07 Apr 2011  What Do YOU Think?

When Should the Public Sector Take Over in a Meltdown?

Summing Up Jim Heskett's readers have wildly differing opinions as to what extent governments should step in to remedy public sector "meltdowns."

 

Summing Up

The variety of responses stimulated by this month's column may help explain why our public institutions are so often perceived as responding slowly to natural or man-made "meltdowns."

First, as Ravindra Edirisooriya suggests, we had better have a common understanding of what a meltdown is. As Philippe Gouamba puts it, "Is it a partial collapse or a total collapse? What is at risk in this collapse; is it human lives, corporate capital or national pride?" Having asked these questions, he opts for intervening "immediately."

Others are more introspective. While C.J. Cullinane recommends that government "at least monitor the situation," he offers little hope that government intervention can be any more effective than private sector responses. Richard Oxford agrees, noting that "Free markets work within limits." R. A. F. Reisner argues for the "public's right to know," but suggests two other questions in assessing the need for a takeover: "What's the cause of the problem? And what are the public interests at stake?" Gerald Nanninga suggests the criterion of whether "government management is clearly superior," noting that this may be the case only when there is a "threat of widespread panic" or "when a crisis breaks down an entire system (like the banking system)." Elaine Scheye would limit intervention only to cases where "public safety" of a physical nature might be threatened. Rob Houck reminds us that considerations of potential legal liability often inhibit transparency in such cases.

Should the public sector wait for an "invitation" for its intervention? The sentiment here seemed to be that it depends on the nature of the calamity. In a natural calamity, according to Kamal Gupta, the invitation is less important. Phil Clark, based on his experience, has concluded that "the sooner the government becomes involved in catastrophic events the better the outcome " When it is economic, however, the guidelines are less clear. Gupta would suggest avoiding intervention. But when it is national, he suggests that other countries "wait & watch, and move in at an appropriate time, whether invited or not." Given the widely varying nature of crises, Gaurav Goel suggests putting in place methods for early prediction as well as criteria for the timing of intervention and, just as important, "the exit process once the desired results (predefined) are achieved."

Several argue that prevention…whether through planning, laws and regulations-or the financing of "insurance" …is a valid goal for the public sector. Marco Solari suggests that the "government role should be to dismantle too much concentration of power." Stephen Basikoti says governments can be more "proactive in their monitoring activities." Here there is recognition that several forces mitigate this approach, among them lack of public credit for prevention (as opposed to recovery), political opposition to preemptive actions, and the sheer cost of insuring against meltdowns (Phil Clark).

David Physick responds with questions: "Is the question being posed, i.e., 'When?', the wrong one? Is the correct question actually 'Why'?"

What is the public's role in a meltdown? What do you think?

Original Article

Over the past several years, we have witnessed a variety of "meltdowns," ranging from financial to nuclear. Although we can debate the meaning of the term, it's a graphic way of describing a situation in which events appear to be out of the control of a responsible private organization.

Differences of opinion arise over whether an "out of control" situation exists. In just the last few weeks, we have seen the Japanese government debate whether or not it should intervene in the management provided by nuclear power provider Tokyo Electric Power Co. in efforts to control a meltdown at its Fukushima Daiichi Nuclear Power Station. At the same time, the global public sector stood on the sidelines, waiting for requests for assistance by the Japanese government in a matter of clear significance to private and public entities around the world. In a sense, the situation raised the question of intervention among public organizations as well as between private and public.

Recall the debate over whether or not the US government should have bailed out two major automakers. Regardless of whether their problems were of their own making, there were those who argued that the immense health and pension obligations and non-competitive compensation structures of these companies represented a situation "out of the control" of management. Others objected, saying that these private organizations should have been allowed to deal with natural consequences of their own actions.

The near meltdown of the financial sector is an even more appropriate example. Here was a situation in which a decision by public officials to allow Lehman Brothers to fail had consequences not for just other private organizations, but for public entities all over the world. Clearly, the community of interest (and self-interest) extended far beyond Lehman Brothers and the US Government.

Now we have the issue of who should control information related to a critical failure that is of interest to private and public institutions globally. In the case of the nuclear meltdown in Japan, the lack of timely and accurate information was an important part of the problem. Whose responsibility was it to assure that the best information was made available to all interested parties? In Pennsylvania, when the company operating the Three Mile Island power station was found to be issuing information of questionable accuracy, then-Lieutenant Governor William Scranton, responsible for energy policy in the state, went to the control room of the faulty reactor to check personally on the confidence, if not the competence, of the workers in that facility. Are such efforts appropriate, even in situations in which disclosure can exacerbate the very problem for which a solution is sought?

When should the takeover happen: (1) immediately, assuming a natural conflict of interest in distributing accurate information?, (2) later, or (3) not at all? What are the criteria that should govern public intervention in a meltdown faced by a private organization? Do they apply equally to one government's intervention, with or without a request for assistance, in a challenge faced by another government? What do you think?

References

Jason Clenfield, "Japan's nuclear disaster caps decades of accidents and fake reports," TheBostonGlobe.com, March 18, 2011

Interview with William Scranton, National Public Radio, March 18, 2011

Comments

    • CJ Cullinane

    Government intervention (so far) has proved to be as ineffective as the private sector intervention when life threatening situations occur. The Deep Water Horizon (BP oil) was an example of both government and private sector failure to move fast and effectively when a disaster happens.

    The government should get involved as soon as a situation arises and at least monitor the situation. But it seems we first look for blame and media sound bites and not quick solution to the problem. GM was not a disaster but management incompetence and union greed. The bankruptcy courts are designed to handle these situations not political gifts. I feel the government can do more damage to the economy due to the political motives behind their moves. Sometimes the inefficient and greedy have to improve or leave the field and that is what the court system is for.

    As for natural disasters the government has resources in place to move quickly and should. Who to blame can be sorted out after the situation is taken care of. Companies can be blinded by monetary loss and the government can be inept but both should have to react fast and effectively for the public good. I have not seen this happen in many years but we can hope.

     
     
     
    • Ravindra Edirisooriya
    • Senior Accounting and Finance Major, Missouri Southern State University

    Professor Heskett defined a meltdown as "... events appear to be out of the control of a responsible private organization." I wonder how responsible were those big financial institutions (financial meltdown), BP, Halliburton and others (oil well meltdown) and Tokyo Electric Power Co. (nuclear meltdown). Probably, we shall expand Professor Heskett's definition to include the not so responsible private organizations since they seem to be the most likely to spawn a meltdown; in our free market model (frame) of doing business. Recently, an economist (Nobel laureate) explained that all that is needed to fix the free market model is to price the externalities and add it to the equation to solve the problem of artificial profits. The failure of carbon permits come to mind. Mathematically, what is needed to disprove a hypothesis /argument /theory is one counter example.

    In order to focus on Professor Heskett's question "When ... Take Over in a Meltdown?" we need to study the anatomy of a meltdown. A meltdown is very likely to be a large scale event affecting humanity and the world resources with unpredictable timing. A meltdown takes away (partially or fully) the safeguards (if any) that were in place to fight it. A meltdown can occur due to old technology, excessive risk taking (upside to the company and downside to the society; the government), fatal machine /human error, and /or unpredictable /un-assumed factors. Initially, the private organization(s) involved will deny the scale of the disaster and "obstruct" the flow of information either because it is incapable or on corporate lawyers' advice to mitigate their liability. Some CEOs will cry in public but it would not help anybody. The public sector (government) is more likely to believe private organizations and the scaled down information until the crisis comes to a critical point. Meltdowns have cascading effects on other systems (soon radioactive tuna will start swimming towards US from the Sea of Japan as they are programmed by nature). A meltdown could wipe out humanity as we know it today. Time is of the essence when fighting a meltdown.

    First option of the public sector should be to prevent preventable meltdowns through whatever they can do, perhaps sensible (what is sensible?) regulations /cuts /limitations. The nationhood is an artificial unit in the frame of humanity (a biomass like any other species). Hence, the rights of a nation with respect to a meltdown need to be suspended when it threatens the world with irreversible and life threatening effects. Similarly, the rights of a private organization need to be suspended with respect to a meltdown for the greater good of humanity. So when should the public sector takeover? It depends on the frame you think. In the free market frame, it is when the private organization(s) invites (or permits) the public sector (like BP wanting the government to get involved in the oil spill cleanup). In the humanistic and moral frames, we need to take over ASAP to minimize the adverse effects on humanity.

    Have we invested enough machine /human capital in thinking about the known or probable meltdowns (earthquakes, volcanoes, weather systems, global warming, non-biodegradable waste, environmental pollution, space debris, limited earth resources, declining /increasing demographic trends, declining food supplies, concessions /taxes to the not so wealthy and wealthy, severe income inequality between populations and national debt) that threaten humanity? Do free market adherents think that there are not enough profits (should the motivation for research be profit alone?) to focus on these meltdowns? Eh! We need to start treating ourselves (nations) as one humanity (not cannibalizing each other's economies) and one world soon or else.

     
     
     
    • Philippe Gouamba
    • Vice President of Human Resources, Skyline Windows, LLC

    The simple answer to Professor Heskett's question is: IMMEDIATELY! But here is the problem: as mentioned above by another wise member of this forum, we have to ask what the definition of "meltdown" is? Is it a partial collapse or a total collapse? What is at risk in this collapse, is it human lives, corporate capital or national pride? Public sector take-overs at taxpayer expense are a shameful last resort triggered by the total failure and lack of scruples of corporate executives. Shame on them, for putting governments in a position where government and taxpayers have to save the private sector and prop companies and institutions up in order to protect the public that they are in business to serve. Is it the new role of government to now save badly managed companies so that they do not defraud or injure the shareholders that invested in them and not hurt the general public? IMMEDIATELY, is when the public sector should step in and IMMEDIATELY is also when the incompetent executives that lead these companies should be made to face the SHAME that they are responsible for up to and including criminal prosecution if the incompetence rises to that level.

     
     
     
    • Anonymous

    We exist in a global community that is interdependent and operates within a management and international system that is not organized to address the issues mentioned. I believe we will see more of these types of disasters as time goes on. I appriciate the author's persepctive on this and hope that this article will encourage more research, dialogue and action toward the development of a model that minimzes th negative impact of "meltdowns".

     
     
     
    • R. A. F. Reisner
    • President, Transformation Strategy Inc.

    There is strong value in the HBS "analysis-decision-reflection" framework for questions such as those of Professor Heskett - when should the public sector takeover strategy be used in the case of a meltdown? There are, as has been noted in the discussion that Professor Heskett's question triggered, significant questions of public sector values as well as public sector competence.

    The question of the public's right to know is a good example of the issues underlying this concern. In Japan there has been strenuous debate following the near meltdown at the Fukashima plant about the right of the public to know about the risks and the state of the crisis. Here the comparison of last year's BP oil spill is instructive. In 2010 when BP was finally forced to make the video from the undersea camera available on-line, expert estimates of the extent of the damage of the oil flowing into the sea jumped by tenfold in 24 hours in comparison with previous assessments that were limited to company data after it was screened. Disclosure would seem to be one area where there are strong public sector values at stake.

    But takeover? Even assuming that the issue of competence could be resolved, that some form of expert conservatorship could be established (as for example, in the case of Fannie Mae in 2008) there are two questions that will require analysis in every meltdown case: What's the cause of the problem? And what are the public interests at stake?

    The day may come when some will argue that there should be a takeover of the money losing Postal Service for example. (See RReisner, "When a Turnaround Stalls", HBR 2002.) After all, it will be argued, the post office is losing billions each year.

    But in fact, analysis will show that the Postal Service would have broken even so far this year if it had not had to "pre pay" the health care costs of its retirees, a special multibillion dollar provision added to postal reform in 2006.

    So is the Postal Service a dinosaur of the information age that could meltdown? Should there be a public takeover? You have to first analyze what's the problem?

    In the short term the postal service is losing billions so that Congress can sustain its pay/go rules. This is an accounting problem having to do with federal cash cow status.

    But the long term? Is there a need to move paper and packages? Through a public infrastructure? For how long? What's the 2030 forecast? How can revenue exceed costs? What should the Postal Service be permitted to do to make money? What should it be free to do to cut costs?

    Before the rhetoric that the Postal Service is "not too big to fail" starts and someone decides that creating a postal meltdown is a good idea, its useful to analyze the causes of crisis and decide whether there is a public interest at stake.

    The public sector does some things very well, but not everything. Public takeovers are like invading Lybya. We want to be very careful to understand where the problem is coming from, what can be done about it, and to continuously improve the performance of interventions before we try them.

    We have vast social and economic systems like the Postal Service and Medicare and Medicaid and Social Security that will have to be realigned in coming years. There may have to be a threatened meltdown before the political consensus will support action. But public takeover? Even by a competent designated management team, we should be clear on causes and remedies, very clear, before we move there.

     
     
     
    • Anonymous

    I think the question that needs to be asked in parallel with this is: is the agency (the public and / or government) equipped to take responsibility for managing the clean up of the downside these situations have created for them? I believe this to be the failure: meltdowns, financial and otherwise, will continue to occur. In the case of Fukushima, the downside was downright predictable and thus the GOJ has failed to serve its people by (1) not involving itself in the planning for managing such a crisis and (2) increasing the amount of risk it would experience in a catastrophe (six reactors at one site). I believe that experience shows it doesn't matter who made the poor decisions that led to the crisis - the people expect the government to provide an appropriate response to manage the downside that the private sector has delivered to them - an ill financial market or a nuclear disaster. Are governments equipped and planning to manage future crises?

     
     
     
    • Gerald Nanninga
    • VP, Retail Ventures, Inc.

    The obvious answer is that governments should takeover the management of a situation only when government management is clearly superior to the status quo management. Based on my observations, there are very few circumstances where I see the government as having superior management skills.

    Two come to mind. First, when there is the threat of widespread panic, government intervention could lessen the panic. That could be by becoming the lender of last resort in a financial crisis (reducing panic of defaults). It could also be in the case of fears of natural disasters or nuclear fallout. In any case, the panic needs to transcend more than one business to be a true national panic.

    Second, when a crisis breaks down an entire system (like banking, or a tsunami's impact on infrastructure, etc), a government may be better able to tackle all of the inter-related pieces together versus each piece of the system trying to optimize its own small part. However, even here, a government may be better able to build a regulatory system to prevent system breakdowns than to fix them after they occur.

    It was suggested that governments may be better able to manage information in a crisis. My experience is that governments abuse, hide, distort and mismanage information more than private industry.

     
     
     
    • Anonymous

    As a former long term government risk manager, this was my agenda for years. The question is both political and operational. When do you intervene in the name of public safety and security and what resources do you bring to the table? I hope more public sector employees and officials familiar with the reality of intervention decisions will participate in this discussion. For too long such intervention, particularly in the USA, has been equated with a challenge to the free market system.

     
     
     
    • Elaine Scheye
    • President, The Scheye Group Ltd.

    Unless there is a public safety issue, then the market place should be allowed to work and allow businesses that meltdown be allowed to fail without government intervention.

     
     
     
    • Gaurav Goel
    • DGM, RCom

    I think that during an incidence, it is very difficult to accurately define the point of time when it is appropriate for an external entity to intervene. Each meltdown is unique in many aspects including its potential danger to the society. In retrospect we can say that the outcome of particular catastrophes could be predicted during the early stages when such events were happening, but we can certainly find many examples where similar events didn't end up being catastrophe and were controlled by people managing the situation. If the public sector decides to intervene in all seemingly dangerous situations then they may stretch their resources too thin and the interventions may not be effective. The people who are closely involved in the incident are either optimistic to bring situation under control or are too scared to ask for help hoping that external world would not know about the goof ups they have made. In both these situations we may not rely on them to ask for help. So what should be done? I think that the public sector should proactively assess the impact of potential meltdowns in critical sectors and predetermine the situations when they need to intervene. There may be different stages of intervention and in most cases the initial stage intervention should be sufficient. One important thing is to define and follow the exit process once the desired results (predefined) of the intervention are achieved.

     
     
     
    • Phil Clark
    • Clark & Associates

    Pay me now or pay me later. There is no free ride when major "meltdowns" occur. I worked in crisis management in the federal government for 35 years and believe me most companies and even government agencies are not prepared for a meltdown. Why? Because it costs too much money to have resources to cover those events. If credit card companies had to have on actual reserve the cash to cover all credit card debt they grant, credit would be completely different. How about mortgages? Should banks have the cash on hand to cover the loans? Unfortunately, most businesses and organizations do not plan on having the reserves to cover a catastrophe. Even insurance companies struggle with this. As a nation we are still struggling to find the dollars to cover the rebuilding after Katrina. Bottom line...most catastrophies requires resources in access of those immediately available to recover an entire economy. That is not g ood or bad. It is just the facts. Sadly, politicians and many on Wall Street are not willing to cover these events when the nation is impacted. They are more than happy to take profits and place pensions, emergency operations, and loans on margins...but not willing to cover when these "margins" are called. So bottom line...over 35 years...I have seen the sooner the government becomes involved in catastrophic events the better the outcome. I know that isn't politically correct but it is a fact. What needs to be considered is how to attract the smartest and most dedicated federal managers to look after our nation during these times. Unfortunately, we would rather gripe that they are overpaid, lazy and freeze the salaries of employees that respond 24 hours a day, face tough decisions and look after this country. Remember that federal employees swear an oath when they take their job to protect and preserve the nation. I only wish private sector companies had t o do the same. How would the oil speculation be faring today if their job was to protect the well-being of the nation instead of their profits. Nothing wrong with making money...but when it harms the economy? A fair profit might in the long run be better.

     
     
     
    • Tom Dolembo
    • Director, NewNorth Institute

    The US Government and Fed (and more recently the EU infrastructure) did bail out and amply recap malefactors of the 2008 crash. The govt did not bail out most homeowners or small business people or direct lend to replace banks who sucked the bailouts into capital and left it there or much affect the remaining survivors. This recovery is weak. We are left with what we now might consider a "Perfect Storm". Toxic assets remain in the system, massive defaults in public debt lurk behind mystifyingly inaccurate credit agency ratings of local and state bonds; pension funds, university endowments and hedge funds are driving up ICE commodities inflating another bubble, and we have serious pushbacks in congress to pay for the inevitable deflation or engage the tax system above the middle class levels to fund its own default. The next crisis is, of course, world-wide. There is no dry powder left in the horn. The too bigs are much bigger, at risk in far more obscure shananigans and this time, public agencies are broke from covering the last set of bets. When, in 2008, we had a single bubble in mortgage backed derivatives (which are by and large still there in the tranches), now we have myriad bubbles supported by specious recovery hype. Public agencies can't, won't, and should not bail out the malefactors, that's a given. The next collapse will take far more of the infrastructure with it, and if the triggering event simultaneously aces the US and EU, no agency can stop it. This is not a financial issue, really. The streets of Tunis and Damascus are not filled with poor peasants, but educated young people. Our children are bereft of opportunity in very similar ways. I don't think it is out of the realm of the possible that a massive second bubble break will drive our own into the streets. A Perfect Storm does need a lot of coincidence. Each of the pending crises may bleed off on their own. All the last bailouts bought was time. And this time, the timer is attached to a financial IED of our own design.

     
     
     
    • Kamal Gupta
    • CEO, Edseva Software

    I would like to distinguish between three types of meltdowns. The first is natural calamities & industrial accidents (Fukushima, BP Deepwater, Chernobyl, Union Carbide Bhopal types). In such cases, the government should move in swiftly to protect the public.

    The second one is business meltdown, most often caused by greed or inefficiency. General Motors, Lehman & its likes in Wall St and such bodies should be allowed to die or fend for themselves. We are seeing the results of protecting banks that were "too big to fail". Not a single lesson has been learned by them.

    The third type is the failure of a country, whether it is Iceland or Ireland, or it is failed countries like Somalia. In such cases, other countries should wait & watch, and move in at an appropriate time, whether invited or not. A failed country is the breeding ground for violent elements who will spread the disease, first within their own borders and then globally.

     
     
     
    • Santhanam Krishnan
    • AGM

    Dear Professor,

    There cannot be a single answer to the queries raised by you in the present article. Before we get down answering the questions raised, we need to answer the fundamental questions such as - 1. For whose benefit the public and private sector exist? 2. Does not a Government (either directly or indirectly) benefit by the existence of Private sector? 3. In given situation of information asymmetry (whether deliberate or other wise) whether Government should remain as a silent spectator faithfully following the policy laissez-faire, though the fallout will have definite national and international ramifications?

    The economic history and political management of the last century has taught us two important lessons vis-?-vis international meltdowns including situations entirely/not entirely created by economic mismanagement including wars - a. If the local public sector (read Government) does not intervene, some others will, either for good or worse; b. There is a luxury of limited choices to any public sector (read Government) in this interconnected world.

    Be it, the recent Global melt down in which Uncle Sam came out with the economic dole out package of US$ 800 Billion or Greece's economic debacle - indicates whichever political system a Government may follow, when it comes to defending national pride, every Government will turn out to be a comrade to Private Sector - because there cannot be a separate Private national pride or public national pride! When it comes to the question of another Government well, there are mechanisms available to intervene - unfortunately we do not have a frame work where things will automatically work like a well oiled machine. Selfish national interest coupled with economic interest as well as some international humanitarian sentiment may force other Governments to intervene and they will intervene.

    Economist Keynes once said, "In the long run every one will be dead", the same applies albeit with a slight modification - in the long melt-down run every Government will intervene - since national pride is a driver. National Pride is an economic animal. The degree of severity of meltdown will decide the degree of intervention.

    Santhanam Krishnan Mumbai, India

     
     
     
    • Richard Oxford

    I believe that it is the responsibility of the public sector to immediately begin monitoring the situation. Both with 3 Mile Island, the Gulf Disaster and seemingly the meltdown in Japan, the private sector was down playing the threat. Now is this an honest mistake or instinctive protection of share value?

    It is unlikely that the government is ever better equipped to handle the disaster. That is not their job. But, my believe is had the US government not stepped in and pressured BP, that disaster could have been much worse.

    Similarly, it is easy to dismiss greed and mismanagement at GM, but, had it failed, we would have been on the hook for their overpriced pension and added hundreds of thousands (if not millions) to the unemployment rolls.

    Free markets work within limits.

     
     
     
    • Anonymous

    In order for there to be an effective response to a major melt down. The correct facts about the situation must come out quickly. For the facts to come out clean and quickly our society must adhere to a high ethical standard, which is currently lacking in our CEO's, Government officials, union leaders, and sadly Higher Education Institutions. Assuming there is a return to integrity, then the Government with the correct information could immediately begin monitoring the situation and bring what asset they have available to help limit the fall out.

     
     
     
    • Dan Quizal
    • CEO, MediaMegaphone

    I can't believe you would ask such a question...that is, if you have ever read the Constitution.

     
     
     
    • Rob Houck
    • Partner, Eaton & Van Winkle

    I have skimmed the responses above and some of my observations will repeat the foregoing. 1) Normally we should expect the private sector to be more familiar with the technology (whether engineering or financial) than the government. We do not give the government the incentives we do the private sector to develop these (hopefully) better mousetraps. 2) The technology is often not patented, so disclosed information can be interesting to competitors. In the midst of WWII, Mercedes and its rival auto makers were already planning for competing with each other post war's end and not sharing technology. 3) The private sector managers may be so over their heads in liability that they may not be detered from taking further, unreasonable chances. Their only hope may be the unreasonable long shot. They cannot lose still more if the outcome is substantially worse than a more conservative measure. 4) If anyone survives, he/she may have legal liability. "Anything he says can and will be used against him." So better not to disclose the worst and hope for the best. As to the Constitution, first, it is a flexible document and second, let's figure out the answer and then decide whether it is constitutional or not. As a famous president once said, "it would be wrong" but then went on to consider it.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    Meltdown is a critical development which has to be handled without delay. Firstly, the concerned sector and/or the organisation must utilize all resources at its disposal to take corrective measures. Concentrating first on investigating and taking actions against the responsible should also follow but the priority has to be on reclaiming the lost ground. Government/Regulators' intervention is welcome but the red tapism generally leads to abnormal delays as they confront a situation they are unable to immediately grasp. Time is, therefore, the essence. This applies to all sorts of surfaced abnormalities due to any reason whatsoever.

     
     
     
    • Marco Solari
    • vp, eirecon associates

    Meltdowns are only a problem when there is too much concentration of power in one place, whether that power be financial, market, or physical. The government role should be to manage (eg dismantle) too much concentration of power. (and it should be applied to government also!) That should be the focus of regulation--breakup of power. Then the question answers itself: who cares if a small player melts down? It is then creative destruction.
    We have allowed the siren's call of efficiency and scale to lure us onto the shoals of government intervention. Dangerous waters, indeed!!

     
     
     
    • Marco Solari
    • vp, eirecon associates

    Meltdowns are only a problem when there is too much concentration of power in one place, whether that power be financial, market, or physical. The government role should be to manage (eg dismantle) too much concentration of power. (and it should be applied to government also!) That should be the focus of regulation--breakup of power. Then the question answers itself: who cares if a small player melts down? It is then creative destruction.
    We have allowed the siren's call of efficiency and scale to lure us onto the shoals of government intervention. Dangerous waters, indeed!!

     
     
     
    • Jay Somasundaram
    • Systems Analyst

    When should a supervisor takeover the work of a subordinate? When the question is re-framed in managerial terms, the answer falls into place.

    Ideally, the supervisor and subordinate are working harmoniously. There is a natural balance between escalation and take-over, there is good information flow, and parties are aware of the skills and resources available to all parties.

    Government is expected to supervise business. There is no question of that. The level of supervision provided by a good manager varies dependent on the subordinate and the work being undertaken. A good manager knows when the subordinate is getting out of his/her depth, and increasingly steps in. Where the employee refuses to work with the manager, then the employee may be stood down. Otherewise, it is a fluid relationship.

    In the disasters that spring to mind, there is broad agreement that the "manager" wasn't doing their job - i.e. monitoring and supervising.

    A general priniciple of management is that supervisors should operate to higher competencies and be held more accountable than staff.

     
     
     
    • Barry Schaffer

    I think the discourse is more about problem solving and rational solutions. As a society why are we not better able to use proper think tanks, some private some public, to review the perplexing problems of our time. Waste management, clean energy,plasma gasification are all solutions to devastation. Our reaction time is awful, forget the Blame cycle and manage the problem.

     
     
     
    • Stephen Basikoti

    We already have regulators i.e. financial and nuclear watchdogs, etc., to keep an eye on unfolding events and anticipate dangers to systems. The regulators should realize that, if they are not proactive in their monitoring activities and in designing safety nets, in case of meltdowns, they will have to deal with events that spiral out of control and create fear and havoc.

     
     
     
    • David Physick
    • Consultant, Glowinkowski International

    Is the question being posed, i.e. "When?", the wrong one? Is the correct question actually "Why?". Why have we got to this point where government has had to wade in to save the day? If I recall my ergonomics from my psychology masters, Three Mile was due to poor design of dials and instrumentation whereas Chernobyl was lousy man-management. Japan, perhaps that is the nuclear equivalent of failing to recognise the mythological black swan of economics does exist, i.e. build a containment wall 20 feet high because tsunamis don't occur above that height. In the more recent financial services sector turmoil, the old human frailty of greed is to blame and it existed on both demand and supply sides. I worked for over a quarter of a century in one of the UK's principal retail banks and watched how people developed an expectancy of right to be given a loan. The marvellous US comedian, Rich Hall, says the US core c ompetence is 'selling cr*p fast' and it appears people want to be financed to acquire it!

    In the UK, the government sold off most of the state assets during the Thatcher years, i.e. utilities, train services, and now we are left with industries bled dry by avaricious managers and investors, and customers receive appalling service. Is there where government should have recognised it has a duty to remain involved with managing critical infrastructural suppliers?

    Professor Heskett's question is multi-faceted covering political, sociological, economic, philosophical and environmental issues. As such, I think WE ALL need to take a long hard look at how we live our lives and, perhaps, taking note of Mr Quizal's reference to the constitution, consider what happiness really means. (Controversially, I'd question whether the US constitution has really worked, considering the inequitable distribution in wealth and massive interference in US government from corporate funded lobbying.) As far as I am aware, its measurement calibration is neither dollars nor pounds sterling. If the emerging economies of the world follow us down the road we have travelled, then I don't relish the world later generations will inherit.

     
     
     
    • Gordon Smith
    • CEO, Miller and Smith

    Two respondents stated that we would all be on the hook for pension payments if GM would have failed. I totally disagree. A worker,and we're all workers, should know the strength and weaknesses of the organization they're associated with and accept the risk that with a jucy unfunded pension plan comes a risk of eventually no plan at all. My small firm(110 employees) has no pension plan albeit we do have a profit sharing plan paid annually. To hire someone I must compete with firms like GM who do. If they fail, why should I make my competitor's plan whole through taxes that I pay. Will they make my employees whole when I have years without profit? This is the United States--lets take risks and compete for the good of all!

     
     
     
    • Anonymous

    I think Government intervention should be immediate.One more alternative to this problem can be Public-Private partnership where we have equal contribution of both public and private sector.In case of contigencies whole issue needs immediate concern as in global economy we have impact on the world economy. Secondly,In case of meltdown the criteria should include complete transmission of information as soon as possible so as to avoid vigrous situations in near future.Complete analysis of situations should be lesson for other countries after seeing the impact.

     
     
     
    • Abhishek Syal
    • Founder President, Act to Rise for Innovation in Special Education ( A R I S E )

    The public sector should come into play after asking the questions and getting yes:-

    1. Does the disaster affect many others which are not linked to the company?

    2. Does this disaster has the potential to blow out tomorrow which may impede or harm the public or their living conditions?

    3. Is the concerned company not taking necessary steps, and is it turning it into a failure?

    4. Does the concerned company require aid of other government agencies, (for other data or equipment requirements)?

     
     
     
    • Yedendra Chouksey
    • Professor, International School of Business & Media, India

    I think the effectiveness and the timing of intervention by the public sector in a catastrophe created by the private sector will depend on the role of the former (e.g. complacence or collusion) in the catastrophe ignited by the former. (According to some analysts, in the recent meltdown of U.S. economy, government regulators were found wanting in reacting to the warning signals through available information). In such a situation the government action is a mixture of face-saving and defensive rather than bold measures which might delay, and sometimes deny, the cure. When disasters are caused by the inefficiency of the private sector or the fury of nature, public sector has to act immediately. Where the crisis is aggravated by withholding of the information by the private sector, the guilty should be brought to book after the crisis. In any case, in sensitive industries, quality of information generation and timely accession by the government should be a part of a reliable audit and checking system. Besides, when the government of the day is found incapable of handling major crises and the disaster is likely to engulf other countries, intervention by international bodies seems to be the way out. However, such an action has to be built on the consensus which must include the affected nation. Lastly, what is the remedy when the calamity is caused by the actions of the government alone and the repercussions are confined to the victim country? A role reversal has been found to be the answer in India. Here the private sector takes over.

     
     
     
    • Anonymous

    As a former public sector manager, I agree with the gentleman who stated that elected officials and the public will not support regulating private sector operations to the extent needed to prevent or at least minimize "meltdowns" because they want more from the government than they are willing to pay for. Now a member of the private sector, I can say without a shadow of a doubt that all the great, strategic thinking is certainly NOT the province of the corporate private sector. If the "government" doesn't look out for the health, safety, and welfare (little W) of its citizens, then who will - certainly not the "market" or the "private sector". Our "free market" religion here in the U.S. blithely dismisses a huge range of abuses that our kids and grandkids will hate us for in 50 years.

     
     
     
    • Joanna
    • Business Systems Analyst

    As some folks mentioned, we should first decide "what" needs to be done, and then decide on whom. Once we decide who is to do what, we must then decide to what extent. We sometimes get caught up in the "who" and lose sight of the solutions. Many of us have been brought up to believe that everyone pitches in, in crises.

    Finally the constitution does mention "general welfare" -since the private sector is only obligated to its bottom line, it is government that must be concerned about the general welfare of its citizens.

     
     
     
    • Karen Caswelch
    • CEO, Akoya, Inc

    I think there is a preferred response and there is a practical response. In the case of business intervention (skipping the nuclear situation for a moment), the preferred option is to let the company fail. It's our free market philosophy.

    Unfortunately, the real world doesn't let us act in a vacuum. While I'm not a big fan of government intervention, the events of 2008 indicate to me that the only savior was the government and that in general they made a number of good moves. I am a strong believer that the future economy in the US is dependent on a much stronger manufacturing capability and if GM and Chrysler were allowed to go under, I believe the ramifications to the total economy (think suppliers, dealers, universities, research, just to name a few). Does anyone truly believe, in spite of the terrible management at GM over the years (I include myself in that group), that we would be better off without them?

    I think when it comes to the big stuff the only one with the resources to act is the government.

    If GM had not been bailed out, the US would be paying pensions as they fell under the pension guarantee act, so there would be an on going cost and even less on the revenue side due to the number of jobs that would have disappeared across the country. I truly believe that would have been catastrophic during that time period.

    Regarding the nuclear situation, I think the issue is about safety and in a situation where the safety of the population is at risk, earlier and faster is probably better due to the inherent conflict of interest with the group running the plant.

    Regarding the nuclear issue

     
     
     
    • Yadeed Lobo

    When should the takeover happen: (1) immediately, assuming a natural conflict of interest in distributing accurate information?, (2) later, or (3) not at all?

    The takeover should happen immediately just like the Treasury/ Fed did in the United States for collapses - in case of financial crises. There is natural inclination for private sector organisations to withold information whether intentional or not.

    The pitfalls of a later takeover in a financial meltdown is evidenced in the finance company collapses in New Zealand.Here the Securities Commission had clear conflicts of interest ,was toothless and the government was forced to intervene.In case of one intervention South Canterbury Finance the government's intervention resorted to a $1.58 billion taxpayer funded bailout of private investors. New Zealand Treasury papers even reveal the early warning signs but show the government not reacting in time.

    The free market has some significant benefits but as Raghuram Rajan has pointed out a slight dose of regulation does have its therapeutic effects.

    What are the criteria that should govern public intervention in a meltdown faced by a private organization? Do they apply equally to one government's intervention, with or without a request for assistance, in a challenge faced by another government? What do you think?

    Top would be public safety as in Japan or New Zealand's Christchurch earthquake.Here economic burdens should take a backseat.

    Economic burden imposed on ordinary people (as in a rising deficit which will be taxpayer funded) should be a criteria in case of financial crises. A Warren Buffett/US Treasury style dividend payout is a very efficient way of achieving good governance outcomes.

     
     
     
    • Dave Schnedler
    • President, Corporate Planning Forum

    I don't believe that the question is properly framed because it skirts two of the principle issues of the voters, namely trust in the fairness of the system and the belief that the government is genuinely acting in their own best interest, namely the integrity of government.

    Clearly government has a responsibility to protect the wellbeing of the whole, but it has other responsibilities as well. Take GM and Chrysler. In bailing out these two companies Ford was denied the huge benefit it deserved as a consequence of its superior management and decision making. In the short term auto workers benefitted, but in the long term would the industry have been healthier with only two domestic manufacturers rather than three? Wasn't the bailout of Chrysler really a short term political decision, to the benefit of the few at the expense of the many? Did the government strike the proper balance between the short term interests and the long term interests of the voters?

    And then there are the financial institutions such as AIG. Why did the tax payers need to make good on AIG's gambling debts/ CDS's -- why shouldn't the counterparties have had to eat those repayments? Or in the case of the mortgage backed securities, Why are the taxpayers taking all of the burden via the Fannie and Freddie bailouts? Why haven't the bondholders taken a haircut?

    Sarah Palin's message is cogent to those who own small companies or are self employed -- it is a populist message. Big Government is helping big banks and big businesses and doing nothing for small businessmen, or the self employed. For instance, Federal reserve policy provides cheap liquidity to multinationals but liquidity is unavailable to small and medium sized businesses due tightened lending standards.

    The way to ensure that government intervention is unnecessary is to prevent these companies from becoming "too big to fail", or breaking them up when they do. Teddy Roosevelt had no difficulty breaking up large corporations, and yet CITI and other banks, which were assembled via acquisition in a very short period of time prior to the crisis simply could not be disassembled, or broken up, we were told, even though Sheila Barr wanted to.

    FDR inflicted dire consequences on financial institutions after 1929, but this time the consequences have been born entirely by taxpayers and homeowners. Voters have a right to expect government to look out for their interests, not special interests, and in this instance government has failed to make that case. So, in answer to Jim Haskett's question, I would say that it is a little more complicated than that.

     
     
     
    • Ajay Kumar Gupta
    • Doctoral Researcher and Faculty (ITM), Tata Institute of Social Sciences, India

    There are three crucial factors that determine when public sector should take over in a meltdown. They are loss, capacity and impact. Timely and accurate information play helpful role to assess these components. When loss is irreparable (human loss) and cannot be substituted by any other gains, whether it is public, private or personal gain, then government should take over. Secondly, when magnitude of situations is beyond the capacity of private sector and the loss (resources, capacity and morale loss) has profound impact on public sectors, organizations and societies, then government should take over. The most important factor is impact of the situation. When the impact has long term, shocking and recurring in nature that potentially harm people, place and society then government should take over. Comparing two situations of lay- off and subprime crisis, where public sector should intervene and takeover, we find that subprime crisis has more severe impact on people, society and government. At the same time, it also has long term deteriorating impact on resources, capacity and growth. So, given the choice, public sector should come forward to prevent subprime crisis like situation first and lay-off second. In Japan, due to Tsunami and a series of earthquakes, the loss is unarguably, irreparable. It is beyond the capacity of private sector and its impact is recurring and shocking. Private sectors do not have capacity to overcome or control the situation, and even if they have capacity, it exponential and devastating effect will be much higher, if not controlled in time. So, in the situations, where loss is beyond repair, capacity of private sector or public sector is incapable to control the situation in time, and impact on people, planet and development, then public s ector should take over. Considering public sector faces similar situations, private sector should also willingly come forward to co operate and coordinate to overcome the situation.

     
     
     
    • Anonymous

    I think it is the high time we realised that meltdowns have become strategies to change the direction of managing sectors or economies by particuar interest groups to the busness game for either bringing attention of public or private to that particular sector or economy for particular reasons. Once we begin to appreciate this perspective that meltdowns do not just come but are created by a particular party or player to the game of busness, interventions to counter such disturbuses or likely mismatch in economies must come into place immediately . otherwise we shall merely be re-acting to implications . So interventions must be lunched in a continious manner as and when the possible meltdown is articipated.

     
     
     
    • Paul Lepley
    • HBS '71

    13 identified three types of crises: nature/accident, greed/profit, and government.

    28 listed four questions.

    31 noted that everyone needs to pitch in.

    It is in everyone's interest to cooperate in times of crisis. What is necessary is for someone somewhere to seize control, to collect accurate information, marshal resources, make decisions, and provide direction. That person (or group) may be inside a corporation, government, NGO, or merely an individual (think of the Founding Fathers). When those "with the power" fail to act quickly and in good judgment, it is each person's responsibility to demand competent action -- even leading to the overthrow of corrupt government if necessary.

    A curious observation is that this is the same thing we expect during all the non-crisis times, too!

     
     
     
    • shadreck Saili
    • UCT

    I think it is the high time we realised that meltdowns have become strategies to change the direction of managing sectors or economies by particuar interest groups to the busness game for either bringing attention of public or private to that particular sector or economy for particular reasons. Once we begin to appreciate this perspective that meltdowns do not just come but are created by a particular party or player to the game of busness, interventions to counter such disturbuses or likely mismatch in economies must come into place immediately . otherwise we shall merely be re-acting to implications . So interventions must be lunched in a continious manner as and when the possible meltdown is articipated.

     
     
     
    • Guy Higgins
    • Principal, Performance@

    Seems that there is substantial lack of confidence in the willingness of the private sector to take the necessary action quickly and to keep the public informed. At the same time, there is considerable concern about the ability of the public sector to intervene and take appropriate and effective action (while also keeping the public informed -- recall, it's in the public sector's interest to appear competent and effective too).

    There is some important "stuff" to consider whether discussing the capability and readiness of either the public or private sector to intervene in crises:

    • Is this a domain that is amenable to rapid understanding and highly accurate predictability? If so, then there is a set of decision behaviors that is appropriate. The Deepwater spill may have fallen into this domain.
    • Is this a domain where there is significant analysis required before decision makers can understand and make appropriate decisions. Less reliability in prediction. Different set of decisions and actions here. The financial crisis may have fallen here (but honesty and avoidance of biases in the analysis is critical)
    • Is this a domain in which complex adaptive behavior dominates and predictability is marginally or completely unreliable. Very different approach required. The war in Afghanistan may fall into this domain.
    • Is this a domain in which chaos dominates and the only thing that can be done is to move somehow out of chaos. The behavior here is different still -- 911 probably fell into this category. Mayor Giulani seems to have done a good job of taking action to move NYC out of chaos.

    No one, private or public sector can take the appropriate actions in these domains if they don't understand how we, as human beings make decisions and they don't practice making decision decisions in various decision-making domains. Leadership and decision making are skills. Some people are born with more talent for these skills than others, but everyone gets better with training, coaching and practice.