Background
Since its foundation in 1914, Merrill Lynch transformed from an investing consultant for small businesses to one of the largest firms in Wall Street. The company’s uniqueness was in its friendly, open, and trusting culture. Merrill Lynch’s past culture inculcated a culture of “backslapping”, friendly, hardworking culture that demanded hard work but cared for both the customers and the employees. The company had a large number of brokers, who were considered the pillars of the company and called the “thundering herd” were almost pampered by the company, which was personified as “nurturing, benevolent entity, so-called “Mother Merrill”” (Dick, 2009, p. 140). The company culture values loyalty and trust.
The corporate culture of Merrill Lynch shows that the company had a strong employee and customer relation orientation. The main components of the corporate culture of the company may be summarized as follow:
- High degree of trust among employees was the focus of the company’s culture. The company trusted its employees and they were given the freedom to work with their clients in their own manner. The employees were allowed the freedom to adopt independent style to handle their customers. As a brokerage firm, the employees had their own set of customers. They maintained the relation with these customers and more revenue they earned for the company more was their rewards.
- The company values loyalty. The company inculcated a culture of loyalty for their customers and employees. Loyalty was important as the company was in the business of investing other people’s money. They had to inculcate a certain degree of loyalty to ensure that people would allow them to invest their money. Hence, the culture demanded loyalty from their employees and in turn was loyal to them.
- The culture of the company developed a familial relationship with its employees and customers. All who were associated with the company were considered as a part of a family. Thus, familial trust was high and this trait developed loyalty. The company took care of its employees and was quick to reward good performance. Recognition for high performance was a part of the culture and employees were rewarded annually with expensive trips and other such benefits.
- The company spent a lot of money on training and monitoring of the brokers in order to keep them motivated and to upgrade their knowledge about the financial market constantly. Employee benefits and bonuses were high and the company was known to take care of its employees.
Why did Merrill Lynch need to change?
In the year 2007, Merrill Lynch required to undergo a change. The reason for the required change was due to the dwindling financial performance of Merrill Lynch. In 2007, the company had recovered the initial financial problem it faced, but there was discontent among employees and customers alike. There were two broad reasons for the change – internal and external. The internal cause was due to the rising discontent among the employees. E. Stanley O’Neil, the then CEO of the company, changed the focus of the company from a people-oriented organization to profit. He believed in cost cutting and in order to make the company run in profit he cut almost “24000 jobs and closed 300 field offices” (Dick, 2009, p. 142). His profit-orientated strategy led him to do away with the nurturing “Mother Merrill” culture of the company. Salaries were frozen and no bonuses or benefits were paid to the employees. Discontent and demotivation swept through all ranks in the company as employees at Merrill Lynch were used to the flamboyant excesses that the company showered on them. The customers too were disgruntled due to the lower staffing and impersonal segmenting of customers that removed the low account balances to the call centers, providing direct financial advise through brokers only to the rich clients. These measures from an accounting sense were immensely good as this soared the company’s profit to 28 percent but this created wide discontent.
O’Neil initiated cost cutting measures and pushed the company towards riskier ventures. His aim was to create a new age financial service company that provided a large number of services with fewer people and a strong focus on profitability. The company started investing more on collateralized debt organizations (CDO) and other debt instruments such as subprime mortgages. Initially this strategy was working fine for the company, however, in July 2007, the global credit crunch reduced the return on subprime mortgages considerably, which was due to the low return rate of borrowers who were earlier creditworthy. This led the company to great losses.
Changes in the Industry in 2007-08
A few of the noteworthy events in the financial industry in 2007-2008 are as follows:
- The financial situation in 2007 intensified, with a global credit crunch setting in, due to the payment default of creditworthy borrowers.
- The financial market was in turmoil. In 2008, JPMorgan Chase acquired a brokerage firm called Bear Stearns with government assistance.
- In 2008, one of the most prestigious names in investment banking, Lehman Brothers went bankrupt. Without government assistance, the bank was about to be acquired by Bank of America and Barkley’s.
Change Initiatives
Merrill Lynch was in a tight spot, which forced ousting of O’Neil as CEO. John Thain, who worked with Goldman Sachs for twenty years, joined the company as CEO. The changes that were undertaken by him in chronological order are as follow:
- Personnel and Structural Changes
- Thain changed the leadership of the company and brought in a new team from among his old colleagues at Goldman Sachs and NYSE.
- He intended to revamp and repair the company’s risk function, which had failed miserably. He hired a former employee of Goldman Sach, Noel Donohoe, as Co-Chief Risk Officer.
- Repairing Balance Sheet
- Thain altered the importance the earlier leadership had laid on mortgage security. His aim shifted more towards raising capital to cover the losses of the company.
- Thain arranged to sell $30 billion CDOs to the Lion Star Fund and “booked the transaction as sale” at 0.22 cents (Dick, 2009, p. 145).
- He raised $27 billion in capital in order to reduce losses (Dick, 2009).
- He consolidated the risk functions of the organization in order to manage the diversified risk-taking ventures.
- He introduced a profit linked compensation plan for the organization (Dick, 2009).
- Sale of Merrill Lynch
- When Lehman Brothers declared bankruptcy, Thain decided to sell the company to Bank of America. The move was a strategically correct as Merrill Lynch would have faced dire financial problem due to short sellers’ lack of confidence in the market.
Change Management Issues
The problems in the change management strategy of Merrill Lynch identified in the case study and the risk of adopting the strategies are discussed below.
- The change initiative of O’Neil was opposed to the old corporate culture of Merrill Lynch that prevented easy acceptance of the new processes. The employees were not ready to accept the change or the organization structure that shifted its focus from relationship to profitmaking. The risk was employee dissatisfaction and loosing of clients.
- John Thain changed the structure of the leadership and brought people from outside the company to handle most of the important departments. This overall changed the culture of the organization as these new leaders were accustomed to a different culture than that of Merrill Lynch. The risk was dissatisfying the customers.
- Linking compensation to profit ushered a new development for the salary and reward structure in a company, which linked reward with individual success of a broker and not to the overall profit of the company. This was a positive move importance of individual success to overall success of the company. However, the risk was moving away from the prior culture of the organization.
- The decisions taken by John Thain were mostly successful as the company was in a financial crisis and such a strategic move was necessary to keep the company afloat. However, the decision was not communicated to the leadership of the company. The risk was heightened turnover, reduced trust within organization, and among clients.
Recommendations
The sale of Merrill Lynch was the right move. Otherwise, the company would have faced short selling by clients and would have gone bankrupt like Lehman Brothers. However, the selling of the company should have maintained that the culture and the functioning of the company should be managed in such a way that the old culture of the company could be retained. The recommendations for the present Merrill Lynch, based on the information provided in the case are:
- Stress should be given on the retail brokerage division of the company that was the strongest division of the company.
- The new leadership should communicate the strategic plan and the goal of the company to the employees to ensure transparency of the decision making process. Any plan to change or alter the divisions, departments, or the overall employee focus should be communicated.
I would have introduced most of the changes introduced by Thain but would have tried to change a few of the intense-profit oriented strategy of O’Neil. May be the timing for initiating the change in structure was premature. Structure in the company required change but only after proper understanding of the processes and the culture of the organization. Communication of the strategies and mission of the company was not communicated to the employees. I would have ensured that all employees were informed of the strategic changed implanted in the company.
Reference
Dick, T. J. (2009). Merrill Lynch: Evolution, Revolution and Sale, 1996-2008. Columbia: Columbia University Press.