February 25, 2014

Gross, El-Erian Clashed in PIMCO ‘Pressure Cooker’

Tension with Bill Gross seems to have prompted Mohamed El-Erian's exit, reports Wall Street Journal

It’s the hottest topic on Wall Street: What exactly prompted PIMCO CEO Mohamed El-Erian to resign from the bond shop, which was  founded by Bill Gross and manages nearly $2 trillion?

El-Erian’s move, set to go into effect next month, may have been influenced by a spat, reported in Tuesday’s Wall Street Journal, during which Gross supposedly said in front of a dozen colleagues, "I have a 41-year track record of investing excellence. What do you have?"

In response, El-Erian reportedly told Gross, “I’m tired of cleaning up your s---."

Rising tensions between the two, experts say, reflected the climate largely created by Gross.

“The environment was a pressure cooker,” said Management Systems Consulting Corp. President Eric Flamholtz, on Bloomberg Television. “I have a lot of respect for Bill Gross, but the environment was a pressure cooker...and was unhealthy.”

This sentiment wasn’t just found at the top levels, says Flamholtz, who has consulted with PIMCO on human resources matters. “It was an undercurrent theme with almost 100% of the people there,” he noted.

“The stress they were under when performance wasn’t there …can’t be minimized as things [like change in the bond market] unravel,” the consultant said.

Of course, this dynamic often goes hand in hand with trading activities, as well as with the building of a highly successful business in general, some observers point out.

“[T]he behavior described is completely typical of any highly successful, high-functioning organization in any field I've ever seen,” said Netscape co-founder Marc Andressen on Twitter. “High-functioning business organizations aren't Disneyland. There's always stress, conflict, argument, dissent. Emotion. Drama.”

And emotions were very likely to escalate as bond rally came to an end, others point out. “It stops, there were withdrawals, [and] people get testy,” said Flamholtz.  

The situation may have been compounded, though, by the personality and leadership history of Bill Gross.

As the WSJ reported, Gross allegedly said last summer, “if only Mohamed would let me, I could run all the $2 trillion by myself … I’m Secretariat. Why would you bet on anyone other than Secretariat?”

“He’s the founder and autocrat, and his opinions matter most at the end of the day,” said former PIMCO Managing Director Bill Powers, in an interview on Bloomberg Television. Such a dynamic creates many “possibilities for tension,” Powers noted.

Going forward, though, PIMCO seems to have diffused some of the concentration of power in the upper echelons of the firm. “This sets up a healthy future in which it’s hard for two to square off,” he said.

As both El-Erian and ex-PIMCO CEO Bill Thompson learned, Gross “will wear [any singular opponent] down,” added Powers.

PIMCO’s new leadership structure puts three leaders at the top of the business and six deputy chief investment officers in place, he explains. “There are more leaders now, and more power that is delegated."

If there’s disagreement, Powers says, it means it won’t be one on one. “It’s a fairer fight,” he said, “and that could mean a healthier future for PIMCO.”

Corporate Culture

For Flamholtz, though, there needs to be cultural change throughout the organization in “the way people are treated.”

The people who’ve worked at PIMCO “had a lot of money but were very insecure,” he says.

PIMCO, the management consultant adds, is “not any worse than anybody else.” Still, for its future, it should "build a strong corporate culture that is an enhancement” to its business.

In four of five areas, PIMCO is already doing quite well, he says: its treatment of clients, its standards of accountability and performance, its openness to innovation and its process orientation and planning.

“Where it’s relatively weak is in its treatment of people,” which is a very “corrosive process,” Flamholtz said.

“You’ve also lost people. People can take pressure… and then [their ability to do so] stops,” he shared. “Not everyone is a Bill Gross and can handle the pressure for 30 or 40 years.”

Even horse-racing legend Secretariat eventually had to retire from the race track.  

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