Introduction
Marines are an interesting breed. We’re by far the smallest of the military services, and despite that (or perhaps because of it) we excel. We value such things as honor, courage, competence, commitment, and teamwork. We believe in being always faithful—we sometimes call it loyalty. We value discipline, and yet, at the same time, we encourage independent thinking. We train Marines to be leaders, yet insist that they learn to follow. We value integrity, humanity, and empathy; and we teach people to kill.
Marines learn skills that are not taught in most business schools. Some of them are military-specific—such as hand-to-hand combat, field first aid, fire and maneuver tactics, and how to call in air strikes. But many of them are about such things as leadership, planning complex operations, perseverance in the face of adversity, dealing with foreign cultures, and honor. We then marry those skills with a set of principles, practices, and values that, together, help us to materially increase the probability of success on the battlefield. It’s not an academic exercise. It’s an approach that has been proven time after time to save lives. It’s serious business.
Over the past few decades I have observed that the combination of those Marine Corps skills, values, practices, and principles can be quite relevant and quite effective in a wide range of environments, most certainly including but not limited to Wall Street. In many cases they result in a much more perfect solution than we often see in today’s world. That’s what this book is all about.
The focus of this book is on Wall Street because that’s where I have worked for the past twenty years. However, I also spent fourteen years as a corporate executive, and I now work with corporate CEOs every day. The skills, values, practices, and principles that I write about in this book are just as applicable in the boardroom—and in my opinion just as applicable in political caucus rooms as well.
For ten years I was an active-duty Marine. I began as an enlisted Marine—a buck private at time when over four hundred thousand Americans were fighting in Vietnam—down from more than half a million not long before that. The communists had just taken over Cambodia. The year before I enlisted, US combat deaths were more than eleven thousand. The year I joined, as American involvement began to be reduced, still more than six thousand Americans were killed. Antiwar protests occurred on college campuses and in Washington, DC.
I was promoted through the enlisted ranks, sent to Officer Candidate School, and then became a platoon commander in a Marine infantry battalion. Later, I was promoted to captain and became a company commander, and then a battalion staff officer. I held several other leadership roles. Along the way, the Marines allowed me to complete my college degree and obtain an MBA from UCLA. I ended my career as a member of the staff of the commanding general of the First Marine Division, a storied unit that I’ll touch on in a few of the chapters that follow. After a decade of active service, I left the Corps and moved to Manhattan, where I started a new life. But you never stop being a Marine.
For the first five or six years of my civilian career, most New Yorkers I met—most civilians—didn’t know how to react to my military service. This was the early 1980s, and they hadn’t served—nor, in most cases, had most of their friends and associates. The wounds of Vietnam were still fresh. Marines were a curiosity to many—baby killers to a few; simply brutes to others. The subtleties were lost on them. Marine MBAs anywhere near Wall Street were an anomaly. Paradoxically—at least to me—those same people generally reacted quite positively when I told them I worked in Manhattan in mergers and acquisitions. That was a place and a profession that they knew and respected. Most of my Marine buddies were impressed too. It wasn’t a common transition. A few years later though, in the mid-1980s, that positive view of Wall Street and those who worked there would change. For many it started with the arrests of such people as Ivan Boesky and Michael Milken.
At first, and for years, Boesky, Milken, and others like them were admired. They were feted as prime examples of how Wall Street could help Main Street. Milken found creative ways to bring much-needed capital to midsize privately held firms and smaller public companies that had been virtually shut out of the capital markets. His junk bonds, combined with his network of buyers for those bonds, allowed those firms to raise money, expand, and create jobs.
“Ivan the Terrible,” as Boesky was sometimes called, was originally seen as a smart stock trader who brought efficiency to many markets and made money for his investors. He also was a philanthropist. As his fortune and fame grew, he and his wife became fixtures in the society pages of New York newspapers. He was the epitome of the American success story: the son of Russian immigrants, he had started on Wall Street as a stock researcher, married the daughter of a wealthy real estate investor, and had, over time, amassed something like $200 million by buying shares in companies that were possible takeover candidates in the hopes that the stock would rise once a takeover was announced. For example, Boesky bought ten thousand shares of Pacific Lumber three days before Maxxam Group announced that they had received an offer to buy the company. Good timing!
Boesky attributed this uncanny ability to predict takeover candidates to superior company research—he asserted that his group was smarter and worked harder than anyone else, and he laid out his approach in a 1985 book called Merger Mania, which he billed as “the first comprehensive presentation of the fundamental theory of merger arbitrage.”
Then it all came crashing down. In November 1986, nearly every evening news program opened with the story that the US government had charged Boesky with illegally profiting on mergers and acquisitions by paying to obtain nonpublic information (insider trading). Boesky’s prescience was apparently derived mostly from paying bribes to insiders. It wasn’t pretty. Then he wore a wire and took down Michael Milken. Among many of my friends and acquaintances, the news introduced a sense that Wall Street was filled with greedy crooks.
To me, Boesky was a trader, not an investment banker, and Milken was a bond salesman—but my friends didn’t see the difference. To them, we were all part of the same crooked system. Oliver Stone’s iconic 1987 movie, Wall Street, further cemented this view in the character of Gordon Gekko, an unethical corporate raider (possibly partly based on Boesky and partly on Milken) willing to sacrifice others for his own enrichment, who traded on inside information provided by a Wall Street broker/sycophant. (The movie introduced the phrase greed is good to the lexicon.) As with Boesky and Milken, the characters in the movie also weren’t investment bankers. They were unscrupulous arbitrageurs, stockbrokers, and corporate raiders—but, again, most of my friends didn’t see any distinction. To them, it was all “Wall Street.”
It took me a while to accept that my friends were picking up on something real. The entire financial world was changing in ways that incentivized less-than-stellar behavior, even at investment banks and in boardrooms. Wall Street firms were shifting from a partnership model in which top executives owned their firms—and focused on providing unbiased advice and playing with their own money—to public ownership. With the change, many Wall Street executives quickly realized that they could reap huge personal rewards by taking much bigger risks than they had been willing to take when they and their partners owned the firm. Their upside was huge—with little downside risk, since outside shareholders bore the brunt of any gambles gone bad. At the same time a growing number of corporations were incentivizing their top managers with stock and stock options that could be worth millions. They too became motivated to take large risks with few downside consequences for themselves.
Combine that dynamic with lenders willing to provide virtually unlimited cash to risky endeavors, and add Congress’s slow loosening of many of the restrictions on Wall Street that had been imposed in the wake of the 1929 stock market crash. Add similar deregulatory moves in Europe, and you had a recipe and an environment for extreme risk-taking. Greed was in fact looking very good (for some).
Over the thirty-plus years since I left the Marines and moved to Manhattan, a never-ending and perhaps ever-increasing series of both corporate and Wall Street–related scandals have seemingly occurred—more so than during any other similar period that I am aware of. There have been far too many to list—especially since most don’t get quite the media attention or the prosecutorial attention as did Ivan Boesky, who agreed to pay $100 million and was sentenced to three years in jail, or Michael Milken, who was accused of ninety-eight counts of securities fraud and racketeering and ultimately agreed to (personally!) pay $600 million in fines and restitution and served two years in jail. Many others were involved in the irregularities and eventual collapse of junk bond financing soon after, just as in the 1990s many were involved in irregularities at the nearly one thousand US savings and loans (S&Ls) that failed (at a cost to the taxpayers of nearly $150 billion) after their regulators loosened restrictions, and owners and managers began offering large, complex commercial loans they didn’t understand—instead of the home mortgage loans they were chartered to provide.
Neither the junk bond collapse in the 1980s nor the S&L fiasco of the 1990s had anything to do with my m&a investment banking world. But it certainly contributed to the idea that “bankers” were a corrupt bunch, and investment bankers certainly weren’t immune. In 1991, a UK bank, Bank of Credit and Commerce International (BCCI), went under in spectacular fashion—costing shareholders and debt holders billions; and costing thousands of people their jobs. BCCI had courted the rich and powerful, including US president Jimmy Carter and UN ambassador Andrew Young. With US government consent, the bank acquired three American banks before it was accused of fraud, tax evasion, money laundering, arms trafficking, smuggling, bribery, and the support of terrorism.
In 1995, Barings Bank, the queen of England’s bank, founded in 1762, collapsed after an undersupervised trader amassed about $1.3 billion in trading losses. Shareholders were effectively wiped out. The Dutch bank ING bought Barings for one British pound plus assumption of liabilities. Hundreds lost their jobs.
In late 1997, prosecutors charged a former compliance officer at Salomon Brothers with getting paid for tipping off a network of brokers and traders to deals at the investment bank.
In 1998, a hedge fund based in Greenwich, Connecticut, called Long-Term Capital Management managed to borrow billions to bet on complex derivative securities. The company was led by some of the brightest minds in the country. But it seemed as if they didn’t understand the risks they were taking. When markets turned against them, not only did the firm collapse, it nearly wiped out some of the largest financial institutions on the planet. Reportedly the secretary of the US Treasury as well as the head of the Federal Reserve concluded that unless the government stepped in to force a rescue, the result could be global financial crisis unlike any seen since the Great Depression. So that’s what they did.
In 1998 another Salomon Brothers employee was charged with insider trading; in 1999, yet another. In 2000, the former chairman and CEO of the investment bank boutique Keefe, Bruyette & Woods Inc. was arrested and charged with leaking secrets about pending bank mergers to his mistress, a Canadian exotic dancer, escort, and porn actress, who used the information to buy stock in advance of those deals. And the list goes on.
In 2000, Enron, the Houston-based energy, commodities, and services company was worth $68 billion; by 2002, it was bankrupt. The accusation was that, with the connivance of its bankers and accountants, Enron’s executives had engaged in massive accounting fraud. Thousands of shareholders were wiped out. Thousands more lost their jobs and their retirement accounts disappeared.
And then the tech markets crashed; NASDAQ crashed; the world entered yet another recession; more people saw large parts of their savings wiped out, and hundreds of thousands lost jobs. Many people were sure that Wall Street had created yet another financial disaster. In 2002 it was WorldCom—another company built on mergers and acquisitions—that collapsed, amid accusations that it had overstated assets by some $11 billion. More money and jobs lost. And then in 2007–8 came the subprime mortgage crisis.
For years, the US Congress and Wall Street worked together to help Americans get loans to buy homes, and as they did so, home prices rose. Wall Street and others contributed to campaigns, and congressmen created government-sponsored enterprises (GSEs) such as Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) to spur home ownership. The GSEs would buy mortgages from banks, savings and loans, and other mortgage lenders. That way the mortgage “originators” would have more liquidity to offer more mortgages. Freddie and Fannie would package the loans into securities backed by bundles of mortgages and sell these securities to investors. Wall Street helped by buying and selling these securities and by creating their own securities based on subprime mortgages that were below the standards set by Fannie Mae and Freddie Mac. It worked—until people started getting greedy. Some banks and other mortgage providers began to issue “liar loans” and engage in outright fraud. People who should never have received loans (based on their income) got them anyway; mortgages were issued based on overinflated home values. Then borrowers began to default; home prices declined; more borrowers defaulted; and it all came tumbling down. For more on this subject, see the Oscar-winning movie The Big Short.
Not long ago, The New York Times ran a story about RBC Capital Markets, a part of Royal Bank of Canada that was ordered to pay $76 million in damages for advising the board of Rural/Metro, an ambulance company based in Scottsdale, Arizona, to accept a $438 million all-cash sale to the private equity firm Warburg Pincus. According to The Times, “RBC persuaded Rural/Metro’s board to accept the offer from Warburg without telling the board it was trying to win a role in Warburg’s financing of the transaction.”
Over the past half dozen years, global financial firms have paid out more than $235 billion in fines to various US and international government agencies for bad acts, including ignoring obvious conflicts of interest, manipulating currency and interest rate markets, and selling fraudulent mortgages and asset-backed securities—yet they still managed to generate huge profits. No CEO went to jail. Mark Taylor, dean of the business school at the University of Warwick in central England and an adviser to the Bank of England’s Fair and Effective Markets Review, said, “The problem is the incentives for cheating markets is massive. If you can shift a rate fractionally, you can make millions and millions of dollars for your bank and then for bonuses.”
Did I mention Bernard Madoff—an icon of Wall Street, founder of Bernard L. Madoff Investment Securities LLC; philanthropist; former chairman of the board of directors for the NASDAQ; and a significant contributor to politicians—who was convicted of masterminding a massive $65 billion Ponzi scheme?
Ugh! This can’t be my world.
I work on Wall Street. I know Wall Street. Most bankers are not crooks, and most Wall Street deals work out fine—otherwise there would be no Wall Street. To focus on the all-too-frequent ethical lapses in corporate executive suites, in Washington, DC, or on Wall Street misses the larger points of what has changed in the past thirty years. Sure, lack of individual ethics on Wall Street and in corporate boardrooms contributed mightily to many of these scandals. But these alone can’t be blamed for the savings and loan crisis of the late 1980s and the NASDAQ and tech market crashes; or the rise and subsequent crash of the residential housing market and the ensuing global financial meltdown of 2008. These came as a result of a confluence of factors—many of which were political, and a few of which were macroeconomic.
Still, the culture on Wall Street (and increasingly in corporate executive offices and in Washington) has undoubtedly continued: it still disproportionately rewards a few individuals over teams, encourages completion over cooperation and compromise, fosters short-term thinking over long-term horizons, measures companies by stock market value or profit, and too often respects people only in proportion to their wealth or power. One has only to look at the recent ignition-key debacle at General Motors or the Volkswagen diesel-engine emissions scandal to see the same forces at work. What else, besides these kinds of warped priorities, allowed GM executives to ignore repeated warnings that ignition switches could shut off engines and thereby create life-threatening accidents while simultaneously preventing airbags from inflating? (As of this writing GM has compensated families for more than fifty deaths and thousands of injuries as a result of the failures. More than 2 million vehicles were recalled, and fifteen GM employees were eventually fired.)
What else could have been driving VW corporate executives when they knowingly created and installed sophisticated software that would detect when diesel engines were being tested for emissions—and trigger pollution controls that would help the engines pass those tests—but shut the controls off during normal driving (thus allowing health-threatening pollution at up to forty times higher than that allowed)? Volkswagen chairman Hans Dieter Pötsch said the scandal arose from “a mind-set in some areas of the company that tolerated breaches of the rules.”
The values, habits, and repeatable processes that I’ll outline in the pages to come ought to be useful for anyone running an organization, but my central goal today is to help my current profession, Wall Street, break out of its cycle of tolerating breaches of the rules and other bad acts and regain the trust of the American people.
In October 2014, a Harris Interactive survey found that 57 percent of Americans trust Wall Street less than a few years before; 72 percent trusted Congress less. Another Harris Interactive poll indicated that two-thirds of Americans think that those who work on Wall Street “are not as honest and moral as other people,” and 64 percent think Wall Street bankers don’t deserve the money they earn. Seven out of ten said everyone on Wall Street is willing to break the law for bigger profits. Again, only our politicians fare worse.
As for my friends, I notice that they still don’t find enough difference between various Wall Street types to bother distinguishing among them. And in this book, in fact, I will use the terms Wall Street and bankers the way most laypeople now use them: as shorthand for all of the traders, brokers, investment bankers, hedge fund managers, private equity partners, venture capitalists, financial executives, and everyone else who makes a living in today’s financial community. We all operate in this environment. As William Dudley, president of the New York Fed, acknowledged in a 2013 speech:
“There is evidence of deep-seated cultural and ethical failures at many large financial institutions.… [Wall Street banks] really do have a serious issue with the public, and I think that trust issue is of their own doing. They have done it to themselves.”
Don’t get me wrong. I’m no socialist; I’m an entrepreneur and an investment banker. I like to earn money, and I have no problem with bankers, corporate executives, or others who do too—as long as it is done honestly, and in accordance with the basic values of honor, courage, competence, commitment, teamwork, loyalty, and perseverance in the face of adversity. It is certainly not my intention to lecture people about ethics—other than to note that whether you are a banker, an executive, or a politician, lack of ethics is a surefire way to lose the support of clients (or constituents) and risk long-term business (and personal) disaster. That’s the opposite of what most of us want. Ask the executives of Enron, or WorldCom; Washington Mutual or Countrywide; Drexel Burnham, or Madoff Securities; GM or Volkswagen. That kind of behavior may catch up to you.
In spite of all this, most Americans recognize that they need Wall Street. The same Harris Interactive survey noted that, for all that mistrust, nearly two-thirds of those polled said they still believe that “Wall Street is absolutely essential” to our way of life. If we want to save and invest, create jobs and opportunities, and build houses, roads, and schools, most people on Main Street realize that they are tied at the wallet to Wall Street.
Some critics believe that the solution to many of the problems in corporate America or in Washington or on Wall Street is increased regulation. I support the idea of reasonable regulation and oversight of Wall Street, corporate America, and politicians. (It would be nice if politicians had to follow the same rules and restrictions as the rest of us.) But it’s a pipe dream to think that regulation alone will change a culture that sees opportunities to obtain wealth or power beyond the dreams of most and that, along the way, condones and rewards price gouging, system gaming, and other unscrupulous practices. Corporations, as well as the highest levels of politics and Wall Street banks, are highly competitive places. The financial rewards can be substantial. In that environment, a lot of businesspeople, politicians, and Wall Street bankers will find ways around the rules—or find ways to change the rules—if they believe the risk of doing so is low. (Give a professional race-car driver a choice between a fast car that is potentially unsafe and a safer but slower car and guess which one he will take?)
As a result, I am focused on an even more important, if quixotic, goal than simply changing the rules; I want to change a culture. I hope to show those on Wall Street another way to win, a better way—both for their clients and for themselves. The book that follows lays out the eleven key strategic principles and practices that I first learned and practiced as a Marine, and that I have applied to the businesses I have led—and around which I have built my own companies.
Applying any one of these principles can increase the probability of long-term success in business and on Wall Street—but, alone, none of them are unique or particularly powerful. It is the combination of all eleven that can not only help materially improve your odds of success, but also help to change a culture that needs changing on Wall Street—and beyond. It works. I’ve built successful companies around these values and practices, and I now lead a successful investment bank that employs these practices. It’s what I call the Marine Corps Way.
* * *
It all starts in chapter 1 with a practice I call “Take the Long View.” In the Marines, short-term thinking leads to shortsighted results. It’s all about understanding what is in your long-term best interest as well as in the long-term best interest of those around you. It’s not only about a Marine’s responsibility to formulate clear long-term strategic objectives—although that’s certainly part of it; but it’s also about the responsibility of Marines as well as corporate executives and their advisers (including bankers) to figure out which battles need to be fought and which can be skipped over. It’s about keeping those objectives the focus of strategic thinking, and avoiding the temptation to take an action (or to advise a client to take an action) that may serve short-term interests (or generate a fee) but may not be the best way for the client to achieve its long-term strategic goal.
Whether the issue at hand is to encourage a set-piece battle at a remote outpost near the Laotian border called Khe Sanh, or to withdraw forces from Iraq before the country has been fully stabilized—these are serious questions with serious potential long-term consequences. Whether it’s smart to ignore the warnings about financial institutions that are overleveraged or about dot-com or housing bubbles, or to downplay the risk of acquiring some firm or of ignition-switch problems, may not always be issues of life and death, but they are serious too—as the wrong action can cost thousands of people their jobs and their life savings, and sometimes more. (Ignoring ignition-switch failures at GM may cost the company billions of dollars in fines, legal settlements, repair costs, and lost revenue, but it may also have cost more than 124 people their lives.) Short-term thinking can have serious consequences. What’s more, it is possible to make this long-term thinking part of your personal habits—and your company’s culture. It’s also the foundation of trust between banker and client; executive and shareholder; politician and constituent. It’s important.
Chapter 2 is called “Take a Stand.” It has two connotations. The first is simply about being decisive. Decisiveness is one of fourteen leadership “traits” that all Marines are taught. You have to work with the data that you have at hand, make a clear, firm decision, and accept responsibility for the result. That way of thinking informs the way every Marine officer carries out his or her daily routine. It’s ingrained. The second connotation is about doing the right thing—including taking a stand as an adviser—even when it’s not what the client wants to hear. It’s one thing to know what to do, it’s something else to push your client to do the right thing—even at the risk of self-interest.
Bob Weissman, who was president of D&B and then became chairman and CEO at the end of my days working for that company, once told me that a key part of his long-term strategy was to be around in the long term—to keep his job. I understand well the desire for self-preservation, and I do not advocate taking actions that are highly likely to shorten your career—unless moral, ethical, or legal issues are at stake. But the Marine Corps Way is that leaders and their advisers both should not be afraid to take clear, unambiguous positions on the long-term merits of an action. We don’t prevaricate to see what polls say or which way the wind might blow or blindly execute the actions that someone else has mandated as if we have no individual responsibility for our actions. Those are the excuses that too many business executives, politicians, and bankers give when they unquestioningly take a course of action that they know—or should know—is not in the best long-term interests of the organization, without at least taking a stand, speaking up about what should be.
Had some senior software engineers at Volkswagen taken a stand on the software that was being used to defeat emissions testing, VW would not now be looking at billions of dollars in losses—and a serious dent in their reputation. Had some senior mechanical engineers at GM taken a stand on faulty ignition switches, 124 people would be alive and GM would not be now paying compensation to the families of hundreds of victims. Had some US politicians taken a stand, fifty-eight thousand Americans (and more than a million civilians) might not have died in the Vietnam War; and we would probably never have invaded Iraq, where about forty-five hundred Americans died (in addition to about half a million Iraqis).
Taking a stand requires senior people at all organizational levels, including their advisers, to weigh inputs and make hard decisions or at least tough recommendations—even when short-term self-interest may indicate that the smarter move is to shut up or just go along. It’s also about creating a culture where it’s everyone’s job to take stands—to stop bad ideas from becoming reality. I love Ross Perot’s quote on the difference between the culture at EDS and that of GM: “An EDS employee who sees a snake kills it. At GM, they form a committee on snakes, hire a consultant who knows about snakes, and talk about it for a year.”
Kill snakes. Take a stand. Over time the Marine Corps Way can result in more respect and more success.
In chapter 3 we’ll discuss the need for senior executives and senior bankers to “Be the Expert (or Use One)” in some clearly defined field. I’m tired of generalists. My father, who is a retired mechanical engineer from the Cummins Engine Company, used to bemoan that senior executives at the company knew all about general management techniques but didn’t know a crankshaft from a piston rod. I can relate. I see too many bankers who are good at financial analysis and managing process but know too little about the industry that they serve.
Marines are required to be “technically and tactically proficient”—experts on multiple dimensions. To begin, every Marine is a rifleman, and every Marine officer is, at the core, a rifle platoon commander. Lawyers and clerks, tankers and truck drivers, supply clerks and jet pilots—all must be available to fight on the ground, in the trenches, at any time. But that base-level training doesn’t make any of these Marines experts at infantry combat; it just means that they have a common starting point—a base on top of which they may start to build true expertise in some field. That happens by building on the base of knowledge through a combination of education and extensive real-world experience in the assigned area of specialization, in specific environments (desert, mountains, jungle, tundra, etc.) and under specific conditions. That field experience allows us to learn from our own mistakes and those of others. It helps us to anticipate what the other side will do—not just react. It helps us to know how best to act when life throws unexpected obstacles in our path. It gives us the edge over others in combat and in life. It allows us to survive where others perish.
Most bankers have decent financial-modeling skills. They can read a balance sheet. Most can manage parts of a transaction. Some have pretty good interpersonal skills. But it can’t end there. The Marine Corps philosophy is that each individual must build on the common base to become a domain expert in a clearly defined field—and being a good pilot or an artilleryman is not specific enough, just as being a good generalist manager, banker, or politician is not good enough to be an expert. To win in combat, Marines must be experts at their jobs in the specific combat environment at hand.
Wall Street, like our corporate boardrooms and political capitols, used to be filled with true experts. These people not only knew how to get a deal done (or a bill passed), but also actually knew quite a lot about the industries they served—insurance, aviation, agriculture, energy, or any of a thousand other clearly defined areas. That’s what made them successful. That’s how we got good legislation passed. That’s how we built great corporations; that’s the approach of the best of Wall Street. True domain expertise allows leadership at firms such as Google, Apple, and Airbnb to quickly assess a situation and know what to do, what not to do, when and how to do the right thing. It may not be the only key to winning—but it’s certainly one of them.
Chapter 4 is about the need to “Know the Enemy”—to study and understand the history, culture, and motivations of the parties on the other side of the conflict or the negotiating table. It’s not an academic exercise. It’s another key practice that increases the probability of coming up with a long-term strategy that will lead to success.
While many people agree in principle with this concept, few spend more than a few minutes studying the other side. Some believe that all parties are basically alike; some believe they can figure it out in five minutes; some believe that they negotiate from a position of such strength that they can dictate terms. That kind of hubris leads to failed deals and failed strategies—that kind of hubris led HP to buy Compaq, and led the United States into a quagmire in Vietnam, and to some extent in Iraq, Libya, and Syria.
The person on the other side of a business deal isn’t typically an enemy. However, your odds of success in any business or political endeavor are significantly enhanced if you make an effort to understand the other side in depth—their strengths and weaknesses, capabilities and constraints, ambitions and motivations. It would be so nice if those on Wall Street as well as business executives and maybe even a few of our politicians would actually listen to those on the other side of the table—or their arguments—really listen. Just maybe they could work out a mutually winning strategy. With that knowledge and understanding you are much more likely to be able to pick your battles and sometimes avoid battles completely by creating win-win scenarios. When that is not possible, at least the knowledge gained from understanding the other side will help you anticipate how the other side will act and react to your moves—and that leads to success.
We’ll follow that with a chapter on the need to “Know What the Objective Is Worth,” a brief primer on the basics of valuation from a perspective that also is foreign to many bankers—the value that a Marine would put on seizing, occupying, and defending hostile terrain.
Marines value territory based on a clear-eyed understanding of the interrelationships among four critical factors: (1) the importance of the objective to achieving the larger mission at hand; (2) the appropriateness and necessities of the timing involved; (3) the affordability of the price required to attain the objective; and (4) the risk/reward trade-offs. Now you won’t find those four factors in any Marine Corps manual. I’ve derived them from many teachings and my own observations. But what is interesting to me is that valuing companies or even valuing strategic political moves—such as bailing out a company or an industry—can be premised on these same four factors. Yet, MBA programs teach future corporate executives and bankers alike to assess value based solely on fairly simplistic quantitative metrics. They use discounted cash flow models and measure internal rates of return. They also use the one that I like least—they derive values by looking at “comparable” transactions. Don’t get me wrong, these approaches have merit. They can help as a sanity check. But no Marine would say that because we paid for Iwo Jima with sixty-three hundred American lives (and twenty-five thousand casualties), plus two US Navy aircraft carriers, that this price somehow defines the price (lives, casualties, ships) we would pay to take Guadalcanal. It would be absurd. These naïve approaches to valuation are how Yahoo! wound up paying $5.7 billion for Broadcast.com and $3.6 billion for Geocities, and how Time Warner agreed to a $164 billion deal with AOL.
In chapter 6, we’ll talk about why bankers, like business leaders and Marines, also need to adopt the mantra “Know Yourself”—to see their unit’s strengths, weaknesses, capabilities, and constraints in cold, harsh objective reality and to understand how the other side is likely to perceive them. This is not only about understanding where you and your organization may have negotiating leverage—although it certainly helps. It’s also critically important to understand your institutional strengths and weaknesses in order to formulate your strategic objectives as well as your tactics to achieve those objectives. General Custer should have better understood his regiment’s capabilities before he refused the offer of a battery of Gatling guns and an additional battalion of soldiers before going after Indians at Little Big Horn. Daimler-Benz would have been much better served if it had better understood its own strengths and weaknesses before it decided to spend $38 billion to acquire Chrysler in 1992. (They were fortunate to sell it for $7.4 billion in 2007.) Americans would have been better served if we had understood our capabilities more clearly before we attempted the invasion of Cuba’s Bay of Pigs in 1961—and before we disbanded the Iraqi Army in 2003.
Marine general James Mattis, the leader of Marines in Iraq, once famously said, “You cannot allow any of your people to avoid the brutal facts. If they start living in a dream world, it’s going to be bad.”
In battle and in business, lack of critical self-awareness can lead to disaster.
I worry about potential clients who cannot clearly tell me what makes their firm special; why that uniqueness matters; and why we should expect it to continue in the future. I want clients to be able to articulate what they do that is better than anyone else on the planet. (I can for our firm.) I simply don’t understand the me-too company or the investment banker that is almost as good as the competition but less expensive; or the Wall Street investment bank that is pretty good at managing price and process but not much more. How do they differentiate themselves from the crowd? By their Rolodex? Bad idea.
In chapter 7, we’ll talk about the need to “Control the Timing” of your strategic actions. It’s about control—not necessarily about surprise. In the 1990s, Saddam Hussein could not have been surprised at the assault by US-led coalition forces in the first Gulf War. He probably watched the buildup on CNN. It took more than five months. But the coalition controlled the timing of that assault, and it made all the difference.
In 1973 a coalition led by the Syrian and Egyptian armies surprised the Israelis with a full attack on Yom Kippur, the holiest day of the year for Jews. It was a surprise. But they still lost the war. Controlling the timing is not about surprise; it’s about moving with conviction when you have the resources in place to win—and not sooner. For too many corporate executives, the timing of major strategic moves is purely reactive—when an acquisition opportunity is presented or when a suitor has approached you. For too many bankers, the best time to enter into a deal is whenever they have someone willing to pay fees. For too many military buffs, the word timing is associated with the word surprise.
Chapter 8 is called “Negotiate from the High Ground.” There are plenty of books on “how to negotiate,” and this will not be another. Instead, this chapter is about the philosophy of negotiating in an environment where we want to win but are not—or at least we should not be—trying to completely destroy the other side. The high ground has two connotations in the Marine Corps. From a tactical perspective, it’s the physical place you often want to be, since it’s usually both more defensible than the low ground and a better place from which to launch assaults. Clearly, the high ground has a second, ethical connotation too. It involves doing the right thing. Ask any Marine about Marine Corps values, and several words will invariably come up in the conversation: honor, courage, commitment, competence, loyalty, and teamwork. These combine to form an ethos that is also about the high ground. It is instructive to remember that a transaction may be the end of the process for the bankers—but just as peace usually follows war, for most participants the transaction, like an armistice, is just a phase point. It’s useful if on the way to signing it, the parties have contemplated what will come next. I’ll set forth nine negotiating rules that I developed while a Marine and that have guided me in negotiating successful transactions for a long time.
In chapter 9 we’ll talk about the benefits, and the nuances, of international dealmaking, and another philosophy that I evolved while a Marine—and refined during my early career days—that I call “Seek Foreign Entanglements.” While it may make sense for some businesses and some bankers to retreat behind national borders, in most cases isolationism is self-defeating. Your competitors will think more broadly, your constituents and clients need to think more broadly—and you should too. A common thread throughout my career has therefore been the recognition that trying to build a world-class business by staying safely at your home port usually doesn’t work. World class requires a truly global perspective. There is a big world out there beyond our borders, and many smart business leaders are trying to figure out how to take advantage of that. Clients seeking to hire an investment banking adviser would be well served to consider one that understands this concept. Again, this chapter won’t tell bankers, executives, or politicians how to manage these complex transactions. I could write an entire book on that subject alone. Instead, it will lay out another set of eight rules that I have developed for increasing the probability of successful cross-border transactions.
Next, chapter 10 is about the due diligence review process and a philosophy I refer to as “Trust and Verify.” Ronald Reagan didn’t coin the phrase trust but verify, but he put it into the popular lexicon—and it’s an apt description of the sometimes painful but always necessary practice of verifying critical assumptions before you take irreversible steps. It seems reasonable, I know. But I can’t tell you how many times people buy used cars without having them inspected or buy companies without first doing their homework or start a process to sell their business without anticipating the due diligence review process that most buyers will want to pursue. There are no perfectly clear crystal balls, but gaining intelligence and carefully vetting your assumptions can go a long way to ensuring victory. It’s something that Marines do nearly every day. This chapter is about the need for buyer, seller, and their respective advisers to anticipate the due diligence review process and manage it so that we increase the odds of winning the battle. I’ll include a short list of the undesired consequences of a few due diligence reviews that could perhaps have been done better.
The final chapter calls for bankers and business leaders to “Be Disciplined.” It may be my favorite chapter. Marines like winning. We don’t like drama. As a result, we try to remove as many variables as possible before heading into action—and that takes discipline. We take the long view, we establish long-term strategic objectives, and then we plan using a rigorous detailed approach. When we are ready, when we have all the resources in place, when the timing is right, then we commit; we act in accordance with that well-developed plan. Discipline may be a hallmark of the Marine Corps, but we don’t have a monopoly on it. General Electric has long been known for its disciplined approach to business; so is, for that matter, Warren Buffett. It’s not always easy, but it is a critical practice to achieve long-term success, and it can be taught.
Discipline is not about blind obedience to orders. It is about more than the ability to get up at 4:00 a.m. after four hours of sleep or hike all through the night with fifty pounds of equipment on your back. That’s grit as well as mental and physical toughness. Discipline is about doing the right things the right way—every time. Discipline requires that you not only know how to plan to win the battle but also about why you want to win it, and what you are going to do afterward. It requires courage, competence, commitment, and teamwork, and if done the Marine Corps Way, it requires honor too.
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The Marine Corps Way requires us to conduct our business with honor. It requires us to persevere in the face of adversity in service to a cause that is greater than ourselves. It’s not always easy, but I have seen firsthand that applying these principles leads to success on many fronts. It works for Marines, it has worked for me in the companies that I have led, and I believe it can work for others as well—for Wall Street bankers and for the corporate executives who engage them, and perhaps a broader world too. There will be resistance to change, but changing can help these organizations earn back America’s trust and restore the fundamental faith that Main Street must have in boardrooms, Wall Street, and Washington for our economy to function effectively and efficiently.
When I relayed to a friend the premise of this book, he called it “tilting at windmills.” He said that my expectations for change were “unrealistic and unreasonable.” I agreed—on all counts.
When Marine Corps colonel Lewis “Chesty” Puller found his First Marine Division surrounded by thirteen enemy Chinese Army divisions plus another three divisions of North Koreans at the Chosin Reservoir in Korea, he is reported to have said, “They are in front of us, behind us, and we are flanked on both sides by an enemy that outnumbers us twenty-nine to one. They can’t get away from us now!” And he led his men to the sea—destroying seven enemy divisions. Persevering in the face of adversity is a long-held Marine tradition.
George Bernard Shaw, the Nobel Prize–winning Irish playwright once said, “The reasonable man adapts himself to the world; the unreasonable one persists to adapt the world to himself. Therefore all progress depends on the unreasonable man.”
The US Marine Corps is filled with “unreasonable” people who boldly go where others fear to tread … in an effort to make the world a better, safer place than we found it—for all of us. Perhaps that is the reason why we who have served as Marines seem to take so much pride in our service to the Corps. Perhaps that is why every November 10, all around the planet, Marines of all ages and experience toast the birthday of our beloved Corps. When the “Marine Corps Hymn” plays, watch us stand tall.
It would be impossible to maintain such sustained pride in an organization were it not based on something very real. Marines know that we have achieved victory precisely because we have put into practice the skills, values, and principles that I talk about in this book. We have succeeded “in every clime and place where we could take a gun,” according to the lyrics of the “Marine Corps Hymn.” These are the action-oriented principles that brand-new recruits begin to learn in basic training, and that we strive to live every day we serve, and beyond.
The same friend asked another question—why you? What makes you the one to set forward eleven principles to change the way Wall Street works? You’re not famous; you never ran a bulge bracket firm. Why you? To this, I can only say—why not me? Someone should. As Ronald Reagan said in his second inaugural address, “If not you, who? If not now, when?” I now turn that question around to readers: “If not you, who? If not now, when?”
Copyright © 2016 by Ken Marlin
