Bonuses expose Wall Street's CEO succession failure

NEW YORK — Eight days before Christmas, Ken Lewis took the stage for his last public act as chief executive of Bank of America. Hundreds of his workers watched from red velvet seats in Charlotte, N.C.'s McGlohon Theater, a former Baptist church.

Lewis stood to present Brian Moynihan as the man who would succeed him as head of the biggest U.S. bank.

Moynihan was already known to many in the room: In five years, he had headed wealth management, investment banking and consumer lending. He was the Charlotte-based bank's top lawyer when it received a second government bailout, for $20 billion, in January 2009.

"Hopefully, he'll be in this job much longer than the last three or four," Lewis, who became CEO in 2001, quipped. "Another unique characteristic about him is that he wanted the job."

The laughter that filled the theater was a collective sigh of relief.

After months of meetings a dozen candidates, Chairman Walter Massey and his directors had finally found someone to take over before Lewis's departure on New Year's Eve.

"What happened at BofA is an embarrassment," says John Reed, former co-chairman and co-CEO of Citigroup. The bank's board should have had at least two people ready to take over if Lewis resigned, Reed says.

The global market crash of the past two years exposed pivotal management mistakes at the biggest U.S. banks — from slack risk oversight to multimillion-dollar bonuses for bankers chasing short-term profit.

Lewis's exit highlights another kind of poor bank stewardship: the failure of CEOs and boards of directors to plan for an orderly succession when it's time for the top person to leave.

Inadequate planning derails a company's strategy and destroys morale; former executives, recruiters and leadership consultants say. In the past four years, disorganized transitions cracked the foundations under some of the world's biggest financial institutions, including Citigroup, Merrill Lynch, insurance giant American International Group and Zurich-based UBS.

"If you're busy figuring out who is going to be your leader, instead of moving forward, you're suffering and so are your shareholders," says Marc Feigen, a New York-based management consultant who counsels CEOs and boards. "It's really the board's first obligation — the hiring and firing of the CEO."

Bank of America's stock fell 10 percent from Sept. 30 to Dec. 15, the weeks of the search for a successor to Lewis. The Dow Jones industrial average rose 7.6 percent in the same period. The bank reported a $5.2 billion loss for the fourth quarter of 2009 after it repaid government bailout money.

"Bank of America's board should have had a succession plan in place," says Jonathan Finger, a Houston-based investor whose family controls 1.1 million of the company's shares. "The board seemed to be very protective of existing management, and that is not an item that is relevant to shareholders."

Feigen and other experts tick off a half-dozen reasons why banks are so ill-prepared for a power shift. Wall Street firms are revenue-based operations, they say, where money and promotions go to those who bring in business, not necessarily to well-trained managers.

Add to that personalities that Tom Wolfe labeled "masters of the universe" in The Bonfire of the Vanities, his 1987 chronicle of the sins of Wall Street bond traders.

"Everyone is trying to kill each other all the way up the ladder," says Regina Glocker, a partner at Exchange Place Partners, a New York-based executive search firm. "On Wall Street, it's a group of particularly fierce individuals."

That has set the stage for dictatorial CEOs who surround themselves with executives who don't push back, says Mark Nevins, president of Nevins Consulting, a business leadership firm whose clients have included Citigroup and UBS. They stack their boards with directors who don't insist on detailed succession planning, Nevins says.

"Insularity and arrogance — for Wall Street, those are often the headlines," Nevins says.

Some banks have been trying to do CEO succession right. On Jan. 1, Morgan Stanley made a smooth transition when CEO John Mack, handed his job to successor James Gorman. Mack remains Morgan Stanley's chairman.

Jamie Dimon, CEO of JPMorgan Chase, shuffled top management last year in a move analysts say signaled who would run the company without him. That man is Jes Staley, who was named head of JPMorgan's investment bank.

At Goldman Sachs Group, a company riveted together by its team culture, CEO Lloyd Blankfein and his lieutenants have all survived a rigorous program for training leaders. The purpose is to create a deep bench of executives qualified to run the bank.

"You have to be able to answer the question, 'If you get kidnapped, who is next in line to take over from you?' " says John Rogers, a Goldman managing director and top counselor to Blankfein. "It's a discipline."