Five lessons from the financial crisis
The same week that the Financial Crisis Inquiry Commission is casting blame on Wall Street excess, a panel of financial services IROs (and one from an online employment service) did their own soul-searching at an event hosted last night for NIRI-NY by BNY Mellon.
The ‘great lounge’ on the 49th floor of BNY Mellon’s One Wall Street headquarters, under thousands of iridescent seashells covering the ceiling, was the perfect setting for ‘looking into the abyss,’ as the event was billed. The magnificent art deco skyscraper – some say the greatest ever built – was conceived just before the crash of 1929 and Wall Street’s original fall from innocence.
1. It was good for IR
John Andrews, Citigroup’s head of IR, dominated the panel. Once Morgan Stanley’s IR chief, he went to Goldman Sachs in 1999 ahead of the firm’s IPO then in 2007 moved to Citadel, Ken Griffin’s hedge fund (‘Ken thought they would go public. The market had other ideas.’) This voluble veteran candidly described the mess he found when he was drafted by Citi CEO Vikram Pandit in March 2009, just after Citi announced its infamous exchange offer with the government: ‘Look up dilution in the dictionary and it says, See Citi.’ On his second day on the job, the stock hit 97 cents.
‘Paradoxically, while the crisis was obviously a huge challenge for financial services, the silver lining was that it was good for IR,’ said Andrews with a steely glint. ‘The role of reputation became paramount.’
The crisis proved to CEOs the importance of IR, capping more than a decade of gradual evolution. ‘In 15 years I’ve seen a dramatic change in the job. Today I’m sitting three or four doors down from Vikram,’ Andrews added.
2. Management doesn’t always get it
‘One of the biggest challenges we had was management. They don’t always understand what the market thinks,’ Andrews said. He told of Citi’s analyst day in May 2008, before he joined the company. The bank had emerged from its decade-long ‘Sandy/Chuck show’ with ‘a long history of bad relations with shareholders,’ and IR had ‘no credibility with management.’ In the midst of an expanding credit crunch, Citi’s management boasted of the bank’s great earnings power, prompting at least one investor to walk out: ‘Sometimes you have to tell management, You’re delusional. I’ve definitely said it.’
Toby Willard, vice president of IR at American Express, was in his company’s corporate planning and analysis group when the crisis hit. He spoke of the luxury of being able to talk during the crisis to investors who didn’t have an axe to grind with the management team. ‘That stream of feedback to management can be really important,’ he said.
3. You need credibility inside
Andrews again: ‘You may ask, Are we ready for a crisis? The question you really need to ask is, Do I have the CEO’s ear?’
IROs have to make a lot of quick ‘gut calls’ in a fast-moving crisis. Decisions have to be measured against which constituencies the company cares about: shareholders, management, employees, the press, regulators. ‘Then there were new groups, some of them zany, like Congress,’ Andrews said. ‘Who do you cater to? You have to hope your CEO listens to IR as much as he listens to others in the room.’
‘You can leverage that credibility to get better information quicker,’ said Phil Talamo, who weathered the crisis as IRO at fund manager AllianceBernstein then joined UBS as co-head of IR for the Americas in October 2010. Few fund companies were hit as hard as AllianceBernstein, which had bet against the crisis as a big holder in Lehman Brothers, Freddie Mac, Fannie Mae and Citi, leading to the resignation of its legendary CEO and progenitor, Lew Sanders, in December 2009.
4. There is no such thing as a crisis manual
‘It’s not about having a manual or a policy. It’s about having the right team,’ Andrews pronounced.
Citi may not have had that at the beginning but it did by the end: ‘If there were another crisis, we would respond much better because we fused together in the last crisis.’
Willard said that at Amex everyone is now working more closely together to anticipate problems and react to them.
Robert Jones, former head IR at Monster Worldwide, the online recruitment company, said the crisis led to IR working more closely with PR, marketing, sales and others inside Monster: ‘IR can be seen as part of finance. But in a crisis you have to have credibility and be able to reach out to others in the company.’
5. Admit your flaws.
‘The one thing you can do as an IRO in a crisis is get management to tell the truth – and that really builds credibility,’ Andrews said.
In other words, financial performance might suck, but at least admit the weaknesses and investors will pay you back with their trust.
‘You have to convince management not to stick their head in the sand,’ confirmed the battered Talamo.