KEY POINTS:
The rapid fall of Stanley O'Neal from the helm of Merrill Lynch has left investors wondering who else in the banking industry may pay a price for the US sub-prime mortgage crisis.
O'Neal's downfall leaves Citigroup's Charles Prince, Bear Stearns' James Cayne and Countrywide Financial's Angelo Mozilo among
the prominent US chief executives under fire for failing to avoid losses from mortgages and this summer's seizing up of credit markets.
But it is one thing to blame and another to punish. And for a board of directors ultimately responsible to shareholders, sacking the CEO may not always be the way to go.
"People can make devastating mistakes," said Jeffrey Sonnenfeld, co-author of Firing Back: How Great Leaders Rebound After Career Disasters and senior associate dean at the Yale School of Management.
"The critical question for a board is whether the mistakes were the product of a fair effort at good business judgment, or the result of stupidity, corruption or cronyism."
At Merrill, an unexpectedly large US$8.4 billion ($11 billion) write-down and O'Neal's apparent unauthorised overture to Wachovia Corp for a merger may have made it easier for the board to oust him.
That followed the exit of Merrill's fixed-income and structured credit chiefs less than a month earlier.
The independent directors who comprise a majority of public companies' boards may not feel beholden to a troubled CEO. But Patrick McGurn, special counsel to the governance unit of RiskMetrics Group, said that does not excuse rash action.
"If the CEO is keeping the board in the dark, then perhaps he gets what he deserves," McGurn said.
"If a company doesn't have the right people in place to fix what's wrong, that can lead to paralysis. You want to leave the necessary pieces in place rather than decapitate senior management."
Prince has faced questions about his leadership from the day he was tapped in July 2003 to replace Sanford "Sandy" Weill as Citigroup's chief executive. He appears to have the backing of his board and of Robert Rubin, the former US Treasury Secretary who chairs Citigroup's executive committee.
But a US$6.5 billion write-down of mortgages, leveraged loans and other debt should leave Citigroup short this year of Prince's goal of boosting revenue faster than expenses. The bank also faces potential sub-prime exposure through tens of billions of dollars of structured investment vehicles. Citigroup shares trade below where they were when Prince took over.
Prince has a safety valve of sorts in that Citigroup does not have a clear internal successor.
By contrast, Bear Stearns president Alan Schwartz is considered a logical successor for Cayne at the Wall Street investment bank, and Countrywide chief operating officer David Sambol could succeed Mozilo at the largest US mortgage lender. Cayne appears to have allayed some concerns after striking an investment pact with China's CITIC Securities.
Mozilo, in contrast, faces calls from some investors to resign after presiding over a US$1.2 billion third-quarter loss and pocketing over US$100 million in the past year from stock awards.
The US Securities and Exchange Commission has opened an informal inquiry into his trading.
Sonnenfeld, the Yale professor, said CEOs could be excused for sagging performance. He said Cisco Systems' board, for example, left John Chambers in charge because it "recognised the whole industry was intoxicated with cyberspace" before a 90pc drop in its stock price from 2000 to 2002.
"There will be a lot of pressure to come up with a retirement package for Cayne. People have been stalking Prince since he took over. At Countrywide, I actually think the SEC investigation is going to be more critical than anything else," he said.
- Reuters