Why Narcissistic CEOs Kill Their Companies

Whether you're an employee, an investor, or a CEO yourself, you need to read about these 2 recent academic studies of how and why Narcissistic CEOs can kill their companies.

Read the full Forbes Post

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John Thain vs. Ken Lewis vs. Hank Paulson vs. Ben Bernanke

There's something highly annoying about watching the blame game playing out over the last week, first with Ken Lewis blaming Hank Paulson and Ben Bernanke and, this morning, with John Thain getting in some licks against the guy who saved his firm from a Lehman-like outcome.

The press and shareholders often complain about the size of executive compensation (as well they should), but the truth is that execs and most notably CEOs (not unlike politicians) are driven by a more powerful motivation (especially towards the end of their careers): preservation and enhancement of their reputation and legacy.

What prompted Ken Lewis last week to point the finger at the US government for Bank of America's (BAC) troubles is the fact that he'll be facing the music this week at his shareholders' meeting. There will be a large number of highly respected shareholders voting against him and he might well follow Terry Semel's lead and resign a few days afterwards, if the votes against are large enough.

In Lewis' mind, his life's work (building up BAC into the world's largest financial supermarket -- no longer a positive -- buying FleetBoston, MBNA, Countrywide, and Merrill) is about to go by the boards with a negative vote. That would be even more devastating to him than losing his job or a paycheck.

Lewis is putting up his last defense in striking out at Paulson and Bernanke. Nothing personal guys, business is business.

For Thain, the situation is different. This is a guy that should have another good 15 years in front of him as a major financial services CEO. Now, that's in question since he decided to move up the Merrill bonuses last year and the whole office deco-gate.

In my view, neither man is coming off well with their latest accusations and both will have to spend more time in the penalty box. For Lewis, that might include a large mark is his career accomplishments after this week's vote.

Position: None.

Originally published in RealMoney on 4/27/2009 7:39 AM EDT.

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Thain's Undoing Was Thinking He's Worth It

By Eric Jackson

From TheStreet.com

01/23/09 - 09:08 AM EST

MER , BAC , C , GS (Cramer's Pick) , NYX , TYC , AAPL , JPM , GE

The stunning announcement of John Thain's departure from Bank of America (BAC Quote - Cramer on BAC - Stock Picks) yesterday, less than a month after merging Merrill Lynch (MER Quote - Cramer on MER - Stock Picks) into the bank would have been unthinkable a few weeks ago.

After announcing the shotgun marriage of Merrill Lynch with Bank of America in September, hours after Lehman Brothers collapsed, the sterling reputation of John Thain was cemented: This was a CEO who could do no wrong.

Revelations leaking out of Bank of America in the last few days, and Thain's departure today, alter his image -- perhaps irreparably. Observers now wonder how this quiet, smart overachiever could have shown such poor judgment. After all, this is a man who rose through the ranks at Goldman Sachs(GS Quote - Cramer on GS - Stock Picks), turned around the New York Stock Exchange(NYX Quote - Cramer on NYX - Stock Picks) and merged it with Euronext and then had headhunters and corporate boards falling over themselves offering him numerous CEO spots.

There are 5 puzzling decisions Thain has made in recent weeks that ended up being his undoing:

1. He decided to move up Merrill's bonuses which are typically paid in January to December, prior to the closing of the merger with BofA. The payouts amounted to $15 billion, only a 6% drop from last year. Bank of America sought an additional $20 billion from the Treasury days later (this after requesting a $10 million bonus for himself for 2008, which was rejected by his board).

2. He did not come to BofA CEO Ken Lewis immediately to disclose Merrill's fourth-quarter loss after a sharp erosion of Merrill's book of business.

3. He left New York to go on a family ski vacation in Vail at the time news broke about the Merrill bonuses.

4. He planned to attend the upcoming Davos meeting, even though the financial industry is once again under extreme strain and BofA has advised against it.

5. He reportedly ordered an expensive redecoration of the Merrill corporate offices using his personal decorator in early 2008 at the same time he was preaching cost cuts to his new employees. (Among the expenses reported: $87,000 for an area rug, $11,000 for a "Roman shade" and $243,000 in salary and bonuses for Thain's driver last year.)

The last detail prompted short-seller Doug Kass to draw comparisons with now-imprisoned former CEO of Tyco(TYC Quote - Cramer on TYC - Stock Picks), Dennis Kozlowski, who famously approved a $6,000 shower curtain for the corporate apartment he stayed at in New York. (Kozlowski actually looks frugal compared to Thain.)

What's interesting about to the comparison between Thain and Kozlowski is that both were highly regarded prior to these scandals. At the time of his hiring, new Merrill CFO Nelson Chai complemented Thain's intelligence: "When you're the smartest guy in the room, which he typically is, you come at things from a different altitude."

How could someone so smart, make these poor decisions? And if it can happen to Thain, who will be the next golden CEO to drop? How can you spot the next smart executive to fail?

Sydney Finkelstein, a Professor of Management at Dartmouth's Tuck School of Business with whom I've worked on consulting projects, published a 2004 business best-seller called "Why Smart Executives Fail" that looked at 60 successful CEOs who later failed, including Kozlowski, Enron's Ken Lay and Jeff Skilling and George Shaheen of dot-bomb Webvan. The book is a great read -- and very current, given what we're living through.

Finkelstein summarizes what he calls the "Seven Habits of Spectacularly Unsuccessful Executives." One of those habits seems very relevant to John Thain: "They identify so completely with the company that there is no clear boundary between their personal interests and their corporation's interests." This was the habit that derailed Kozlowski, in Finkelstein's opinion. Here's a brief except from the book on this trait:

"We want business leaders to be completely committed to their companies, with their interests tightly aligned with those of the company. But digging deeper, you find that failed executives weren't identifying too little with the company, but rather too much. Instead of treating companies as enterprises that they needed to nurture, failed leaders treated them as extensions of themselves. And with that, a 'private empire' mentality took hold.

"CEOs who possess this outlook often use their companies to carry out personal ambitions. The most slippery slope of all for these executives is their tendency to use corporate funds for personal reasons. CEOs who have a long or impressive track record may come to feel that they've made so much money for the company that the expenditures they make on themselves, even if extravagant, are trivial by comparison. This twisted logic seems to have been one of the factors that shaped the behavior of Dennis Kozlowski of Tyco. His pride in his company and his pride in his own extravagance seem to have reinforced each other."

In the case of Thain, he signed off on these expensive corporate renovations after Merrill "won" the battle to get him as CEO (remember Citigroup (C Quote - Cramer on C - Stock Picks) wanted him too). At the time he took over the company a year ago, he was one of the kings of Corporate America. He might well have felt justified in green-lighting these expenses and using his own decorator.

It's also interesting to note that, in all the criticism of how Ken Lewis of BofA failed to do sufficient due diligence on Merrill prior to announcing the deal, no one has criticized John Thain for insufficient due diligence on Merrill prior to taking the top job. At the time of his hiring, he assured the press that he'd been given complete access to Merrill's books. Apparently he did a poor review. When Merrill's fortunes started to go south, no one went back to ask Thain about this oversight.

What this sorry episode teaches all analysts, media, and investors is that we need to appreciate success and achievement but always remain skeptical. We shouldn't be afraid to ask tough questions even about "untouchable" CEOs like Apple's(AAPL Quote - Cramer on AAPL - Stock Picks) Steve Jobs, JPMorgan Chase's (JPM Quote - Cramer on JPM - Stock Picks)Jamie Dimon, or General Electric's(GE Quote - Cramer on GE - Stock Picks) Jack Welch. Past success no longer guarantees future success in today's world.

Unfortunately for BofA shareholders, no one had warning signs about Thain until the last 72 hours. (And let's not forget that, if you're a Merrill shareholder, you are overjoyed that Thain sold this company at such a premium and kept the fourth-quarter loss under wraps until the deal went through.)

One thing's for sure: If you're a company insider and you hear about a big corporate office renovation, starting looking for work and start selling your insider stock right away.

Neither Eric Jackson nor his fund owns stock in Merrill or BofA.

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Where Citi Went Wrong

By Eric Jackson

TheStreet.com

01/15/09 - 12:26 PM EST

C , WFC (Cramer's Pick) , GS , JPM , MS , NFP

Citigroup (C Quote - Cramer on C - Stock Picks) is a mess.

From the moment Wells Fargo (WFC Quote - Cramer on WFC - Stock Picks) snatched Wachovia from under Citi CEO Vikram Pandit bank in October, Citi has stumbled.

Its stock price since then has plummeted from the low $20s to the mid-$3s today, as the market fears its decision to sell its Smith Barney business to Morgan Stanley (MS Quote - Cramer on MS - Stock Picks) will fail to quench its need for capital in the coming months.

So what caused this massive implosion? A lot of Citi watchers have assigned blame for the large drop in the bank's market cap, from $300 billion to $30 billion.

Pandit has been widely characterized as a weak and indecisive CEO in the press. The New York Times blamed Bob Rubin and risk management headed by Tom Maheras -- both are now gone. In a recent interview, large Citi shareholder Prince Alwaleed bin Talal pointed the finger at former CEO Chuck Prince. A few (including John Reed, the man who merged Citi with Travelers in 1998) have also pinned Citi's shortcomings on the "financial supermarket" model masterminded by Sandy Weill. (On Tuesday, Pandit announced Citi would dismantle that supermarket model, returning to its old Citicorp roots.)

It turns out that Citi's biggest mistake leading to its downfall did occur in 1998, but it wasn't the April super-merger of Citicorp and Travelers -- it was the November ousting of Jamie Dimon by then-Chair and CEO Sandy Weill over a disagreement with Weill's daughter.

Had Dimon stayed on, he -- not Chuck Prince -- would have succeeded Weill and Citi would have avoided many of its missteps. Instead, Dimon moved to Chicago to head up Bank One, later triumphantly returning to New York when Bank One merged with JPMorgan Chase (JPM Quote - Cramer on JPM - Stock Picks). Dimon, who could now stare at his former employer down Park Avenue, now serves as CEO and chaiman of JPMorgan.

Wall Street has watched the spread in performance of the two banks ever since. JPMorgan's stock is down 30% since the merger with Bank One on Jan. 15, 2004, while Citi's stock is down 92%.

The reasons for corporate blow-ups are never simple; it's usually true that every employee is replaceable. However, Citi has never been the same company since Dimon was pushed out.

Even a decade ago, most knowledgeable observers knew Dimon was going to be a special CEO one day. Sallie Krawcheck (who was a Citi analyst at the time) said back then: "Investors are asking two questions: What should I do with my Citigroup shares and where is Jamie going next so that I can buy the stock?''

Dimon had been a longtime protégé of Sandy Weill's. After graduating from Harvard Business School in 1982, Dimon turned down a job offer from Goldman Sachs (GS Quote - Cramer on GS - Stock Picks) to go and work for Weill, whom he knew through his father. Over the next 15 years, the two built an empire: Commerical Credit, Primerica, Travelers and Citi.

But in late 1998, after announcing the biggest merger ever, Weill and Dimon sparred over Weill's daughter, Jessica Bibliowicz. Dimon refused to give Bibliowicz the job of chief asset manager of Travelers, as Weill demanded. What's more, Dimon also wouldn't agree to promote Weill's son, Marc, to head up Salomon's bond group. Weill demanded that Dimon resign.

Jessica went on to run National Financial Partners (NFP Quote - Cramer on NFP - Stock Picks), a $100 million financial advisor that has seen its stock swoon by 93% in the past year as Barron's has written negatively about its future prospects. Having left Citi in 2000, Marc now heads a small money management firm in Greenwich, Conn., called City Light Capital.

All the World's a Stage

The Shakespearean similarities between what happened with Weill and Dimon are uncanny. Jaime Dimon was the Earl of Kent challenging King Lear and Weill sided with blood over an adopted son.

Weill now has had to watch the dismantling of everything he spent his career building. The Wall Street Journal quoted two friends who know Weill as characterizing his mood ranging from anger to despondence since hearing that Citi's "financial super-market" model was being disassembled.

Vikram Pandit was a poor choice as CEO in December 2007, as he's waited much too long to change Citi's status quo until forced by the government, but it's likely that neither John Thain, Ken Lewis nor Sandy Weill circa 1995 could have done much better given the circumstances the bank was facing prior to Pandit's hiring.

It's not 20-20 hindsight to say that Citi's greatest mistake was letting Dimon walk out the door. Many knew this at the time; when he said goodbye on the Salomon Smith Barney trading floor, 1,000 traders gave him a standing ovation.

One bad move does not usually cost a career or a company. Life has a way of giving us lots of "do-overs" to course-correct our mistakes. However, there are decisions that stick with us for the rest of our lives and we always look back on and regret. Weill's hubris in pushing Dimon out will always be looked back on as the beginning of the end of Citigroup.

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TheStreet.com: Activist Investor: Stale Ideas Killed AIG, Lehman

TheStreet.com
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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