8 Producer Managers: How Continued Focus on Banking Resulted in Absent Management

the proposed management processes were still under development or not yet implemented (Sharp Paine and Santoro 2004).

The change in ownership structure had preceded the dramatic growth of the company. Both these changes affected the requirements on management. The challenge of managing within a short-term money culture was encapsulated by the then co-head of investment banking at Salomon. He observed that some people only joined the firm for a few years to make a lot of money. The money culture was explained by the view that the person who earns $10 million for the firm is more valued than the person who makes $1 million, and the person who earns $100 million is a god. A real problem was that if someone were paid $10 million for three years in a row, the manager would have no authority over this employee who had, by then, achieved financial independence. The person would not have to listen to moral persuasion (Sharp Paine and Santoro 2004).

The bonus culture had moved from being difficult to manage to unmanageable in Salomon, caused by the growth of the organisation and the changes in ownerships. If an employee was able to become financially independent within only a few years, any medium let alone long-term incentive scheme would have little effect. In one special case, the 31-yearold head of the bond arbitrage group, which made $400 million in profits, took home $23 million in one year (Sharp Paine and Santoro 2004).

The short- and long-term complexity is also less relevant for an organisation creating multimillionaires within just part of one business cycle. In a partnership, partners would be incentivised to sustain the firm’s earning power and to continue in existence. Avoiding failure was possibly the single most important objective for a partner. An employee in a listed company would be focused on individual deals and annual remuneration, particularly if the remuneration was so substantial as to overcome any loss of longer-term earning power.

By this stage, the bonus culture had moved from being difficult to manage, as in the United States savings bank First Federal in 1975, to unmanageable in Salomon in 1990. If an employee was able to become economically independent within only a few years, any medium, let alone long-term, incentive scheme, such as the early incarnations in General Motors, would have little effect. Even when the annual assessment process for employees had become sophisticated, as in Citi by 1997, the historical problems of not paying bonuses persisted.

Action was taken by Warren Buffett in Salomon on the time horizon and scale of compensation. Buffett was critical of the old-fashioned

method of compensation where bonuses were paid in cash. This was inappropriate for a company based on shareholder capital, which was no longer owned by partners but by shareholders, of which Buffett was one of the more substantial. Short-term cash payment of bonuses was more appropriate to a partnership that Salomon had been. The continuation of paying bonuses in cash after Solomon had been listed is a good example of path dependency. The firm continued a practice from the period of partnership that was no longer appropriate for a period of public ownership.

Buffett approved of the management decision in 1991 to pay bonuses in the form of shares, which the recipient would be unable to sell for five years. This was still only half the time of the original incentive plans in General Motors. This would mean that the bonus recipient would have a risk of the value of the restricted shares going down as well as up without being able to sell them. Buffett’s intention was that wealth creation by employees should be the result of themselves owning part of the business, with both risks and rewards. Wealth creation for employees should not only involve upside, when shareholders had the risk of both upside and downside (Sharp Paine and Santoro 2004).

Goldman Sachs was another investment bank that went public, in 1999, to obtain capital to increase its global activities and to take more risk for its own account. Interestingly, titles were changed from partners to managing directors before then, in 1996. This was specifically done as an incentive. Some who were not partners, but had made exceptional contributions, were made managing directors as recognition of their contribution, often at a young age. One of the aims was to provide the incentive of a managing director title to stop competitors from hiring Goldman Sachs talent with the promise of a managing director title (Nanda et al. 2006). The managing part of the title did not imply a management function.

Going public provided a positive impetus for management in banks. The need to report to shareholders, particularly when listed on the demanding New York and London stock exchanges, created a significantly increased requirement for disclosure, reporting and accountability. The banks that remained in partnerships or family ownership were sometimes left behind. One example was Lazard Frères who had been a leading investment bank during the twentieth century. It had been a top ten mergers and acquisitions advisor, but had slipped to twelfth by 2001. A new head of the New York office in 1992 realised that pay reviews were

the only driver of the banks’ authority. Partnership meetings were said to be infrequent and achieving little. Performance reviews were said to amount to grunts, incomparably simplistic in contrast to listed peers such as Citi (Subramanian and Sherman 2008).

In the major investment banks, the compensation process had become extremely sophisticated, complex and laborious by the early 2000s. The approach was relatively similar amongst them, reflecting the intense competition for the best and highest paid talent. Key features included the size of the bonus pool, the mix of cash and equity and the dates at which the equity could be sold. Many factors were involved in determining the allocation to each division and individual.

By 2007, internal observations in Lehman Brothers indicated that including risks in the incentive plans to determine individual incentives had been discussed for as long as a decade but had not yet been implemented. A particular problem in those activities was the ability of traders to value their own positions. A high or low value could affect the expected profit, and consequently the trader’s compensation. Another important problem was that many activities would not see their final outcome for several years. Compensation was often based on net revenue. This in turn reflected what an investment or trading position could be sold at (Maedler and van Etten 2013). If the value of the position was to deteriorate later, the compensation would already have been paid when this occurred. This approach provided no incentive for traders to think longer term for the benefit of the bank, particularly if they left after their compensation had been received.

The music stopped in 2008. Wall Street bonuses amounted to an astonishing $35 billion in 2006, and only fell a little to $33 billion in 2007. With losses in New York’s traditional broker/dealer operations estimated at over $10 billion in 2007, and over $35 billion in 2008, bonuses fell significantly but only to a still very large $18 billion in 2008. This was still the sixth largest bonus pool on record and amounted to an average $112,000 per employee (Zeisberger et al. 2009). In spite of extremely large losses, it was difficult not to pay bonuses. When the investment banking industry was surveyed at the end of 2008, all but 2 per cent said that compensation was a factor in the 2008 financial crises. This did not prevent the payment of the 2008 bonuses. The money and bonus culture had become truly path dependent and management of incentives was truly absent.

RefeRences Dávila, Antonio, and Robert Simons. 1997. Citibank: Performance Evaluation.

Boston: Harvard Business School. Doyle, Stephen X., and Jay W. Lorsch. 1975. First Federal Savings (A). Boston:

Harvard Business School. Ferguson, Niall. 2010. High Financier. The Lives and Times of Siegmund Warburg.

London: Penguin. Fulmer, William E. 2000. Credit Suisse (A). Boston: Harvard Business School. Holden, R.T. 2005. The Original Management Incentive Schemes. The Journal of

Economic Perspectives 19 (4): 135–144. Johnson, Simon. 2009. The Quiet Coup. The Atlantic, May 2009. ———. 2010. The Next Financial Crisis. Boston: Forum for the Future of Higher

Education. Liebowitz, S.J., and S.E. Margolis. 2000. Path Dependence, Lock-In, and History.

The Journal of Law, Economics and Organisation 11 (1): 205–226. Maedler, Markus, and Scott van Etten. 2013. Risk Management at Lehman

Brothers, 2007–2008. Madrid: IESE Business School of Navarre. Nanda, Ashish, Malcolm Salter, Boris Groysberg, and Sarah Matthews. 2006. The

Goldman Sachs. Boston: Harvard Business School. Roover, Raymond de. 1966. The Rise and Decline of the Medici Bank, 1397–1494.

The North Library. Sharp Paine, Lynn, and Michael A. Santoro. 2004. Forging the New Salomon.

Boston: Harvard Business School. Subramanian, Guyana, and Eliot Sherman. 2008. Lazard LLC. Boston: Harvard

Business School. Zeisberger, Claudia, Na Boon Chong, and Grace Wu. 2009. Bank United States:

The Challenge of Compensation After the 2008 Financial Crisis.

Fountainbleu: INSEAD.

CHAPTER 8

Producer Managers: How Continued Focus on Banking Resulted in Absent Management

The heads of large banks are both clever and energetic. The competition for the top jobs is so intense that it is impossible to achieve such a position without at least a good brain and the willingness to work hard. Other qualities, such as single mindedness and emotional intelligence, are helpful, but intelligence and hard work are indispensable. The days when the top positions were inherited have almost completely gone, at least amongst the large, complex banks. As soon as a bank is listed on a stock exchange and becomes owned by shareholders, merit rather than genes becomes the overriding selection criteria. Inherited wealth and nepotism as well as a top education are, of course, still helpful in the competition for the top spots. Nevertheless at some stage banks will be involved in so many different lines of business and products, in so many countries and have become so very large that no single individual can understand, let alone control, it all. When that happens will depend on the level of complexity in the organisation and the capabilities of the individual, but it is inevitable if complexity continues to grow. When something becomes increasingly complex, in order to manage it you can become increasingly expert. However, if the bank becomes increasingly complex in several different lines of business, products and countries, no one person can be an expert in all these complexities. So the only possibility is to manage through other people who are expert in their areas. And to do this you have to be an expert manager. And given how demanding it will be to manage so many complex activities you have to be a really, really good manager and have really good managers

© The Author(s) 2020 C. Dinesen, Absent Management in Banking, https://doi.org/10.1007/978-3-030-35824-2_8 133

working for you and so on. And this does not often happen in banks, because nearly everyone wants to be a producer, a proper banker and not a manager.

In the beginning, when banks were small and simple, there was no need for specialist management. The most senior banker, often also the owner or a partner, was also the manager. Sometimes the bank was managed by a partnership with a committee of partners appointing and working with the most senior partner, who ran the bank on a day-to-day basis. If the bank was one branch, operating in one line of business and one country or state, this adequately met the management needs of the operation. The approach was the same whether the bank was a commercial or investment bank. In some cases the owner was someone who did other things than banking. In such a case the owner or owners might appoint a manager. This manager was himself, and in those days it was nearly always a he, a banker who also managed.

For the first 650 years of western banking, say from the beginning of the fourteenth century in Florence until the middle of the twentieth century, this was how nearly all banks were managed. The Medici, Rothschild and Warburg banks were all managed by producer managers. They would never have thought of themselves as such. They were bankers. Being a banker involved not just carrying out banking business but also the required leadership, including setting direction, executing and setting a great personal example as a leader (DeLong et al. 2007).

In Goldman Sachs the greatest producers often ended up as the chief executive officer of the firm. Sydney Weinberg, who took Ford Motor Company public and was the best known businessman in America, was chairman of Goldman Sachs from 1930 to 1969. He was succeeded by Gus Levy, Goldman Sachs’ second highest producer after Weinberg (Nanda et al. 2006). A later chief executive officer described the leadership of Goldman Sachs by the senior partners as producer managers, who execute and meet clients, even as they lead their businesses. They are not administrators who order their subordinates to do the real work (Nanda et al. 2006).

In the largest bank for much of the twentieth century and some early parts of the twenty-first century, J.P.Morgan, the chief executive officer is still a producer manager. When the United States pharmaceutical giant Pfizer lost one of its lenders in the $68 billion acquisition of Wyeth in 2008, the chief executive officer of J.P.Morgan supposedly stepped in saying “I got your back come hell or high water”. This chief executive officer of

the largest and extremely complicated bank insists that he is “part of the army that supports” the investment bankers who he describes as the bank’s “Navy Seals”, the United States Navy’s special forces. Some believe this approach helps explain why J.P.Morgan survived the financial crisis better than any other United States bank. What it shows is that even this chief executive officer remains a producer manager rather than a full-time manager. However it is also “a terrifically run operation” according to Warren Buffett (Weber 2018). But as we shall see later J.P.Morgan also and still suffers from incidents of absent management.

It took management academics to develop a term for this type of leadership or management in banks and other professional services firms. This first and important term was in Lorsch and Mathias’ seminal 1987 article When Professionals Have to Manage (Lorsch and Mathias 1987) where they used the term ‘producing manager’. Others have referred to ‘player managers’ referencing sports including such great soccer players as Kenny Dalglish at Liverpool and Gianluca Vialli at Chelsea. At the end of their playing careers they simultaneously played and managed their teams. In Goldman Sachs and Merrill Lynch the term ‘producer manager’ was occasionally used and that is my preferred term because the two words are equal. Not producing manager or managing player, but ‘producer manager’. At least in the terminology the two activities are equal. As the focus here is absent management, the result was, and often is, that there was absent management because being a producer, a banker, took precedence over being a manager.

Industrial corporates was where management was developed as a specialist skill and in a remarkably different way from banks and other professional services firms. The Industrial Revolution in Britain in the eighteenth and nineteenth centuries saw the emergence of very large corporations starting with mining and textile factories. These employed first hundreds and then thousands of people and their sheer size meant that the enterprises required organising to function effectively. Different skills were required to organise the work from those who did the work, mined the coal and iron or worked the looms when they moved from home industry to factories. The managers were not just foremen or leading workers, they were something entirely different. They had authority to decide who did what, under what conditions and for how long. They worked in an office rather than a mine or factory and dressed differently. Sometimes they were not only managers but also owners.

Most importantly managers in industry were just that, managers. They were specialist at management. They did not also pick up a pickaxe and start digging or thread a loom. In fact many of them would not have known how to do so as they lacked the skill. They were managers, and their skill was management, not production.

Possibly the management of a large industrial corporation had similarities with the historical management of a large agricultural estate. On large farms with hundreds of labourers, such as existed for example in England when the Industrial Revolution began, there was similar complete separation in activity skills and status between farm workers and the owner managers. Uniquely in England there was a large concentration of land ownership when aristocrats had bought church land from King Henry VIII as he completed the dissolution of the monasteries by 1540. In addition English landowners did not have the additional powers over the peasants working the land of their Continental European counterparties. English landowners therefore needed to encourage, and sometimes compel, but certainly to manage, those working the land to increase productivity (Meiksins Wood 1998). Some of these large estate owner managers became large industrialists because coal or iron was found on their land, and they had the money to exploit it. Some of them also had the specialist management skills to manage large enterprises or to find professional managers with those skills.

The Industrial Revolution also brought another new management challenge. It required specialist management skills to manage enterprises in more than one location and none more so than, obviously, the railways. Everywhere the railway went, specialist management was required, completely separate from the activities of driving the trains and operating individual stations. The railway managers used the trains as passengers, but there was no question of them driving the trains.

Banks, of course, were a crucial and completely necessary part of the development of the Industrial Revolution. The highly developed banking sector in the City of London was one of several reasons why the United Kingdom saw the birth of the Industrial Revolution. Other countries such as France, Germany and the United States also saw rapid developments of their banking systems to support the financing of their industrial revolutions.

Amongst the earliest available business school case studies addressing bank management are several on the First National Bank. This was a predecessor of today’s Citi, which was to become one of the largest, most geographically diverse and most complex banks in the world. These cases

consider the development of management in response to a multidivisional structure and of the attitude to management in 1970. A managerial role within the bank was seen as a poor career choice for any ambitious employee. Management was administration and operational but not a leadership function. Management skills were then not available in Citi and had to be imported from the automobile industry.

Citi’s predecessor in 1970 was an early and rare example of a multidivisional structure in a financial institution. The structure in 1970 reflects the multidivisional structure of the large chemical company Du Pont and automobile manufacturer General Motors in the 1920s. The management historian Alfred Chandler described this in 1962. Chandler identified the role of General Motor’s Advisory and Financial Staff as helping to coordinate, appraise and plan policy. This interdivisional committee’s most important functions were to make recommendations to the Executive Committee and to propose new policies and procedure. The Executive Committee in turn remained the governing body at General Motors (Chandler 1962).

While the multidivisional structure was present in Citi by 1970, the roles of the professional managers were different to Chandler’s observations in General Motors. Where professional managers proposed new policies to the top of General Motors, the Citi Operating Group appears as an administrative function. The Operating Group was less powerful than the professional managers in Du Pont and General Motors, the non-financial, industrial examples. The head of the Operating Group had concerns that his group was still seen by the rest of the bank as a necessary evil and was only just tolerated by its more intelligent brethren (Seeger et al. 1974). The low regard in which this function was held is seen from the description of the newly appointed head of the Operating Group. He was described as an immensely perceptive, sophisticated investment banker (Seeger et al. 1975), who cried for 30 days when he was assigned to head up the Operating Group. This was in spite of understanding that the back office was a point of vulnerability.

Banks’ complexity increased with the demand for corporate finance. Whether to lend to or invest in railways, with their new types of risk and often poor safety record, was a major discussion point and bone of contention amongst the Rothschild houses. However, corporate finance remained a specialist banking activity. There were only a small number of banks involved. The growth in corporate finance for different sectors and in various countries caused increased complexity in banking products. But at

least the banks nearly always operated from a single location, limiting their operational geographical complexity.

The development of management in industry and transportation got all the attention from historians and later management academics. It was a remarkable and interesting development, management as a specialist activity. The focus of such important historians as Chandler on the development of management in such industries as General Motors and Dupont in the 1920s is understandable.

No such specialist development took place in banking and other professional services. And less attention was paid by historians or academics. Although banks had existed for at least six centuries, there was an absence of a history of management in banking, until very recently. And until Lorsch and Mathias’ 1987 article When Professionals Have to Manage, very little attention was given to those entities such as banks where specialist management did not develop.

The transfer of professional managers and management knowledge from industry to banks was clear in the early Citi case. Citi was aware of current management practices in industry in 1970. The head of the Operating Group, the crying banker, set out to hire a right hand man. He acknowledged that the Operating Group was a factory and that the principles of production management had to be continually applied to make that factory operate more efficiently (Seeger et al. 1974). The pure retail side of banking was learning from industry in terms on how to manage.

The head of the Operating Group was fully aware that Citi could not provide what he required. “The plain fact is that the language and values we need for success are not derived from banking” (Seeger et al. 1974). His eventual recruit as his right hand man had worked for Ford Motor Company for six years and had a Master of Business Administration (MBA) degree from Massachusetts Institute of Technology. This recruit in turn made a remarkable observation at a speech at the American Bankers Association in 1974. “The fact is that, traditionally, banking operations are not really managed at all” (Seeger et al. 1974). Finding this observation in an early management case study, sitting in the Library of Harvard Business School, was one of the first encouragements for pursuing the possibility of establishing Absent Management in Banking. If a senior executive of a major bank could make this statement in the early 1970s, there must have been a time when there was absent management in banking, at least management as understood by a corporate executive with an MBA.

Professional management in Citi in the 1970s was an administrative and not a leadership function. Citi bank’s top management attention was directed outwards and towards the market (Seeger et al. 1974). Tradition held that the career path to the top in banking led through line assignments in the market-oriented divisions (Seeger et al. 1974). The new recruit from Ford did not see himself as a banker in the traditional sense, partly because he had an MBA and because he had grown up in industry (Seeger et al. 1974).

By the 1970s professional management in financial services was considered administration and was side lined as such both operationally and as a career path. However awareness of professional management practices, including multidivisional structures, was present within financial institutions. The knowledge of these practices and that they were not to be found in banking were the reasons for the recruitment from non-financial, industrial corporations such as Ford.

There is significant variation in the importance of the producer manager approach in different types of banks. For pure retail banks whose success is related to carrying out millions of small transactions and providing banking services such as deposit taking, payments, personal loans and so on to private customers, the approach to management looks more like that found in other retail sectors. Many retail banks have learnt a great deal from retail and service businesses such as supermarkets or car rentals. When Banc One designed ‘The Bank of the Future’ in the 1980s it was modelled on retail. The first branches included an interactive video centre and a sales boutique environment that offered such services as insurance, real estate, brokerage services and travel and was open seven days a week (Phillips and Greyser 2001).

The more a bank, such as a corporate commercial or investment bank, is focused on larger clients, the more prevalent the producer manager approach is. However the producer manager approach and related culture have also become important for retail banks because many of them are part of universal banks with retail, commercial and investment banking activities. In a number of mergers to create universal banks, the person becoming chief executive officer was from a commercial or investment banking background. He was likely to continue operating as a producer manager.

Those chief executive officers with a retail banking background often found themselves becoming producer managers once they were chief executive officers of universal banks. Reasons that will be considered in

more detail shortly included the need to lead corporate commercial and investment bankers by example. These chief executive officers also found that large corporate commercial and investment banking clients expected to meet the top man or woman, because that was a sign of the client’s importance.

Where there are pure specialist managers at the very top of large universal banks, they nearly all have some client involvement. In addition they rely on producer managers in many if not all parts of the bank so the producer manager approach is relevant for commercial and investment banks, although less for pure commercial retail banks.

By 1990s larger banks had started using some professional managers for such support services as operations, finance, IT and Human Resources (Auger and Palmer 2003). These were specialist managers supporting the producer managers in their dual roles, particularly with their management responsibilities.

One of the important features of the producer manager approach is that the very top people still do client or production work. In banks with large clients, the chief executive officer is still expected to have a relationship with the largest clients. A similar approach is seen in non-banking professional firms such as the large accountants, lawyers, management consultants and so on. The importance and influence of the producer manager approach in universal banks can be seen from chief executive officer with a retail bank, who has not met a customer for decades or possibly ever, suddenly having to spend time with large clients of the newly acquired commercial or investment bank.

There are plenty of books about banking, including about individual banks. The more famous the banks, the more books. Many of them are interesting, even enjoyable. They are particularly focused on the famous bankers, the vast majority of whom must have been producer managers. However nearly all these books do not consider management and concentrate on banking, understandably enough. The great deals, the sometimes explosive growth and the competitive triumphs are covered, often with great insight and based on interviews with those senior individual still alive. More recently, and particularly since the 2008 financial crises, many books have focused, sometimes even more entertainingly, on the monumental failures of some banks. But still little focus has been given to management. As far as the books about failures are concerned, this is surprising. There are plenty of anecdotes about what chief executive officers were doing, including their golf and bridge playing habits, but little about

how the banks were managed. Some of the best known and biggest selling books on banks have not a single listing on ‘management’ or ‘leadership’ in their indices.

It would be superficial to conclude that there was absent management in banking because those writing about them have not addressed the topic. But management has not been of great interest to the writers and, presumably, their readers. It is possible that the management part of bankers’ producer manager roles was the least interesting, to the writers, their readers and possibly to the bankers themselves.

Before considering how the producer manager approach to management contributes to absent management, its advantages should be given their due. Many professional services organisations consist of fairly small teams with one of more senior people being both top producers as well as managers of their teams. This provides a fairly flat structure and relatively little bureaucracy. Bureaucracy is seen a big negative by high producing bankers, particularly those involved with large clients. It is seen to both stifle creativity and getting in the way of doing business. Small teams unencumbered by bureaucracy are well suited to the intense, highly competitive world of large client banking and capital markets.

One of the real benefits of the producer manager approach is that most managers are close to the business, due to their production responsibilities. This enables them to take decisions that are well informed about the needs of the business including the clients. In contrast, a specialist full time manager in an industrial corporation will need to make significant efforts to be in close communication with those fully focused on producing and selling the goods produced.

This closeness to the business makes the producer managers credible to their peers and subordinates. One of the arguments why the producer manager model has persisted for so long is that in professional services firms full time producers would not respect and follow the leadership of managers who are not also producers. It is a determining characteristic of a professional services firm that what the senior producers do sets the standards of the firm and provides the example for their juniors. Bankers are doers, and the greatest bankers become legends such as Cosimo de Medici, Nathan Rothschild, John Pierpont Morgan and Siegmund Warburg. The contrast with famous corporate business giants, Henry Ford, John D. Rockefeller and Bill Gates, is that bankers are famous for what they did, not for what they built. What both have in common are the large amounts of money they made.

In corporate and investment banks, juniors compete extremely hard to work with the top producers. These top producers can conversely have their pick of the most talented younger bankers. For a successful banking career, it is often seen as crucial to have a senior producing patron. One of the worst examples of this almost cultish adoration of top producers is when they move from one bank to another. If the top producer does not move with a team, the first management action of the newly arrived top producer manager is often to dismiss all the direct reports of his or her predecessor. These posts are then filled by recruiting the direct reports and colleagues from the previous bank of the new boss. This is often done with no consideration for what talent may be lost or the delay in completing the new team, due to the often long, up to six months’ notice periods of these previous colleagues. This is not sophisticated, modern management. It is about the strength of the personality of top producers. It also indicates that they are recruited almost exclusively for their production and not for their people management. It finally says something about the confidence of the new top producer manager in his or her management skills. The idea that none of the exiting direct reports can add anything to the future setup is simplistic and illogical. But the new producer manager is primarily a producer who wants tried and trusted producers from his or her past. Spending the time assessing and managing the existing talent, who is in place and ready, is not an attractive management task for this new producer manager.

Management as a skill and discipline is regarded as a necessary evil, something that has to be tolerated for reporting and compliance reasons. The ‘real’ bankers often do not see management as a skill or function that creates value in the organisation.

Corporate clients expect the best talent available to work for them. This is one of the reasons why the producer manager approach persists. As producer managers become more senior, clients still expect them to be involved in the client’s business even if the actual work is largely delegated. Clients will often view their key, long-standing contact to be ultimately responsible for the service provided.

Another important advantage of the producer manager approach is that it allows bankers to achieve a high degree of personal satisfaction. People often join banks to be bankers and not to be managers, except perhaps in the case of pure retail banks. The sense of achievement is often linked to successful banking, capturing a new client, being mandated to issue a bond, completing a highly profitable trade, improving in a league table

and, significantly, to making a lot of money. For bankers it is less easy to find the same personal satisfaction from longer-term achievements, for example, the development of junior subordinates from interns to fully fledged, highly producing bankers.

Incentives have been considered in the previous chapter, but it is worth emphasising how they can influence the producer manager approach. It is easier to link the returns on the production of a producer manager to the bank’s financial results than the results of her management. The production tends to be related to clients and markets, to increasing revenue and profit. It tends to be short term and often within the year being considered in terms of a bonus. Sometimes the true consequences of a trade can take longer to be understood, as was described in the last chapter. Mostly it is possible, when assessing the annual performance, to determine with some accuracy what the individual banker has produced and estimate what this has contributed to the bottom line.

It is more difficult to assess the financial result of the management of the producer manager. If she has a high performing team and she has kept her team stable, this has an important financial impact. There has been no gap between losing a strong performer, finding a replacement and getting him up to the same level as his predecessor. There has been no spending on executive search firms that can cost a third of the annual remuneration of a new hire. There has been no need to offer a high guaranteed bonus, in addition to the fixed salary to attract the right level of talent. The producer manager’s and her senior peoples’ time has not been taken up by interviewing a series of candidates. The stability of the team is unlikely to have been achieved without the producer manager having devoted time and energy to lead her team, including frequent group and one-to-one communication and feedback, as well as development of her existing talented team members. The team’s stability would be unlikely without her management time effort.

At the producer manager’s annual assessment, where the basis for her bonus, or often more accurately her share of the bonus pool, is determined, it is unlikely that her production and management will be equally recognised and rewarded. In a year where she has excelled as a producer, as a banker and also managed to lead her team to excel, she may not be equally rewarded for both producing and managing. Her production will count most. When her boss, a more senior producer manager, has to explain the apportionment of his bonus pool amongst his direct reports, it is much easier to explain why some are rewarded more than others. This is

particularly so if some of her production success that year is already known at this higher level. And both her boss and his boss probably achieved their elevated positions due to their production rather than their management.

This is path dependency. If those deciding on the proportion of reward for production versus management reward production more because that is how they were rewarded, they are following a path. And nothing will change. And management will be less likely and sometimes absent.

Scorecards for annual assessment were introduced into banks decades ago. Examples in the previous chapter showed how difficult it can be not to pay a bonus in a poor year, for fear of losing a talented person or demotivating everyone. However path dependency can also play a role in terms of which part of the production or management is rewarded most. If a producer manager is responsible for capturing an important new client, it will be difficult not to recognise this in the annual assessment and bonus. If this person’s management has been poor, it will be difficult to reduce the bonus given the excellent production. Conversely, if the person has also managed to have an excellent year as a manager, that will probably not be equally highly regarded and rewarded as the production. After all the bonus pool is only ever so large, so that is unlikely too.

There is also a job security aspect of the producer manager role that favours the production. In bad times when cost cuttings reduce employee numbers, those making a contribution to production are less vulnerable than those more exclusively focused on management. If the bad times are likely to result in a crisis, the survival instinct of a producer manager is likely to make her focus on production. This is exactly the time when management is most important. And this is when management may be absent due to the producer manager focusing on production.

For the producer manager, who joined the bank to be a banker, her enjoyment is more likely to come from her production. Equally she is more likely to be rewarded more for her production than for her management, even in years where she excels at both. She may continue to excel as a manager as well as a producer, but when she needs to prioritise, the incentives of achievement and reward are likely to drive her to produce.

To repeat, people who join banks do so for many reasons, but many of them do so to be bankers rather than managers. The modern retail bank, where management looks more like other retailers than professional services firms, is an exception. Merrill Lynch became the world’s largest stockbroker and had global operations involving investment banking and advisory services, wealth management, asset management,

capital market services, insurance, banking and related products. It was common for Merrill Lynch’s chief executive officer to have risen through the stockbroker practice. An exception was the chief executive officer from 2003 to 2007, who had a background at General Motors (Thomas and Kanji 2005). But even this former industrialist and MBA, once at Merrill Lynch, wanted to be a producer. He was reluctant to accept a staff job, even that of chief financial officer, although he eventually agreed (Thomas and Kanji 2005).

Morgan Stanley in 1999 provided an example of the development of investment banking management. Morgan Stanley had developed from a small partnership to a top multidivisional and multinational, publicly listed financial institution. The senior employees had changed titles from Partner to managing director. Management continued to be seen as potentially detrimental to banking by 2000. Management was still not seen as an attractive career path. Many observers, both inside and outside of the firm, wondered whether Morgan Stanley’s then new chief executive officer could successfully change the way the firm worked and implement new management systems. And whether he could do this without tainting the entrepreneurial culture and creativity that had been the foundation of the firm’s success (Burton et al. 1999).

Morgan Stanley had experienced phenomenal growth during the period from the 1970s to 1990s. In 1970, its 230 employees focused almost exclusively on traditional corporate finance. By 1992, its 7000 employees, a 30 times multiple growth in 22 years, operated in ten divisions and five North American, seven European and six Asian locations. The ten divisions were investment banking, equity, fixed income, merchant banking, asset management, foreign exchange, commodities, research, services and finance, administration and operations (Burton et al. 1999).

The firm was growing, diversifying and globalising which strained all of the internal systems and placed significant demands on managers (Burton et al. 1999). The lack of management capability was also noted: “Most people grow up trying to be great professionals, great traders, great salespeople, great bankers, not managers or leaders” (Burton et al. 1999).

By 1999 management had been embraced by retail banking for years. However it was a common joke that for investment banks, the term ‘Wall Street management’ was an oxymoron (Burton et al. 1999). There was a problem of the big producers. The new Morgan Stanley chief executive officer had identified the problem and was focused on changing it. “Wall Street has historically had a culture where the biggest producers have always

made the most money despite the fact that they are destroyers of culture and destroyers of people. You have to have the courage to stand up and fire those destructive forces” (Burton et al. 1999). From his 1999 statement: “We have not done a good job in pushing down the importance of management and explaining what we expect from you once you become a principal on a desk or a managing director. What is required of you? Well, you have not finished. You have further responsibilities. You have a job to do. And your job, other than making money, or building the systems that you’re building, is to teach the people below you” (Burton et al. 1999).

In addition to incentives outlined in the previous chapter, there are a number of disadvantages of the producer manager approach, which can contribute to absent management. The first is related to time.

When earlier comparing commercial and investment banking, it was noted that commercial bankers often have the longer time horizon. Their business is based on smaller individual transactions and retaining the commercial clients, as well as high net worth individuals, for a longer period of time in order to be able to make a profit. This is even more the case for retail bankers whose business is about a very high number of small transactions requiring long-term client retention to be profitable.

There is similarly a difference in time for production and management, but in this case, the conflict between the two is contained in one person. An effective producer manager must be able to handle two time horizons simultaneously. The production is generally the more short term, related to clients and markets. For the commercial producer manager, there may be less of a conflict. Servicing commercial clients successfully will require retaining them for more than one year. Successful management similarly requires a multiyear time horizon. For those serving larger clients, including investment bankers, the time conflict becomes more acute. For these clients, successful production is about a single or a few large transactions. And these transactions are extremely time sensitive. This is a key reason why these bankers often work long hours and why their juniors, including their summer interns, sometimes have no evenings or weekends off.

The time pressure is further intensified by competition. Many larger deals are competitively bid, so winning can become all time consuming. Once a deal has been successfully won it often involves more than one bank. This means that each bank is highly incentivised to drive the deal and deliver on time. Similar time pressure applies to nearly all trading, where market hours require complete concentration, as does handling investor clients particularly those with a high net worth.