Merrill Lynch's Stanley O'Neal Has Some Answering To Do

Last Updated Oct 29, 2007 11:45 AM EDT

One of the core truths about chief executive officers is that they are responsible--in tandem with their boards--for major strategic risks that their companies take. By that definition, Merrill Lynch CEO Stanley O'Neal and his board have some answering to do.

The firm announced a $5 billion write down mostly because of losses in the value of Collateralized Debt Obligations (CDOs), which are rapidly becoming known as one of the most reckless things Wall Street has done in years. It turns out that virtually no one was analyzing the risks inherent in selling mortgages and then syndicating the loans to others. Now comes word that Merrill is expected to add more than $3 billion to the write-down.

So far, O'Neal has responded by firing senior executives who oversaw risky activities. His pattern has been to promote executives to take on greater risks, then fire them when they overstep the bounds of sound judgment.
But shifting the blame down the ladder isn't good enough. Did O'Neal know that Merrill was taking risks of this magnitude? If he didn't, he should be fired immediately. No board should stand for losses of that magnitude if the CEO was caught sleeping.

More likely is that O'Neal did know about the risks but swept them aside because of the profit potential. Even then, his board needs to have a candid conversation with him about whether he was doing his job. He ultimately should be the one who has the wisdom to assess what risks Merrill should be taking.

And if the board is not capable of having a tough conversation with O'Neal, then that tells us something else--the board itself lacks clout. It is not an effective body.

When it comes to write-downs of $7.5 billion, it seems that failure starts at the top.