Monday, November 10, 2014

PIMCO: A Tale of Many Woes

Long-time rivals of Pacific Investment Management Company (PIMCO) have been tight-lipped all year about the ugly divorce that played out publicly between PIMCO founder Bill Gross and his presumed heir apparent Mohamed El-Erian.  These rivals have been some of the biggest beneficiaries of client money fleeing the firm.  The departure of these two highlights PIMCO’s succession planning failure.  Since their feud became public, the firm has had customer withdrawals totaling hundreds of billions.  Industry experts expect PIMCO undoubtedly will face further redemptions that may further unsettle staff and investors.  What went wrong?

Unresolved tensions between Gross and El-Erian are similar to conflicts encountered by founders and successors throughout the business world, and the escalation of their tensions followed a rather predictable path.  That path was described by sociologist Friedrich Glas as “becoming more entrenched in their positions, forming coalitions, then taking more public action, such as the bickering reported in financial periodicals.” 

These types of outcomes are common among firms that give short shrift to succession planning.  A successful firm attracts top talent, with that new talent expecting the opportunity to succeed its founder.  This talent may come with significant accomplishments of its own and may be or seem impatient to gain control of a company that took the founder significant time to build.  The firm is the founder’s identity, making it difficult for the founder to give up control.  Even as El-Erian left PIMCO, Gross sent out a tweet stating, “I’m ready to go for another 40 years!”  While the tweet may have been sent to instill a sense of confidence to the firm, it may also be perceived as a sign that the founder could not let go of control.

With both Gross and El-Erian gone, PIMCO’s new leadership will undoubtedly lead to a changed corporate culture.  Pension funds, endowments, foundations and consultants will keep a close eye on the new leadership and new culture, and they will look for any prolonged reductions and outflows in firm assets under management.  This turmoil will most assuredly affect portfolio returns.  In addition, when one or more executives leave a firm without the proper preparation, clients frequently withdraw assets.  Investment firms need to ensure that the future leadership is not only capable and has the confidence of clients, but also has been involved in establishing the future direction of the firm and its investment process.

Lesson Learned: Firms should plan ahead because nothing about succession planning is easy.

Michael D. Cathey, CFA
Consulting Principal
NexTier Companies, LLC

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