By Lisa Kassenaar Jan. 27 (Bloomberg) — Eight days before Christmas, Kenneth D. Lewis took the stage for his last public act as chief executive officer of Bank of America Corp. Hundreds of his workers watched from red velvet seats in Charlotte, North Carolina’s McGlohon Theater , a former Baptist church with tall stained-glass windows and a Byzantine dome. Lewis, in his usual gray suit, white shirt and tightly knotted red tie, stood to present Brian T. Moynihan , 50, the man who would succeed him as head of the biggest U.S. bank. Moynihan was already known to many in the room: In five years, he had headed wealth management, investment banking and consumer lending. He was the Charlotte-based bank’s top lawyer when it received a second U.S. government bailout, for $20 billion, in January 2009, Bloomberg Markets magazine reported in its March issue. “Hopefully, he’ll be in this job much longer than the last three or four,” Lewis, 62, who became CEO in 2001, quipped as he heralded Moynihan’s brains and commitment. “Another unique characteristic about him is that he wanted the job.” For Lewis — and thousands of Bank of America investors, loan officers, traders and tellers — the laughter that filled the theater was a collective sigh of relief. After almost three months of meetings with more than a dozen candidates, Chairman Walter Massey and his directors had finally found someone to take over before Lewis’s planned departure on New Year’s Eve. “What happened at B of A is an embarrassment,” says John S. Reed , former co-chairman and co-CEO of Citigroup Inc. The bank’s board should have had at least two people ready to take over if Lewis resigned, Reed says. “There was no indication that the board had a clear idea of what they were looking for.” Pivotal Mistakes The global credit crunch and economic collapse of the past two years exposed pivotal management mistakes at the biggest U.S. banks — from slack risk oversight to multimillion-dollar bonuses for bankers chasing short-term profit. Lewis’s exit highlights another kind of poor bank stewardship: the failure of CEOs and boards of directors to plan for an orderly succession when it’s time for the top person to leave. Inadequate planning derails a company’s strategy and destroys employee morale, former executives, investors, recruiters and leadership consultants say. In the past four years, disorganized transitions cracked the foundations under some of the world’s biggest financial institutions, including Citigroup, Merrill Lynch & Co. , insurance giant American International Group Inc. and Zurich-based UBS AG. First Obligation “If you’re busy figuring out who is going to be your leader, instead of moving forward, you’re suffering and so are your shareholders,” says Marc Feigen, a New York-based management consultant who counsels CEOs and boards on strategy, organization and leadership. “It’s really the board’s first obligation — the hiring and firing of the CEO.” Bank of America’s stock fell 10 percent from Sept. 30 to Dec. 15, the weeks of the search for a successor to Lewis. The Dow Jones Industrial Average rose 7.6 percent in the same period. The bank reported a $5.2 billion loss for the fourth quarter of 2009 after it repaid government bailout money. “Bank of America’s board should have had a succession plan in place; they clearly failed in that area,” says Jonathan Finger , a Houston-based investor whose family controls 1.1 million of the company’s shares and who pushed to strip Lewis of his chairmanship last April. “The board seemed to be very protective of existing management, and that is not an item that is relevant to shareholders.” Ill-Prepared Feigen and other experts tick off a half-dozen reasons why banks are so ill-prepared for a power shift. Wall Street firms are revenue-based operations, they say, where money and promotions go to those who bring in business, not necessarily to well-trained managers who can step into the CEO’s shoes at a moment’s notice. That problem has been compounded in recent years by many banks’ expansion into every kind of finance, from proprietary trading and the selling of custom derivatives contracts to credit cards and mortgages. Add to that personalities that Tom Wolfe labeled “masters of the universe” in The Bonfire of the Vanities, his 1987 chronicle of the sins of Wall Street bond traders. “Everyone is trying to kill each other all the way up the ladder,” says Regina Glocker , a partner at Exchange Place Partners, a New York-based executive search firm. “On Wall Street, it’s a group of particularly fierce individuals.” Internal Contests Financial firms are especially prone to the kind of internal contests that can drive some of their best managers out the door, says Mark Nevins, president of Nevins Consulting Inc., a Manhattan-based business leadership firm whose clients have included Citigroup and UBS. That has, at times, set the stage for dictatorial CEOs who surround themselves with executives who don’t push back. They stack their boards with directors who don’t insist on detailed succession planning, Nevins says. “Insularity and arrogance — for Wall Street, those are often the headlines,” Nevins says. Some banks have been trying to do CEO succession right. On Jan. 1, Morgan Stanley made a smooth transition when CEO John Mack , 65, handed his job to successor James Gorman , 51. Mack remains Morgan Stanley’s chairman. Jamie Dimon , CEO of JPMorgan Chase & Co. , shuffled top management last year in a move analysts say signaled who would run the company without him. That man is Jes Staley , who was named head of JPMorgan’s investment bank . Goldman’s Deep Bench At Goldman Sachs Group Inc. , a company riveted together by its team culture, CEO Lloyd Blankfein and his lieutenants have all survived a rigorous program for training leaders. The purpose is to create a deep bench of executives qualified to run the bank. “You have to be able to answer the question, ‘If you get kidnapped, who is next in line to take over from you?’” says John Rogers , a Goldman managing director and top counselor to Blankfein who has managed the firm’s executive office under three CEOs. “It’s a discipline.” Merrill Lynch’s directors couldn’t answer that question back in October 2007, when they ousted Chairman and CEO Stanley O’Neal after the firm announced a $2.3 billion quarterly loss. The red ink was linked to collapsing prices for subprime mortgage-backed securities. The Merrill board took three weeks to fill O’Neal’s seat, hiring John Thain , then head of NYSE Euronext and a former Goldman president, to revamp risk management and keep the firm’s brokers and clients from heading for the exits. Prince’s Exit A week after O’Neal left Merrill, Citigroup’s board pushed CEO Charles “Chuck” Prince to resign, also after losses linked to the crumbling mortgage market. The company had no clear choice for CEO among its 375,000 employees. As of Jan. 26, Citigroup stock had tumbled 90 percent from the time of Prince’s departure. The bank is now 27 percent owned by U.S. taxpayers. It lost $7.6 billion in the fourth quarter of 2009. It’s not just U.S. firms that are having trouble finding successors for their CEOs. In February, UBS persuaded Oswald Gruebel , 65, to come out of retirement and take over a bank he’d competed against for decades at Credit Suisse Group AG. And in October 2008, Royal Bank of Scotland Group Plc said that CEO Fred Goodwin was leaving the bank in the same statement that announced a 20 billion pound ($33 billion) bailout. The government had to go outside the bank to find a new CEO, picking Stephen Hester , who had been a banker at Abbey National Plc and Credit Suisse. ‘Systematic Problem’ “This is a systematic problem in financial services,” Feigen says. Board members at publicly traded U.S. companies appear to know how bad a job they do at planning for future management changes. In its 2009 Public Company Governance Survey, the National Association of Corporate Directors found that 89.2 percent of respondents ranked CEO succession as a “critical issue” while just 15.7 percent viewed themselves as “highly effective” in the area. About 43 percent of surveyed companies have no formal, written CEO succession plan — not even one for replacing the CEO in case of emergency, the Washington-based NACD says. In the wake of the 2008 market crash, regulators have tried to address the boards’ failures. The Securities and Exchange Commission in October said companies must take seriously shareholder requests for details on who is in line for the corner office. SEC Bulletin “We now recognize that CEO succession planning raises a significant policy issue regarding the governance of the corporation,” the SEC wrote in a bulletin . Larry Bossidy , who helped build what’s now GE Capital during his 34 years at General Electric Co. , says the recession may have focused directors’ attention. “We’ll get better at this in the next couple of years because we’re analyzing mistakes,” says Bossidy, 74, who went on to run AlliedSignal Inc. and Honeywell International Inc. “Boards will take it more seriously and try to select people to run companies with an aptitude to be more hands-on.” Boards of directors and shareholders have a particularly hard time asserting themselves when a CEO sees himself as the man who built the company. That was the case with Lewis, who worked alongside former CEO Hugh McColl at NationsBank Corp. through mergers that included the 1998 purchase of BankAmerica Corp. When he was appointed CEO, Lewis continued the McColl tradition with a series of his own deals, including the $48 billion purchase of Boston-based FleetBoston Financial Corp. in 2004. What Would Jesus Do? “For CEOs, confidence is a good thing, but arrogance is not,” management consultant Nevins says, adding that all CEOs need regular analysis and feedback. “Even Jesus Christ would have ‘development opportunities,’” he says. That’s a reference to an assessment category in a typical executive review. Grooming managers to fill your shoes can be easy to postpone when the board isn’t pressing. And some CEOs find the topic unnerving. “CEOs can be very anxious about succession,” Nevins says. “When boards are talking about it, they are confronting their own mortality.” Boards should have detailed succession plans that include three to five years of training for managers identified as potential leaders, Nevins says. They should avoid “horse races” — the practice of openly pitting candidates seeking the corner office against each other. Weill’s Behemoth Retired Citigroup Chairman and CEO Sanford “Sandy” Weill was, like Lewis, an empire builder. He took over consumer lender Commercial Credit in 1986 and then bought companies such as Travelers Insurance Co. , the Smith Barney brokerage and bond trader Salomon Inc. In 1998, he merged Travelers Group Inc. with Citicorp, then led by Reed, in an $80 billion combination that created the first financial services behemoth, with consumer and investment banking, credit cards, insurance and other financial products. Co-CEO Reed quit the new company in April 2000, leaving the titles of chairman and CEO to Weill alone. The two had had difficulty sharing power, according to people familiar with the matter, and never settled on a clear successor if they both left the company. Dimon, Weill’s protege for 16 years and an heir apparent, was fired in November 1998 after Salomon Smith Barney posted trading losses that weighed on the company’s earnings . Lawyer and Loyalist Weill announced his retirement in 2003, three months after the bank settled charges it had misled investors with biased research, which later led to a $400 million fine. His choice for CEO was Prince, a loyalist and lawyer who had led the bank through a raft of legal difficulties. In an interview published in the New York Times on Jan. 2, Weill blamed Prince for Citigroup’s near collapse, saying he took on too much risk. Prince declined to comment. Prince, like Merrill’s O’Neal, was asked to resign by his board as subprime losses came to light — with no successor in sight. The board finally replaced him five weeks later with Vikram Pandit , who had come to the bank less than a year earlier, after more than 20 years at Morgan Stanley and a year running a hedge fund firm that Citigroup bought for $800 million. Pandit, who holds degrees in finance and electrical engineering, had little experience in consumer businesses such as credit cards, auto loans and mortgages. Naked After Purge Both O’Neal and Prince fired critical personnel or allowed them to walk away, says Clarke Murphy , head of the CEO and board services practice at New York-based executive recruitment firm Russell Reynolds Associates . “If you have institutional purges, you are naked when it comes to management succession,” Murphy says. “Some of these people may have been the best-trained general managers for other parts of the bank.” At Citigroup, Prince’s appointment prompted another candidate for the job, Robert Willumstad , to leave in 2005. Willumstad, who ran Citigroup’s consumer businesses and then became the company’s president, went on to become chairman and, briefly, CEO of AIG . He also co-founded Brysam Global Partners Inc., a private equity firm, with Marjorie Magner , another Citigroup veteran who quit under Prince. The executive exodus at Merrill under O’Neal included Gorman, Morgan Stanley’s future CEO, an Australian and former McKinsey & Co. partner who joined Merrill under CEO David Komansky in 1999. Gorman Steps Up Gorman ran Merrill’s private client group until 2005, when he resigned and, six months later, joined Mack as head of Morgan Stanley’s global wealth management division. Mack was then on his second round at Morgan Stanley , a company that he first joined in 1972. He had left in 2001 after a bruising succession battle with then-CEO Philip Purcell . Four years earlier, the firm, led by Mack, had merged with broker and asset manager Dean Witter, Discover & Co., headed by Purcell, and the two agreed that Mack would take over later. As the years passed, Purcell failed to relinquish power. Mack, who had taken the title of president, quit and took a job running Credit Suisse. Under Purcell, a raft of Morgan Stanley management committee members resigned, including Pandit and Joseph Perella , who went on to found investment bank Perella Weinberg Partners LP. In 2005, after Purcell himself was ousted by his board for poor performance, Mack was invited back to run a wounded bank; the shares had fallen almost 40 percent in five years. Subprime Blunder During Mack’s second term, the firm ramped up trading risk and grew its real estate and prime brokerage businesses to compete with Goldman Sachs as markets soared. Those choices put the firm near the brink as the subprime crisis sapped away profits and forced Mack to take $10 billion in federal bailout money, since paid back. The bank’s earnings from continuing operations in the final three months of 2009 were $413 million. Mack stepped down on Dec. 31, a month after his 65th birthday. He’d been planning his departure for years, says Tom Nides , Morgan Stanley’s chief administrative officer, including making sure the board discussed potential successors both inside and outside the firm. “We don’t always do everything right, but we do get an A+ on succession,” he says. Gorman is already talking about succession with the board, Nides says. Determined Man Gorman’s appointment was announced in September, and he spent months learning details of all the bank’s businesses and meeting employees and clients. “Very few people get a second chance at succession planning on Wall Street, and Mack did,” executive recruiter Murphy says. “You have a determined man by nature incredibly determined to leave a legacy that was different than his first go-round.” When Thain took over Merrill in 2007, he settled in for the long haul. Still, he says he was quick to formulate a succession plan with the board, part of the training drilled into him during his 25-year career at Goldman Sachs. “If I was hit by a bus, there were several choices, and the governance and nominating committee knew who they were,” Thain says. Instead, he was hit by a market meltdown that in one September 2008 weekend saw Lehman file for bankruptcy and Thain negotiate a quick sale of Merrill to Lewis’s Bank of America. Investors heralded the combination partly because it gave Lewis an obvious choice as a successor. Musical Chairs Then, an uproar broke out over fourth-quarter 2008 Merrill losses that were tardily disclosed, accelerated Merrill bonus payments and the $1 million-plus Thain spent decorating his office. In January 2009, Lewis fired him. The game of musical chairs continues. In mid-January of this year, Thain was talking to CIT, a lender to small businesses that filed for bankruptcy in 2009, about taking over as CEO, according to two people familiar with the matter. “The career paths in finance tend to be shorter and the rise to the top can be faster,” Thain says. “It’s different than a manufacturing company. But that doesn’t mean there shouldn’t be a plan.” JPMorgan had a plan for Jamie Dimon when he arrived at the bank’s Park Avenue headquarters by way of Chicago’s Bank One Corp., which the New York bank bought in 2004. Dimon, who had been CEO of Bank One, served as president under CEO William Harrison , who had worked for JPMorgan or one of its predecessors since the late 1960s. Dimon was one of the reasons Bank One was an attractive purchase, says ex-Honeywell boss Bossidy, a JPMorgan director at the time. In the Wings “Jamie was equipped to run a multidepartmental type of bank,” he says. “Having him as a potential successor was an important consideration for the board.” Dimon took over in 2005. During the next three years, JPMorgan, which earned $3.3 billion in the fourth quarter, avoided the worst of the subprime meltdown. Dimon, 53, is now searching for his own successor. In September, he promoted Staley, head of asset management, to CEO of JPMorgan’s investment bank. Staley, however, is nearly the same age as Dimon, who may stay on until he is 60. Meanwhile, he is grooming other, younger candidates by rotating them through different executive positions. Swap Around “Jamie thinks it’s hugely valuable to swap executives around so they can get the experience to run the bank some day,” says a member of JPMorgan’s executive committee who declines to be named. Goldman Sachs, which earned $4.6 billion in the fourth quarter, isn’t immune from Wall Street’s battles of the ego. In 1999, Henry Paulson and Jon Corzine shared the leadership for six months, until Corzine was forced out as the firm debated selling shares of the partnership to the public. Still, executive recruiter Murphy says the firm handles succession better than anyone. “At Goldman, leadership training isn’t grooming; it’s Darwinian selection,” Murphy says. The last time Goldman switched CEOs, Paulson departed to become President George W. Bush ’s Treasury secretary. Blankfein, approved by the board , stepped into the job the moment Paulson was confirmed by the Senate in June 2006. The firm had already named Gary Cohn and Jon Winkelreid as co-presidents to fill Blankfein’s old job. Replacing Blankfein Goldman’s 12-member board has discussed who might run the bank if there’s an emergency involving Blankfein, says Rogers, who’s secretary to the board of directors. And the company has done extensive vetting to figure out who’ll take over when Blankfein, who’s 55, retires. A similar regime applies to management jobs throughout the company. “We have hours and days of discussions about all the roles,” Rogers says. “It’s an operating principle.” The process primarily happens within a leadership training unit called Pine Street, named after the road in lower Manhattan where Marcus Goldman first hung the firm’s shingle in 1869. Pine Street steers selected vice presidents and managing directors — about 150 people a year nominated by their managers — through “leadership acceleration initiatives.” Over several months, they’re assigned team projects and assessed on their commercial instincts, initiative, teamwork and communication skills. They also get personal coaches, who offer private guidance on how to move up. 360 Reviews Goldman assesses every employee, including Blankfein, with an annual “360 review,” where bosses, peers and underlings anonymously evaluate each other. “You have to understand one thing about the Goldman culture: It’s taken very seriously,” Rogers says. “A process like this is only as good as the degree of buy-in and acceptance it earns from the people who participate.” The firm also typically assigns two people to share important jobs as co-heads. That helps the bank hold on to talent and takes advantage of employees’ different strengths, Rogers says. It also helps keep egos in check among bankers who, for 2009, will share a compensation pool of $16.2 billion. “If you think you are bigger than the organization, you won’t succeed here,” Rogers says. “The culture finds you out.” At Bank of America, Moynihan, who came to the bank with the FleetBoston purchase, has been training managers all the way up his own career ladder, says bank spokesman Larry Di Rita . “It’s in the nature of how he approaches leadership, and he’s carrying it into the CEO job.” One challenge now, as Moynihan restores order at a bank damaged by Lewis’s bungled departure, is to make sure his board does a better job of laying the groundwork for his own successor. To contact the reporter on this story: Lisa Kassenaar in New York at lkassenaar@bloomberg.net .
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