governments. Each party believed that Barclays, public investors and either government would step in to rescue the troubled Wall Street Bank. In the second quarter of 2008, the Chief Operating Officer had resigned so as to communicate with the markets how Lehman had lost $2.8 billion and was instituting management changes. Similarly, the public had seen the government intervene in the case of Bear Stearns and was expecting the same rescue to be applied to the Lehman Brothers. Through the Federal Reserve, the United States government declined to bail out the company. Nonetheless, the response was too late and the company had to close shop. According to Pearson and Nelson (2000), communication is about sharing meaning and understanding which requires initiative, teamwork and communication skills, both written and verbal. In the transaction model of communication, participants not only play the source and receiver roles at the same time but also blur the conversation (McLean, 2003). For example, the US government was sending signals of refusal to commit resources while the same time the UK communicated that it did not want to expose England to unnecessary risks. A prepared communicator is one that is concise and punctual. The Federal government was inconsistent in the application of bailout decisions which led to uncertainty among financial institutions and the investors (Posen, 2009). Besides, most business communications are required to be brief and up-to-date without overloading or confusing the audience. The ability of the audience to grasp the message is hindered by indulging n tangents or talking in circles. Although ethical communication is egalitarian, some board of management fail to communicate with shareholders, regulators and other investors. As a result, their expectations, rewards of participation in the group, access to information is jeopardized. Lehman Brothers managed its balance sheet using Repo 105 transactions which was not within the knowledge of Federal Reserve as it should (Piontek & Metrick, 2014). Moreover, the company’s board did not access these transactions which would have helped in rescuing the company a bit early. In business communication, messages can be primary, secondary or auxiliary. Messages carry meanings and when taken literally it may mean a different thing than the one intended (McLean, 2003). In these messages, the major parts include attention statement, introduction, body, conclusion and residual message. Wiggins, Piontek and Metrick (2014) provide an elaborate description of the bankruptcy witnessed in Lehman Brothers. The attention statement is ‘The Lehman Brothers Bankruptcy A’ which is a short statement meant to capture the attention of the readers. The introduction part gives the history, causes of failure and questions on its bankruptcy. This section chose to convey the message, drew shared and familiar experiences and provided a common ground with the audience. The article’s body gives the history of Lehman Brothers, its business strategies, financial performance, regulator inaction, personnel and financial crisis. The detailed body of this article shows how it has been organized into structures with some aspect of clarity, visualization and support for each point (Hasling, 1998). However, the article lacks conclusion which is a summary of the main points and is a psychological closure of the topic among the audience. The message is communicated when the reader gets the residual message that there were a number of factors that contributed to the collapse of Lehman Brothers. With a simplified language and grammar, the audience will be able to understand the underlying reasons and relate with the sender. Language especially that uses jargons can be an impediment to effective communication. Audience who are not familiar with certain business terms may find it difficult to understand (Pearson & Nelson, 2000). While the speaker can tell the reaction of the audience from use of jargons in verbal context, written language lack immediate response. The failure by Lehman Brother to wade through the financial crisis of 2008 is associated with the conspiracy theories and the hope that key parties in the rescue will be sending a message or presentation. However, the Federal Reserve instead chose to use non-verbal communication such as timing and tone of voice. For example, at the last minute, the government insisted that companies should own up to their risks and take responsibilities over their actions. Mehrabian (1972) argues that nonverbal communication is fast, contextual, universal, and communicates feelings and attitudes. The attitude and the general feeling in the government circles were tested when accountability was fast shrinking and the housing prices had skyrocketed. On the other hand, written communication needs to be tailored by choosing words that meet the threshold of usual communication to the public. A desire to have a business document understood by a variety of readers is best expressed when jargons are avoided and common words used (Washburn, 2008). The 2008 Lehman Brothers financial report uses words such as ‘shadow banking system’, ‘internal stress tests’ and ‘proprietary trading’ which are difficult to be interpreted by the ordinary audience. While no effort was made to explain the meaning of these jargons, it makes it difficult to determine understanding among the audience. Business communication can be formal or informal. While the formal style is wordy and passive, it gives an impression of objectivity (Seiler & Beall, 2000). Serious problems occur in writing techniques that impede understanding or obscure meaning. Words used in formal business documents are governed by rules, shape our reality and bear legal responsibility. Specific terms and words anticipate and incorporate rules when the context and the audience are known. When notifying employees of a possible collapse by the company, it is important to use a memo. Although this platform represents the interests of the business or organization, it does not call to action (Washburn, 2008). In March 2008, SEC had stepped up its role in supervising Lehman Brothers but still failed to communicate to employees on site. While memos and emails were being sent to the employees required them to provide daily reports, they were not called to action (Wiggins, et al., 2014, p. 10). For example, a financial report to the directors of Lehman Brothers has terms such as ‘liquidity ratio’ and ‘hedge funds’ while another report to investors has ‘dividends’ and ‘earnings per share’. In this regard, the report goes beyond the syntax and vocabulary to focus on the specific appeal to context or audience. Bailey (2008) observes that the writer of the report is in a position to communicate using business terms to limit misinterpretations and promotes understanding. Since a company is a legal entity, writing to defame a person, state false claims or to exaggerate exposes the company to unintended consequences. Lehman Brothers Chairman, Ben Bernanke, testified in writing about the failure of the company to share information among the Federal Reserve and SEC (Federal Reserve, 2010). However, the failure to provide accurate liquidity figures pointed to provide full disclosures and risk levels mean that the company bears legal responsibility. Clarity and conciseness are important to the success of business communication (Andrews, et al., 1999). While clarity enables the receiver to decode the message completely and quickly, conciseness is being direct in verbal and visual delivery of the message (Kostelnick & Roberts, 1998). Use of indirect expressions or euphemism to communicate delicate ideas may make it difficult for the audience to follow. On the other hand, reference and expectation can help address rhetorical situations. For example, giving a speech to disenchanted investors outside Lehman Brothers building on why the company collapsed requires one to meet the expectations of the audience. Again, the investors do not want a lengthy presentation but a brief and a direct one that explains what, why and how it happened. Furthermore, providing a way forward will help lower the anxiety and ‘clear the air’ about the possible loss of funds (Wiggins, et al., 2014). To understand rhetorical situations, it may be important that focus shifts to key points and clear understanding (Seiler & Beall, 2000). In March 2008, when investors were filled with rumors of a possible collapse of Bear Stearns, there was also fear that Lehman was the next casualty. Due to failure in communication, Lehman did not make a written article or a report in a bid to explain what is expected of their company in the near future (Taylor, 2010). Instead, they waited until the lenders withdrew from the firm and others refusing to accept narrow collaterals. Apart from communication being fast and concise, it should consider the audience. For example, different messages will be communicated to shareholders, employees, directors, regulators and financiers. The timing of communication to key stakeholders will be paramount in keeping the company intact. Conclusion Lehman Brothers was a casualty of the 2007/08 financial crisis that affected many companies in various sectors around the world. The essay show that the company relied on nonverbal communication of the Federal Reserve that it was bound to rescue the firm after it did for Bear Stearns. While communication is meant to create understanding and share meaning, use of jargons may hinder the level of understanding among certain class of audience. In the case of Lehman Brothers, employees who were hired to investigate its financial dealings were not able to provide a call for action and instead created an avenue for rumors to thrive. As a result, investors thronged in to withdraw their funds and led to a panicky situation in the market. Several articles highlighting this event have shown ability to capture the five different parts of a message and their functions. The key areas include attention statement, introduction, body, conclusion and the residual message. Nonetheless, written language lack immediate response compared to a speech. When a formal communication appears in the financial reports, spoken communication is required to explain pertinent issues that require urgent attention. The company’s management was relying on the government and Barclays Bank to bail it out but it was too late. This essay shows that language and communication need to be formal, simple, punctual and concise during business communications. 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