Thursday, September 18, 2008 Activist Investor: Stale Ideas Killed AIG, Lehman
By Eric Jackson
09/17/08 - 09:43 AM EDT

As we all try to digest the unprecedented volatility that has besieged the stock market this week, with Lehman Brothers (LEH Quote - Cramer on LEH - Stock Picks) and Merrill Lynch (MER Quote - Cramer on MER - Stock Picks) now washed away, there is one question that is often repeated: How could so many smart people get things so wrong? It wasn't hubris or laziness. It was the inability of the board members and CEOs to look at the problems facing their companies with fresh eyes.

Newcomers like John Thain at Merrill took decisive actions to create the maximum shareholder value under the circumstances. Old-time CEOs like Dick Fuld at Lehman and Robert Willumstad at AIG(AIG Quote - Cramer on AIG - Stock Picks), who is a new CEO but has been on AIG's board since 2006, dawdled, and their companies are now paying the price -- one with bankruptcy and the other agreeing to a government bailout last night.

Management theorists Don Hambrick and Danny Miller conducted a study on the seasons of a CEO's tenure 20 years ago. They found that CEOs had the freshest eyes early in their tenure. They revisited old decisions made by their predecessors and charted a course for the organization under their leadership. After only a few years though, the CEOs began running their companies from within the prism of their past decisions. If their strategy didn't work out, they would defend it, stating that it simply needed more time.

This tendency for defensively believing in past decisions is not a CEO condition -- it's a human condition. It's not a trait that gets noticed when times are good, but it can be a deadly trait in so-called "perfect storm" times like the one we're currently living in.

It's up to the boards to hold CEOs responsible for their decisions by questioning them when warranted. Sadly, that didn't happen in the case of Lehman and AIG. In the case of both, it cost them the companies.

In this environment, even the most gilded companies' CEOs -- such as Lloyd Blankfein of Goldman Sachs (GS Quote - Cramer on GS - Stock Picks) and John Mack of Morgan Stanley (MS Quote - Cramer on MS - Stock Picks) -- need to be questioned by their boards. Worst-case scenarios must be discussed and preparations made.

Just because a CEO has a long tenure at a company and holds the title of chief executive doesn't mean he or she will fail; it simply means he or she needs to be on guard against "conventional wisdom." Conventional wisdom a few months ago was that Lehman was no Bear Stearns.

Wachovia's (WB Quote - Cramer on WB - Stock Picks) new CEO, Robert Steel, appears to be using his financial industry experience (he formerly served as head of equities at Goldman and undersecretary of the Treasury), as well as his lack of Wachovia tenure, to make quick moves in downsizing and separating the good and bad aspects of the bank in his first couple of months on the job. It warrants watching if he can be successful in doing what's needed at that bank in comparison to Thain's moves at Merrill.

Vikram Pandit, the CEO of Citigroup (C Quote - Cramer on C - Stock Picks), deserves a lot of scrutiny. He came to Citi after his Old Lane hedge fund was acquired. So far, he has done little to separate himself from the model that Sandy Weill built and for which Chuck Prince acted as caretaker. Will Pandit be just another caretaker? How will Citigroup be defined under his tenure? We have yet to find out. In the meantime, the company's stock drifts lower with the industry, and Citigroup continues to pay a dividend it can't afford. There is no urgent capital-raising needed yet, but Pandit needs to have the pressure kept on him.

In these difficult times, all CEOs and directors must come to work each day with fresh eyes to confront the problems they face. No matter how much past success they've achieved, no matter how esteemed these CEOs are, Lehman and AIG have taught us how easily everything that it took generations to build can be lost.

There, but for the grace of God, go I.

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