The Hot Stove League

MUCH LIKE THE WORLD OF SPORTS, the corporate world is full of high-paid and in-demand superstars. As with their heroes on the field, many average Americans cannot fully understand the amount of money that is paid to many powerful CEOs.

Last month, All-Star third baseman Alex Rodriguez opted out of his contract with the New York Yankees. The 32-year-old slugger, already the highest-paid player in the majors, is coming off a very productive year in which he is sure to win his third American League MVP award, and is in line for a huge payday. The same week, Merrill Lynch’s CEO Stanley O’Neal stepped down from his position with the wealth management giant and left with $160 million for his trouble.

As teams around baseball will scurry to try to come up with enough money to entice Rodriguez to join their team, Merrill Lynch will also be competing to woo a financial rising star to play for them. In both cases, there’s a lot of money at stake, and it may be hard to prove whether or not that money will ultimately buy success.

Laurence Fink, the CEO of BlackRock, a major American investment firm, is the No. 1 candidate. This is not the first time that Fink’s name has come up as a possible CEO candidate, and the financial star is having to deal with the same kind of rumor and innuendo that is usually saved for the sports section. So far, Fink claims that he is happy with his position at BlackRock, but Merrill has reportedly given him two weeks to make up his mind.

Fink has been the CEO of BlackRock since 1998 and has successfully led the company for the past decade. Regarded as a whiz kid early in his career, Fink has been largely lauded for his early success with mortgage-backed securities in the 1980s. The irony of Fink possibly succeeding O’Neal is twofold: his success with mortgage-backed securities — seen as O’Neal’s biggest failure — and the fact that Merrill Lynch purchased 49.9% of BlackRock under the management of O’Neal. Before this summer’s credit crunch brought everything crashing down around Merrill and O’Neal, his investment in BlackRock was thought of as the former Merrill CEO’s greatest success.

While Rodriguez flirts with the idea of playing for different teams next year, Fink also has his options open. Buckling under the same pressure experienced by Merrill Lynch, last week Citigroup Inc. parted ways with its CEO, Charles Prince. Citi, the largest bank in the United States, also seems to be in the market for Fink. This isn’t new for Fink, as he was rumored to be in the running for the top position at Morgan Stanley in the past.

While there is no doubt about Fink’s impressive track record as head of BlackRock, one can’t help but wonder whether or not his talents are being overvalued by Merrill Lynch and Citigroup. Can someone who has never managed an institution as large as Merrill be the savior that they are looking for? Could someone from inside be more appropriate to take over? During O’Neal’s tenure with Merrill, he was known to get rid of executives that did not perform up to his standards. O’Neal periodically got rid of many high-ranking executives, many of whom would probably be considered as possible successors to O’Neal himself. This has led to a dearth of executive talent at Merrill and a blemish on the resume of many executives who worked under O’Neal.

Now Merrill has no choice but to headhunt a star officer from outside. If it is successful in landing Fink, it will find someone who does not have the experience of leading a company the size of Merrill. Fink is also someone who is fundamentally different in his managerial style than O’Neal. O’Neal was largely praised for his ability to take on high-risk, high-reward decisions. One that paid off was his investment in BlackRock. Unfortunately, O’Neal rolled the dice again and spent $1.3 billion for First Franklin Corp. First Franklin was one of the originators of subprime mortgages, and its purchase by Merrill in January 2007 came just months before the words “subprime” and “crisis” became synonymous.

Just as in sports, you are praised for a decision that works and fired for one that doesn’t. O’Neal went from being a savvy risk-taker to an out-of-work millionaire in a matter of months. Fink, on the other hand, is known for his aversion to risk, someone who will not be praised for his aggressive decisions but will most likely not have to enter into forced retirement because of his gunslinging style. If Merrill Lynch thinks that this fundamental shift in management style will get the company to where it wants to be, then by all means, it should offer the kitchen sink for Fink. If not, then it may consider trying to rebuild its company from within, using an executive with the knowledge and experience with the firm that will surely be needed.

Fink’s cash compensation for 2007 is valued at over $34 million, and if he takes the same position at Merrill, that number is likely to rise. That kind of money is comparable with that of sports’ most talented athletes and is almost unfathomable to the average American. Where does all that money come from, and is one person really worth it? Merrill Lynch certainly must think so — these kinds of figures are nowhere near unique when it comes to highly powerful corporate CEOs.

The Boston Red Sox, Chicago Cubs or Los Angeles Angels may be willing to pay Alex Rodriguez $350 million, but that will not promise a World Series. Merrill Lynch is also trying to get back to its winning ways, but that is not guaranteed to happen by poaching the financial world’s hottest free agent. It takes more than one man to really build a winner, and a company that’s trying to build itself back up may want to try and fix things from the inside first.

Until next time,
Jamie Ellis

November 7, 2007

The Daily Reckoning