Perhaps Too Many Acts in the Corporate Tent

Originally posted in The New York Times on November 11, 2007.

As two of America’s biggest companies, Citigroup and Merrill Lynch, scramble to find a leader and hundreds of thousands of employees wonder who their next boss will be, management gurus are quietly asking another question: are these companies simply too big or too complex for any one person to run?

The abrupt resignations of E. Stanley O’Neal at Merrill Lynch and Charles O. Prince III at Citi in recent weeks, following more than $15 billion in combined losses at their companies, has done more than expose how unprepared Wall Street was for a market meltdown; it has also revealed just how difficult it has become to manage these behemoths.

“Across the board, people are wondering if their companies are too big and unwieldy and unfocused,” says Jeffrey A. Sonnenfeld, senior associate dean for executive programs at the School of Management at Yale. On Wall Street, he adds, size creates special dangers. “Staying on top of risk in such a sprawling business is hard.”

Roy Smith, a former partner at Goldman Sachs and now a professor of finance at New York University, points to the very different experiences of Citigroup and his former employer during the recent subprime crisis.

Goldman’s losses, he notes, were a fraction of those of Citigroup, even though both companies were active in the same businesses. “Maybe it’s because Goldman has 30,000 employees while Citi has 10 times that many,” he says. “Therefore, they are able to be more focused on the more limited number of things they do.”

It’s not only financial companies that are facing questions. One day after Mr. Prince quit, Richard D. Parsons, the chief executive of another company that was the product of megamergers, Time Warner, announced that he, too, would retire at the end of the year.

Time Warner’s stock price is the same as it was five years ago when Mr. Parsons succeeded Gerald M. Levin, who presided over the megadeal with AOL that’s widely considered to be among the biggest — and most disastrous — mergers ever. Mr. Parsons will remain chairman, however.

Throughout his tenure, Mr. Parsons has struggled to offer a convincing rationale for businesses as diverse as publishing, cable television and film production to be under one roof. And Citigroup operates in more than 100 countries, employs roughly 370,000 workers and offers services ranging from credit cards (120 million accounts in the United States alone) to banking, mortgages and asset management.

“The concept of Citigroup and Time Warner as unified companies is questionable,” says William W. George, the former chief executive of Medtronic, a medical device maker, who teaches at Harvard Business School. “Maybe what was put together is simply too broad.”

Of course, just as fashion styles come and go, so has the favored model for the American corporation. In the 1960s and 1970s, conglomerates like ITT and Gulf + Western were all the rage. But in the 1980s, investors began to complain about poor performance and an obvious lack of synergy (Gulf + Western owned everything from sugar plantations to movie studios), and the conglomerates were broken up.

By the late 1990s and the early part of this decade, it seemed like the conglomerate was making a reappearance. Now in the wake of the departure of Mr. Parsons, Mr. Prince and Mr. O’Neal, the question of whether size matters in corporate America is up for debate again. “We’re at an inflection point,” says Mr. Sonnenfeld. “If the economy weakens, it might be more likely these giants will be broken up.”

It is unclear whether the model of a supersize company will be shelved, but executives will certainly want to re-examine one of primary rationales behind it — diversification. The theory, at least, was that losses in one area would be offset by gains in another. That safety net clearly didn’t work for Citigroup.

Whatever happens, it’s clear that investors are losing their patience with chief executives who can’t deliver. A study of 2,500 top global companies by Booz Allen Hamilton, the consulting firm, found that annual turnover among chief executives increased by 59 percent between 1995 and 2006. Over the same period, according to the survey, involuntary exits from the corner office soared. One in eight departures was involuntary in 1995; by 2006, the ratio was nearly one in three.

One explanation for that trend, says Steven Wheeler, a senior vice president at Booz Allen, is not necessarily size but complexity. “The ability to run and make changes in one division doesn’t translate into the ability to do that in another and as C.E.O. you’re responsible for the whole business,” he says.

Other experts insist the problem isn’t size or complexity, but the skill of the individual chief executive and his or her top team. And that’s what was lacking at Merrill and Citigroup, according to Noel M. Tichy, a leading management authority at the University of Michigan and co-author of the new book “Judgment: How Winning Leaders Make Great Calls.”

Big companies, he says, are especially vulnerable if they don’t take the time to train and develop future chief executives. “What you’re seeing is broken leadership pipelines,” he says. “Merrill and Citi never invested in their pipelines.”

As for complexity, Mr. Tichy argues that General Electric has prospered despite having a stable of businesses as varied as jet engines, commercial finance and light bulbs. In part, he says, that’s because Jeffrey Immelt, the chief executive, spends 25 days each year on succession planning and cultivating future G.E. leaders.

“G.E. is far more complex than either Merrill or Citigroup,” he says. “Don’t tell me the problem is that they’re too big or too complex. The key variable is talent.”