Other CEOs under microscope as Merrill chief exits

By Jonathan Stempel - Analysis

NEW YORK (Reuters) - The rapid fall of Stanley O'Neal from the helm of Merrill Lynch & Co Inc MER.N has left investors wondering who else in the banking industry may pay a price for the U.S. subprime mortgage crisis.

O'Neal's downfall leaves Citigroup Inc's (C.N) Charles Prince, Bear Stearns Cos Inc's BSC.N James Cayne and Countrywide Financial Corp's CFC.N Angelo Mozilo among the prominent U.S. 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 $8.4 billion write-down and O'Neal's apparent unauthorized overture to Wachovia Corp WB.N for a merger may have made the board's decision to oust O'Neal easier. That followed the exit of Merrill's fixed-income and structured credit chiefs less than a month earlier.

"Others could say, 'Here's someone across the street who couldn't get the job done, maybe we should look at our own executives," said David Killian, a portfolio manager at StoneRidge Investment Partners LLC in Malvern, Pennsylvania.

DECAPITATING MANAGEMENT

So far, other banks hurt by credit losses have culled the rank-and-file, or let people go who were near but not at the top.

At Bear Stearns, where two hedge funds with risky debt blew up, co-president Warren Spector stepped down in August, and hundreds of jobs have been cut. At Citigroup, a handful of executives left this month, including capital markets chief Thomas Maheras and co-head of fixed income Randy Barker. Countrywide is cutting up to 12,000 jobs.

And a poor quarter in corporate and investment banking at Bank of America Corp (BAC.N) led to an expected loss of more than 1,500 jobs in that unit, including President Gene Taylor.

Timothy Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York, said "there is risk in cutting too deeply, especially into real talent. It's much easier to hire one person than dozens."

And Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, said some business decisions may look bad only in retrospect.

"Before you assign responsibility, you have to think about that," he said.

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 Inc, 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."