By: Diane Brady
I’ve read that you’re the sixth of 10 children and the seventh of 12. Which is correct?
My mother had 12 children, but sadly, two of them died when they were both aged four. So, I grew up with nine siblings. Being one of ten meant that I grew up highly socialized, and many of the interpersonal skills I have today come from growing up in that environment.
You have sometimes talked about the tall poppy syndrome. Is that a result of growing up in such a large family?
Well, it’s an Australian concept. If you look at a field of poppies, it’s much more pleasing to the eye if the field is smooth. So, when you get one flower that sticks up above the rest, our instinct is to cut it down. I suppose it’s about modesty. In a family of ten children, there’s a certain instinct to want to be noticed – but there are also nine siblings to police immodest behavior and take you down a peg when necessary. A certain amount of modesty is necessary when one is a CEO, particularly when your firm and your industry have been through a searing experience like the financial crisis.
Canadians can relate to that. A teacher once told me that Alice Munro’s book Who Do You Think You Are? was renamed The Beggar Maid in the US because Americans wouldn’t get it. Instead of trying to get back in line, they’d start to tell you who they are.
It’s American exceptionalism, which is a concept I have difficulty with. There are enormous positives in American society – a culture of creativity and innovation, an openness and a generosity of spirit – but to embrace the concept of American exceptionalism seems to imply that the rest of the world is unexceptional. America is often exceptional, but, like every country, it has certainly had its difficult periods. I often joke that I came here as a student because I thought it was great; little did I know it hadn’t achieved that exalted status. But what is great about this country is a sort of unyielding desire to get better and to move forward and to make decisions. It’s aspirational.
Is that changing?
I think that the willingness to make a choice and move forward is still there. But as I said, Americans can point to plenty of periods that nobody thought were exceptional. I think the nationalism and populism we’re seeing today are expressions of an enormous frustration over the fact that, in 30 years of almost continuous expansion, the economic rewards have not reached everyone. We still have a minimum wage of around $7/hour in some states – which to me is just incomprehensible. If you’re working a 35-hour week, that means you bring in about $250 a week, maybe $13,000 a year. In Australia, the minimum wage is about twice that. There’s a growing recognition here in the US that we need to create more balance. But the great thing about this place is that if one choice doesn’t work, we will try something else. We continue to change, adapt, and move forward.
A decade after the financial crisis, there’s still a lot of anger directed at Wall Street.
As a company, we’re safer, sounder, and more resilient than we were before the crisis. And while that is probably recognized, I think Wall Street is still regarded as a group of people who seem to disproportionately win. I totally get that. There’s a whole language and a culture and a cadence of success that’s focused on financial results. The irony is that Wall Street – and by that I mean the traditional businesses of investment banking and trading – is now one of the least remunerative parts of our financial services universe, compared to private equity, hedge funds, and good old asset management. But while it’s less rewarding than it used to be, it is still dramatically more rewarding than almost any other profession. And when people think they’re smart because they’re making a million dollars while the average person is making $45,000, it can create this poisonous, self-congratulatory circle, and a competitive drive for ever more risk and rewards.
Didn’t you turn down a job at Morgan Stanley after business school to go to McKinsey instead?
Yes, you’re right. I didn’t know much about either of them, but at that point in my life I was interested in issues of strategy and management, and McKinsey was the logical choice to explore that and develop those skills. It was a great experience. Pattern recognition comes from the experience of seeing things happen in different colors and shapes. It’s hard to get that kind of training in one company, unless it’s GE, where they can move people around to work in different units. By going to McKinsey, I was able to work with dozens of companies and see what makes some of them great. Plus, Wall Street firms have a tendency to promote the best producer, not necessarily the best manager.
So, what makes a company great?
You have to start with a compelling strategy. Second, you have to build a culture around that strategy that supports it. Third, you need to have leaders in place, not just for today but for the future, to sustain that culture, which then drives an enduring strategy.
Our strategy at Morgan Stanley is simple: We manage the flow of capital. We advise on it, distribute it, and help manage the flow from those who have capital to those who need it. We only operate in businesses where we have a client in that business, and we keep the client at the center of everything we do. In terms of style, we keep ourselves a little below the radar, but are not invisible because we’re a global corporation. A significant part of our ethos – and something I care a lot about – is our commitment to giving back to our communities. I want us to be known as a well-managed business operated by well-meaning people.
When a crisis is industry-wide, it’s natural to wonder if there is a culture of greed or ethical indifference.
Or problems with the incentive structure. Many banks were public companies that still operated like private partnerships – which they had been in the past – that are operated for the good of the employees. These firms had sold a large part of the equity to shareholders, but they still paid themselves out of the earnings as if they owned all of it. That created an asymmetric risk, because you’re betting somebody else’s capital. If you’re wrong, your compensation might go from, say, $2 million to zero, with shareholders footing the larger losses. If you’re right, you make $4 million. Who wouldn’t like those odds? The financial crisis forced the banks to grow up. Shareholders want strong governance, a commitment to society, and discipline around employee compensation. If shareholders don’t get paid, you don’t get paid. That’s only fair.
David Komansky, who convinced you to leave McKinsey for Merrill Lynch when he was CEO, has said you have “a nice balance between academic ruthlessness and people skills.”
It’s very kind of him to say so. That observation contradicts the stereotype that I’m some analytic management consultant who sees the world through a lens of numbers, making ruthless, brutal decisions to achieve objectives. I do connect with people. Growing up with so many siblings, I was fortunate to be pretty well socialized. I have good relationships with all nine of my siblings. And my academic training gave me many skills that have been helpful in my career.
Personality-wise, we are all a mix of our parents, and I was fortunate to learn from both of them. My mother was extremely social, very personable, incredibly warm, loving and intelligent. My father had a great ability to accept the fact that life was imperfect and bad things can happen, so you had to just get on with it and stay optimistic. He grew up in the outback and switched his study plans from medicine to engineering after an uncle told him that he was good with things, not with people. He had an extraordinary ability to simplify complexity, which is something I was fortunate to learn from him. It means you can quickly figure out what matters most and handle a lot more complexity.
How does that work in practice?
It’s about sizing up possible outcomes. Let’s say we’re weighing whether Morgan Stanley should open a business in a particular emerging market. Before we start, I’d ask, “Well, what’s the size of the economy? I know Germany is more than $4 trillion and this economy is probably less than half that. How much of its banking system is concentrated among domestic banks vs. international banks? How active are its companies in capital markets vs. corporate lending? How does wealth get accumulated?” We can have a team go and spend months figuring out the precise details. But within an hour, you can also probably figure out whether that business is likely to be worth the effort by looking at the range of outcomes and measuring that against other priorities and opportunities we could pursue.
Is that why you bet big on wealth management?
A lot of people on Wall Street did not like the retail business. Historically, it delivered poor returns when compared to some institutional businesses, and created compliance issues, issues of suitability, etc. I felt that if you could achieve scale, you could make the investments to manage those risks and it could be a very attractive business. This might sound a bit hokey, but I also happen to believe that there is a real moral good in ably managing somebody’s financial health. There are essentially three ways to do that. The first is through financial advisors, who have a personal relationship with their clients, and provide personalized financial advice. That could be a Morgan Stanley financial advisor, an independent financial planner, an estates lawyer, your next-door neighbor, others. That business is highly concentrated with a small handful of firms: Morgan Stanley, Wells Fargo, Merrill Lynch, and UBS. The second option is the direct model. Schwab created that category, and now dominates it, along with E-trade and TD Ameritrade. I think at this point it would be difficult for anyone else to compete in that segment at scale. The third way in which people accumulate and manage money is through their workplace, with stock plans, options, and 401Ks. Employers are starting to understand that, in addition to physical health support, people need support with their mental health and financial health, too.
And that brought you to the decision to acquire Calgary’s Solium Capital?
Do you remember Victor Kiam, the guy who liked Remington shavers so much that he bought the company? Well, this was our Victor Kiam moment. We had worked with them, so we knew them and liked the company. They have 3,000 stock plan clients with around one million participants. We have just over 300 clients with 1.5 million participants. The difference is that we only target the C-suite in companies that are mostly in the Fortune 500. Solium targets a much broader mix, so we can reach the entry-level employee with five shares, and the CEO with many more. Some of those people may become wealth management clients and some won’t. But that’s not why we bought it. It’s the ultimate scale business and one that might become our most important channel in the next 30 years.
One of the biggest challenges when you’re wealthy is figuring out how to raise responsible, hard-working kids. Do you give them advice?
It’s funny. I had dinner with my daughter last night, and we were talking about finances in relation to something that she was doing, and she said, “I really don’t understand money.” My response was, “Well, that’s something I can definitely help with … because you’ll need to.” Obviously, she’s aware of the career I have, but she is determined to go her own way and chart her own path. But she already realizes that, whatever field she’s in, financial acumen is a key part of success. I can say the same for my son, too. Whether I can claim any credit for that is another matter, of course, but I’m proud of them both.