December 18, 2013

Lessons From Merrill’s First 100 Years From Founder’s Son

Winthrop Smith Jr., a 28-year Merrill veteran, tells of the values that made the firm great and blasts the O’Neal interregnum that almost killed it

A still from a recent Merrill ad campaign. A still from a recent Merrill ad campaign.

In a little over two weeks, Merrill Lynch will be celebrating its 100th anniversary, a milestone that corporations in a dynamic economy filled with mergers, acquisitions and bankruptcy seldom achieve.

In fact, Merrill quite nearly didn’t make it. Had it not been taken over by Bank of America, the firm would have expired before turning 95.

It is with that very recent adversity in mind, and its older glorious past, that a former Merrill executive and the son of one of its founders has written a book, just released, called “Catching Lightning in a Bottle: How Merrill Lynch Revolutionized the Financial World.”

“I didn’t want Merrill Lynch remembered for the bad days of 2007 and 2008 when it had to be rescued by Bank of America,” says Win Smith Jr., the son of Winthrop Smith, co-founder of Merrill Lynch, Pierce, Fenner & Smith.

Himself a career Merrill employee until he broke with the firm — voluntarily resigning in 2002 — Smith told ThinkAdvisor he wanted to explain how precious and unique was Mother Merrill’s culture before it got derailed in the previous decade by a new leadership of which he is sharply critical.

No less a personage than former SEC chairman Arthur Levitt praised Smith’s book, saying “no novel could be as captivating,” and noted its author’s frankness in assessing the leadership failures that nearly did in the firm.

Former Merrill CEO E. Stanley O’Neal is the book’s chief villain, but its many heroes include founder Charlie Merrill and Smith’s father.

“In 1929, [Merrill] was prescient in seeing the bubble on Wall Street and people being far too in debt and overleveraged. He got his customers out of debt and out of the market,” Smith says.

The ensuing market crash shattered confidence in the stock market — but Smith’s father, then working for E.A. Pierce, to whom Merrill had sold his interest in the business — shared a vision with Merrill for restoring trust in the markets and popularizing investing, which was then the province of a small minority of Americans.

“The average American didn’t understand how to invest and didn’t trust Wall Street, and Wall Street needed a lot of reform in order for the average investor to invest safely. So they recapitalized the Pierce organization and became Merrill Lynch, Pierce, Fenner & Smith,” he says. (At an earlier point in its merger history, the firm had the name Merrill Lynch, Pierce, Fenner & Beane.)

Merrill was the CEO, but when the first of several heart attacks induced him to step down, Smith’s father assumed day-to-day leadership of the firm, speaking daily with Merrill until his death and running the firm until his own passing in 1961.

“As opposed to the extravagance of today, he carpooled to work. Instead of vacationing in the Hamptons, he went to farm in Connecticut where he raised sheep,” Smith says of his father.

What made the firm unique, Smith says, is a set of five core principles and a culture that Merrill and Smith fostered, which the firm’s other employees all embraced.

Those principles were that “the client’s interests had to come first; you have to have respect for all employees; you need to foster a climate of teamwork; you have to have responsible involvement in your community; and integrity,” he enumerates.

“I and my colleagues felt those were our North Star. When we made mistakes, those principles brought us back,” he says, since they were transmitted through corporate lore that included accounts of how Merrill’s leadership would correct mistakes, making good on customer losses, for example, that the firm’s leaders regretted.

However individually different Merrill’s leaders were, they shared those stories and those values, he says, until Stan O’Neal became its CEO and chairman in 2003. That same year O’Neal gave an interview to the New York Times in which he described “Mother Merrill…as a club,” which O’Neal said was out of place in modern commerce, but which Smith says Merrill employees interpreted as “totally disparaging.”

Apart from setting a different tone, it was a radically different course of management that most alarmed Merrill veterans, Smith says.

At the time O’Neal assumed leadership of the firm, Merrill had become “one of the top if not the top global financial services firms” with record-beating return on equity, $1.5 trillion in assets under management, the top spot in global debt and equity underwriting for 48 consecutive quarters and its stock priced at an all-time high.

“It’s hard to say that record was in need of the dramatic reorganization” that O’Neal imposed, he says.

O’Neal made massive cuts in the organization, including mass layoffs among the firm’s financial advisors, taking a $1.8 billion one-time write-off.

“He cut out businesses we had spent decades building” — businesses that could not avail the company when the Street began its post-dot-com recovery, Smith says.

“In 2003-2005, he realized we needed to generate profits so he moved into subprimes and CDOs. Merrill Lynch became one of most exposed firms on the Street in just a few years. By the time Merrill Lynch collapsed, he had taken our leverage ratio from 13 to 1 to nearly 36 to 1, which was basically unsurvivable. No other leader would have cut into the muscle of the organization. No other leader would ever have gotten into those businesses,” Smith laments.

Smith says Merrill’s board of directors at that time shared in the blame, with no one on the board thinking to contact him or any other Merrill veterans to ask why they were resigning. Worst of all, though, was O’Neal’s golden parachute, making his departure as controversial as his tenure.

“After O’Neal brought the firm down, they let him walk away with $162 million in severance, when the public as well as Merrill’s employees were wiped out.”

Smith does not see the solemnity of a contract as a defense in this case.

“I was head of HR [for a time]. I designed compensation plans. [O’Neal got that package because] they allowed him to retire…If they had fired him for cause, which would have been justifiable under the circumstances, that stock would not have vested and he would not walk away with all that money,” Smith says.

The Merrill founder’s son, who had risen to executive vice president and chairman of Merrill Lynch International when he left the firm after 28 years, has praise for O’Neal’s successor, ex-Goldman Sachs exec John Thain, who led the firm after Bank of America’s acquisition.

“He really tried to restore an appreciation of the history and values of the firm” and to rebuild after the beating the firm and its stockholders took.

What lessons does Smith derive from Merrill’s century-long history?

“I think it’s very important to understand the power of a culture and the power of values.”

Smith cites executive compensation as one example of that culture, saying that while no rules prevented Merrill’s leaders from selling their stock, executives didn’t do so because it was part of the culture; moreover, a third of the stock was held by employees when he worked at the firm, and more than half of executives’ pay was in stock, so the leadership at that time shepherded the firm with a view toward long-term results, in contrast to the year-to-year mentality of the O’Neal era.

Another lesson: “When looking at leaders, don’t look only at skills and technical abilities; look also at character,” he says.

Smith also offers words of encouragement for today’s financial advisors:

“There is always going to be place for a good, trusted financial advisor—no matter how much the world has changed…

“Good advisors put the client’s interests first; don’t do anything that involves a conflict of interest. The best advisors are charging fees, not commissions; they’re not selling products but understanding client needs; the best advisors today are working in teams, not trying to be all things to all people. I think those things were true in the past and true today,” he says.

As to Merrill’s upcoming centenary celebration on January 6, Smith muses:

“I think it’s a marvelous day; when you think about how many firms last 100 years, you really can’t count too many…

“I’d tell the people at Merrill Lynch [it's] time to reflect on the history and understand there’s another 100 years ahead of us.”

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