Marshall Carter: Making Sense of the Financial Mess

Marshall N. Carter is chairman of the New York Stock Exchange Group and deputy chairman of the parent company NYSE Euronext. He was chairman of the board of directors of the predecessor, New York Stock Exchange for two years prior to the merger. Mr. Carter has served as a director of the NYSE since November 2003. Concurrently, he has been a lecturer in leadership and management at Massachusetts Institute of Technology and Harvard Kennedy School of Government.

Prior to the Exchange, Mr. Carter served as the chairman and chief executive officer of the State Street Bank and Trust Company, Boston, and of its holding company, State Street Corporation. He joined State Street in July 1991 as president and chief operating officer, became CEO in 1992 and chairman in 1993. During his nine years as CEO, the company grew more than sixfold. State Street is a leading servicer and manager of financial, pension, and mutual fund assets worldwide. Prior to joining State Street, Mr. Carter was with the Chase Manhattan Bank for 15 years, in positions related to finance, operations, and global-securities businesses.

A former Marine Corps officer who was awarded the Navy Cross and Purple Heart during two years’ service as an infantry officer in Vietnam, Mr. Carter served from 1975-76 as a White House fellow at the U.S. State Department and Agency for International Development. Major projects during that year were the application of satellite technology to agricultural activities in West Africa, the use of high-level U2 photography for disaster-relief activities in Guatemala, and the use of sensor-surveillance equipment as a member of the project team that installed the U.S. Sinai Surveillance Mission in Israel after the 1973 Middle East War.

Mr. Carter holds a B.S. degree in civil engineering from the U.S. Military Academy at West Point (1962); an M.S. in operations research and systems analysis from the U.S. Naval Postgraduate School, Monterey, California (1970); and an M.A. in science, technology, and public policy from George Washington University (1976), which he attended on the GI Bill.

Mr. Carter was chairman of the board of trustees of the Boston Medical Center, the primary inner-city hospital for Boston from 2001-09. Long active in industry affairs, he co-chaired the U.S. Working Group of Thirty, which developed recommendations for revamping world securities clearance and settlement processes after the securities markets problems of October 1987. He was a member of the board of directors of Honeywell International from 1997-2005. Mr. Carter also chaired the Massachusetts Governor’s Special Advisory Task Force on Massport and Logan Airport following the events of September 11, 2001. In 2006, Mr. Carter was inducted into the American Academy of Arts and Sciences.

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This Conversation took place in Marshall Carter’s home in the Boston area on May 7, 2010. Participating were David Gautschi, currently dean of the Graduate School of Business Administration at Fordham University in New York, and Al Erisman. Prior to publication, we asked Carter to update his comments regarding the financial-reform legislation.

Ethix: How does what happened to the market yesterday (May 6, 2010) compare with what happened in October 19, 1987? [On that day called, black Monday, the market dropped 20 percent. The Federal Reserve did an analysis of that event (PDF)

Marshall Carter: October 1987 was a true lack of confidence in the market. The market not only fell, but it also stayed down for a long time.

Yesterday there was lack of confidence in the world’s economy triggered, in part, by what is happening in Europe. Greece is not very healthy, and neither are some other countries of Europe. PIIGS ( Portugal, Italy, Ireland, Greece, and Spain), they say, are the next ones to go. In addition, there was heavy trading in futures and high frequency trades backing away from the market.

But there were some other contributors to yesterday’s market drop as well. Remember, the market dropped suddenly, about 1,000 points, but it rebounded very quickly as well. There may have been some technical issues we are still reviewing. However, in today’s trading world, there are more than 50 places to trade, and only a few of them are regulated by the SEC (Securities and Exchange Commission). People can trade around the NASDAQ and the New York Stock Exchange. Half the trades are not on the market but are accomplished through electronic matching engines. For example, let’s say your company wants to sell 10,000 shares of stock and another company wants to buy 10,000 shares of stock. You can cut a deal between the two of you that is completely outside the market. And this trade is unregulated. We do not think there is any unethical behavior going on there. We just think that the markets are not as transparent as they are should be, which means investors are not protected and price discovery cannot happen.

Technology and the Markets

Is there checking that goes on in this trading?

Speed has overwhelmed everything and so much of the activity is automated.

About two months ago, a big mutual fund company submitted a trade to sell 16 million shares of X. A big mutual fund company would not normally submit that kind of a trade, they would submit it through 40 brokers so that each one would do a little piece (through automated routing machines) and then the market does not fall away from them. So, if a specialist saw a trade for 16 million shares on the floor, that person would say, “Wait a minute, hold, that is not right.”

About 10 or 15 years ago a large broker decided to lop off the last two digits of their shares. So 17,000 shares will be 170. They had a summer intern entering trades, who added back the zeros, so a trade intended to be 17,000 became a trade for 1,700,000. But a human caught that.

Doesn’t technology take care of this kind of problem? Can’t they automate those rules?

They could, but there are two problems. One is anticipating all of the things a specialist could spot as being unreasonable. But the second concern is that the filters working on the rules would take too long. We are trading in under 10 milliseconds these days. You do not have time for a person to take two seconds to check it, or for filters to slow down the transactions. Everybody wants that little edge in the market gained through time.

So, the technology really has changed the nature of the market.

There are two things that technology enables: speed and anonymity. People also want to be able to protect their investment strategies, and anonymity is key to that. Technology enables more small trades that get “hidden” in the distributed mix.

Banking and the Economic Crisis

With the current economic crisis, what has happened to banking?

The real change in the nature of the bank happened in 1999 when President Bill Clinton and Congress removed Glass-Steagall. Before the market crash in 1929, banks were allowed to do mergers and acquisition business, trading operations, brokerage operations, and commercial lending. After that market crash two senators, Carter Glass and Henry Steagall, introduced what has become known as the Glass-Steagall Act to separate these functions. Under a lot of pressure from the financial industry, President Clinton and Fed chairman Alan Greenspan were convinced that these restrictions should be removed.
The repeal of Glass-Steagall remains the biggest problem in banking today.

The repeal of Glass-Steagall remains the biggest problem in banking today. It used to be that a bank had a public-service role in providing capital to the economy. But when all the walls came down, a big bank could make so much more money on the trading side that they soon lost their vision about their work in building the local economies.

And where does that leave the lending side? When I think the role of the financial institutions, it is to provide the capital for other businesses to grow and expand. A good example is the banks providing capital to Ford in their transformation [ISSUE 70 Conversation].

Addressing big issues like the one at Ford would have required a consortium of say 100 banks, including the little guy in Ohio taking a $4 million slice. This is because the local manufacturer that makes seatbelts wanted his bank to be in the consortium.

But in general, that is exactly right. Banks should be allocating capital for effective production. Now we have had the federal government enter the picture in these areas, like with the bailout of General Motors. I did not have any trouble with the GM bailout from President Obama, but I thought what he should have done was to add some hooks to the money. I wish he had said, “I will give you the $25 billion, but I am ordering 3 million cars for the nonmilitary side of the government. I want them delivered in three years and they must give 50 miles per gallon.”

So, I do not think there is a single smoking gun of something to cause the mess we are in, but there are many factors. The removal of Glass-Steagall, the Mergers and Acquisitions (M&A) firms getting trapped into quarterly earnings when they require a longer time horizon, the tremendous amount of money that the trading side of these institutions could make are just some of the factors.

I do think that is important to separate unintended consequences from lousy planning.

There was a fourth trend that happened in the early ’90s. The conventional thinking before that time was that CEOs had to have five times their annual salary in direct ownership of stock. Then, compensation programs shifted to stock options and restricted stock. The way to reward senior executives was to boost the earnings of the company on a short-term basis, and this happened.

They are not considering the unintended consequences.

I do think that is important to separate unintended consequences from lousy planning. [Former Federal Reserve Chairman Alan Greenspan] was warned by Brooksley Born, the chair [1996-99] of the CFTC (Commodity Futures Trading Commission) that derivatives were getting way, way too big. Her view was that they provided liquidity to the market and refused to do anything about this. So, the issue is not unintended consequence, it is a failure to open yourself to what is happening in the world.

Glass-Steagall was effectively an attempt by the federal government to respond to the big market crash of 1929, and we lost sight of that message. When you get someone doing everything, they have too much power.

We hear a lot about the divide between Wall Street and Main Street. What are your thoughts on this?

That’s a question of how you define things. What is Wall Street? We’ve tried to get them not to do this, but on the evening news every night, whenever something goes wrong on Wall Street or in business, they show a picture of the New York Stock Exchange. Have you ever noticed that? It is like, “Oh, no, are we in trouble again?” So the question is: Is Wall Street the six big banks? Is it the stock brokers? Is it mutual fund companies?

On Main Street, there is a perception that these guys are operating for their own benefit, not for efficient capital allocation. So I would say that in my view, Main Street –here in the parlance of Boston, we are probably close to Main Street even with the big mutual fund companies here — now perceives Wall Street as acting in its own best interests and not for capital allocation or social values.

Why have people pulled money from the banks?

I think that people pulled money out of the banks because they believed the banks were not trustworthy. People lost faith in the big-money center banks. They didn’t lose faith in my little neighborhood bank up here with $500 million balance sheet, because they never sold any mortgages. Many banks figured out that they would make more money by creating the mortgage and then selling it downstream to the CDOs and CDSs. They lost some of their loyalty to the neighborhood.

Bank Consolidations

Isn’t bank consolidation a factor in creating big banks that no longer identify with a neighborhood?

True. Twenty years ago, there were 15,000 banks in this country. Now, Bank of America alone has about 4,000 branches. But the question at Bank of America is how to create those branches to serve a small town in Iowa. The local branches get instructions from the head office that must work within certain parameters, not allowing for localization. So, the problem is that some of these companies are maybe too big to manage.

How do state regulators fit here?

How does the state regulator deal with a North Carolina-based Bank of America? We went from prohibitions on interstate banking, to today’s conglomerates in just 20 years.

How do you deal with “too big to fail”?

Let them fail. Look at Lehman and Bear [Stearns]. I think you could say each of those was too big to fail, but both did (although Bear really was a forced merger). But how many do you have that are too big to fail? You only have three or four?

I joined Chase Manhattan Bank bank in 1976 and thought it was huge. But it was one of eight or nine banks, including Chemical Bank, Irving, Bank of New York, Chase, Citi, and Bowery Savings. Now there are three left: JP Morgan, Chase, and Citi.

Does that put the whole system in jeopardy?

We have a three-tiered banking system. We have these money-centered banks, then you get these big regional players, then you get the local players with the focus on customer service. I do not think that is the way it should it be. Sheila Bair, who runs the FDIC, has been pushing for a fund to support unwinding these big banks slowly when they go bad. But I don’t know whether that is the right question. Perhaps it goes back to Glass-Steagall: Is it the right thing for one institution to do M&A, commercial lending, and trading?

For example, in 1995 as we shifted State Street from a bank to be in the processing business, selling information with a bank license, we heard that Microsoft might be interested in coming into the global banking business. After all, it was a global business moving information, and Microsoft was interested in that. But they lost interest when they found they would have to have a bank license and move $400 billion a day around the world. Further, we had to be able to deal with losses, sometimes $30 to 50 million a year. It was like a loan-loss reserve for processing banks, and this was a foreign concept to them. They were used to making and selling a product, building a customer relationship. This processing business is a different world.

Mergers and Acquisitions

Wall Street seems to love mergers, but so many of them don’t really succeed. John Reed, after he left CitiGroup once said that he was convinced that mergers don’t work. What do you think?

This is a language and strategy question. When I was at Chase, we bought a big bank in upstate New York, 150 branches, a $4 billion bank. Chase was a $100 billion bank. When I arrived in Rochester, the headlines of the local paper said, “Lincoln First merges with Chase.” I had to tell them, “No, fellas, you have been acquired. That is a very different scenario.”

The rule I had at State Street was that we never bought any company that was more than 15 percent of our size. We were so desperately afraid of the cultural differences. You can’t get the management teams together to develop the change of venue, picking one strategy or process from column A, one from column B, etc. You can’t afford it, and you can’t run a company that way. So, yes, I think it is very hard to find an example of one of those big mega mergers that really worked.

Unless the CEO is exceptionally gifted and is able to select a new management team and create a new culture, it simply won’t work. There are many, many examples.

I recently taught a class on the things I have learned in management over 48 years. One of the biggest mistakes made in mergers is that the leadership team spends too much time with the 20 percent of the people who actively oppose the merger. Because 20 percent will actively oppose it, 20 percent will support it, and 60 percent will be indifferent to it. If someone is upset, you need to get them to update their résumé, and get out of there. Or they continue to woo the 20 percent that are already committed. They never pay enough attention to the 60 percent, and they are the ones who are going to make it successful.

We did about 13 deals over the 10 years I was the CEO, and I was always very nervous about acquiring anybody with more than 1,500–2,000 employees. In our case, we did not like put our own people in to run the new company. They would keep their own name and then the bottom of the address would say a State Street Company. They had made their name with a lot of sweat equity over the years, and that is what we were buying. This would only change gradually over a period of years. We bought a company in Kansas City called Investors Fiduciary Trust, about 1,500 people, and they spent a long time building up their IFTC name in the Midwest. We just wanted to keep that.

There are several ways you can do this, and others have followed a different course.
When Bank of Boston merged with Bank of America, Bank of Boston disappeared into a much larger bank. Every branch is another piece of Bank of America .

We didn’t buy Boston Safe Deposit Company in 1992 because we thought if we did it would have destroyed them and their people. The economy was down, and we would have had to lay off too many people to make it work. There are lots of goals beyond pure financial ones.

Financial Reform

In light of the importance of Glass-Steagall, will this be reinstated as a part of the financial reform?

It never saw the light of day. Restriction on the product line for big banks? Never was considered. We would like to see something to regulate trading on exchanges, to make it clear how big some of these transactions are, but that is gone as well. I think the issues are beyond Congress’ ability to understand. I am a little bit like the comedian Lily Tomlin! I try not to be skeptical, but it is hard to keep up.

Today we have nine banking agencies, nine different regulators, a couple of them going back to the Civil War. We hope there will be a change in the way licensing is done, because today a license is given by the agency that that has primary responsibility for the company, rather than given for the function the company performs. For example, AIG had a thrift bank. So they were regulated by the Office of Thrift Supervision. They were not even touched by the SEC and here they are creating these thousands and thousands of securitized CDSs. So, we think if you are creating a security, you should be regulated by the SEC. It has not been that way.

Is it politically possible to build legislation that will address the key issues?

I think it is going to be very, very loosely worded. That’s why we got in trouble with Sarbanes-Oxley. The dreaded section 404 is only 16 lines long. The SEC issued no guidance and the Public Company Accounting Board issued no guidance. After Arthur Andersen went down, the other so called final-four accounting firms went to “zero defects” to protect themselves.

Do you remember the last time Congress voted as a unified body? In 1961, the National Football League decreed that even if the stadium was sold out, you have to go 100 miles away to watch the game on TV. Congress rose up as a body and defeated this 535 to 2. That was the last time congress voted as a unified body.

Too many in the legislature simply want to say no to everything rather than build something and deal with the compromises that must go into that.

In the old days senators would fight for their position on the floor, but then go have a beer together. That doesn’t happen any more either. There is no social interaction at all. There is an ethical problem here. Instead of trying to do what is right, they seem to be simply trying to carry out the party line.

Now that the legislation has passed, what is your perspective on it?

The final bill, while not perfect, does strengthen our financial system and will provide better systemic-risk oversight, Sarbanes-Oxley reform, and better transparency for derivatives.

Business Reform

In light of all of the breakdown, what should a good business do?

You must start with the change in the composition of boards. It was very significant to me that when a major bank went out to get a new board, they actually advertised on the Internet looking for financial experts. Any CEO now can say “I need functional experts in my business.” If a financial institution brings on someone because of their name, can they really provide guidance on CDOs and other complex instruments? This is where change has to start, although it may be more difficult for a chair or CEO to accomplish diversity on their company’s board.

We also need to split the chairman and the CEO like the British model. Someone recently did a study that found 15 years ago, only 20 percent of CEO candidates would have said it is OK with them if there is a separate CEO. Now, 65 percent of CEO candidates say it is OK with them if there is a separate chairman. A lot of that has come with the changing nature of their company organization. You have the requirement at the top of the company for two major players.

In my case, as the non-executive chair at the NYSE Group, I do some things with Congress and deal with major customers, but the CEO runs the company. Companies need to do this.


What about executive compensation?

I think [executive compensation] is totally out-of-control.

I think it is totally out-of-control. It started in the early 1990s. When I became the CEO at State Street, I was told by the analysts that I had to own five times my after-tax salary in company stock. Options did not count, it had to be direct ownership of stock. But this said that the way you get wealthy is to drive up the stock price as compensation was based on stock awards.

I will tell you the best unintended consequences story I have heard recently. Some of these CEOs have had this macho thing about who had the biggest yacht. One spent over $100,000,000 for his. But when they went to major ports, they couldn’t park with the other boats because of their size. They put them down with the oil tankers where they couldn’t be seen. So these guys are now building smaller boats.

And how does it get reversed?

I think we have got to have say on pay in corporate governance, so that the shareholders will have a view of all those compensation programs.

But the traditional shareholders aren’t there in the same way because of institutional buyers and speculators.

Yes, three-quarters are institutional but they vote according to Risk Metrics and the CII (Council of Institutional Investors) and they are pretty tough on pay. So I think we are moving in the right direction and giving shareholders a voice whether they are institutional or not.

I don’t think these ratios, like the CEO can only earn 20 times the average union wage, can work.

Herman Miller did this for many years, but more recently they stopped because they could no long attract the kind of leaders they were looking for.

That’s right. And some people talk about going to what the Japanese and the Europeans do, but then you need to look at what is meant by compensation. In some countries the CEO gets a a car, an apartment, a vacation home, and none of this is part of the “salary.”

I actually like the old Wall Street way of paying people. Bear Stearns, when they originated this 40 years ago, gave only cash and stock compensation. If you want to join a country club, you join a country club. If you want to drive a Lamborghini, that is your business, but none of these peripheral things were part of the compensation. It only causes trouble. The theory is that you pay people a fair wage and they live their lives outside the firm and pay for it.

Is it greed?

I am not sure that it’s greed. If you have $50 million or $70 million, I don’t think greed is driving you to the next level. Perhaps status. If I am head of a large company and I get the board to allow use of a business jet, which my wife uses to go to Hong Kong and shop, that is very different from a business jet you use to move 20 people every week to St. Louis. The thing is if you are going to use it as a corporate tool, you have to really manage it and it cannot become a perk for the CEO. Where the people have gotten into trouble is when this is a perk for the CEO.

A friend of mine at Washington Mutual was in risk management and raised questions about the loan practices because of the risk. When he asked the questions, he was asked in return, “Are you a part of the team or aren’t you? This is our strategy and you either follow it or you don’t. If you don’t, you can go elsewhere.”

Ethical Issues

What do you think it will take to create real ethical change in business?

I don’t have a real answer to this. It must start in grade school. The values in the schools and the families have deteriorated. The church is no better. Our future leaders must come from a foundation of ethics and trust.
[Real ethical change] must start in grade school. The values in the schools and the families have deteriorated.
In business, the ethical culture of the company is clearly a pattern that is set by the CEO. That is the person who says, “This is the way we are going to operate, and this is the way we are not going to operate.”

Then it goes to the decisions for promotion. If they were not aligned with the ethical commitment, then the ethical commitment does not matter. You send a message to the organization in the way you do promotions. If the person who gets promoted is the one who got the contract by paying bribes for it, and he gets promoted and celebrated, then that is the message that goes out to the organization — that this is what you are supposed to do.

Could you generalize about your perspective on business ethics?

The general impression of the population would be that business ethics have deteriorated over the last few years. It goes beyond The Wall Street Journal list of a few years ago of 16 American companies that had ethical or accounting problems. The second part of that is that people on Main Street believe that these big financial institutions are restricting loans and sometimes acting in their own interests. Look at how these big companies have had to make public statements saying that the customer still comes first.

I think Main Street is saying, “You have to prove it to me.”

The focus right now is more on risk than it is on ethics. I do not see a lot of companies launching ethical programs to reboot their ethics, but I do see them launching a lot of risk programs so that they have a better view of what the risk is in their products and in their operations. A lot of these products fall between trading risk, market risk, and product risk. So, it was not clear that there was a good sense of responsibility for this or that product. You could say that is defensive ethics, only doing it to avoid regulations to stay out of trouble. It is not clear they are trying to do the right thing.

When I was at Chase, there was a period when I was trying to move from staff jobs to line jobs and I had to serve a couple of years as a corporate risk officer. Audit was interesting. The ratings were 1,2,3,4, and the highest ranking was only satisfactory. Others were “needs improvement, needs lots of improvement, and unsatisfactory.” If you got an unsatisfactory, then you had a monthly meeting with CEO and the risk council and you became the business unit manager of the month., acronym BUM. That got through. We were able to go from 30-40 percent bad audits to practically none because you have this whole management saying what gets measured gets done.

What does this mean for the person in the organization caught in such issues?

You can be ethical in business but sometimes you may need to move to a different company.
I have been asked this a lot. The underlying question is this: Can you be in business and be ethical? And how can you meet the ethical challenge at whatever level you work? My response is, you can be ethical in business but sometimes you may need to move to a different company.

I often talk with college students, giving them real issues to think about. Here are two examples:

It’s two minutes after 4 p.m., and you are working in a mutual fund company. Your supervisor comes with a stack of trades and says these are from our biggest customer. He tells you that your clock is wrong and you need to enter this trade before 4 o’clock. That’s illegal, since he is asking you to backdate them. What do you do?

One of my favorite cases comes from a major university. You are a young researcher and the president is getting married on campus. You are told to add $10,000 to your research grant for corporate overhead. He was trying to get the grant to pay for his wedding. A real case. I think the president got fired for that.

Let me ask you a question. Do you think the ethical line is being moved? Do we put up with things that our grandparents would not have accepted?

Without a doubt. This happens in the broader society, but it also happens to each of us unless we establish a foundation for our values that we check regularly. The auditor of Enron from Arthur Andersen made the comment that he had given in on one small point, then another, then another, until he was surprised at where he was six months later. He had lost a large battle an inch at a time.

The new dean of the business school at Harvard, Nitin Nohria, talked about this recently. His thesis is that what started out as a profession of business never really took hold. So business is not a profession as so many of us believe it should be. He argued that we are now at one of those inflection points, where we must consider a different path. Rakesh Khurana developed this as well in his wonderful book, From Higher Aims to Hired Hands.

Unfortunately, it is not just business dealing with ethical challenges. The New York Times recently [July 17, 2008] ran a story on the continued problems at the American Red Cross. While providing 43 percent of the blood supply for America, they continue to have problems in getting it right after repeated fines and warnings.

Look at the widespread falsification of papers at educational institutions. So, I am not convinced that the ethical role blow-off in this country is just business. Business makes the headlines because of the high money value of some of these choices. Blankfein [Goldman Sachs CEO Lloyd Blankfein] made headlines recently when he claimed, “They came to buy risk and they found risk. We delivered. I was doing God’s work.” The absurdity makes headlines, but I am not convinced it is just business that is the culprit here. Perhaps the unique issue for business is the money factor, taking people’s life savings.

Corporate Social Responsibility

Video of Marshall Carter
Watch Marshall Carter speaking about business ethics and corporate social responsibility

Some are trying to morph themselves over into this new field called corporate social responsibility, trying to get out ahead of the problems. Rather than respond to a TV report that somebody identified a child in your factory in Nicaragua, you don’t have to put a plant in Nicaragua. You think about why you are going to put the plant there. Look at what Nike had to deal with in their Vietnam plants. They had to go totally on the defensive. So, the question is: Should they have thought about that well before they put a plant in Vietnam?

This whole corporate social responsibility area is very new. There is a corporate responsibility officers association where I gave a talk recently. People are taking the Social out of it now and they are just saying corporate responsibility. This deals with everything from where you put your plants to what you do with paper. Some people are really skeptical about this green movement. When GE started the “eco imagination thing” which is very clever, but the question is, is GE really committed to that or is it just marketing? I think they are really committed!

Green washing is what they call it when it is simply a marketing program.

Yes. I got a letter from my local insurance guy that says, “We are going green!” I don’t even know what that means.


It seems that some leaders get caught up with what is in it for them. How do you keep your head as a leader?

That’s right. When you are successful as a CEO it is really hard to keep your feet on the ground. You have got to do a lot of management by walking around, talking to the different employees, getting many different views — even negative ones.

Because I have been a pilot for almost 25 years now, I keep my plane down at a little airport. They do not really know who I am, just another guy with an airplane. I talk with the guys in the hanger, the guys pumping gas, and you can connect with real people. A lot of these CEOs are isolated. They only see other CEOs. I have never once gone to one of these CEO things over the weekend because I want to avoid that isolation factor. They’ll throw me out of my club!

You said that you had tried to connect with people, but what else did you do?

I think you have to clearly set out what our ethical standards were. And we had to live these by example. I once interviewed a person from a major competitor for a position of senior vice president in the credit-and-risk area. He arrived with the competitor’s strategic plan. So the question is, “Is this lucky intelligence or is the guy stealing?” I viewed it as stealing and we didn’t hire the person. I would make examples of things we didn’t do.

Do you communicate the rationale to the people your company?

Yes. You have to do that. You have to be visible in these things. For example, every year we would track salaries with four or five companies through an independent firm. That’s routine now. This information became public knowledge and was communicated through the SEC. I would meet with my communications people and say, “I give half my salary to charity, and here is the list of the charities. When The Boston Globe calls and somebody wants to make a big deal out of the fact that I am making $950,000 a year and I got $10 million in stock, you tell them that I have just pledged $7 million to the Boston Medical Center.” With The Herald and The New York Times, that diffuses the issue, but the Globe just did not put it in. I guess they decided there was no story there.

We did not have a corporate jet; we just didn’t do a lot of that kind of stuff. State Street is a Fortune 500 company, so it is a big company. It is that old trite thing; you have to walk the talk.

Advice for Leaders

What advice would you offer to a new CEO at a bank today?

… you don’t want any of your friends on the board.The first thing I would say is, you don’t want any of your friends on the board. I learned this the hard way. I was initially upset when I was appointed CEO. One of my board members, the CEO of Polaroid, Mac Booth, pulled me aside after the board meeting and in a very friendly way he said, “Now Marsh, just so you are clear, you do not have any authority to add anybody to this board. You may give me a few names if you want and we will consider them, but you have no authority to offer a position on this board because they might have to be tough.” That is why they are here.

You look at some of the famous cases when board members were friends of the CEO or were under contracting to the company. They couldn’t be tough. So I have never had anybody on the board that I ever even knew before. So I think this is No. 1. As a CEO you need that independent voice.

Maintaining this independence of the board is difficult, isn’t it? After a time on the board you build a relationship with the board members that can lead to a friendship.

In a big company like ours, we really did not have much social interaction with the board. Manufacturing can be very different from service. In manufacturing, you may be the biggest company in town in some small town in Arkansas or Washington. A board meeting can take on more of a social environment. In the service industry, we see customers all week. The last thing we want to do is have some social obligation over the weekend.

No. 2, you must put very strong risk metrics in place. You have got to look very closely at what is off the balance sheet. Every company has stuff off the balance sheet. Enron had lots, the whole thing was off balance sheet! Enron even had a fake trading floor. They had all the computers and all of the people, but they were not hooked up to anything. They were showing investors their trading floor, but they were not actually trading. How did that happen?

Sadly, this kind of deception goes on too often.

I recall a startup company that rented a warehouse, brought in desks, people, and phones, and brought potential investors in to see their messy business!

When we joined a country club here, we had to be visited by some couples from the club to make sure we were acceptable. We heard that one person had wanted to make a good impression on the interview team, and he hired a woman to act as his wife! The level of deception people are willing to go to is amazing.

Beyond careful oversight, you have to make public, to the extent that you can legally, any violation of ethics in the company. Openness and transparency, are vitally important to running a business.

Regardless of the details, the biggest thing you have to do is set the example, in companies big or small. People look up to the leader. At GE, for example, everyone in the company knows who Jeff Immelt is, so his words and his actions really count. He is the leader, and his actions and attitudes really matter.

How do you make sure that you get good feedback? Isn’t there a danger that when people are looking up to you they will tell you what you want to hear?

Let me tell you how I tried to do this at State Street, where we had about 22,000 employees and a large number of customers. I would try to build relationships in my own organization three or four levels below my direct reports.

Here is an example: I went to call on the pension fund of Alaska (a big business for us), with a woman vice president who was the account manager. She was married and had a family. But one time we got snowed in for two days with about 4 feet of snow. In Juneau, Alaska, once you have been to Wal-Mart there was nothing else to do. So we talked about the company, about customers, about deals. For the next five years when I wanted to know what was really going on there, I would call her, though she was about four levels below my position in the organization.

My direct reports knew that when I called one of their subordinates, I was never checking on them. I made it very clear. I said when I call Jane Dow about the California personnel system, that is all I want to talk about. I do not want to talk about how you guys are doing. You need to make it very clear that you seek information, but you have to be very careful. If you say to that young VP, “I am a little up in the air about our strategy in Europe,” they might tell others that the CEO doesn’t know about our strategy in Europe. You have to be very, very careful about how you portray your own question.

Acting on “Walking Around” Insight

I spent a lot of time managing by walking around. The trick about managing by walking around is what you do with the information. I remember walking into a large area with an ancient fax machine, and I asked the people what they thought about the state of their technology. They would then tell me about the ancient fax machine, the outmoded computers, the one-line telephones, etc. So, what I would never do is go back and call the boss of the unit and say, “ You guys have really screwed up down there.” Rather, I would call in my chief technology officer and say, “Take 10 days — survey across the whole company. What is our fax technology status, because I understand that you can now send a fax from your computer?”

When I found out stuff by walking around I used it generically, not specifically. If you use it specifically, the next time you go there, nobody looks at you because you got them in trouble the last time. Managing by walking around is a magnificent technique, but you have to know how to use it.

This television program, “Undercover CEO,” is great but that’s the one place that makes me a little uncomfortable. When the CEO meets with someone and they have a certain issue, then he solves that issue directly. This gets other people ticked off because he solved one person’s problem and not theirs.

But sometimes, as the program illustrated, you find things that you thought had been solved. You issue a policy and think it is done, but by wandering around you might find it has never been implemented.

Leadership Principles

There is a level in the company where knowledge is power, and knowledge does not get passed down below this certain level. I have also observed that all the leadership books have about 18 things you are supposed to do.

There are only three that are really important:

1. Technical competence, know what your business and job are about.

2. Adaptability, because everything changes in six to 18 months now.

3. The ability to communicate.

I think those are the three leadership traits that every leader needs. My tenure as CEO was 10 years, which is very long by today’s standards. But the reason people don’t last long now is it is really a 24/7 assignment. Even the CFO can call you at 2 in the morning and pass a problem up to you.

Why 24/7? Has the world become so much more complex?

I think that is right. A company like State Street is doing business in 96 countries. When a squirrel gets into the power supply in a power plant in Australia and shorts the wires — and your biggest customer in Asia is having a trustees meeting and can’t get the signal on their terminals — you get a call. This actually happened. We didn’t have time to care about the squirrel! And everybody wants instant solutions.

Dealing With Different Cultures

Are people prepared for the breadth of this challenge? I am not just talking about 24/7, but around the world, in different cultures, etc.

We do not prepare people very well cross-culturally in American business in general. There was an executive who was running one of our big product areas when we first merged with the Europeans. The executive was from the Midwest and seemed to have a grasp of the cross-cultural issues. Half of the team is from Europe. In a brief one day, the executive said, “If somebody is misbehaving or acting poorly, I immediately try to sort out, is this cultural, is the person a jerk, is there some hidden agenda?” That perception is fairly unusual. For example, in the early years of the Internet, it took me a few years to figure out one of the reason why Europeans of our educational status didn’t answer emails. It was because they believed that answering an email was clerical work.

These cultural differences will influence ethical issues as well.

That’s right. In fact, if we go back 25 years, stockbrokers in some countries could front run trades. That’s illegal here. So does that mean you need a global norm? Maybe focusing on that is the wrong thing to do. Instead, maybe if you build this team of people from 10 countries and you say this is the objective, this is the plan to get there, and you build it around that as opposed to saying this is ethical training.


Where did your foundation for ethics come from?

For me it was the military, especially at West Point. I went into West Point the week after graduating high school when I was 18. There are a couple of things about military training. One is you get ethical instructions early. Second, the penalty for poor ethics in the military is much higher than any place else because people are going to get killed or wounded if a person in combat submits a false report. You get very early that you do not lie, cheat, steal, or that kind of thing. You are in a very open environment. You get an infusion of that when you are very young, which you may not get in other colleges.

4 thoughts on “Marshall Carter: Making Sense of the Financial Mess”

  1. I had a pleasure to work with Mr. Carter while at Chase on two assignments: Global Credit Lines and Global custody. I was impressed by his leadership on our first one on one meeting at Chase Plaza.

  2. As a long time member of the NYSE ,and now stockholder, I am ashamed to say how little I know of Mr Carter.After reading this interview, I am totally impressed not only with his background and experience, but with his ability to express himself and his thought process and conclusions. I am extremely happy he’s on our team.

  3. Thomas S. Caldwell

    I got to know Marsh during the pre ipo days of the NYSE. As the second largest owner (49 Seats) of the NYSE, I appreciated his clarity, integrity and basic understanding of what was important. Behind the headlines of the time was Marsh Carter’s critical guidance.

    A straight up individual, who it has been my priviledge to know.

  4. This is a fascinating interview!
    Several points stood out, but this one below has similarities to political parties, independents, polling, etc.

    “One of the biggest mistakes made in mergers is that the leadership team spends too much time… with the 20 percent of the people who actively oppose the merger. Because 20 percent will actively oppose it, 20 percent will support it, and 60 percent will be indifferent to it. If someone is upset, you need to get them to update their résumé, and get out of there. Or they continue to woo the 20 percent that are already committed. They never pay enough attention to the 60 percent, and they are the ones who are going to make it successful.”

    In politics, overemphasized by media, we hear the 20%s a lot from both sides (or multiple sides), but there is that pesky group in the middle who’d like to see a little competence, and priority given to solutions.

    I also liked the observation about CEO’s big yachts having to be parked down with the oil tankers …

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