CEO Richard Fuld on Lehman Brothers’ Evolution from Internal Turmoil to Teamwork

When Richard “Dick” Fuld took charge of Lehman Brothers in 1994, the firm was famous on Wall Street for the bitter internal feud between traders and investment bankers that had cost Lehman its independence a decade earlier. Fuld, who had sided with fellow traders in the battle, knew he would have to make peace with the bankers and create a culture based on teamwork if the firm wanted to compete in a new era of integrated financial services.


Fuld joined Lehman — a legendary firm with roots as a commodity broker in the pre-Civil War south — in 1969, when pay at many Wall Street companies revolved around a star system with top performers earning outsized compensation. Those who put in the longest hours and became ruthless competitors reaped big payouts. The kind of team building necessary to meet the complex needs of major clients today was of little value back then, Fuld explained in a recent Wharton Leadership lecture.


“The early Lehman Brothers was a great example of how not to do it,” he said. “It was all about me. My job. My people. Pay me.” Today, a stellar performance by one person is not enough to make a difference on Wall Street. “No one individual can deliver the whole firm to any given client.”


“Bobbie” Lehman, the senior partner who steered the firm through the stock market crash of 1929, the Great Depression and into the 1950s, was “masterful” at pitting employees against one another, said Fuld. As a result, Lehman staff rarely shared ideas or helped build relationships that might benefit the firm as a whole. “He got people to work hard, but it took all the glue out of the partnership.”


The failure to work as a team led to the demise of the firm in 1984, after traders and bankers could not agree on a future direction for Lehman Brothers. As a result, the firm was sold to American Express, which folded Lehman into its Shearson division. “We lost the firm. Capital markets and banking couldn’t come together,” said Fuld. “I was just as guilty as anyone. I couldn’t reach over to embrace the bankers.”


Everyone Is an Owner


Fuld got a second chance when American Express spun off Lehman in 1994 and tapped him to run the company. He had not set out to become the top manager at the firm, but the leadership ranks were thin after many defections during the Shearson years. “I was the only one left standing,” he said.


The night the head of American Express asked him to take over the company, which at that point was called Shearson Lehman Hutton, Fuld had a full-blown anxiety attack — he stopped breathing for 45 seconds. “I realized I was it. I didn’t want the job and I wasn’t looking for the job. But once I had it,” he continued, “I came in the next day with terrific resolve.”


He restored the company’s name, Lehman Brothers, and began to rebuild. The new team focused on diminishing its dependence on Lehman’s powerful fixed-income trading business and began to extend deeper into investment banking.


Shares of Lehman have risen 800% over the past decade, and Fuld said it is now difficult to see the line between the capital markets and banking operations at the firm. Led by bond trading, Lehman ended 2006 with a record $4 billion in earnings, and today it is the fourth-largest U.S. securities company.


In fiscal 2006, equities sales and trading, asset management, brokerage services, mergers and acquisitions and stock underwriting accounted for 44% of Lehman’s revenue, up from 41% a year ago, the highest since 2001. The company’s stock rose 19% in 2006, although it trailed competitors: Goldman Sachs was up 55%, Morgan Stanley, 39%, Bear Stearns, 35% and Merrill Lynch, 32%.


One of the most important elements of Fuld’s plan to develop a culture of teamwork at Lehman Bros. has been to link compensation to the overall performance of the firm through equity awards. Indeed, recent regulatory filings created a stir when they showed that Fuld would earn an extra $186 million over the next 10 years based on share grants he received a decade ago.


Fuld said he and other partners who agreed to accept the new equity pay structure are now reaping the benefits of the cultural change at Lehman. He said there are now more than 200 people at the firm with at least $10 million in stock. “They were all there in the early days. They have earned it.”


Establishing a culture built on teamwork leads to the best business decisions for the firm as a whole, and paying employees in stock helped reinforce that culture, he said. “I wanted them all to think and act and behave like owners.”


Hiring New Leaders (and an Old Veteran)


Fuld was asked how Lehman will be able to compete against much larger investment firms and international banks such as Citigroup. He responded that the size of a firm is not as important as its understanding of risk tolerance. While Lehman could support six or seven major deals a year, it will instead focus on three or four that can most benefit from Lehman’s expertise, said Fuld, who cautioned that the global financial system remains awash in liquidity that could dry up suddenly. If that were to happen, Fuld does not want Lehman to be overextended.


Going forward, Fuld said his first goal for the firm is to raise Lehman’s share price, which hit a 52-week high of $78.89 a share in October, to $150 a share. He also said he wants Lehman to rank first or second in targeted business segments. Currently, Lehman ranks eighth among merger advisers and tenth among arrangers of global equity sales, according to Bloomberg.


He also hopes to help the firm grow internationally. Lehman earned 37% of its 2006 revenue from outside the U.S., up from 36% last year. Fuld said Lehman’s business is strong in much of Europe but could be improved in the U.K. He added that the company needs to begin to build in Russia and the rest of Eastern Europe. In Asia, he noted, most of Lehman’s business has focused on the sale of distressed assets but now is focused on new business in Korea, Japan and China. “I think we’re only scratching the surface” in Asia, he said.


In investment banking, the company is strong in the media, power and chemical sectors, but needs to improve in consumer products and retail, he said.


Fuld told the audience he is pleased with Lehman’s strategic direction. Now he needs the right people to carry it out. “The vision is to hire terrific people who will be the next generation of leaders and the people who will take this firm to the next level.” His formula for inspiring a culture of teamwork includes hiring people who can work together and giving them all the tools and training they need to do their jobs. Workers need to be held accountable and paid fairly, he added.


Indeed, Lehman is hiring new employees faster than rivals. According to CIBC World Markets, Lehman grew its work force by 8.1% in 2006, compared with 1.3% at Merrill Lynch and 2.1% at Morgan Stanley. In August, Fuld hired 78-year-old Felix Rohatyn, the veteran Wall Street deal-maker, as an adviser to Lehman.


The Power to Empower


Fuld, now 60, looked back on his decades of experience to isolate five qualities that he has found are important for leaders.


First, leaders must understand their business. “Know how the pieces fit,” he said. “Read. Network. Connect the dots. Anticipate. Try to limit the surprises; surprises kill you.” Leaders who have done their homework make it safe for others to follow, he added. “Leaders earn the right to lead.”


Fuld’s second piece of leadership advice is to pick a strategy and stick with it, “unless of course, you’re wrong.” He recalled that in 1998 the financial press was filled with false rumors about the firm. Fuld’s policy had always been to ignore the press and let false rumors die. He stuck with that strategy as the stock fell from $85 a share to $22. Finally, he was forced to go out on the road and talk to analysts. The company also pre-released earnings to help explain away the rumors.


The third key to leadership is leveraging teamwork, according to Fuld. That may sound easy, he said, but many people are afraid to “take the ‘I’ out of everything they do.” Like the employees who worked under the Bobbie Lehman system, they act on their own and take credit for any success for fear that they would be compensated less if they did not promote their achievements. “That’s very destructive,” he said.


The fourth key to great leadership, Fuld continued, is for managers to hire and surround themselves with the best people possible. “You can’t be afraid that if the people you hire look good, that diminishes you,” he said. “If you want to run an ‘A’ firm, ‘B’ people can’t get it done.”


Fuld noted he has been with many of the same top managers for 22 years and expects them to push back when they disagree with him. When he has to make a tough call he asks them: “Does anyone feel this decision would be disastrous to the firm?”


Unlike Bobbie Lehman, Fuld never lets managers who disagree square off directly. The most dissension he will tolerate is an agreement to disagree. “What I need is peace in the family,” he said.


Finally, he noted, it is important to lead by example and to know when to give managers lower down in the chain the authority to make their own decisions. “Real power is the ability to empower others,” he said. “A good leader brings out the best in others. The real reward is in seeing others’ achievements.”

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