Securities management faces new demands, bigger risks
John Chalsty recalls being appalled at what he found when he joined Donaldson, Lufkin & Jenrette Inc. as an oil analyst in 1969. The lack of attention to the management process, he thought, made the business ``a sort of cottage industry.'' But later, when he had become more humble, in his words, Mr. Chalsty realized that the company's management differed from the rest of corporate America. The securities business was structured in a way that allowed it to be part of the last successful flowering of the classic partnership.
Almost 20 years later, the amount of capital raised by the securities industry has hit hundreds of billions of dollars, profitability has skyrocketed, Wall Street has attracted thousands of employees as companies expanded, and a five-year bull run symbolized unlimited opportunities. Traders also started working through 24-hour trading days, signaling that globalization of the markets could not be ignored.
But when the stock market fell last October, firms let people go in droves and eliminated departments. Congress turned its attention to the markets, regulations, and investigations. This came on top of the insider-trading scandals.
Chalsty, president and chief executive officer of Donaldson Lufkin, and other industry officials spoke last week on the trends and demands on the industry's management at a conference sponsored by the Securities Industry Association.
``Many of the challenges we are facing today are a result of the rapid expansion of business which burst upon us due to the expansion from 1982 to 1987,'' noted Edward I. O'Brien, SIA's president.
Since the stock market plunge, roughly 12,000 people have been laid off, with more expected, particularly if market conditions do not improve. Last week the Dow Jones industrial average closed up 54.71 points to 1,958.22.
In another measure of layoffs, a survey by Arthur Andersen & Co. and the SIA, released last week, found that 15,400 workers in full-line securities firms and large investment banks were laid off from June 1987 through last month.
SIA member firms, for example, had added 100,000 jobs to the securities industry since 1982, while the United States Department of Labor found that the whole industry added 160,000 jobs.
Capital has also been injected into the industry in record amounts. In 1987, domestic underwritings raised capital for corporations totaling $179 billion, compared with the $88 billion raised in 1982, according to the SIA. Industry capital last year reached $35 billion; five years ago it stood at $11 billion.
Yet, the SIA noted, profitability last year, as measured by the pre-tax return on equity, fell to its lowest level this decade, 10 percent, and profit margins slid as well.
To manage business in the down markets, ``you have to have your act together in the bull market'' and target a niche, said Benjamin Edwards III, chairman of A.G. Edwards & Sons Inc., in St. Louis.
Mr. Edwards said the goal of making money, for example, might not necessarily be the niche that draws employees together. For A.G. Edwards, emphasizing customer service did, so the company structured itself to achieve that. Management focused on teamwork, as opposed to the star system, in which a few people receive high salaries. ``Everyone should have an interest in the bottom line,'' Edwards said.
``Management needs to read the tea leaves,'' and give its employees an expectation of the future, said Robert Shapiro, president of RFS & Associates Inc. Management needs to identify its firm's mission through investment ideas and the execution of these ideas.
``In corporate America, management is a desired profession,'' Chalsty added. Employees start management training on their first day of work.
The securities business, on the other hand, had in the 1950s and '60s a horizontal management structure with compensation based on performance. Traders and salesmen became leaders and, during those years, a firm's capital was not greatly at risk and individuals were unlikely to produce a financial disaster.
``The '70s changed that,'' Chalsty said. Shrinking margins and declining commissions resulted in the need to seek out new business and create products.
The 1980s brought the five-year bull market, new products, and a growing awareness of international markets. A substantial increase in capital risk could result in damage by one person, Chalsty noted, as Merrill Lynch & Co. found last April, when one trader's bond-trading activity cost the company $377 million.
Now, ``the problems of management surface quickly,'' Chalsty said. ``Every day is a new day. This is a totally different industry from 17 years ago, and from seven years ago.''