When Merrill Lynch (MER ) Chairman and Chief Executive David H. Komansky selected Stan O'Neal to be his president and heir apparent in July, he caused a real stir. Komansky had publicly stated he would select a successor by the end of 2001. Four executives badly wanted the job. In July, Komansky suddenly changed his mind and announced that O'Neal was his final choice.
Yet the controversy over the race to rule Merrill continues. Since being selected as president, O'Neal has driven away two of his three rivals for the top post. And a dramatic shakeup of Merrill's top management team by O'Neal has sparked speculation that Merrill's board of directors overruled Komansky's selection for a successor and that he may retire by 2002, instead of 2004. Below are edited excerpts from an interview with Komansky by BusinessWeek Investment Banking Editor Emily Thornton in which he sets the record straight on how O'Neal landed his new job:
Q: Why did you select your successor in July?
A: I had committed to the board a year ago and many times publicly that I would select a successor by the end of the year. As we went through the process, it developed more into a public horse race. It was beginning to be somewhat dysfunctional.
Once I came to a decision in my own mind who I was going to recommend, it didn't make much sense to me to wait until the end of the year for a couple of reasons: No. 1, I had made a determination who I was going to recommend. No. 2, the environment was becoming somewhat dysfunctional in the press. The organization itself was focused on it more and more in the gossip mill. It was a very popular, and somewhat distracting, point of conversation.
The other thing that entered into my judgment was that it became obvious this was going to be a challenging year from the point of view of business and profitability. We had to make a lot of changes and a lot of things to accomplish. I finally came to the conclusion that we'd be better off doing what we had to do this year, trying to get positioned so we could go into the new year with all of this behind us.
I had gone through a very strenuous process with the people I was considering for the position, and I had a series of one-on-one conversations with every member of the board prior to that. I think it was in June I told them I wanted to accelerate the process and that I would be at the next board meeting to announce a nomination for president. At the next board meeting I did that. It was unanimously supported.
Stan was the only person I recommended. He was my choice, totally. The timing was my choice, totally. And very frankly, in retrospect, it was one of the luckiest things I've ever done in my career. If I'd had to face this challenge of the tragedy and the dislocation of the firm and everything we've had to do since September 11, it would have been a challenging situation for me to handle by myself.
The process was precisely as I explained. These stories about the board accelerating it, or wanting to accelerate it, or exercising new influence over who my recommendation was is absolutely a figment of someone's imagination. It never happened. It happened exactly as I described it.
Q: Jeffrey M. Peek was never your first choice as a successor?
A: Never. Jeff Peek clearly was one of the people I was considering. I think very highly of Jeff. He did a terrific job here and accomplished a lot. Members of the board liked him and felt precisely the way I did. Nonetheless, given the people I considered, I felt Stan was clearly the best choice.
Q: You've selected someone with a different style. What do you see as the character of the firm going forward?
A: One of the big issues I've wrestled with in my mind for the last year and a half or two years was my view of this industry and how the firm would be going forward, as opposed to looking at the firm from a retrospective basis.
With the competition we are facing by the commercial banks, the commoditization of much of our business, with the changes I see going forward in the private-client business. I see the next 10 years as being very different from the past.
I thought it would take somebody with a different point of view. Someone who could look at the business as it will be, as opposed to what it has been. I thought Stan was best suited to do that. The fabric of this firm stated in our five principles is critical to maintaining our uniqueness, which I think we have.
If you look at my selection as chairman and my background, if you look at Stan's selection as president, if you look at the character and makeup of many of our executives, I think, and I always thought, of this firm as a meritocracy. This is a firm in which you have the opportunity to excel, and to me it's critical that these things do not change going forward.
At the same time, I think we need to do a better job adapting to a more competitive and global environment going forward. A change of style, a change of points of view, was critical and why I selected Stan.
Q: Since many people are no longer in the executive management team, there's a perception that the Merrill principle of "respect for the individual" has been tarnished.
A: When you make a change such as this and appoint a new chief operating officer, that person has every right to put on the field the team that he is most comfortable with and help them achieve his visions as best as possible. You always suffer some turnover when you make these kinds of appointments.
I had hoped that some of the people who have left would not have left. But it didn't surprise me. To me, the respect for the individual is in how they're treated as opposed to whether or not their job was protected. Some of the people who left were offered very significant other positions and they chose not to accept them. In very rare cases, they were not offered positions for a variety of extenuating circumstances. But I think respect for the individual is how you treat the individual. It does not necessarily mean job protection.
Q: Why does Merrill need a dramatic shakeup?
A: I look back on the decade of the '90s, and I say that purposefully we started out doing, and in retrospect we did, drive the globalization of the firm into 40 countries and position ourselves as the most global securities firm. In that period of time, we made something in the area of 19 acquisitions ranging from big to small. Any time you grow that much, that you make that many acquisitions, there comes a time when excesses creep into your organization, and the portfolio has to be redressed.
The situation was complicated by the competition that was new to our industry -- commercial banks. They brought an element of competition that we hadn't seen before. And the growth of the virtual online firms -- first their success, then their demise -- with our private-client business added a whole other dimension. We probably took as much advantage of the e-business opportunities as any firm in the business.
This whole panoply of activities put us in a position that when the bubble broke and the economy softened, there were excesses in the firm. Some very difficult decisions would have to be made that would drive us in some direction that would be atypical of the way we operated in the past. Some of the things Stan did in the private-client business were indicative of his ability to see the changes that had to be made and his willingness to go ahead and do it.
I don't see it as a shakeup. I see it as a question of redressing our portfolio, resizing and reshaping those businesses that have to be, and putting us on a platform that we can drive for our next period of significant growth. I look at it as a very healthy step forward for the firm.
Q: Will Merrill become a better company for all of its constituents?
A: It has been a pretty good company. We've served our clients well, our employees well, and the record speaks for itself for the value we've created for shareholders over a long period of time. I would expect going forward we will do at least that well and hopefully better. But I think the firm and the industry will be operating in a much more competitive environment over the next 10 years than we have over the last 10 years.
Q: How does your partnership with Stan work?
A: Stan was appointed president and chief operating officer. From my point of view, a COO's responsibility is to manage the day-to-day affairs of this firm. This is Stan's role. That's what I expect of him. That's what the board expects of him. And thankfully that's how he sees his role. We discuss all of the major appointments and people decisions. It's as close to a partnership as this kind of relationship can possibly be. Thus far, thankfully, we haven't tripped over each other, and I don't suspect that we will.
Q: Is there an example of an issue on which you have changed Stan's mind?
A: We've certainly had issues where we felt differently about people. We've had issues where we felt differently on certain directions. We discuss them. We debate them. There have been times that I clearly have impacted his decisions. There have been times he has convinced me his direction was right. It has been a healthy give and take.
If he and I agreed on everything, it would be a little like talking to the mirror, which is a dangerous situation as far as I'm concerned. The debate is good for each of us and good for the firm.
Q: Is there an example of this?
A: If there was, I wouldn't give it to you. There haven't been many. But there were a couple of situations that initially we saw differently, and we found a way to accommodate.
Q: There is a perception that you no longer have control at Merrill Lynch.
A: I'm the chief executive officer, as long as the board of directors invests that title in me, I have the ultimate responsibility, accountability, and control of the firm. Stan, being COO, has had invested in him the responsibility of managing the firm on a day-to-day basis. These kinds of situations always take a certain amount of getting used to.
The fact of the matter is that I'm going to retire in a little over two years. Succession is probably the single most important decision a CEO makes in his career. This time frame is perfect for us to work together, and my point of view is that my most important function over the next two years is to create an environment and provide the kind of help and guidance that will put Stan in the position to be the best CEO that Merrill Lynch has ever had. And I am bound and determined to do that.
Q: There's a perception that O'Neal is shrinking the firm for a potential sale.
A: It's such a hackneyed thought. Think back on how many years I had to deny the fact that we were selling to Chase. If we wanted to sell Merrill Lynch, we could have done it any time we wanted to do it at a price that is significantly higher than it is today. As long as we're convinced we can create more value for the shareholders as an independent organization, that's what we want. If the situation changed, I would have felt differently. And when Stan becomes CEO, he'll have the same point of view.
It's reasonable to assume that before I recommended him to the board, one of the things that I was most interested in was his point of view about that. This business of us wanting to sell, I guess it sells newspapers, but it's a pretty beat-up tune.