Stephen H Baum Leadership

For those who aspire to the corner office, there are important lessons to be learned from what has been revealed in the debacle at Merrill Lynch. 

A week ago, it was revealed that O’Neal’s response to mega losses in sub-prime products was to fire the execs he had put in place and driven to take greater and greater risk. And that he had fired the executives previously in those jobs for failing to take greater risk. Some had been rising stars at Merrill. No place was found for them elsewhere in the organization. 

Reading this,  I sent an article to USA Today. In it, I argued (full text below) that the pursuit of risk had to be a CEO decision, that the failure to ensure systems and processes and other risk controls to deal with such higher risk was a CEO obligation, that O’Neal failed to preserve any of the treasured Merrill culture when he raised the performance bar. My concern was with the long term effect of how he was dealing with talent. 

Today’s article alleges other failings: using fear to drive people to the extent they don’t want to come to work, inhibiting open discussion and debate, shunning people with independent minds and those more loyal to the enterprise than to the CEO, deriding key executives in their absence, purging rivals and allies alike and keeping his board so much in the dark, 

His demise is a tragedy that someone so capable, someone with such a great track record of turning the behemoth Merrill around earlier should have gone so far astray that his former allies were considering a proxy fight to oust him, that his board came to distrust him. And it is doubly a tragedy that one of the few African Americans in the top ranks should fail as a role model for others. Yes, his “severance” pay will be astronomical. But that is an issue for another day. For today, it is sad that he will be remembered for the debacle. 

For Del Jones at USA Today October 21, 2007

Merrill Lynch is by no means unique in suffering major losses and write-downs from venturing into riskier than traditional businesses. Sub-prime loans was probably the most visible example. But the fact that Citigroup and others did likewise is not good enough justification for the outcome. And that other companies with purely Darwinian cultures threw away people with great track records preceding their last post is not a benchmark for a firm with a great cultural tradition. Merrill has historically not viewed its people as disposable. 

Approval if not the original idea for entry into riskier lending businesses came from the top. Putting high performing executives and rising stars in positions to run these higher risk businesses was also a CEO prerogative. And pushing them to take more risk again a top-down pressure. So, when the people and the portfolio risk management processes to oversee such ventures fail, it is my view that the CEO also fails. In this case, it is Stan O’Neal. He has admitted the high-risk foray was a mistake, but we do not know the rest of the story and how he is dealing with it.

My view strictly from the outside is that there may have been additional mistakes. My focus is on the handling of talent: were experienced executives pushed out to install more risk-oriented wunderkinds? Were some executives fired because they weren’t producing enough? Were risk management processes and systems made ready before the move to higher risk lending? When the roof fell in, what alternatives were considered? Don’t get me wrong – leadership is a high stakes game with big rewards for winners and penalties for losers. But removal from the corporation under these circumstances has terrible messages for the next generation of leaders. 

To begin with, those fired did not become less capable than before they took the post. Is there not a place somewhere in the organization for such talent? Does the investment in their development have to go with the write-down? And what signal does this send to the rest of the high potentials about risk? You are completely on your own (or worse)? The next time there is a search for talented executives to take high risk positions, those who accept may not be the ones with great character, prudent approach to risk and a great track record. They will have better alternatives. Can the shift from relationships to value-creation be accomplished while preserving the best of the Merrill culture built over decades?

One celebrated CEO was heard to say that he would fire a trusted, star executive if that executive were plucked from leadership of a successful, traditional business to run a high risk venture and failed. However, most CEOs do not have an infinite supply of trustworthy, super-capable talent. The replacements may be ambitious and be willing to play an all or nothing game, but lack other qualities important to the long-term health of the business.

My family is a client of Merrill. We trust and respect the money managers who serve us. We look forward to learning more about the direction Merrill is taking with its greatest asset – its people.