Human nature helped get us into this economic mess. So strong leadership is essential to help get us out of it. This is the collective message from the INSEAD Leadership Initiative.

The dust may be settling, but the aftershocks of the global economic crisis will rumble on for many months – perhaps years – to come. The fundamental causes of this very manmade disaster are by now well documented: over-intricate mathematics combined with human nature at its worst. There has also been much talk of solutions, principally increased regulation and the injection of government dollars by the billion-load. But are we in danger of ignoring the human dimension – in particular the importance of leadership?

According to Cristina Escallon, Director of the INSEAD Leadership Initiative, there is a need to refocus the debate. “Of course we need technical solutions, but good leadership also has a critical role to play,” she says. “The new, constructive debate will focus not on finding a few culprits, but rather on equipping leaders to steer others out of the crisis.”

And to get the discussion started, this article presents views from some of INSEAD’s leading faculty, who study leadership from different perspectives. They reflect on their area of research and how it can shed some light on the origins of the crisis. More importantly, they consider how good leadership can help to restore economic stability.

Don’t panic, do reflect

Professor Luk Van Wassenhove’s research focuses largely on disaster management in the context of humanitarian relief and is therefore particularly transferable to the current situation. “You get two types of leaders in a crisis.” he says, “There are the leaders who go with their gut feel, roll up their sleeves, go in there and start doing things. On the other hand, the better leaders are often those who have prepared between crises.” The temptation is clearly to react quickly without reflecting. But, according to Professor Van Wassenhove it is the reflective leaders who are most effective, having prepared their people, their organisations and their partnerships in advance.

This emphasis on reflection is supported by Professor Subramanian Rangan, whose research focuses on cross-border leadership. “People need time to figure out what the problem is in order to propose solutions and take action,” he says. “It really is like an earthquake. You have to figure out where the fault lines are and whether the aftershocks are done, before you act.” Thus the key for leaders is not to panic into a hasty response, no matter how great the pressure on them to act –even though it is a natural human tendency.

Distributed leadership, distributed responsibility

Furthermore, according to Professor Rangan, it is vital for all of us to avoid another instinctive reaction: blaming our leaders. “They may not be faultless,” he says. “But our CEOs are in a system led by prices. And prices are a collective construction.” To some extent, then, western society as a whole is responsible for the borrowing frenzy that originally inflated the economic bubble. As Professor Rangan puts it, “Prices have a sociological as well as economic component. We are all part of the market.” In short, we need to learn lessons and find solutions – rather than focus all energy on finding culprits.

This notion of distributed responsibility coincides with a view that is prevalent at INSEAD – and increasingly in the wider academic community – of distributed leadership. It is set out in Professor Henrik Bresman’s latest book (co-authored with Professor Deborah Ancona of MIT) on X-Teams. “Leadership,” they say, “can no longer exist only at the top of the organisation but must be distributed throughout it.”

Stay close to the ground

The point about distributed leadership is echoed by Professor Hal Gregersen, an expert on leading strategic change. His recently published book, It Starts With One, co-written with INSEAD colleague Professor Stewart Black. The book’s message is that an organisation changes only as fast and as far as the individuals within it. As Professor Gregersen says, “You change individuals and you change organisations; you change organisations and you change institutions; you change institutions and that’s how you change entire countries.”

Hence his advice to business leaders in the current crisis: stay close to the ground. He claims they must remain in touch with those at all levels of their organisation and – crucially – their customers. Talking of the CEOs whose organisations created subprime products, Professor Gregersen says: “I ask myself how many of these leaders had real honest contact with lower-income families, middle-income families, those who bought the bulk of all those mortgages.” He also invokes his own research findings about innovation: “True innovation comes about when entrepreneurs are almost anthropological in their observation of customers.” By stepping out of their own little world, they see the world differently. This is exactly the approach needed in finding innovative solutions to the crisis.

The trouble is that in a crisis everyone, including leaders, tends to be fearful. “And fear, as we know, leads us to be uncreative,” says Professor Gregersen. “All the available data suggests that in times of danger, we don’t innovate.”

Manage collective emotions

Most importantly of all, then, leaders in today’s crisis must instill collective calm in place of the collective fear that is currently dominating the financial markets. This point is made by Professor Quy Huy. His extensive research into the management of collective emotions and its effect on the performance of organisations offers a key to understanding the current crisis. As he says, “The leaders of financial institutions should have reduced the excessive optimism and greed that led people to take excessive risks and thus caused the meltdown of the financial markets.”

However, as well as being the key to understanding the problem, the management of collective emotions is also the key to understanding the solutions. “Leadership at any time is best shown by the ability to manage the collective emotions of those around them,” says Professor Huy. “And in times of crisis truly great leaders are usually those who show an example by regulating their own emotions effectively.”

The task now, according to Professor Huy, is for the leaders of financial institutions to turn the situation around: to build confidence where once there was fear. “The most important thing, according to my research into positive emotions, is trust,” he says. “And senior executives can only generate trust through authenticity and transparency. You should only do what you say and say what you do.” Starting within their own organisations, business leaders are thus in a position to influence the entire economic system, by rebuilding that all-important trust. This is yet another case where ‘it starts with one’.

Conclusion: confidence through leadership

This too is where the INSEAD Leadership Initiative can make its own small yet – we hope – influential contribution. “As an academic institution, we believe we have a responsibility to encourage a productive discussion between organisations, the academic world and ultimately individuals,” says Cristina Escallon, Director of the Initiative. “Our colleagues in Finance and Economics can shed light on the technical aspects of the crisis. We aim to generate constructive discussion on human aspects of the crisis, focusing on leadership as a solution – and a shared responsibility.” After all, in the midst of so much uncertainty one thing is sure. Only this kind of positive thinking can rebuild the confidence our markets crave.

To join the debate yourself and see your views published here please email camille.cadel@insead.edu