Posted by Gene Colter
Shares of Merrill Lynch & Co. are about as depressed as those of any other Wall Street stock, hovering near 52-week lows. That fact, plus the blanket coverage of investment banks’ travails, made it pretty easy to gloss over a Merrill news nugget that will come to be seen as good and important in the months and years ahead.
Chief Executive John Thain is retooling Merrill’s compensation structure so that come bonus time overall firm performance counts more than unit performance. That policy change was reiterated last week at a Wall Street Journal conference but received less coverage than other Thain utterances.
This is very much the way things get done at Thain’s previous Wall Street firm, Goldman Sachs. Goldman held off becoming a public company for 129 years, and understandably so: The partners did very well, and the private status was a sort of elite-club-marketing tool for the firm. But even since going public in 1999, Goldman continues to act very much like a partnership.
It’s not touchy feely. Goldman traders and deal bankers most likely do not begin the day with team-building exercises. What the Goldman structure does do is pull all units together to guarantee the best bottom line and, it follows, the best pay packages on the Street. More to the point, it compels across-the-firm risk management where all units try to foresee how their activities could affect or be affected by other units.
Such “holistic risk management” (to use the voguish phrase) can’t prevent every crisis, but it will almost always give a firm a better view of risk and allow it to plan for the domino-like spread of risk that typically accompanies a financial disaster.
Contrast this to the normal practice on the Street, where each unit basically is encouraged to beat the others: “If we prop traders outgun the asset managers, we’ll get a bigger cut of the pie.” (There would be more cursing in there, but that’s the general idea.)
Thain is importing one of Goldman’s best practices, and in doing so will strengthen the foundation of his giant brokerage house.
Here’s hoping – without much hope – that other Wall Street chiefs jump on the bandwagon.
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