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CRISIS OF CHARACTER – Building Corporate Reputation in the Age of Skepticism.

Peter Firestein

(Copyrighted material. All rights reserved.)

First pages:

The conduct of corporate life provides one of the defining characteristics for any age. In post–World War II America, business virtually carried the country on its back, as corporations translated the organizing principles they had developed in the war effort to create one of the greatest bursts of growth and productivity ever. As shareholders became well-to-do, unions also flourished. The opportunity to create healed many of the wounds of the generation that had endured the depression of the 1930s and the war.

That was then.

The publication of this book comes amid one of the greatest financial—and therefore human—crises in the history of the modern world. What began as a normalization of inflated home prices in the U.S. exposed unimaginable abuse of the financial system by some of its managers. The creation of mortgage-based derivative securities—most with no underlying collateral except their reference to each other—had reached staggering proportions. While no one knew the exact figure, the total face value of these and other derivative products far exceeded the world’s annual economic output—perhaps by a factor of ten.

Remarkably few saw the disaster coming. Many people were making a great deal of money, and examining the source of these riches was not only inconvenient, but clearly a waste of time. Emblematic of the spirit of the age were a number of the investors in funds offered by Bernard Madoff, who allegedly bilked clients out of approximately $50 billion. Some of those investors had long thought Madoff was engaged in illegal activities. They believed he was abusing his role as a broker dealer, misappropriating privileged information to trade ahead of his customers in that business. They saw themselves as beneficiaries of such misdeeds. None considered that they might be victims of a Ponzi scheme.

Madoff’s investors who suspected him, but remained invested, offer insight into the psychology of the age. Financial markets had become a secular religion, centered on the belief that government regulation limited progress and that markets and their participants were best qualified to regulate themselves. The tragic result of this absence of accountability was a financial system gone haywire.

When markets for many derivative securities dried up in mid-2008, there was no way to tell what they were worth. So it became impossible to know what the banks who held those securities were worth. Unable to determine their own solvency, these banks became incapable of lending. Businesses of all kinds withered for lack of credit, forcing millions out of work. Rises in unemployment tracked credit card defaults almost exactly. To make up for those losses, many banks raised interest rates on cardholders who were still paying their bills, forcing them into more dire straits. Rates of home foreclosures multiplied. People cut back on spending and purchased only the things they needed, imposing further stress on consumer goods companies already starved for credit.

The U.S. financial crisis spread across the globe like an epidemic. European institutions began to suffer the same solvency problems as their U.S. counterparts. U.S. and European demand for manufactured goods plummeted, forcing thousands of Asian exporters out of business with near-catastrophic effects on employment there. President Obama’s new CIA director testified within weeks of taking office that global unrest due to unemployment had surpassed terrorism as the primary threat to the U.S. In countries that had moved toward free-market economic models—as in Eastern Europe after the fall of the Soviet Union and Latin America in the wake the “Washington Consensus,” which promoted democratic reforms and open markets—pressures toward protectionism gained ascendancy. Globalization, which had created enormous economic power and wealth over the prior two decades, seemed in danger of shifting into reverse.

Public bitterness raged against both the bankers whose smoke-and-mirrors path to personal wealth had caused this crisis, and against the outgoing administration of George W. Bush that had let them do it. As President Obama began to implement plans to save what was salvageable of the banking system, reduce the rate of home foreclosures, and stimulate economic activity, Americans glanced back at the Great Depression and wondered whether they were doomed to live it again. We had considered the 1930s an experience far in the past, from which our modernity had made us immune. Yet—few dared say it—if those times weren’t repeating themselves now, what we were experiencing veered uncomfortably close to them. Could it possibly be as bad this time?

The writer Stetson Kennedy, who lived through the depression of the 1930s, pointed out that we may have been more poorly prepared to survive a depression in the early 21st century than we’d been in the 1930s. Contemporary life had moved us light years from the skills that would enable us to survive in tough circumstances. Steinbeck’s Okies loaded everything they had on a truck and went to California. We couldn’t fit more than a fraction of what we’d come to rely on in even the largest SUV. And besides, there were no more promised lands to go to.

Had we progressed at all over the last seven or eight decades? Or was our experience telling us that real progress is a nonsensical idea? Were we, instead, trapped in a long-wave cycle that contained the best and worst of times, but always returned us to places we’d been before? Was the economic cycle written in our DNA?

One of our more impressive combinations of ideas and technology may reside in the software we’ve designed to analyze and manage financial risk. It has become complex almost beyond belief. But its sophistication has not enabled us to identify real risk, and so we have to ask ourselves whether our ability to create such complexity has actually taken us anywhere at all. It seems that the technology we design contains our faults. Commentary after the meltdown by those who understood risk programs told us that they were limited by the array of possible results with which they’ve been programmed. If a program designer wanted to include every outcome that had occurred since 1960—and four decades or so might have seemed a long time—lessons learned from the collapse of the banking system in the early 1930s would have been excluded. That programmer may have seen such data as so far from his or her experience as to be irrelevant. The problem, of course, was that the possibility of such a collapse had remained with us.


As individual experiences shape perceptions of risk, so they influence the writing of books such as this. Presuming to write a book is to animate the supposition that one’s own views have some kind of universality. That, of course, is for the reader to decide. Because one of the primary ideas of this book is the necessity for candor in corporate life, I offer a bit of candor regarding the far-off origins of the book itself.

I grew up in South Bend, Indiana, which, during my youth in the 1950s and ’60s, was a classic mid-American industrial town populated by immigrants from Poland and Hungary who had been living there in neat, narrow-yarded houses for half a century. They had come to work for Studebaker, Bendix, Oliver, and other large manufacturing concerns of the kind that created American power as we knew it, but today are remembered mostly in sepia-tinted murals that decorate restaurant walls in a town that feels better dwelling on its history than its present.

The downtown of my youth was dense with department stores, jewelry stores, banks, hotels, and theaters. The Palace Theater was an ornate classic of the vaudeville age. Not only the town’s citizens, but farmers and small-business owners from a 50-mile radius in northern Indiana and southern Michigan crowded the sidewalks as they bought diamonds and refrigerators on credit.

By far the most prominent of the companies at which the town’s residents worked—and from which the town itself drew its security—was Studebaker, the last major American auto company outside Detroit. Studebakers were well-engineered, stylish cars whose models ranged from the useful to the luxurious. Today, movie companies wanting to represent an American street between 1945 and 1960 often rent one of the last remaining Studebakers. During World War II, Franklin D. Roosevelt sent 10,000 Studebaker trucks to the Soviet Union for defense on the German front. On a visit to Moscow in the mid-1980s, I needed only mention that I came from the place where they made Studebakers to receive an unmistakably Russian embrace from people of a certain age who claimed they’d driven those dependable vehicles through the frozen wartime winters.

When I was away at college, Studebaker closed down forever. The company’s management had not performed up to the level of its engineers and designers. Adequate cost controls had been absent for a long time. I knew employees of my parents’ generation who punched the time clock in the morning, disappeared for the day, and returned to punch out at four in the afternoon without repercussion. The result was that the enormous plant on South Main Street, with its dedicated railroad sidings, went dark and silent.

Within two years, the vibrant downtown looked as though it had been bombed. At least half the stores had closed. And within five years, their structures had been removed. Over the next couple of decades, a number of banks and vertical parking lots went up. They looked like concrete shoe boxes on a hard-baked plain. I never saw them without thinking of the vibrant town, now lost, that had formed me. And, as I got older, I became conscious of the fragility of the thread from which it all had hung. The world that had seemed the only world to me as a child had turned out to depend on a few men in management jobs who―I’m guessing here―may have spent too much time on the golf course.

The experience of witnessing the decline of my hometown has influenced business decisions I’ve taken much later in life. Approximately a quarter century after the disappearance of Studebaker, a job offer came my way from the financial products marketing group at the investment bank Drexel Burnham Lambert. I was to serve as senior writer of the media presentations used to market high-yield debt offerings—also known as junk bonds—that originated with the group headed by Michael Milken. I had been impressed with the way Milken had convinced capital markets that portfolio diversification made low-rated debt, which had been around for a century or more, less risky and worth more than the market had ever thought. This seemed a remarkable accomplishment.

What was more important to me, however, was the piece of the junk bond rationale that said refinancing American companies, and installing fresh management who could run them at sufficient profit to service the new debt, would save both the aging companies and the communities that depended on them. Because of my experience in my hometown, this theme resonated with me, and it was part of the reason I took the job.

Three years into my time at Drexel the U.S. Attorney for the Southern District of New York, Rudolph Giuliani—later two-term mayor of the city—indicted Milken on a series of financial improprieties . Drexel soon went the way of Studebaker. A brilliant, enormously productive boss had been caught engaging in illegal acts that were utterly unnecessary to his wealth and legendary success. All of us who worked in the company lost our jobs as the organization dissolved around us.

For me, these experiences distill into a single insight, which is that the individuals who run significant companies hold much more than the companies themselves in their hands. Their influence extends to where the children of their employees can go to college, and whether the communities that surround them survive. It is from this point that the rest of this book ensues.

It is no longer reasonable to argue that corporations exist in a social vacuum where their sole obligation is to provide economic choices. The Nobel Prize–winning economist Milton Friedman spent his life making this argument. But, as the boundaries between corporations and the life that exists around them continue to blur, the ability to force such old delineations fades.

People look to corporations as they look to their politicians. They want corporations to reflect their own values. As a consequence, the question arises: Why should the conduct expected of corporations and individuals differ from each other? Why should we not hold both to the same standards? A corporation’s strong social identity can cast its light across products and services, and onto the attitudes of investors, legislators, regulators, and prospective business partners. The only requirement is that this stature be earned. And, in earning it, the last thing the company needs is a sense that it is excepted from the norms of human affairs.


In 1976, the biologist Richard Dawkins introduced the concept of the meme—an idea that takes hold in many different minds, and in many different places, at roughly the same time. The delusional brand of risk analysis that seized some of the world's best financial minds and led to the subprime crisis was a meme. People were invaded by these ideas, and, in various stages of accepting them, gave each other license to continue along the same path.

This book is dedicated to breaking the meme of the corporation as a fortress divorced from its social context. Today, and in the future, the viability of corporations and other large groups requires a break from traditional norms in the relationships between organizations and society’s interests—including those associated with the environment. Doing what has been done in the past will not yield the same results as the past. The results will be worse because society, itself, has moved far from where it was.

This is new territory in the practice of corporate management, and its contours are unlikely to have been learned at a parent’s knee. The way forward for any individual—and for the ultimate reputation of the group in which he or she participates—lies in personal experience and judgment.

Global Strategic Communications, Inc.

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●    Usable intelligence on investor attitudes.

●    Strategies for building strong reputations.

    Crisis preparation and recovery.

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