“It is Absolutely Critical in a Merger to Quickly Establish Unambiguous Lines of Responsibility”Published: March 29, 2000 in Knowledge@Wharton
Deutsche Bank is merging its way to growth. Headquartered in Frankfurt, it has 90,000 employees and nearly 7 million customers in more than 60 nations. On March 9 the bank announced a $30 billion merger agreement with Dresdner Bank; the two companies are scheduled to merge before the end of the year. This deal follows its acquisition last year of Bankers Trust for $10.1 billion. This makes Deutsche Bank one of the world's largest financial institutions.
What challenges do organizations face as they try to make such mega-mergers work? What is involved in managing organizations across cultural boundaries? Michael Useem, director of the Wharton School's Center for Leadership and Change Management, discussed these questions with John Ross, president and CEO of Deutsche Bank's American operations.
Useem: Before becoming president and chief executive officer of Deutsche Bank Americas in mid-1999 you served as CEO of Deutsche Bank Group Asia Pacific. What were the one or two biggest challenges in running a German bank in the Asian region?
Ross: The challenges in that part of the world had nothing to do with our being a German bank. At that time the challenge was that Asia was in a crisis. Secondly, we were trying to go from being an old-line commercial bank to a modern investment bank. As a result, not only were our clients wondering whether we were going to do what other banks were doing–which was to withdraw capital from the region–but we also had internal staff members wondering whether they would keep their jobs. This was, first, because of the Asian crisis; and second, because we were looking for a different business model. Eventually things worked out quite successfully for us, primarily because change is easier to implement in a crisis than when things are going spectacularly well.
We made a policy decision that we were going to grow in Asia rather than contract. Our clients, both government and corporate, responded very well to this decision. We were able to do things that in the normal course of events would have taken much longer. With Asians it typically takes a longer time to establish relationships, than in the West, but in a crisis, you can make things happen faster.
Our strategy of expanding in Asia and building an investment bank was very well received by our staff and by clients. The staff members came to realize that they did have the requisite job skills. We simplified the management structure and made our business objectives and organizational structure known clearly. I went to Asia at the start of March 1998 and we were completely reorganized by June. We stuck to a clear, simple strategy and conveyed it to our clients, reinforced it with the staff, and this turned out to be a very effective approach. Being a German bank made no difference.
Useem: Since Deutsche Bank's acquisition of Bankers Trust in June 1999, you have been at the forefront of integrating two very different banking cultures. Could you describe the most important cultural differences between the two banks and what you have done to overcome them?
Ross: One of the great challenges we had in the merger was convincing people that the cultures were not all that different. Yes, it is true that Deutsche Bank is headquartered in Germany. It is also true that Deutsche Bank was for years seen as a commercial bank and Bankers Trust as a wholesale bank. And obviously, Bankers Trust is headquartered in New York City, so there must be cultural differences between the two. That was the simple assumption.
The fact, however, is that before the change of control, two of Deutsche Bank's five main divisions were run by non-Germans, and approximately 35% to 40% of the staff of Deutsche Bank were non-German. The investment bank–inside Deutsche Bank we call the investment bank Global Corporates and Institutions (GCI)–is one of the five main business divisions. That division, as it turned out, is predominantly run by Americans. The bulk of the staff inside GCI are either American or British. The bulk of the income that was made at Bankers Trust was made by their wholesale banking business lines, and so it was basically Americans talking to Americans. There was really very little culture clash.
Deutsche Bank also recognized that it is absolutely critical in a merger to quickly establish unambiguous lines of responsibility and make senior executive decisions as rapidly as possible. Such decisions should also be implemented as soon as possible. We did that with Bankers Trust, so that there was no confusion about who was running what, who was responsible for what, and what was the game-plan and strategy going forward.
We had a period of almost six months from the date of the merger agreement to the change of control date. Therefore, on the actual day when the change of control occurred, June 4, 1999, it wasn't a sudden change. It was the continuation of a strategy and chain of command that had had already been well communicated during the prior four months.
Useem: You referred to the importance of making prompt executive decisions. When you hire or promote a senior manager at the bank, what do you look for in the person's record and style to know if the individual will be effective in working, managing, and leading across cultural and national boundaries?
Ross: Ideally we look for market leadership in the particular product line the individual is working in. Secondly, we want to know if the person is a good communicator and is innovative. Deutsche Bank espouses five values: Client focus, performance, innovation, teamwork and trust. We look for all these values in our staff, whether they are in junior or senior management. We look to see whether prospective candidates fit those values. Where the candidates come from–i.e., their nationality–is irrelevant.
One fact that pleasantly surprised executives from Bankers Trust after the acquisition was that we are probably the most multi-national of any financial services firms in the world. When you look at the bank's executive committee, you will see that close to 40% of the members are non-German. I don't think any of our competitors can state that that large a percentage of their executive committee is made up of people whose citizenship is not that of the firm's country of incorporation. This is not particularly well understood by people globally before they consider joining Deutsche Bank, but it is a very strong argument for us when we do speak to them and demonstrate that it is the case. Newspapers have now started picking up on this as well.
Useem: The announcement on March 9 that Deutsche Bank and Dresdner bank will join to form one of the world's largest banks presents a new set of challenges for managing cultural differences. From your experience in overseeing Deutsche Bank's integration of Bankers Trust, what advice would you have for consolidating your merger with Dresdner?
Ross: We are doing the same thing that we did in the case of Bankers Trust, which is to early on make decisions about who is doing what, who is responsible for what, and make sure that those people are able to communicate with their own management teams. This ensures that on the change of control date there is no ambiguity or loss of momentum otherwise, you lose revenues; clients tend to take their business to the competition until you've sorted out your management problems; you get bad press; and staff are agitated and tend to focus on their own personal concerns.
One of the biggest problems in mergers arises out of lack of decision making early on. If there is lack of clarity with regard to reporting lines, responsibilities, strategy, and so on, a merger that looks great on paper can turn out to be problematic. Another mistake that I have seen some companies make is that they try to be 100% correct in every decision they make before change of control. You can be 85% or better correct–and often that is good enough. You may make mistakes, but if you are flexible you can correct them later.
Useem: Drawing on your service with Deutsche Bank's operations in both Asia and the Americas, what are the most important qualities required for leading the growth of global banking?
Ross: You have to believe in the premise that we live in a global environment. Therefore, working globally, you need to be flexible enough to understand and be considerate of other cultures because you are trying to do business with those cultures. If you work for an American firm, you may find that outside the U.S. American managers may not always be the best choice. What should clearly count is product knowledge and the five values I mentioned before. Managers should espouse those values and demonstrate them. If you are an American firm, leaving the impression in the market that only Americans can get ahead will limit you in terms of the talent pool you can draw from. This is also true of German firms. We have made it clear globally that you don't have to be German to get ahead inside Deutsche Bank.
Note: John Ross is a keynote speaker at the fourth annual Wharton Leadership Conference to be held in Philadelphia on May 18. The focus of the conference in Philadelphia is "Leading with Speed: Developing Leaders for Fast-Moving Organizations."