Thursday, May 16, 2013

Mr. Indispensable

Mr. Invincible you are not
“The cemeteries are full of indispensable men.”

Attributed to several indispensable men

Fire Jamie Dimon.

There, that got your attention, didn’t it?

Seriously, folks, the brouhaha surrounding the upcoming nonbinding shareholder vote to separate the Chairman and Chief Executive Officer roles at J.P. Morgan is getting a bit silly. People are marshaling all sorts of weak, irrelevant, and disingenuous reasons on both sides to argue for and against the resolution. Hence we get ludicrous examples of access journalists asking a gaggle of powerful white men whether another powerful white man should lose his power. Gee, I wonder how that turned out, don’t you?

I will not bore you with a demolition of the flyweight reasons the pros are using, including envy, spite, ad hominem vitriol, and gleeful detestation of Mr. Dimon as an avatar of hated “banksters” everywhere. On the other side, however, the cons have assembled all sorts of arguments against stripping Mr. Dimon of his Chairmanship which woefully fail to address the central point of the exercise, which is good corporate governance. Some say Jamie shepherded the House of Morgan through the dark days of the financial crisis with nary a scratch, and hence should be rewarded by keeping his seat at the head of the boardroom table. Yes he did, and a boffo job at that. So what? I got really good scores on my SATs. Did that mean I didn’t have to take tests or submit papers in college? Of course not: the past is the past. Besides, J.P. Morgan sailed into the Panic of 2008 in the best shape of any of its peers, with the possible exception of much smaller Goldman Sachs, which also came out smelling like a (relative) rose. It’s not like Jamie excavated a pile of shit and turned it into gold. He started with a pile of gold and mostly kept the tarnish off. No superhero he.

Some say the evidence of outperformance by companies with bifurcated Chairman/CEO roles is lacking. Part of that is due to the all-too notable reluctance of powerful men to give up power (viz. supra), which has led to a remarkable paucity of such structures among large publicly-traded corporations. Hence, the sample set from which one can draw financial performance data is unhelpfully small. Even so, this is a remarkably lame argument, equivalent to the contention that the fact that most people who wear seatbelts never get into accidents (and, contrariwise, wearing a seatbelt does not prevent accidents) means that seatbelts are useless. Go ahead and pull the other one.

Still other FOJs contend Mr. Dimon’s delivery of $21 billion in record profits last year should silence his critics and put the kibosh on this petty attempt to strip him of rightful powers and duties. But I say the man or woman at the helm of a $2.4 trillion colossus which employs over a quarter of a million people around the globe damn well better produce some pretty amazing results, especially when so many of its largest competitors remain in disarray, the cost of funds for financial firms could not be cheaper if Ben Bernanke were backing up a dump truck full of dead presidents into J.P. Morgan’s lobby, and his privately held bank is implicitly backed by the full faith and credit of the United States government (and perhaps the European Union, too).1 The man is a CEO. He is supposed to create good results with the awe inspiring assets he has at his disposal. He did. Big whoop. Give the man a fucking fruitcake.2

* * *

But all this is smoke and mirrors.

The entire point of separating the roles of Chairman of the Board and Chief Executive Officer is that they have different responsibilities and duties. They are different jobs. Now, perhaps at smaller companies with simple business models and uncomplicated objectives (grow revenues fast enough to meet payroll and pay the bank on time), there is no practical need to separate them. But the bigger a company gets—and I think we can all agree J.P. Morgan is about as big as a firm can get—the breadth and scope of duties each role properly possesses expands dramatically. The CEO is supposed to be the chief employee, leading his or her organization to deliver on the agenda and objectives the Board of Directors has set. The CEO is an operating executive.

The Chairman, on the other hand, is supposed to lead the Board of Directors in setting the agenda, strategy, and objectives of the corporation, in response to its employers, the shareholders, and all the other myriad stakeholders (employees, regulators, government officials, vendors, community members, and customers) which have a say or a stake in the activity of the firm. The Chairman and other directors of the corporation are stewards. They are not supposed to get down in the weeds, day to day, operating the various parts of the business. That is the CEO’s job. But as stewards they are supposed to think about the what-ifs, the perils and opportunities that may or may not confront the firm in the future, and the problems and threats which may be festering beneath the glittering surface of excellent corporate performance. A properly engaged CEO doesn’t have time to worry about such matters. He has a day job to perform.

The other key duty of the Board, with the Chairman at its head, is oversight. The Board is supposed to monitor the performance of the CEO and his or her key executives: guide, correct, discipline, and incentivize him or her to perform in a way which achieves the objectives they have set and satisfies the other constraints the firm must operate under. Even the meanest intelligence can see that having the Chairman and CEO of a firm be the same person collapses this crucial function into irrelevance:

“Gee, Jamie, do you think you’re performing adequately in the public relations part of your job?”
“Why, yes, Jamie, I think I’m doing a great job, don’t you?”
“Sure I do! Have a cigar.”

Of course, a soi-disant superman CEO could surely set his own agenda and monitor his own performance—just as his lesser peers can certainly contribute their valuable perspectives on such matters to their Boards—but such arrangements diminish the patently obvious benefit of involving more than one person’s perspective in the issue. Not to mention short-circuiting the potential for meaningful criticism and disagreement over firm challenges, issues, and threats which merit serious discussion. I don’t care how big your head is, two heads (or more) are always better than one.

The role of the Board as stewards of the firm and monitors of the CEO and his or her executive team naturally introduces a healthy tension into the governance of a large organization. A Board which is properly performing these duties will have occasion to challenge, correct, punish, reward, and occasionally fire a CEO. Find me a person who could legitimately do this to him or herself and I will show you a person who is temperamentally unsuited to the role of CEO. They just don’t make psychopaths that way.

* * *

So much for principle and common sense.

The real reason to strip Jamie Dimon of his Chairmanship is that he has done a shitty job at it. He has failed to accomplish one of the most important, difficult, and basic tasks a Chairman is supposed to do: establish a succession plan for the CEO. Each and every Board worth its perks and compensation should make finding and grooming successors to the firm’s current senior executives—especially the CEO—its most important agenda item. Not only has Jamie failed at this, he has actively fired key lieutenants and potential successors like Bill Winters and Steve Black, apparently on the basis that they posed too credible a threat to his own power.

The fact that certain people find Jamie’s petulant whining that he may quit if shareholders vote to strip him of the Chairman role a credible threat is proof positive that the current Chairman of J.P. Morgan has done a lousy job preparing for the inevitable eventuality that Dimon will have to be replaced. The current Chairman has also done a lousy job cajoling the current CEO to delegate more of the minutiae of running a place as gigantic and complex as J.P. Morgan to trusted lieutenants, and to train and mentor those lieutenants into a position where they can ultimately replace him. That these are related issues, and practices which strike at the very heart of the purported indispensability of any Chief Executive Officer, is highly revealing.

Finally, the current Chairman has done a lousy job selecting his other Board members, particularly in the all-important area of audit and risk management. The risk oversight and monitoring function at a gigantic, staggeringly complex lending and trading bank like J.P. Morgan is arguably the most important one—after CEO succession—a Board has. Yet Jamie stacked his risk committee with a former lawyer and professional board member previously on the risk committee at AIG who currently heads a natural history museum, a rich kid whose life experience consists of managing grandad’s money, and the CEO of a a flight controls company. I will wander way out on a limb here and bet these people couldn’t evaluate the financial risks of a childrens’ lemonade stand, much less one of the largest banks on the planet.

The current Chairman of J.P. Morgan has done a crappy job in almost every dimension that can be measured. And don’t point me to his lead director Tweety Bird, either. I don’t care how fearsome Lee Raymond’s reputation as a former imperial Chairman and CEO was, it is clear he can’t get Jamie Dimon to return his phone calls, much less address the critical areas of underperformance I have identified.

The agenda is clear: the current Chairman of J.P. Morgan should be run out of town on a rail. The current CEO can stay, assuming a new, effective, powerful Chairman thinks he’s up to snuff. Clearly somebody needs to smack that knucklehead around a little.

Fortunately, Jamie, you will be relieved to hear I am not available.

Related reading:
To Catch a Thief (February 13, 2009)
J.P. Morgan and the Marlboro Man (May 20, 2012)

1 Want to deny this? Envision, if you can, whether the US government would let anything happen to all of $2.4 trillion, 256,000 people strong J.P. Morgan if it got into serious trouble. Do you for a minute think they would let it crater like Lehman Brothers? That they would even consider it? I didn’t think so.
2 Or, say, $20 million.

© 2013 The Epicurean Dealmaker. All rights reserved.

Sunday, May 12, 2013

Go Ahead, Live a Little

Kick ass and take names, sister
Longtime followers of this cut-rate opinion emporium will recall your Humble Bloggist to be a gushing fan of Financial Times management inquisitor Lucy Kellaway, whose rapier wit, ear for human folly, and impeccable judgment have always encouraged me to envision her as a modern-day Musketeer wielding a PhD in bullshit detection while sporting sensible shoes.1 Among her many other contributions to modern society, she presides over an occasional agony aunt column for victims of financial capitalism entitled, appropriately enough, “Dear Lucy.”

As chance would have it, a recent inquiry therein puzzled me enough to encourage me to pop my head up from my hidey hole in the Volcano Lair and offer a judicious comment or two. The hapless correspondent’s plea is brief:
I have worked in Global Markets for an investment bank since I graduated six years ago. I’ve recently been given the opportunity to go travelling with my boyfriend, but I wonder how long I can be away from the industry and still have a good chance of being re-employed on my return. Six months? One year? Three years? I’m also aware that when I get back, I’ll be an attached, childless woman in her early 30s, which shouldn’t affect my employment chances but I’m worried it will.

How can I manage this before we go to leave as many doors open as possible?

Banker, female, 28
* * *

Now, my first reaction on reading this tidbit was “Huh?” The emphasis, phrasing, and even question itself is all wrong. “Bloodless,” Lucy calls it, and bloodless it is. Putting aside the apparent implications for this person’s relationship with her boyfriend, it raises serious questions in my reptilian Managing Director’s brain concerning the status of her employment. Certain clues, like “worked in” and “being re-employed” lead me to believe that, notwithstanding this supplicant’s self-selected sobriquet, she is nothing remotely like a real, front office, revenue-generating “banker” and is instead a faceless, gormless member of the administrative, sales, or information technology support staff at her so-called investment bank. A real global markets banker worth the title would have 1) puffed herself up—“built a successful career in Global Markets for a leading investment bank”—and 2) crumpled the letter up and thrown it away before sending it to Lucy, because of course any bank in their right mind would hire a banker of her genius and ability no matter what the fuck she did for three years. People who are successful (and who have a sporting chance of success) in my business just don’t undersell themselves the way this person does.

But, in the interest of charity (and producing a blog post more interesting than this might otherwise be), I will choose to put another spin on the affair. Perhaps her passive-aggressive boyfriend—who has had to listen for years to glowing reports of her fast-paced, exciting life among funny, brilliant, puissant young men who make many multiples of the pittance he brings in as a clerk at the Carphone Warehouse—sent the letter to Lucy in hopes of guilting her into quitting her job and paying for his beach vacation in Phuket for the next three years. Or perhaps this person really is a talented, driven revenue producer who eats nails for breakfast and spits iron filings for lunch but, like many in her industry, is simply incapable of writing her way out of a paper bag with a map and a blowtorch. Or maybe even this person makes £100 million per year trading Cadbury DairyMilk futures for her desperately grateful third-rate Spanish commercial bank but has been cowed by all the ex-Carphone Warehouse employees waving “Occupy Whoever Has Money” signs in Trafalgar Square into epic self-deprecation.

You get the idea. Let’s assume the improbable and take this person’s letter as sincere.

* * *

In which case, my next question is also “Huh?” For a person who has been working in the capital markets division of a major investment or universal bank for six years surely should have developed some horse sense about her industry. People just don’t take sabbaticals in capital markets or investment banking. As Lucy rightly says, things change too fast. Markets change, securities change, customer relationships change. Disappear for one year, much less three, and nobody will remember your name, much less care what you have to say about anything.

I had a Managing Director tell me years ago, when I was a mere pup, wet behind the ears, that the best strategy to succeed in investment banking was to keep your seat. Success would come, and success would go, but you could never enjoy the fruits of good luck or a heated market if you weren’t in a position where you could get paid. Young and naive as I was, I remember finding this advice rather cynical and dispiriting. Surely you kept your seat and made lots of money for your firm because you were really good, because clients respected and trusted you, because you gave them great advice. Because you were better than anybody else. This was stupid on my part. He was right.

Nobody is indispensable in my industry. Nobody. Ever. For every hotshot trader or investment banker glorying in her run of luck and outsized compensation, there are twenty waiting in the wings who could do just as good a job. And a hundred who would be willing to work for half pay to prove they could do so too.

I’ve said it a billion times: in investment banking or sales and trading, you’re only as good as your last deal or your last trade. And your last deal or your last trade had much more to do with you being in the right place at the right time—being in the right seat—than with your charm, skill, or intelligence. And none of us know when the right deal is going to hit.

Everybody figures this out sooner or later. Senior management knows it by heart. So when a banker leaves the industry of their own volition, the message is very clear: “I’m never coming back.”

* * *

Which is not to say you shouldn’t do it. Hey, maybe you’re tired of the grind. Maybe you’ve done your time in Hell, and it’s time to enjoy life a little. Working investment banking hours, under investment banking pressure, with a bankful of aggressive, psychopathic assholes for six years until the age of 28 is enough to make anyone want to chill out on the beach with an umbrella drink for a year or three. It’s your life.

Just don’t have any expectations that your old job, or anything like it, will be waiting for you when you get back. Your experience will be stale and out of date: useless. And there is nothing about your charm or intelligence that will distinguish you from the line of a hundred identical eager valedictorians waiting outside our hiring office. If anything, they’re probably hungrier and more naive (hence more malleable) than you. Intelligence is table stakes. What really makes an investment banker successful is drive and ambition. Will you still have it after traveling the world?

If so, feel free to reapply. But, take it from me, you better have some damn good stories to tell: why you left, what you did while you were away, and why you want to come back. Those are real assets. The rest of us poor slobs who stayed behind want to hear what the real world looks like. But more importantly, we want to believe if we give you one of the scarce seats we have to offer you’re going to have the skill and the drive to make us—and yourself—a boatload of money. That’s the tradeoff: our seat, and the opportunity to make ridiculous amounts of money if you’re lucky, in exchange for your single-minded ambition to do so.

Investment banking is a jealous mistress. She does not suffer indifferent commitment gladly. And she has far too many suitors for her favors to dally with anyone who is not willing to give her one hundred percent.

You do the math.

1 In contrast, say, to lazy dilettantes too eager to take cheap shots without doing the hard work of actually critiquing all too widespread management idiocies in an enlightening manner.

© 2013 The Epicurean Dealmaker. All rights reserved.

Sunday, May 5, 2013

Nothing Gold Can Stay

Carpe diem
Kawase Hasui, Spring Evening at Kintai Bridge, 1947
Nature’s first green is gold,
Her hardest hue to hold.
Her early leaf’s a flower;
But only so an hour.
Then leaf subsides to leaf.
So Eden sank to grief,
So dawn goes down to day.
Nothing gold can stay.

— Robert Frost, “Nothing Gold Can Stay”

We have had one of the longest and most beautiful Springs in New York City this year I can remember. The flowers and blossoming trees seem brighter and longer-lasting than normal, although I have nothing but faulty memory to claim this as fact.

Perhaps I have been more alert to signs of Spring than I am wont after a long and difficult Winter, and more appreciative of the tilting of our planet as balmy breezes and warming sunshine replace bitter freeze. Certainly there has been little enough change in my life for me to believe cold Winter has been banished for good. But hope rises up like tree sap.

The cherry blossoms and gardenias of Central Park fade already. Greedy trees suck up snow melt and sunshine to carpet the grass with shade and canopy over the sky with green. Hot, hard Summer is coming.

Get out now, while you can, and drink the sweet dregs of Spring while they last. There is a special glory to warm sunshine when it is tempered by cool grass and the chilly whispers of Winter’s reluctant departure on the breeze.

Get out now. One day there will come a Winter whose Spring you will never see. Do not waste the Spring you have today.

Nothing gold can stay.

© 2013 The Epicurean Dealmaker. All rights reserved.