Leading During Crisis: Perspectives from the White House

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With Shaun Donovan, former United States Secretary of Housing and Urban Development and Professor Sebastien Betermier
Shaun Donovan: President Obama would always say, first, tell me what the right thing is to do. And then we’ll figure out how to do it. And that’s what I think you have to do as a leader, if you want to create space for risk-taking in government.
Host: Welcome to Season 1, Episode 5 of Delve: a podcast from McGill University’s Desautels Faculty of Management where we’ll hear from management researchers and practitioners as they explore the latest ecological, social, and economic challenges that we face as a society. I’m your host Mo Akif and today, in the throes of a pandemic, we’ll hear from someone who is all too familiar with leading through unprecedented crisis. That person is Shaun Donovan, former United States Secretary of Housing and Urban Development and Director of the Office of Management and Budget under the Obama Administration. Throughout his time in government, Donovan had to tackle his fair share of challenges, from the Great Recession and housing crash, to Hurricane Sandy and veteran homelessness. In discussion with Professor Sebastien Betermier, a McGill University professor of Finance, we’ll hear a candid account of how he helped steer the U.S. out of some of the most significant crises in its history.
S.Betermier: Let’s begin with the great recession, this baptism of fire, of entering mid crisis as a new leader. And before I leave this to you, I’m going to begin giving all of you a brief recap of what it was like back in January 2009. The economy was worsening, the unemployment rate was going up, topping up 8% at the beginning of the year.
S.Betermier: The stock markets were down 40% compared to the year before, about 25% of the subprime mortgages are becoming delinquent. More than a million households lost their job in 2008 alone, and that number is going up. You’re confirmed by Senate in February 2009. Could you tell us how those first few weeks went and what it was like, the complexity and the impossibility of the situation that you faced?
Shaun Donovan: I was the housing commissioner in New York City. Mike Bloomberg was mayor. This was the day that the US Congress was trying to pass the original bailout, the program that would rescue the economy. And literally at the very moment that it became clear that it was going to fail in the US Congress, Mike Bloomberg walked into the chamber and said, “The world is ending.” And everybody went silent. And that was the kind of feeling we all had. That was the feeling President-elect Obama had. I went in and interviewed with him in Chicago a week after the election. And he literally, he was months away from being president, but you could see the entire weight of the world’s largest economy. In fact, in many ways the entire world economy was at risk at that time. And I remember Mike Bloomberg, when I told him I was going to be housing secretary for President Obama. He looked at me like I was crazy for taking the job.
Shaun Donovan: It wasn’t just that this was the biggest crisis that we’d seen in our economy, certainly in the housing markets, since the Great Depression. It was that if you were trying to save somebody’s house, when you went to look at who owned that mortgage, it was literally owned in so many cases by a countless number of investors spread all across the globe with very little idea of who was in charge, right?
Shaun Donovan: There were these incredibly complex, very new financial instruments that were part of what happened in the crisis and part of what led to the crisis. And so unwinding this situation was almost incomprehensible in its complexity. And that’s in many ways the sort of center of what we were facing. I think the other thing just to personalize it a little more, sitting where President Obama sat, sitting where we all sat in the cabinet, the speed of decision making we needed to make.
Shaun Donovan: It was literally like every day we were making an announcement that on its own would have been one of the most significant announcements that an administration might make in the first year.
Shaun Donovan: And so it wasn’t just the complexity of the issues we were dealing with. It was this sense of the fundamentally moral question about who is deserving or not deserving of help. And whatever our own beliefs were, and I will I’m sure come back to my own beliefs, if in the very first few weeks of the president’s time in office, we lost a large share of the American public in terms of their support, that was an irreconcilable problem for us. And so it was the economic complexity, the speed of decision making, the scale of decision making, but also at the same time, the complexity of the politics and the moral questions that we were dealing with that is unlike anything I’ve ever come across and I hope we’ll ever have to deal with again.
Shaun Donovan: But then there’s a further challenge, which is… And we have this debate very much within our own team, who should get help? If someone had bought a second or a third house, they weren’t actually living in the house, should they get help or not? And you can imagine those kinds of, if they’re working or not working, employed, a hundred different variations of these kinds of moral hazard questions that we dealt with. Very different opinions within the team. And I think obviously very different opinions among the American people. But the problem is, this isn’t just, if my house loses 10, 20, 30% of its value, the consequences aren’t just for me. They’re for my neighbors as well, because when the value of my house goes down, it starts to have an effect on the entire neighborhood.
Shaun Donovan: And that’s the essence of the moral quandary. I can’t remember who started it, but one of the things we used to say among many in the cabinet, Ben Bernanke and others who were working on this problem was well, when your house is on fire, the firefighters don’t come in and ask whether you were smoking in bed before they turn the hoses on. Right? And so the issues really become ones of trade off of deserving versus… And I will say, I think the mistakes that we made early on were probably to go too much in the direction of trying to get those moral questions precisely right. And oftentimes, I think this is true in leadership in general, but I think it’s particularly true in the public sector that you can have an illusion in seats of power, that the machinery that you control can get things perfectly when it can’t.
Shaun Donovan: And so often one of the reasons it was slow to get started, if we decided… We did decide that somebody had to be a homeowner living in their home to get help. We had to look at their income and figure out that it was going to be sustainable, that they were going to be able to pay it back. And a whole set of things that meant they’ve got to fill out a few forms, right? These are folks who were getting bombarded by bills. Often they’re putting their heads in the sand and don’t want to answer them, open the mail. And so there were lots of just mechanical issues, basic issues about getting forms filled out and other things. And ultimately the program actually ended up reaching almost as many people as we targeted.
Shaun Donovan: It took longer than we would’ve liked. And over time we started to peel back some of those layers of screening and other things that we did, largely because I think we came to understand that the greater good here, the bigger problem was what was facing the firefighter. That we needed to put out the fire. And whether someone made a mistake and caused that fire or not was of lesser importance.
S.Betermier: So given the fact that you just came into the government and you had this impossibly complex situation literally on your plates, how did this position hamper your ability to do decision making let’s say regarding the initial design of HAMP?
Shaun Donovan: Yeah. So I mentioned that I interviewed with the president a week after the election. I was named to be HUD Secretary in early December. You can imagine that I’ve got about six weeks before I take office. There’s a whole campaign team, advisors and others that had been working with the president. I had done some work on the campaign, but very limited because I had a day job in New York City running housing for the mayor. And so I found myself stepping into this situation, and around the table, not only President Obama, but Larry Summers and Ben Bernanke, and a whole range of others that are completely focused on the economic crisis, housing being a big part of that. And so I was faced with the question, where can I add value? And I think particularly as you think about what makes leadership teams work, what makes people able in times of crisis to function effectively, a huge amount of that is trust.
Shaun Donovan: A huge amount of that is knowing who it is that’s sitting across from the table, whether you can trust their judgment, but also trust that they have their motives are ones of solving the problem, not turf or any of the other things that can come up. And I felt, as I looked at the team, there were a lot of brilliant economists and others on the team who I couldn’t compete with in terms of certain knowledge. What I knew is that I brought in more detailed knowledge of how the housing market functioned, and particularly the way that all of these complex mortgage instruments functioned. And I knew that operationally, they were nowhere near where they needed to be in terms of actually executing on this program.
Shaun Donovan: There were ideas about the design of the program, but the fundamental thing you have to realize, we got a lot of complaints that we were doing a lot to help the big companies, the big banks, and not enough to help individual homeowners. Just think about this. You have a choice between doing five or six transactions with the biggest banks, or if you want to take on the housing challenge, you literally need to take on millions of individual transactions. That was a fundamental challenge that we faced. This is why the Bush administration gave up, by the way, on trying to help homeowners directly. That was their original plan. They ended up deciding to just go directly to banks and try to stabilize the economy through that, because it was just so much simpler because you could do a half dozen or a dozen deals with these banks, and hopefully that trickled through the economy. We made a different decision. We felt we had to help homeowners directly, but the complexity was daunting.
S.Betermier: So how do you negotiate with 60 plus stakeholders?
Shaun Donovan: Look ultimately, and this is true in any dynamic, the more complex, the more important it is to do this, is to understand who are the leaders that are sitting around the table with you. And I identified, there were two of the banks, the CEOs of the banks were engaged, or the CEOs of the mortgage companies were really the lead folks. And there were two of them that I identified who really wanted to get this deal done and I thought would actually spend the time and effort and had the stature within the bank community. And so I went and spent a significant amount of time with the two of them. And before every meeting, I would or Tom Perelli from DOJ would be in touch with them, trying to make sure we were going into that meeting seeing things as closely as possible. We had lots of fights with them as well, but it was really key that they ended up taking the lead on their side.
Shaun Donovan: We did the same thing with the attorneys general. There was one Republican and one Democratic attorney general that each became the leaders for their groups of attorneys general. We identified which agencies of the many, many federal agencies were actually active partners and who was just along for the ride. And so it was really a question of a sort of analysis of who was sitting around the table and who could be leaders within their own pieces of the negotiation that would allow us to get it done.
S.Betermier: So what did you do with those leaders for those two years? How did you get them to view the big picture and finally come to an agreement?
Shaun Donovan: Well, one thing was just, I often say to work in government, you need to be patiently relentless. I was patiently relentless. I scheduled a regular meeting in my conference room at HUD every two weeks. I made sure we had cookies at every one of the meetings. That was actually written about in the press. But literally it was partly, it was just when they saw that I was going to spend a significant amount of my personal time, it was an unusual thing to do for a cabinet secretary, is to put as much personal capital and time into this. And I will also say it was a risky thing for me to do.
Shaun Donovan: There were other members of the cabinet in the economic team who were very skeptical, never thought I would get this done. So I spent a significant amount of time with the president on it as well, and made sure that he was supportive. And in fact, he kept bugging me every time I saw him. “Are we close, Shaun? Are we going to get there?” And when we finally inked the deal, it’s the only time I’ve ever busted into the Oval Office unannounced. I just walked past his secretary. He wasn’t even in the Oval Office. He was in his private dining room, eating something. I interrupted his lunch. One of the bigger hugs I’ve ever gotten from the President of the United States.
S.Betermier: That last point that you mention actually gives us a great transition to get to part two of this discussion, which is talk more about your leadership style and how you’re able to adapt to different types of crisis. In particular, the veteran homelessness crisis and Hurricane Sandy. One of the patterns that becomes really clear in those two crises is you follow an uncompromising pursuit of an effective solution. For example, let’s talk about the veterans first. It’s a major problem in the US. It’s been there for decades. It’s on the rise actually during the great recession. In 2010, there was more than 70,000 veterans living on the streets. June 2010, the Obama administration implements a new plan called Opening Doors. The plan proves to be remarkably effective. Year after year, the number of homeless veteran goes down to being fewer than 40,000.
S.Betermier: Now one of the key defining features of that plan is that it takes a really new and unconventional approach to an old problem. In the previous approach, a veteran is offered shelter, offered treatment against various types of addiction. There’s a carrot to provide permanent housing if the person is responding positively to the treatments and the program is really targeted to provide incentives, to reward good behavior, so to speak. But in practice, it’s ineffective. Now you push for what is called the Housing First Approach. And from what I understand, it’s an approach that you had seen back in New York in the 1990s. It takes the problem and takes it the completely other way around. The veteran is offered lodging first, unconditional priority lodging, and then offered treatment. And the idea here is that if you promote housing stability, first, that is going to make the treatment more effective. That’s one type of an effective policy in this particular problem.
S.Betermier: Can you talk a bit about how… What are the difficulties of going with such an effective solution right away? I’m assuming that it must create quite a bit of controversy, especially with those who have invested so much of their time building and implementing the previous approaches.
Shaun Donovan: Yeah. Look, I think in most societies, the vision of an inventor, of an innovator is the sort of lone… It’s the light bulb going off over somebody’s head and the sort of lone experience of creativity and genius, right? And certainly… I went to architecture school that was certainly sort of in the bloodstream of it. And I think that’s one thing for an individual pursuit, but government is a team sport.
Shaun Donovan: This problem of veterans homelessness in the US, when president Obama came into office, a veteran was twice as likely to be homeless as the average American. Think about that, twice as likely. These are folks who have risked their lives for the country and yet come back home and… And so the first thing I did, I knew that if I was going to have an impact on this, I needed to be locked arm in arm with my colleague who ran the Veterans Administration, the VA. And so I went to see General Shinseki who had been named to be a VA secretary.
Shaun Donovan: He said to me, “So let me get this straight, Shaun. We’re going to give alcoholics and drug addicts, housing without any commitment that they’re going to stop drinking or taking drugs. Is that right?” I said, “Yep. That’s the way the program works.” I had to sell this to community organizations in New York. Yeah, we’re going to bring housing to your neighborhood that has drug addicts, right? It’s a popular thing. And ultimately, I showed them the data. I showed them the results. The truth is it’s really hard to take your medication, to stay in a program or do whatever you need to do when you’re sleeping on the streets. And evidence shows. And again, this is one of those tough moral issues that… Like in the housing thing we had to confront. And ultimately what I knew is that the VA, like the military is an organization that’s very hierarchical. If I could get the VA secretary believing Housing First worked, then we could actually make progress. But if he wasn’t then we were going to get caught up in hundreds of different ways within the bureaucracy at VA. And so for me, it really began with that. The other key one that happened a little later, Michelle Obama, the first lady was very passionate about veterans issues, worked a lot with Joe Biden on the issues. And I knew we had to win over the mayors and governors around the country because ultimately there’s only so much we could do on our own. And so I had the idea to get Michelle Obama to lead an initiative, to invite all the mayors and governors to the White House and challenge them.
Shaun Donovan: We’ve ended up coming up with a plan to end veterans homelessness in five years. We ended up cutting street homelessness in veterans by 60% in five years. So we didn’t quite get it, but we set a big audacious goal and I’m a big believer that if you don’t set big audacious goals, you’re not going to make rapid progress. But we couldn’t make progress if we didn’t have the mayors and governors committed. So, she invited them all and put them all on the spot and said, “We want you to commit to end veterans homelessness.” We now have over 100 different cities and states that have ended veteran homelessness, chronic homelessness for veterans, and some that have started to end all homelessness. New York, state of Connecticut, state of Virginia. And so, there’s real and a huge part of that just came from the podium, that a president or a first lady, that bully pulpit is incredibly powerful. So, those I think were the two key kind of early strategic decisions that really allowed us to make progress. On Sandy, again, this issue of how far you can push the envelope. Taking a billion dollars to build infrastructure and other kinds of investments, but particularly infrastructure, that is going to stop a storm from damaging a place 10 or 20 or 30 years in the future is not a very popular political thing. Right? You could take that billion dollars and put it into that infrastructure, or you can take it and give it to homeowners or business owners who are looking to rebuild.
Shaun Donovan: So, I was going to do something risky in trying to do this much longer term thing, but I also knew that if we did a bad job in the short term. Because we had $60 billion, right? Let’s be clear, this billion dollars I wasn’t spending everything on that. But what I knew is that if we screwed up on the short term stuff, if we didn’t get money to families, get that started immediately. If we didn’t get money to homeowners and others, we were going to be dead in the water.
S.Betermier: Another key pattern of your leadership is your focus on using quantitative measures to drive optimization and collaboration. You view performance management as an effective tool. Now, what is performance management? It’s the clear definition of objectives and priorities. It’s the use of simple and quantifiable metrics to evaluate performance and reward success. It’s a consistent monitoring of the metrics to ensure that the goals are being met in an efficient manner. You’re a very strong advocate of data driven performance management. This is back from an interview in September, 2009. The question was, how do you measure success for HUD? Part of your answer was, well, we’ve put in place a host of benchmarks, some internal. Becoming more performance based and data driven, bolstering relationships with local partners, others external, making the prevention of homelessness and measures of all our program successes. Could you explain how that focus on quantitative measures helped so much to bring down the number of homeless veterans?
Shaun Donovan: I think performance management is important in the private sector. I think it’s especially important in the public sector because often it is the most powerful way to align, not just inside your organization, but outside as well. So take veterans homelessness. This was something I didn’t have to create passion around, ending veterans homelessness. Everybody believes veterans shouldn’t be sleeping on the streets. The question is how are you going to get there? And when we were willing to step up and say, “We want to drive this to zero, and we’re going to actually set year by year targets for how to get there.” All of a sudden, what was a more amorphous challenge started to become much clearer. And then we literally started organizing around. Okay, well, how much money would it take to do that? And we figured out the 25 places in the country that had the biggest veterans homelessness problem. And we started tracking each one of those and meeting with the mayors and governors.
Shaun Donovan: And so it really became a way to create buy-in. I would also say, and I hope we come back and talk about this more. Too many folks in government. All they get is criticism for what goes wrong. And Lord knows they don’t come into government for the stock options, right? When you can set specific goals and meet them and celebrate those goals, it’s amazing the way it starts to create a sense of momentum and buy-in and excitement within a team.
Shaun Donovan: I think you have to be very clear about creating intermediate or shorter term goals, right? Because quick wins are always really important. People are going to lose energy. They’re going to lose commitment if they don’t have that sense, wow, I’ve accomplished something, that we’ve reached a goal.
S.Betermier: So that leads me to my last question of the discussion. And that is how do you build a culture of risk-taking initiatives in the public sector? As the cartoon shows, the federal agencies are not known to be the best at promoting risk-taking initiatives in the local employees, but in the two crises that we’ve just talked about, you’re getting the agencies to move, you’re building momentum. Can you shed more light on how in general you can make this happen and in a way that last, outlast a particular leader?
Shaun Donovan: Yeah. So if you’ll permit me a short story, which is sort of my version of this cartoon. I was sitting with Mike Bloomberg one night, after dinner we’d had a few drinks and he said, “Shaun, you know what the problem with government is? I take somebody who at my company at Bloomberg LP is a rockstar. Three out of 10 of their ideas are home runs. That’s a person that I promote. And more importantly, I take money away from the seven things that aren’t working and I put them towards the three things that are working.” I take that exact same person and I put them in the Bloomberg administration. They probably get fired because one of the seven things that goes wrong, ends up on the front page of the New York post. And more insidiously, I have to take money away from the three things that are working and put them towards the seven things that aren’t because it’s a crisis and it has to be fixed.
Shaun Donovan: Now the private sector isn’t the same as the public sector. Some of those seven things that are going wrong probably do have to be fixed because kids may be dying or other things would be happening. But there’s a fundamental truth I think to what Mike was saying in that there is such an asymmetry of incentives for risk-taking in government. And this goes back again to the idea of why create… What is success, defining success, celebrating success, that so often, what I find in government is somebody who’s been there 20, 30 years. If I scratch below the surface, that’s somebody who came into government for all the right reasons, is passionate about doing things that make a difference in people’s lives. But over time, all of the incentives not to take risks have made them into somebody that too often won’t try something new, right? Won’t be willing to innovate because it could end up on the front page of the New York Post. And so I think a huge part of the challenge I have seen as a leader in government is, how do I create a reason to try something? How do I create a reason to innovate? And then also, how do I let that person on my team know that if they’re doing the wrong thing for the right reason that I’m not going to bite their head off, if they get a bad story because they tried something new. If you’re not trying new things, by definition you can never fail.
Shaun Donovan: I remember one time that I screwed up on something and I got a call from Mike Bloomberg on my cell phone. He almost never called me on my cell phone. So I was nervous. Something had just gone wrong. He asked me three or four questions about it. He got comfortable with the fact that I had the right motives. I wasn’t just being stupid, but I was trying to do something innovative. He said, “Do it again, Shaun.” And so how you communicate both the value in risk-taking, celebrating that, but also at the same time, having somebody back when things go wrong, I think is a huge part of creating that culture of risk taking.
Shaun Donovan: And I think President Obama was… They call him no drama Obama. One of the things that I think was incredibly important in his leadership is that he wasn’t going to make a snap judgment when we talked a lot about those kinds of things today. Whether it’s on the mortgage servicing settlement, early on in the financial crisis, there are a lot of times when he could’ve said, this is too hard, politically, for me. I’m taking too much heat. He would always say, first, tell me what the right thing is to do. And then we’ll figure out how to do it. And that’s what I think you have to do as a leader, if you want to create space for risk-taking in government.
Host: That was Shaun Donovan and Professor Sebastien Betermier talking about leadership in times of crisis – a discussion full of lessons that remain as relevant as ever in the wake of COVID-19. If you enjoyed this podcast and want more insights, you can subscribe on your podcast app of choice, or visit us at mcgill.ca/delve