Culture, Leadership, Alignment, Structure, Systems and Strategy (CLASS-S): A systems theory review of the failure of Lehman Brothers

Abstract

On September 15, 2008, Lehman Brothers, the fourth largest investment bank in the United States, filed for Chapter 11 Bankruptcy protection under the United States Bankruptcy Code. Reporting over 25,000 employees worldwide, assets of $639 billion, and liabilities of $613 billion at the time of filing, this failure disturbed global financial markets and served as a major contributor to tipping the world into a recession that was second only to the Great Depression. Although the macroeconomic conditions of global financial markets were tremulous at the time of the investment bank’s failure, the collapse occurred suddenly. In the first quarter of 2008, the storied investment bank reported profit while other financial institutions were reporting massive losses from write-downs resulting from plummeting commercial and residential real estate holdings. Unknown to many was the fact that Lehman had not yet begun to address its equally troubled real estate portfolio comprised of $25 billion in prime, subprime, and Alt-A mortgages, which had driven the firm’s debt to equity ratio from 26:1 in 2003 to 32:1 in 2008. As a result of this increase, Lehman carried an additional $382 billion in tangible assets on its balance sheet, the majority of which were dwindling rapidly in value. Adopting a qualitative case study methodology, the purpose of the study was to analyze the failure of Lehman Brothers through the lens of CLASS-S (Culture, Leadership, Alignment, Structure, Systems, and Strategy) model to evaluate corporate governance and management of strategic risk. The CLASS-S model considers an organization’s risk strategies and corporate governance holistically as the sum of many of an entity’s parts to arrive at the conclusion that Lehman Brothers failure was a result, in part, of the lack of alignment between the CLASS-S tenants and that alignment is key to organizational success. This finding contributed to the development of the Organizational Alignment Review (OAR) model, replacing the CLASS-S model.