High turnover and the limited experience among the most senior executives on Wall St could be storing up trouble. My column for Financial News from July 2013
When it comes to work, too much experience can be a bad thing. Just ask Alfred Feld, the 98-year-old broker who this month celebrated his 80th anniversary working at Goldman Sachs.
On the plus side, he can share his invaluable first-hand experience of market turmoil as far back as the Great Depression with clients, but on the downside, as Feld once said of his Rolodex: “Everyone in there is pretty much dead”. (Note: Feld died in November 2013)
Too much experience is not the issue at most investment banks. In fact, it is a lack of experience at the top of the industry that is beginning to unsettle regulators. By my calculations, the median average number of months that the chief executive or co-chief executives of the biggest investment banks have been in office is just 11.
This vacuum of experience comes in two parts… First, there is a generational shift under way as many senior bankers and traders grab what is probably their last chance to set up or join a boutique or hedge fund (while many of their less fortunate but similarly grey-haired colleagues are quietly put out to pasture).
Second, and far more worrying from a regulatory perspective, is the wholesale clear-out in the boardroom. News of the departure of the chief executive of an investment bank has become so common over the past few years – 10 of the biggest investment banks have changed their chief executive since the beginning of last year – that it has perhaps lost its collective impact.
This is not entirely unwelcome. It introduces new faces and perspectives to the top of the industry, with a different management and strategic approach that is perhaps better suited to the straitened post-crisis environment. The clear-out also suggests that at least some of the most senior managers at investment banks have paid the price for the crisis (even if just as many have been rewarded with promotion to running their entire bank).
At the same time, given that this collective lack of experience comes as the industry faces such a critical period in hammering out its future (when many people are still not convinced it has sorted out its past), it’s hard not to think that it might just be storing up trouble.
Let’s have a look in more detail at those numbers (for the sake of argument, I treat tenure in the role as an inexact but decent proxy for experience). The mean average tenure of the chief executives of 20 large investment banks or corporate and investment banking divisions of big banks was 38 months (or just over three years) as of the end of June this year, according to my calculations.
This figure is flattered by a few longstanding individuals such as Richard Handler, who has run Jefferies since January 2001 (150 months) or David Hoyt, who has been head of wholesale banking at Wells Fargo since the beginning of 1999 (174 months).
When you zoom in on the biggest 14 investment banks with comparable businesses and disclosure, this average drops to just 18 months in the hot seat. And the median is a mere 11 months, or less than one year.
When you look strictly at their current roles and management structures, the heads or co-heads of eight of the largest investment banks have been in place for less than a year as at the end of June: Barclays (three months), Royal Bank of Scotland (four months), Citigroup (six months), Nomura (six months), Credit Suisse (eight months), UBS (nine months), with Nomura and JP Morgan bringing up the rear (both 11 months).
This shines the spotlight on some of the outliers. For how much longer will Lloyd Blankfein, who has been in office for 85 months and counting, continue to run Goldman Sachs (to the frustration of his number two Gary Cohn)? As Tom Montag approaches his fourth anniversary of running the banking and markets division at Bank of America Merrill Lynch, is he thinking of handing over the baton to someone else, and if so when and to whom?
Of course, it is not as though the banks are promoting graduate trainees to run the firm. While some of the new team are impossibly young (Colin Fan has turned 40 since he was appointed co-head of corporate banking and securities at Deutsche Bank in June last year), most of the new crop are experienced executives a few years either side of 50 who have a long track record at their bank.
James Forese, head of the institutional client group at Citigroup since the beginning of the year, had been head of its securities and banking division for two years before that. Colm Kelleher had been co-head of institutional securities at Morgan Stanley since 2010 before becoming sole head in December last year. And Eric Varvel had more than three years’ experience running the investment bank at Credit Suisse on his own before Gaël de Boissard was promoted to run it alongside him last year.
It is, however, worrying that the average experience at investment banks has fallen so sharply over the past few years.
A year ago, the median tenure of chief executives at the biggest investment banks was 32 months, by my calculations. Five years ago, just before the industry ploughed into the worst of the financial crisis, the median tenure of its chief executives was 45 months (which, I suppose, shows that experience is perhaps not all it’s cracked up to be).
This means that the average experience today of the head of a big investment bank is roughly one third of what it was a year ago and only a quarter of what it was in 2008. That’s a sobering thought when you consider the responsibility that these new boys (and they are all boys) are being asked to carry.
Perhaps more worrying, this downward trend in experience appears to be infecting group chief executives, where half of the big 14 banks have changed their chief executive in the past two years, and the median tenure has fallen from 30 months a year ago to just 20 months today.
This new crop of chief executives does not lack ability or self-belief. But regulators and shareholders could be forgiven for thinking that too much change at once might be a bad thing. Just ask Alfred Feld.
–This article first appeared in the print edition of Financial News dated July 22, 2013