Wind: 3 mph
By Winthrop H. Smith Jr.
Five years ago (this month) I gave a speech in which I accused the CEO and directors of one of America's greatest companies of mismanagement and greed so severe that they brought the firm to its knees.
The occasion was the final shareholders meeting of Merrill Lynch which ended with the company's acquisition by Bank of America. For me, as well as the many other former company executives present, it was akin to a wake as we said goodbye, not just to a company but to a company that, in the words of former SEC chairman Arthur Levitt, had a soul.
I told the shareholders that the firm's downfall was caused by the failure of CEO Stanley O'Neal to follow the leadership principles of his predecessors and the failure of the board of directors to properly oversee the company. In the years from 2001 to 2007, O'Neal stripped from ML thousands of years of executive experience, downsized so aggressively that future growth was curtailed, consciously moved to change a successful corporate culture, ignored Merrill's longstanding principles and incurred huge leverage in order to generate short-term profitability.
To be sure, I was angry and my words were harsh. But it was considered, controlled indignation–and nothing has happened since to make me change or regret what I said. Indeed, over the ensuing years a larger thought has crystallized: While it is a truism that competence is an indispensable quality in a business leader, too often we lose sight of the other critical ingredient, character.
I knew every leader of Merrill Lynch, beginning with Charles E. Merrill and my father, Winthrop H. Smith Sr., and I had the privilege of working there for nearly three decades. Charlie Merrill guided his firm through the crash of 1929, Don Regan led Merrill Lynch through the terrible years in the early 1970s, and Bill Schreyer and Dan Tully successfully steered their firm through the crash of 1987. They each had their unique leadership style and experienced new and different challenges, but what they had in common was character.
This was manifested by a respect for and adherence to the principles–that core set of values established by Charlie Merrill and my father when they set out to "bring Wall Street to Main Street" in 1940. The first principle was: "Our customer's interest MUST come first. Upon our ability to satisfy him rests our chance to succeed." This was a radical departure from the prevailing attitudes on Wall Street at the time.
Later the principles were condensed into five and were displayed prominently in every Merrill Lynch office throughout the world. In our foreign offices, they were written in the local language. And they were etched in the concrete of our headquarters in New York:
Client Focus, Respect for the Individual, Teamwork, Responsible Citizenship, Integrity.
O'Neal and his board of directors abandoned these principles in 2001 and that's when I decided to leave the firm. Over the next few years, the company's bottom line grew stronger, but I knew that without the guiding principles, the future was grim. And, in 2008, I witnessed the collapse of our great firm, the demise of other Wall Street icons and the ensuing distrust that Main Street had for the financial sector. I was saddened and angry that an industry so crucial to a healthy global economy was hijacked by a group of selfish rogues who were only interested in self-enrichment and lacked the moral compass of their predecessors at Merrill.
Bank of America had to step in to save Merrill Lynch from going the way of Lehman Brothers and Bear Stearns. The corporate and institutional businesses are now integrated with the bank, but the private wealth management still functions under the brand of Merrill Lynch, Pierce, Fenner & Smith, Inc. It is encouraging to see its leaders once again embracing the principles. It makes me bullish on their prospects as Merrill Lynch turns 100 years old on January 6, 2014.
Nevertheless, it seems to me that character is too often overlooked in the selection of corporate leaders. Great leaders are not bullies. They need to make the tough and courageous decisions, but they also need to make sure that they receive both the affection and the respect of those they are leading. Boards of directors must make sure that CEOs are motivated for the longer-term and are creating a sustainable strategy rather than merely focusing on short-term profits. And, they must understand the importance of creating and maintaining the correct corporate culture.
Winthrop H. Smith Jr. is a former Merrill Lynch executive, author of the just-released book Catching Lightning in a Bottle: How Merrill Lynch Revolutionized the Financial World and owner/operator of Sugarbush Resort.