In her role at the SEC, Mary Schapiro was known as one of the world’s most powerful female regulators. She was named chair in the midst of the worst financial crisis since the Great Depression. As chairman, she helped strengthen and revitalize the agency by overseeing a more rigorous enforcement program and shaping new rules for Wall Street. During her tenure, the agency’s work force brought about a record number of enforcement actions and achieved significant regulatory reform to protect investors. Schapiro leaves behind an agency that has regained its footing, stature, and morale following desultory leadership under its previous two chairmen and its embarrassing lack of action preceding the financial crisis. Under Schapiro, the SEC, which is usually thought to be the most prominent and important financial regulatory body in the country, brought a huge number of enforcement actions against financial institutions. Her job was to assess what went wrong and to ensure it didn’t happen again. During four years as SEC chairman, Schapiro presided over one of the busiest rule-making agendas in the SEC’s history, during which the agency also brought a record number of enforcement actions, and executed a comprehensive restructuring program to improve protections for investors. Upon her departure, President Obama praised her leadership, saying the SEC became stronger and the financial system “safer and better able to serve the American people-thanks in large part to Schapiro’s hard work.”
Change management is designed to ensure the effective transition of an organisation and its people from the current to future states, and in so doing support the realisation of business benefits. In the context of strategy, it is the realisation of the strategic plan. Change management is about effectively leading and managing individuals, teams, and the organisation to successfully adopt the changes needed to achieve required or desired business results.
Success in Organisational Change Follows Recognisable Patterns – Kotter’s 8 Steps
Harvard Business School Professor John Kotter is well known for identifying a pattern for leading successful organizational change. Yet, we cannot be sure that the President, members of Congress, and key Federal Reserve, Department of the Treasury, and SEC personnel (including Chairman Schapiro) are familiar with this work and with other similar guidance from change leadership literature. And even if some or all of the change agents impacting a restructuring of the SEC are familiar with this work, it is unclear whether any of those change agents are consciously using this learning and incorporating useful elements from Kotter’s books into the SEC reorganization process. Studies of organizational change have shed significant light on the elements of a successful reform effort. Leaders effectuating reform at the SEC do not have to “reinvent the wheel” as they initiate, manage, and institutionalize organizational change. Kotter’s model is organized into eight stages designed to address eight observed mistakes made in efforts for organizational change: “establishing a sense of urgency”; “creating the guiding coalition”; “developing a vision and strategy”; “communicating the change vision”; “empowering broad-based action”; generating short-term wins”; “consolidating gains and producing more change”; and “anchoring new approaches in the culture.”
Each stage has identifiable characteristics.
1. Establishing a Sense of Urgency
“Visible crises can be enormously helpful in catching people’s attention and pushing up urgency levels.” To be sure, the SEC has experienced visible crises over the past few years. Admissions of significant failures at the SEC extend back over more than two years’ time and cover multiple areas of SEC operations. “The natural superiority of the U.S. model for securities regulation is no longer an article of faith, and the credibility of the SEC as a financial regulator has never been lower.” although the SEC has long been “the crown jewel of the financial regulatory infrastructure,” recent developments have called that characterization into question. The SEC has been the target of relentless criticism ranging from claims that it mishandled derivatives regulation, oversight of securities firms, and market risk, to assertions of delays and blunders and possible industry capture at the Division of Enforcement. These criticisms followed the Treasury Department’s Blueprint of Financial Regulation-released in March 2008-that criticized the SEC’s approach to regulation as obsolete and proposed a plan of regulatory consolidation that would effectively lead to the agency’s
demise. Most recently, the revelation that the SEC failed to discover a $50 billion Ponzi scheme at Madoff Investment Securities, despite having received allegations of wrongdoing for over a decade, suggests fundamental weaknesses in its core enforcement operations.
To be successful at organizational change, however, a change leader must use the crisis to shake up the organization. This requires that the change leader “remove sources of complacency or minimize their impact” and take actions that are “bold or even risky.” Kotter uses the concept of fire in a building as a proxy for crisis in an organization, writing that “conducting business as usual is very difficult if the building seems to be on fire.”Interestingly, Chairman Schapiro invoked fire imagery in comments to reporters as she made changes to SEC operations shortly after taking office. Moreover, in a recent speech, Chairman Schapiro noted the rapid pace of change at the SEC over the preceding year: I know that change is hard because within our agency we have been engaged in some of the most significant change in decades. When I arrived at the agency last January, we began a process of assessing our operations and determined we could do better. We determined that we needed to change. And that is the path we have chosen. The personnel changes instituted at the SEC may be seen as examples of sweeping change. The discomfort and discontent of the SEC staff in response to the personnel changes may be evidence of the brash nature of these personnel changes. Kotter’s work predicts this kind of reaction. He notes that “bold moves that reduce complacency tend to increase conflict and to create anxiety, at least at first.”
2. Creating the Guiding Coalition
Leading change is not a solitary task. Because major change is so difficult to accomplish, a powerful force is required to sustain the process. No one individual, not even a monarch-like CEO, is ever able to develop the right vision, communicate it to large numbers of people, eliminate all the key obstacles, generate short-term wins, lead and manage dozens of change projects, and anchor new approaches deep in the organization’s culture. Instead, what is required is a strong leadership team-a team “with the right composition and sufficient trust among members.” In terms of composition, “four key characteristics” are important: “position power”- the entire group who will be charged with making progress in areas of needed change, “expertise,” “credibility,” and “leadership.” Trust is borne of activities that “create . . . mutual understanding, respect, and caring.” Trust is important because it can lead to the effective creation of a “common goal” or “shared objective.” Chairman Schapiro has changed the leadership team at the SEC. We must question, however, whether the team has the right characteristics and the requisite trust. Certainly, the credentials of the SEC Commissioners are quite impressive in terms of expertise, credibility, and leadership skills. Chairman Schapiro has put a premium on attracting to the SEC people with an expansive set of experiences and skills. Moreover, the published remarks of new leaders in the Division of Enforcement-people with position power-are impressive in their indication of a collective change momentum.
New leaders continue to emerge, making the membership of the guiding coalition unsettled and unclear. The executives who ignited the transformations from good to great did not first figure out where to drive the bus and then get people to take it there. No, they first got the right people on the bus (and the wrong people off the bus) and then figured out where to drive it. In general, public information sources are not detailed enough to enable a comprehensive assessment of the suitability of the composition of Chairman Schapiro’s guiding coalition. For example, according to Kotter, “you need both management and leadership skills on the guiding coalition, and they must work in tandem, teamwork style.”He offers matrices that illustrate optimal compositions. Publicly available information does not enable us to determine whether or not the SEC guiding coalition has the optimal balance of management and leadership skills. Only as the exact identity of the leadership team emerges and the team takes concerted and coordinated action will we be able to evaluate its composition. As difficult as it is for us to appraise the team’s composition, it is more difficult for us to assess whether the guiding coalition has the required trust. Although I have not found evidence that ostensible members of the SEC guiding coalition have engaged in team-building exercises or attended a retreat at which intra-group trust may have been engendered, the SEC’s recent self-assessment’ may be a sign that mutual trust is being promoted throughout the agency. As new people are identified for inclusion on the
change leadership team, they will need to be effectively brought into the “circle of trust.”
3. Developing a Vision and Strategy
To achieve successful organizational change, a leader needs to have both vision and a strategy to implement that vision. “Vision refers to a picture of the future with some implicit or explicit commentary on why people should strive to create that future.” Vision serves to channel change in a particular direction and incentivizes and coordinates change in that direction. Chairman Schapiro seems to understand this aspect of change leadership, and she also seems to be incorporating it into the SEC’s operations. Her vision for a reformed SEC refocuses the SEC’s activities on one of the key policy underpinnings of the federal securities laws: investor protection Another lesson I have learned is to have a vision about where you want to take your organization and stick to your principles in getting there. Principles are not ideologies. They are different. Maybe it’s a question of degree. Maybe to some it’s semantics. But as I see it, unlike ideologies, principles don’t seem to demand a particular answer to every problem that emerges.
We’ve seen how strict adherence to ideology played out over the last decade in the financial arena. “Free market ideology” together with rapidly changing technology, globalization and many other accidental causes led too many of us to forget hard-learned lessons from past crises and abandon basic common sense. Principles, on the other hand, help frame a question, an issue or a problem. Having a principle might highlight tensions and trade-offs of particular choices, but rarely do they force you to choose between a good solution and a worldview. For me at the SEC, my main principle is putting investors first. And, I try to stay focused on that every day. And the goal is to build an SEC that is deeply expert, nimble, and aggressive-that gives investors confidence. In fact, as Bob Glauber can attest, I have a sign posted on my door that says “How does it help investors?” It’s a simple question, but it guides all that I do at the SEC. And, all those who enter my office understand that is the prism through which we will consider all issues. It doesn’t necessarily dictate the outcome of every issue that lands on my desk-because there are many solutions to any problem that could aid investors. But, the principle helps to shape our thinking and steers us in the right path. Vision is implemented through strategy. “Without vision, strategy making can be a much more contentious activity…. Even more so, without good vision, a clever strategy or a logical plan can rarely inspire the kind of action needed to produce major change.”‘ Chairman Schapiro’s vision has guided structural and operational change at the SEC as well as substantive rulemaking. Some credit her clearly conceived vision and the related rapidly employed strategy for saving the SEC from more significant structural or operational change.
4. Communicating the Change Vision
According to Kotter, the larger the audience for the change vision, the more powerful it may be. A great vision can serve a useful purpose even if it is understood by just a few key people. But the real power of a vision is unleashed only when most of those involved in an enterprise or activity have a common understanding of its goals and direction. That shared sense of a desirable future can help motivate and coordinate the kinds of actions that create transformations.’ A leader must be careful to communicate the change vision broadly, frequently (repeatedly), and consistently. The message conveying the vision must be direct, clear, simple, and geared to its targeted audiences. Metaphors, analogies, examples, and florid prose may be helpful in this regard. The means of conveying the message should be varied: oral and written, large forum and small group, and through words and actions. Finally, to ensure understanding, the communication of the vision should be a two-way street, involving both give and take as well as conveying and listening.” Chairman Schapiro has engaged in significant public speaking in which she has regularly and repeatedly informed and reminded the SEC staff and various elements of the public about the SEC’s recommitment to investor protection and the linkage of that vision to structural and operational changes at the SEC. Chairman Schapiro regularly appeared before congressional committees and subcommittees, and she has communicated her vision in these arenas as well. She used memorable analogies, examples, and words to convey the SEC’s organizational change message.’ Evidencing an appreciation for two-way communication, soon after her appointment, Chairman Schapiro took action in response to staff suggestions that enforcement efforts against corporate violators of the securities laws were too difficult. Moreover, the self-assessment process and related ongoing staff communications are evidence of two-way communication about the structural and operational changes that have been taking place at the SEC. And Chairman Schapiro has continued to express belief in capturing a variety of viewpoints in decision-making.
5. Empowering Employees for Broad-Based Action
To implement the leader’s vision, employees need to be able to take action. This may mean clearing away structural barriers, skill deficiencies, systemic obstacles, and supervisory impediments that may forestall effective employee participation in change efforts. Many of the structural and operational reforms implemented by Chairman Schapiro appear to be designed to empower SEC staff members for action that carries forward the change vision of the SEC. The efforts of Chairman Schapiro to listen and respond to staff concerns about unnecessary enforcement hurdles are examples of initiatives to streamline structure. In addition, the restructuring of the Division of Enforcement is geared to clear structural barricades to effective enforcement efforts.’ The decision to retain staff with “non-traditional skills” and the implementation of new staff training are examples of efforts to remedy skill deficits. Human resources and information systems have been or are being improved in response to deficiencies identified in the SEC’s self-assessment and the OIG’s investigation, report, and recommendations. In the Division of Enforcement, supervisory positions are being eliminated, supervisory personnel are being replaced, supervisory responsibilities are being realigned, and supervisory attitudes that may have impeded investigations are being corrected.’
6. Generating Short-Term Wins
Because the organizational change process is slow and constituents can be impatient, it is important for a change leader to accomplish certain limited objectives in the short term. Major change takes time, sometimes lots of time. Zealous believers will often stay the course no matter what happens. Most of the rest of us expect to see convincing evidence that all the effort is paying off. Nonbelievers have even higher standards of proof. They want to see clear data indicating that the changes are working and that the change process isn’t absorbing so many resources in the short term as to endanger the organization. To be effective in sustaining organizational change efforts, short-term wins must be “both visible and unambiguous.”‘ They also must be “clearly related to the change effort.” And in an effective change effort, they are planned, not accidental.’ SEC Chairman Schapiro accomplished some highly publicized early wins after her appointment was confirmed. In particular, she swiftly moved to remove perceived barriers to enforcement of the securities laws against public companies. She publicly promoted these changes, and they were picked up by the news media.’ These efforts generated support in and outside the SEC. The achievement of these short-term wins on a staggered but consistent basis has kept the SEC’s structural and operational reforms in front of the SEC’s staff and the public, building consensus around and momentum for the SEC’s self-initiated reform efforts and distracting attention from more substantial externally generated suggestions for change.
7. Consolidating Gains and Producing More Change
The long-term time horizon for organizational change not only makes short-term wins advisable, but also may make early declarations of victory problematic. It is important that the sense of urgency created by the change leaders is sustained for the long haul. Short-term wins are essential to keep momentum going, but the celebration of the wins can be lethal if urgency is lost. With complacency up, the forces of tradition can sweep back in with remarkable force and speed. Although a rapid, consistent pace of change at the SEC was sustained over the first fifteen months of reform, Chairman Schapiro as well as other SEC change leaders, needed to maintain the change momentum by continuing to introduce reforms on a regular basis. Having gone so far, the SEC could have lost all of the gains it had made in organizational change merely by relaxing into complacency. “Until changed practices attain a new equilibrium and have been driven into the culture, they can be very fragile.”‘ To reach that equilibrium, in addition to engaging in more and continuous change, the SEC should bring in additional change agents, continue to foster leadership from its senior managers,
recruit and nurture project management and leadership from lower ranks in the hierarchy, and identify and decrease or eliminate unnecessary internal structural and operational interconnections that often make change efforts more complex.’ These types of efforts in change management are difficult and pervasive.
8. Anchoring New Approaches in the Culture
Finally, to prevent regression, change leaders must address and resolve any incompatibilities between the changes that have been made and the organization’s culture-friction in the group’s system of behavioural norms and shared values. This is not as easy as it may sound. These norms and values may apply to the organization as a whole or only to certain parts of the organization, and it is important to achieve compatibility on both levels. Moreover, culture is change-resistant and nearly invisible. Yet, the failure to address inconsistencies between a change effort and the prevailing culture can undo years of reform.’ Accordingly, it was important that Chairman Schapiro understood the applicable behavioural norms and shared values of the SEC and the Enforcement Division and their respective relevant cultural sub-groups as they continue to reform the SEC and the Enforcement Division. Because the core vision of investor protection should not be entirely inconsistent with the SEC’s culture (in whole or in pertinent part), these and other change leaders at the SEC should be able to “graft the new practices onto the old roots while killing off the inconsistent pieces.” The important thing will be for the SEC’s change leaders to continue to remember the organization’s heritage and link it to the organization’s new and ongoing operations and objectives.