Following on from my piece last week about the need for bank chairman to raise their profiles and engage more actively in the policy, political and regulatory debate – which I insist is better had away from the day-to-day performance, operational and management issues that sit with chief executives – I spent some time mining dozens of banking set-ups around the world.
It’s not really any secret that only American banks allow president, chairman and CEO roles to be wrapped around a single individual; it’s just a fixture of US governance. It’s noteworthy that Bank of America Merrill Lynch and Citigroup have separated out their chairman roles but their examples have had little impact on the sector as a whole.
The sole non-US bank that apes the American model is Societe Generale, where Frederic Oudea is chairman and CEO but with three deputy CEOs reporting to him. All very cosy, I’m sure, but the board should make up its mind and elevate one of them to CEO and Oudea should concentrate on building out his role as chairman.
Speculation and chatter about apparent moves to split the roles, particularly at Goldman Sachs and JP Morgan, have been constant sources of media and blogosphere gossip, which I know drives Lloyd Blankfein nuts. Barely a day goes by without someone speculating that he’s about to cede the CEO role to Gary Cohn.
Similarly, chat around the succession route Jamie Dimon takes – is Matt Zames the heir apparent etc. etc. – has the market enraptured.
Gorman unstapled
Oddly enough, there’s been less chatter at Morgan Stanley, so I got to thinking: what would happen if James Gorman’s chairman and CEO roles were un-stapled? Not that I have any intel to suggest this appears imminent, but it’s not as redundant a notion as you might think and there is, of course, some precedent.
If you recall, John Mack relinquished the CEO title to then co-president Gorman with effect from January 2010, retaining the chairmanship until he left the firm in September 2011. Gorman was given the chairman’s role at that point, in what I consider to be a wasted opportunity. Hey ho, but what would happen if Gorman and the board had those metaphorical guns pointed at their heads and were forced to pick a CEO? Who would they anoint from within the ranks?
Before I get there, it’s worth pointing out that if he had the choice, Gorman is potentially as likely to keep the CEO role and have the firm look for a chairman as the other way round. Bear in mind that he’s only in his mid-50s so has plenty of time ahead of him. He’s looking ever more comfortable in his position: returns to shareholders are starting to pick up, the long fight to overcome a host of legacy issues is starting to pay off, and the firm is getting through its strategy execution priority list.
Gorman scored well in his 2013 evaluation and was awarded US$18m, not far off double what he got in 2012. On that basis, and on the basis that the firm’s performance is improving, it’s relatively safe to assume that he’s OK for now. (I say relatively only because everything at the top of the investment banking greasy pole needs to be viewed through a lens of relativity). But regardless of that, the ‘just-in-case’, ‘you-never-know’ or ‘what-if’ chat around the succession battle for the corner office at 1585 Broadway has continued apace.
The mouth-watering spectacle of seeing Colm Kelleher, president of Institutional Securities and CEO of Morgan Stanley International, facing off against Greg Fleming, president of Wealth Management and Investment Management, is among the most captivating on Wall Street. (Some tip Ruth Porat, the extremely well regarded CFO, as a future leader of the firm but perhaps with outsize odds.)
Point for point
It’s no secret that Kelleher and Fleming both harbour ambitions beyond their current roles but you can barely fit a cigarette paper between them in terms of their respective statures at the firm, which makes the spectacle so tantalising.
Kelleher has a much longer track record. He joined Stanley way back in 1989, whereas Fleming was only appointed at the back end of 2009. But then Gorman himself only joined Morgan Stanley in 2006, and he and Fleming previously sat on Merrill Lynch’s executive committee, so they already knew each other well before Fleming joined Stanley: 15-Love Fleming.
Ah, but Gorman and Kelleher also got to know each other when they worked hand-in-hand as co-heads of strategic planning in 2007; when Gorman was also president and COO of wealth management and Kelleher had recently become CFO from his previous role as global head of capital markets: 15-All.
Oh… Fleming aces Kelleher on age by half a dozen years and Kelleher’s a year older than Gorman: 30-15 Fleming.
When Gorman was anointed as CEO, he made Kelleher co-president of institutional securities in his first major announcement: 30-All, but with a line call because he was forced to share with Paul Taubman and it took two years of Pantomime-style rivalry and conflict before Taubman walked. Days after appointing Kelleher, though, Gorman brought Fleming back to Wall Street as president of investment management, including merchant banking and global research: 40-30 Fleming.
And then there’s the earnings. In 2011, Institutional Securities generated almost 55% of the firm’s net revenues: Deuce.
But since then, wealth and investment management earnings have powered their way to parity as the quantum of trading revenues have been unkind to Kelleher, who as a result of this, and regulatory pressure, has been forced under the bonnet to cut FICC RWAs and jettison chunks of the commodities business. Fleming by contrast, is reaping the benefits of having the firm’s strategy come striding his way. Citigroup is now out of the Smith Barney joint venture, and the remedial work of the past two to three years is starting to pay off and inflows are picking up.
If Kelleher had 55% of net revenues in 2011, that had collapsed to below 42% within a year. Fleming maintained the advantage in 2013 (with a perhaps more representative 51% to 49%). At half-year stage this year, it was as finely balanced as you could get it: 50.3% Kelleher, 49.7% Fleming. In two and a half years, the differential has fallen from 10 percentage points to 60 basis points!
Pre-tax profit margins are comparable at around 26% for each, but with W&IM reporting superior returns on average common equity (16.5% vs 13.4% in IS), it’s definitely Advantage Fleming with another ace.
That advantage was enhanced in no small way when the firm exceeded US$2trn in client assets in wealth management just a few weeks ago. That was seen as a major milestone not just in terms of growth but more for what it said about the transformation of the firm’s business model. And of course, the WM business is very close to Gorman’s heart. In fact, Gorman relinquished personal management of WM to Fleming when the latter’s 17-year adventure with the limping herd ended with the BofA takeover.
Internal appraisals
So what can we glean from how they were treated on comp? Nothing. Both men picked up US$14.5m for their 2013 performances.
Can we learn anything from what the Compensation, Management Development and Succession Committee looked at in coming to their decisions? Not much. For Kelleher, they looked at the performance of the IB and equities S&T businesses, evaluated his efforts to enhance revenue share across institutional equities and fixed-income and commodities, and to reduce fixed-income Basel III RWAs ahead of previously determined targets. The Committee also considered his efforts to optimise the commodities business and position the division for regulatory changes, including Basel III, derivatives reform and the Volcker Rule, among others, and to increase collaboration with Wealth Management.
For Fleming: it was achieving pre-tax margin goals in wealth management and doubling fee-based asset flows; executing the bank strategy to build banking and lending services; and pursuing collaborative initiatives with Institutional Securities to enhance revenues. For IM, it was his efforts to improve investment performance and increase asset flows, and increase revenues, profits and pre-tax margin.
So how did that turn out in terms of bragging rights for the milestones listed in the strategic execution section of the 2014 Proxy Statement which the firm said enhanced shareholder returns?
Kelleher came out slightly ahead, scoring well by exceeding 2013 and 2014 targets in cutting Basel III FICC RWAs from approx. US$280bn at the end of 2012 to US$210bn (excl. lending) a year later. He played a blinder in selling the international oil merchanting business to Rosneft, and the company’s stake in TransMontaigne and its subsidiaries to NGL Energy thereby “improving capital efficiency and aligning client focus with the rest of the sales and trading businesses”.
And he achieved a top-three ranking in M&A and ECM and, reportedly, a top-two showing in equity sales and trading wallet share.
Fleming scored with significantly increasing Wealth Management profits (up 62%) and exceeding the mid-teens pre-tax margin target by achieving 18% in 2013; and you can probably give him the kudos for acquiring the remaining 35% of Morgan Stanley Wealth Management from Citigroup to become sole owner.
When all’s said and done, the two are so finely balanced as to be too tough to call. Except… who would win in a bare-knuckle fist fight? My money’s on the Irishman.
