Accountability Claims Jobs of Wall Street CEOs

In October, Merrill Lynch's (MER) CEO, Stan O'Neal, said he would step aside after the company announced it would write down $7.9 billion because of losses in its fixed-income business as well as its first quarterly loss in six years. In early November Citigroup (C) CEO Chuck Prince announced his resignation as "the only honorable course for me to take" after the financial-services firm said it would write down more than $8 billion for its exposure to mortgage-related securities in the fourth quarter. That was in addition to the $2.2 billion in write-downs it announced for the third quarter.

The bad news didn't end there. In early December UBS (UBS) reported a $10 billion write-down on U.S. subprime-mortgage investments. And just last week, Morgan Stanley (MS) and Bear Stearns (BSC) announced they would take $9.4 billion and $1.9 billion, respectively, in mortgage asset-related write-downs. Both banks' CEOs said they'd forego their annual bonuses because of the poor performances.

For Noel Tichy, professor of management at the University of Michigan's Stephen M. Ross School of Business, these huge losses indicate, in one way or another, a failure in judgment — and one that shouldn't go unpunished. The primary job of a chief executive is to "add value to the assets you're given," says Tichy, co-author with Warren Bennis of "Judgment: How Winning Leaders Make Great Calls." When you don't do that, shareholders and directors have every right to show you the door.

Of course, being the boss means taking the bullet for a deal or strategy or complex debt security gone awry. But should leaders always take the blame? Even in a case like the subprime-mortgage mess, which affected so many companies' bottom lines?

Tichy says if a competitor is managing to do a better job — take Goldman Sachs (GS), for example -- then there is fault to be assigned. If there's even one exception, one company that came out ahead while the others were foundering, Tichy says, it's not so much about industry troubles as about company-specific leadership.

SmartMoney.com: Should leaders always take the blame for company blunders?

Noel Tichy: The role of a CEO is to add value to the assets they're given. If you're given $100 billion and it goes to $38 billion, like John Akers of IBM (IBM), sorry, time to go home, John. The role of a CEO or any leader is to add value to the assets you're given — whether it be return on investment or return on equity.... Like anybody else, you should be held accountable.

With Stan O'Neal and Chuck Prince, shareholders said sorry, time's up, you're not delivering performance, time to go home. And don't you or I feel sorry for them. O'Neal went home with $160 million-plus. I've said in a speech to [executives], How many of you can destroy that much value and still have a job?

SM: These CEO exits seemed largely related to the subprime-mortgage crisis and the bad bets these banks took that lost them so much money. Is that entirely their fault?

NT: Goldman Sachs actually had record earnings. So someone was doing a better job there. And Jamie Dimon at JPMorgan Chase (JPM) didn't have much exposure. So those are leaders who get an A-plus, and they're in the same industry. The Royal Bank of Scotland didn't have exposure. They have to live with the consequences. When capitalism works, you're supposed to be accountable. If everyone had gone down, I'd say maybe it was impossible because all the ships are going down. But all you need is one exception. Then it's about leadership.

In my book I say the essence of leadership consists of three things: people, strategy and crisis.... If you don't get the people right, you have no prayer of making it even with the right strategy and you certainly can't make it through a crisis. O'Neal had little or no support in part, I would argue, because of his autocratic style. I assume people knew stuff that never got to him. His board that he recruited himself is the one that fired him. It couldn't have been warm and fuzzy with that board.

SM: What about CEOs who would otherwise be as much at fault, but have better relationships with their boards?

NT: Prince was [former Citigroup CEO] Sandy Weil's lawyer.... So he got him in that way. But he was not someone who has the full scope of running the most complex financial-services firm on the planet. He didn't surround himself with the right team. I don't feel sorry for these guys.

That's the essence of leadership. These guys are paid to make good judgments. They need to surround themselves with good people and make the right strategic judgments. All institutions are going to face crises. If you don't have the right team and reasonably good strategy, you're dead.

I think John Mack at Morgan Stanley has been hit with a lot of the same issues. If you look at the support and alignment in Morgan Stanley, his senior management's support, he's fairly open in his comments.... He will survive this. He did take accountability and got rid of [co-president] Zoe Cruz. Maybe he could have acted sooner on that, but he didn't.... He brought in some new talent. He's well liked and respected by others, unlike what Stan O'Neal was facing. And he has the support of the board. He's taken responsibility.

SM: What about James Cayne at Bear Stearns?

NT: I don't know the political power of that board. I assume he's got pretty good control. It wouldn't surprise me if he has enough control to stay.

SM: But maybe he should step down. His firm's profits plunged and there are investigations into the collapse in the summer of two hedge funds that invested in subprime mortgages and lost $1.5 billion.

NT: My guess is that board is his.... The world is supposed to work that there's accountability. We all know it's imperfect. When the board is doing its job and the CEO is doing his job, he needs to be measured for performance. That gets measured in shareholder value of the company. It ends up being a much more subtle process. Over time the board loses confidence. The subprime thing happened fast and hard; it happened quicker than with Hewlett-Packard's (HPQ) Carly Fiorina. It was kind of the perfect storm for the industry.

It wasn't impossible to make it through the tough times. If anything in this country we've been too easy on them. They are such a protected class. There really is no downside except to their ego. Do you really feel sorry for Stan O'Neal?... He's still flying around in private planes.