On Executives and Risk

Okay, I read the NYT Dealbook post on Alan Schwartz, and I have to admit, it completely destroys the entire notion of executives at firms, especially like Bear, as having any real personal risk. Let me quote…

Mr. Schwartz, Bear Stearns’s chief executive during the firm’s near-collapse, has been talking with Goldman Sachs, Citigroup, private equity firm Kohlberg Kravis Roberts and boutique advisory firm Centerview Partners, among others, people briefed on the matter told DealBook.

(emphasis theirs).

Okay, now, here’s the issue I have: Alan Schwartz is the reason Bear doesn’t exist today. Remember the three part WSJ article about Bear going under? Remember what I noted about the first part? Alan Schwartz, who is not a trader, vetoed the very trade(s) that would have saved Bear and was proposed by his senior traders. What happened from that decision was that thousands of people lost their jobs, the firm went out of business, and a lot of other, very bad, things. That’s fine that he made the decision. I almost don’t care that he was wrong. However, it’s a huge moral hazard/slippery slope/perverse incentive/etc. Alan Schwartz should be toxic right now.

One can argue about Stan O’Neil, Chuck Prince, or any of the other C.E.O.’s that lost their jobs but got large payouts. (I don’t support that either, by the way–if you were at the helm, you should take what you’ve already been given and neither ask for nor accept any more. You retire/leave rich nevertheless–but boards were incompetent, stupid, or in league on promising these things, so taking them isn’t the fault of the ex-C.E.O.’s.) However, these C.E.O.’s firms didn’t die and go away and they certainly didn’t veto the proposed lifeline with nothing but a body of irrelevant experience to guide them arguing from a place of no authority. These same kinds of hedges worked at other firms.

The common argument says, “C.E.O.’s get paid more because they have more risk.” Well the other people at Bear Stearns got less money, are out of a job, and, in this market, certainly are finding it difficult to get a new job. These people probably don’t have millions of dollars. Alan Schwartz does have millions of dollars, is out of a job as a result of something he could control, and can land on his feet as a senior deal maker making millions of dollars? Unacceptable and unthinkable. If this situation defines the rule then C.E.O.’s should get paid much less than they currently do and realize that even if they roll the dice and lose when betting with an entire company they will still get a job that pays exceptionally well.

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7 Comments on “On Executives and Risk”

  1. dave Says:

    AS was a caretaker overwhelmed; like the villain in Indian Jones he chose poorly. That he will never be fit for such a position again is readily apparent. However, he was in position for that appointment because of his IB rainmaking history. He is an excellent hire once relegated to the proper role. The Street is about money, he makes it in buckets. Prince, O’Neil and Cayne led the charge into the abyss, I’d execute before I would extend an offer. May the Schwartz be with you…


  2. […] Stearns CEO Alan Schwartz reportedly has plenty of employment opportunities, and Dear John Thain is none too pleased: “It completely destroys the entire notion of executives at firms, especially like Bear, as […]

  3. plainfont Says:

    I don’t know why this comes as a big surprise, or is something that is even worth being angry about. Perhaps the most notorious example of this is Bob Nardelli, the former CEO of Home Depot and current head of the Cerberus-held Chrysler Group. Nardelli ran Home Depot into the ground, not before ejecting with a $200+ million golden parachute, and yet, he was chosen to lead Chrysler. My guess is that it’s easier to justify reusing old, even damaged CEOs than bringing on a new one with a clean slate.

    http://www.plainfont.com


  4. Plainfront,

    I don’t disagree that there are other examples. However, my argument does say that an outgoing C.E.O. taking what he was given isn’t his own fault. I also think that, in Nardelli’s case, which i admit not being very familiar with, Cerberus would be at fault for giving him a new job. The issue, there, however, might not be analogous. Cerberus owns the company it hired him to run, so their interest is in having that company perform (both aligned). Also, P.E. companies are known to require their executives to have some skin in the game and being a bit relentless in requiring performance. Lastly, Nardelli did have some track record before Home Depot… so he didn’t mess up his first executive posting and cause a takeunder… Certainly I don’t exactly condone that situation either, but it’s different than hiring someone for his Rolodex.

    -DJT

  5. capitalist pig Says:

    In both cases, I think we should also complain about the boards who picked the wrong guy for the job. Nardelli’s background at GE was in manufacturing, not anything related to retail. Schwartz was an iBanker at a company where most of the profits were generated from trading. The board allowed Cayne to sack Spector, who oversaw trading, and chose the other guy to run the show. In a way, he was set up to fail by his board.


  6. […] of employment options, despite having helped (inadvertently) engineer the downfall of Bear Stearns. Dear John Thain is rightfully pissed. Not surprised Centerview Partners is on there. After all, it hired Jim Kilts — the former […]


  7. My fellow on Facebook shared this link and I’m not dissapointed at all that I came here.


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