In an interview with Ivey Business Journal Editor Thomas Watson, Winthrop H. Smith, Jr., son of one of the original Merrill Lynch partners, reflects on Merrill Lynch’s ethical values and the changed culture of Wall Street.
On the occasion of the 100th anniversary of the founding of Merrill, Lynch, Pierce, Fenner & Smith, Winthrop H. Smith, Jr., discusses his new book, Catching Lightning in a Bottle: How Merrill Lynch Revolutionized the Financial World, and reflects on the badly skewed motives that continue to plague the financial services profession. He contrasts the environment of today’s Wall Street, which is characterized by greed, with his former employer’s focus on client service and ethical values.
How Is This Article Useful to Practitioners?
As the son of one of the original Merrill Lynch founders and a former member of senior management, Smith was uniquely positioned to experience the best and worst that a storied brokerage firm had to offer. The fate of Merrill Lynch illustrates the change on Wall Street caused by the shift in culture. In the past, the focus was on respect for the client and fellow associates. Now, the culture is frequently characterized by the pursuit of profit, disregard for ethics and the client, and the substitution of collaborative management for outsized egos, each of which has contributed to the misaligned incentives in the financial services industry. The abandonment of the partnership model underscores the problem as do some key management decisions on acquisitions and dispositions both at Merrill Lynch and at its competitors. Merrill Lynch at one time represented teamwork and service in its effort to bring investing to the mainstream US public and the world. Boards that simply accept whatever management says or does may enable questionable decision making. Former Merrill Lynch CEO Stanley O’Neal’s scandalous behavior is an example within Merrill Lynch itself of the shift away from the former ethical culture that made the firm great.
If progress in the financial services industry is cyclical, then so are its lessons. Just as firms are recovering from mismanagement, the virtues of humility, customer loyalty, and prudent risk taking continue to take hold in their wake. The key would be for these changes to be more permanent. Those in management and specialists of corporate culture and behavioral finance will find this exchange a welcome refresher of what has worked and what has not in corporate culture.
Smith’s criticisms of a greedy Wall Street culture bereft of any sense of duty to customers and completely driven by profit are all too familiar (think of former Goldman Sachs director Greg Smith’s recounting his former employer’s characterization of clients as “muppets”). Having skin in the game was a cornerstone of the old partnership culture that kept senior management at the bulge bracket firms grounded in their approach to risk. It is an approach that Merrill Lynch once embraced. As this culture fell away, so did humility and prudence. Finance has increasingly become an end unto itself, shedding its primary role of capital allocation. Those without a sense of history are doomed to repeat its mistakes.