Banker, Heal Thyself?

A lot of my childhood friends became lawyers. I am one of the few MBAs among them, and as a result I often end up getting their ‘business’ questions. From these questions, I think it is pretty safe to conclude that even the smartest lawyer is usually a pretty bad business person when it comes to their own practice. Let me be very clear, I am not disparaging lawyers. I think a good corporate counsel is one of the most important advisers a CEO can have. But something seems to happen to good corporate lawyers when it comes to running their own practices. Good lawyers do not usually make for good managers. The same is true of other professionals as well. The next time you visit your physician ask her opinion of her practice’s management team. That all being said, there is perhaps no professional worse at management than a banker.

When I was on the Street, my job was to analyze and evaluate management teams of tech companies. But I made it a core principal to never turn those analytic tools towards my own management. For an Analyst, there is just no joy down that path.

I mention this now because the management of big banks’ management is once again under the spotlight. This week an activist investor took a stake in Morgan Stanley. Most of the press coverage interprets this investment as an endorsement of Morgan’s management, but also an implicit snub, or possibly a threat, to management teams at other banks. This scrutiny is long overdue.

For years, investment bank management teams have been able to float on good times. In China, they have this saying “In a hurricane even turkeys can fly.” And I think for the past few decades investment bank executives have been able to hide a lack of managerial ability through good results propped up by cheap money. Even in the financial crisis, the Fed bailed out the banks’ equity holders, leaving most management teams in place. Nonetheless, the truth is that banks are not well run.

The root of the problem is that the skills of a successful banker (or broker or trader) are not the same skills as a successful manager. Banks tend to promote the highest performing bankers into management, opening up a serious skills gap. Having moved into the corporate world from the banking world, that difference is very clear. Corporates have all kinds of processes and structure built up around management functions and decision making that are generally lacking entirely in the banking world. Internally banks give little thought to culture or employee alignment. Banks have been able to avoid this because they are usually staffed by highly motivated people who just get shit done. But that is a brute force approach that has reached its limits.

Let me give an example. When I was at the Bank, the man running the Corporate side of the firm had risen through the ranks as a Fixed Income trader. He was incredible at that task and a very smart guy to boot. However, he tended to promote the people he knew best. As a result the Bank had a heavy slant towards the Fixed Income side of the house leaving the Corporate Investment Bank, Wealth Management and Equity groups to constantly struggle for executive support (and struggle for bonuses).

At some point in his rise, the man in charge hired a junior analyst on to his trading desk. The analyst did well in that job and moved up on the desk. When his boss became The Boss of the whole Bank, he got promoted as well. For a period, this one-time junior analyst was promoted to run the whole Equity side of the house. He had no familiarity with the product, with the customers or the people in his group. I once attended a meeting between him and our largest equity client. In that meeting, he actually told the client he wanted to fire half his group and could the client help him identify who was under-performing? Needless to say that client did not remain with us for long. (As an unrelated aside, both the one-time junior analyst-turned-boss and the client ended up getting in serious trouble with the SEC, but that is a story for a different day.)

However, the problem is more than just one group being promoted over another group. Even if it had been someone from my group ending up in charge, the Bank would not be in any better shape today. Being a good trader, a good analyst or a good relationship banker does not give anyone the requisite training for being a good manager. That is a different skill set, and no one at the banks are training their teams to pick up those skills.

One of the biggest surprises to me on joining the corporate world was discovering the HR function. At my last employer, the HR leader, and her whole team, were great people. Friendly, smart, helpful and most important really good at supporting the overall business. In every bank I have familiarity with the HR team is the enemy. They are engaged in an explicit war with the banks’ employees. This is true of all sorts of other areas as well – IT, Operations, Accounting, etc.

All large organizations have structural conflicts with different groups vying for resources and priority. What sets the banks apart is that they do so little to harness, corral or manage those conflicts.

Now, you may dismiss this as solely the rant of an embittered former banker (and I will concede that I have crossed over the line into rant), but nonetheless it is important for the future of the industry. There is a hard truth that investment banking teams do not want to talk about. In fact, given their generally poor strategic capabilities they may not be fully aware of it. The fact is that there are too many investment banks in the US today. All of the banks’ core businesses are under threats. Wealth management products are increasingly shifting to low-fee passive and ETF strategies. The Fixed Income bubble is steadily deflating, propped up solely by the world’s very strange interest rate structure. Brokerage commissions are steadily moving towards zero. And while we could debate this one, it seems pretty clear that there are too many bankers chasing IPOs and M&A advisories.  The industry has to shrink. Ten years from now there will be fewer investment banks out there, and those left standing will be much leaner. The firms that survive will be the ones that are managed the best. A few firms will get lucky and latch onto some temporarily lucrative area, but for the most part skill will trump luck.

Banks need to bring their management structures into the 21st century. This is not just about giving everyone a computer. It will mean rethinking how decisions are made and pushing decision making power far out into the front lines. Inventive structures will have to change as well. Similarly, investment decisions will have to be made on some basis other than picking which ever group is doing best at the time of decision-making. This is not an easy process, and it will not happen overnight. But slowly, over time, the firms that do this best will gradually pull into the lead. They will be able to win business and make decisions more quickly. They will be smarter about where to deploy capital. And they will build compliance structures into the fabric of daily business.

In the Valley, we hear a lot (too much) about disruption. And maybe some of the Finance world will be disrupted. But the investment banks face a far more subtle yet challenging task. They need to create a new management structure and new cultures.

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