Blocking The Exits At CSFB

Can new CEO Brady Dougan stop talent from following John Mack out the door?

Legendary Wall Street dealmaker John J. Mack was greeted as a savior when he became chief executive of troubled Credit Suisse First Boston (CSR ) in 2001. But by this summer, the Credit Suisse Group co-CEO was treated as little more than a thorn in the side of the top brass in Zurich. Mack was abruptly ousted on June 24, after months of fighting over whether the firm should pursue a merger with another European bank. Instead, the group decided to go it alone without him. Oswald J. Grübel, 60, became sole CEO, and 14-year CSFB veteran Brady W. Dougan, 44, took charge of the investment bank.

Problem solved? Not yet. Indeed, CSFB's troubles may be just starting. Mack replaced most of the firm's top managers with his own loyalists hired from outside when he took control. And as rainmaker-in-chief, he quickly filled CSFB's coffers with fees from top-drawer clients such as Kohlberg Kravis Roberts & Co.'s founding partner Henry R. Kravis. He rapidly turned 2002's $1 billion loss into a hefty $834 million profit last year.

Now, both CSFB's clients and employees are under siege. As soon as news of Mack's departure broke, rivals began to woo the firm's top talent and to steal away its clients -- both critical to any investment bank's survival. "You can get almost anyone at CSFB to interview these days," says a banker at another Wall Street firm. "It's 'let's make a deal' over there." Chief Administrative Officer Thomas Nides, Mack's right-hand man, may be the first to go, according to a banker close to him. Nides declined to comment.

Dougan is under immense pressure from inside the firm as well. Mack, a charismatic leader with strong views and a flair for motivating people, is a hard act to follow. By contrast, Dougan is a detail-oriented, numbers guy who has risen through the ranks and spent most of his career in CSFB's trading operations. Along the way to becoming co-president of CSFB and a member of the group's executive board in 2003, he gained the trust of key Swiss managers. As head of equities in the late 1990s, Dougan reported directly to Grübel, then chief of CSFB's securities division, for two years.

All the same, Dougan will have far less operating freedom than Mack ever did. He once again reports to Zurich-based Grübel, who'll be looking over his shoulder. "I will spend more time in the U.S.," Grübel told BusinessWeek. And when he's here, Grübel says, he'll be paying more attention to CSFB's employees and clients, whom Mack mainly handled. He aims to meld CSFB more deeply into the group.

BAD HABIT

Grübel has also set a high performance bar. "We need to get [CSFB] back to where we can produce constant profits that are not different from our peers," Grübel says. In fact, he's even taking aim at Wall Street's most prestigious banks, such as Morgan Stanley (MWD ) and Goldman, Sachs & Co. To earn as much as they do, Dougan's CSFB would have to double its profits.

Dougan might have to execute this tall order under adverse conditions. Dougan says he wants to make changes at the bank. But if he rocks the boat too much, he could provoke an exodus. When Mack overhauled CSFB, employees stayed in part because other firms were also cutting costs. But now rivals, their painful overhauls behind them, are hiring again.

The stakes are high for Dougan personally, too. CSFB has a bad habit of running through CEOs. Dougan is the sixth in 15 years, giving him an expected tenure of just 2 1/2 years. He will need all the help he can get to beat those odds.

And that means keeping the talent on board. Dougan is scrambling to convince CSFB staff to stand by him. He has told thousands of employees in town hall meetings, one-on-one chats, and conference calls that CSFB has a bright future and Zurich's support. He also says the firm won't be pursuing any mergers and will be paying people competitively. In one internal call, he went so far as to tell bankers that he wants CSFB to be the "best-paying firm" on the Street after it doubles its profits in the next two years.

The success of Dougan's sales pitch is crucial to CSFB's future. There is speculation that many CSFB top managers are considering leaving, which will make it difficult to run the firm and handle clients. With Mack gone, Dougan is more dependent than ever on the connections that Mack recruits such as Chairman Stephen R. Volk and Co-President Brian Finn brought. And the firm could lose a lot of momentum should Bennett J. Goodman, whom Mack made chief of a new division combining hedge fund and private-equity businesses, walk out. "Our hope is that the majority of the group will stay in place," Dougan says. Through a spokesperson Volk, Finn, and Goodman declined to comment.

FADING FORTUNES

Dougan faces another big challenge: Fixing the investment banking business. Although CSFB's tech bankers recently landed Google Inc.'s coveted $2.7 billion initial public offering, the firm has been losing market share since Mack dismantled the empire of former tech banking czar Frank Quattrone, who was found guilty in May on three charges that he interfered with a federal investigation into the tech group. Quattrone plans to appeal.

Just before Mack's departure, talk flew inside the firm that the investment banking division was about to be restructured. According to the scuttlebutt, the fortunes of Adebayo O. Ogunlesi, Mack's handpicked head of investment banking, were fading, and he was in danger of being moved. Ogunlesi declined to comment.

Dougan desperately needs to figure out how to motivate his bankers. Many were demoralized earlier this year when Mack gave 50 bankers in the tech group and Los Angeles office one-time stock awards to keep them from bolting. Others felt Mack went back on his word that CSFB would no longer dole out lucrative multiyear contracts to attract and keep top talent. CSFB says the awards of stock, which vest over three years, are very different from the multiyear promises of guaranteed salary and bonuses doled out by Mack's predecessor, Allen D. Wheat.

Both Dougan and Grübel say they will not try to keep people by paying them lavish multiyear contracts. If they did, such special deals could drive the firm back into the red. Instead, Dougan wants to convince people to stay because the firm's prospects are bright and he plans to make it a meritocracy. "We're going to have a fair playing field," he says.

That's just what Mack said when he took over. Now, he knows that not all is fair in love and war -- or on Wall Street. Even if you improve your employer's earnings by $1.8 billion, it seems you can't expect to keep your CEO job longer than your luckless predecessors.

By Emily Thornton in New York

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