Stephen H Baum Leadership

Last October (2007), Kelsey Hubbard on WSJ’s MarketWatch (see video page on this website), asked me what went wrong at Merrill Lynch and what mistakes were made by Stan O’Neal who had not yet departed with his compensation package of hundreds of millions of dollars.  Reiterating what I had posted months before that, I said that he had certainly failed several criteria for a successful finance industry CEO:

1. Creating legitimate “alpha (superior returns)” for his clients/investors

2. Ensuring prudent risk management in creating the superior returns (protecting his shareholder’s financial interests and the soundness of the company)

3. Preserving and enhancing Human Capital  (the key to sustainability of the firm) — the interests of the employees and the reputation of the company in the marketplace. 

Subsequent revelations indicate he failed on all of these and more. Firing anyone who warned about risk management problems or who hesitated to take greater and greater risks was only one of the missteps reported to me by insiders and later in the press.  His large severance package was calculated before finding out the real facts that have led to $40Bn in sub-prime write-downs as well as the most recent losses from auction rate securities. It was based performance that wasn’t what it appeared to be. And many who had nothing to do with the policies he instituted have lost their jobs and lost their savings nonetheless. 

Steven M. Davidoff, writing in today’s NY Times, argues that O’Neal’s successor — John Thain — should invoke the “clawback” rules in Sarbanes Oxley and possibly in specific employment contracts, that would require O’Neal to disgorge the compensation he received to the extent it did not reflect the actual profits as measured by profits after write-downs (and I would argue performance against all three criteria). 

This is one of the few ways that trust can be rebuilt with not only Merrill, but all of Wall Street. And we should live so long to see other CEOs disgorge their ill-gotten gains. And re-writing board contracts with CEOs to defer payout until after any chickens come home to roost is the next step.