Stephen H Baum Leadership

This morning on wsj.com, journalist Kelsey Hubbard asked me what lessons are to be learned from Stan O’Neal’s departure from Merrill Lynch as coaching points for those in the corner office or who aspire to be in the corner office. Here is my reply, given a few minutes to write it down. And some thoughts about the next CEO for the long haul as well as the challenges.

The CEO position of Merrill Lynch includes accountability for at least these three “jobs:”

– Leading the firm to create more alpha (superior returns)

– Managing the risk inherent in striving to create more alpha

– Active stewardship of the human capital as well as financial capital

For context, Merrill has been in transition for some years from a culture of relationships-are-paramount and we-are-asset-collectors (and our people are real assets) to one where creating higher alpha for its clients is primary. Stan O’Neal gets credit for pushing the then languishing firm into higher return/higher risk investments. He admits, however, that mistakes were made in the second job: ensuring that people, processes, software, systems and communications provide risk management safeguards appropriate for the level of risk of higher alpha investments.

It is Stan’s performance on the second and third jobs that caught my attention and prompted me to blog about this eight days before the press reported his position in jeopardy. 

I wrote that there were unanswered questions about how risk management was handled and about his stewardship of human capital. I am sure that more key facts will surface soon as both fans of Stan and his critics weigh in with their personal stories.  See the prior blogs for the questions (with a few clarification edits made since they were posted) and comments about the difference between more Darwinian cultures such as Citibank’s and that of what has been called “Mother Merrill.”

The lessons learned, it seems to me, are fundamental and unsurprising. The CEOs with whom I work understand that a strong leadership core consists of five elements:

o Character – first among equals in leadership traits

o Appetite to lead and for the right reason – a desire to control your own destiny and a belief that the outcome will be better if you take charge

o Capacity to be decisive when others can’t or won’t

o Confidence to embrace calculated risk

o Ability to engage and inspire followers

Failure on any of the five is a prescription for catastrophe. Some CEOs are masks and fail on the first three – people of poor character who seek the top job for personal power or who are unable to make tough choices. In this instance there is nothing yet in the press that suggests Stan O’Neal failed on the first three.

However, on the other two there appear to be pivotal flaws. 

Embracing calculated risk means not only taking a measured risk, but also mitigating the risk with sophisticated people, processes, software, communications and what-if simulations which play an active role in decisions. Risk management is part of the calculation in the first place – can we manage it? It is not a sport solely for individual cowboys, notwithstanding the culture in other Wall Street firms. Stan admits to errors in this area, but is silent on whether and when warning signals and cautionary voices were heard. Really heard. 

And, at least from my outsider’s perspective, engaging and inspiring followers was low on Stan’s priorities (except for 9/11 when his presence was a powerful support). He is described as aloof and alone at his moment of greatest trial. Why? 

People make mistakes. Teams make mistakes. In all but a few of the most admired companies, second and third level executives are not pushed out on the plank by themselves either before or after the mistakes. There is plenty of advance planning and support as well as post mortems when things begin to go sour. And whatever decision about their career is made, it is made with due consideration to the signal sent to the rest of the valued executive core and beyond. Sometimes, there must be a firing. But often, they are given a new role because they still have the talent they had before they were put in the high-risk position and may have even become the better for it. This is not naïve. It is talent management in a world where there is no surplus of terrific candidates. 

While hard evidence is yet to surface, it is alleged that Stan was uncomfortable with independent thinkers, sent both rivals and allies packing, inhibited open debate, let intimidation grow to the point that some subordinates did not relish coming to work. 

It may be lonely at the top, but being aloof and treating people as disposable, if indeed he did, leads to being really alone when the chips are down. 

And there are likely more than a few talented employees who do not want to be alone the plank, no matter the upside. There are other places to build wealth under better conditions. 

And it may be speculation, but loner CEOs have been known to keep their boards in the dark too long as well as to seem unapproachable by subordinates. And when the loner has what other CEOs have – an intense competitive drive and will to win – it can morph into counterproductive rules of engagement and behaviors. And it can be emulated by a few other key players into “win at any cost.”  We will see if any of this surfaces as well. 

Eventually, the trust placed by the board and/or the employees turns to doubt. A precipitating incident, large or small, especially if there is a lack of communication and a surprise can then trigger a complete change of heart and act on it. 

So, lessons learned?

– Pay attention to all five elements

– Have the last word but not the only word

A final comment: the continuing challenge of dealing now with past choices in sub-prime risks has to be top of list. But interim CEO Alberto Cribiore or whoever is selected for the top job for the long haul had better be exceptional in both areas where Stan apparently was not. The interview process must get inside the CEO and understand the real traits and the shaping experiences that developed them. The entire Merrill family needs this if it is to recover and thrive.