Estimated reading time: 4 minutes, 2 seconds

PIMCO’s ‘Bond King’ Departs: How Corporate Succession Gaffes May Have Contributed

It seemed an odd pairing from the get-go. Bill Gross and Mohamed El-Erian.

Gross is the eccentric, sometimes mercurial billionaire bond trader who co-founded Pacific Investment Management Company (PIMCO) with two partners as a unit of Pacific Mutual Life way back in 1971, and built it into an investment behemoth with some $2 trillion of assets under management, as CIO.

El-Erian is the worldly, buttoned-down, Oxford-educated and much younger economist who came from the International Monetary Fund and briefly ran Harvard's endowment, as CEO and co-CIO. Yet, like an unlikely marriage of seeming opposites, the relationship worked – for a time – and PIMCO seemed to have an heir apparent and successor to Gross, its aging monarch.

But "marriage" and business don't always mix, especially when the business takes a hefty hit, as PIMCO and all bond-fund investors did last year. That was when the partnership between Bill Gross, 70 (known on Wall Street as the "Bond King" for his outsized success in building up PIMCO's $232 billion Total Return Fund), and his deputy, Mohamed El-Erian, 55, began to unravel.

When push came to shove – or at least to some nasty shouting matches in front of employees – El-Erian unexpectedly resigned in January of this year, leaving Gross, PIMCO, its clients and shareholders in a state of shock from which they all have yet to recover.

Fast-forward nine months, and Gross was reportedly forced to resign from the firm he built from the ground up after months of rumors of erratic behavior and a loss of confidence by his stakeholders – including PIMCO's current CEO, its executive committee, and its parent company and largest shareholder, German insurance giant Allianz SE.

Gross left to join a drastically smaller investment firm, Janus Capital Group, to manage a bond fund with just a fledgling $13 million in assets, according to Reuters.

Where did they go wrong?

While PIMCO's "break-up" story of its top executives is not unique (we all remember Sandy Weil and Jamie Dimon's failed "father/son" succession plan at Citigroup in the 1990s), a number of factors seem to have been at play here.

One is the perils of having essentially two chief executives serving in tandem – especially when one is the company's long-time founder and whose name is essentially synonymous with the firm's own brand.

Another is the inherent tensions caused by poor performance at any organization. Gross's Total Return Fund lost nearly 2% in 2013 (its first losing year since 1999, coincidentally the year that El-Erian first joined the firm), while investors withdrew some $40 billion from the long-time winner.

Then there's the inevitable playing-out of the "family feud" in the news media – in this case sparked by a rather revealing and unflattering Wall Street Journal article earlier this year in the wake of El-Erian's departure.

No one waiting in the wings

In the final analysis, PIMCO's travails are not atypical in that most successful corporations (with the most to lose) fail to identify a successor or pool of appropriate potential next-generation leadership.

Cosmetics giants (and arch-rivals) Helena Rubinstein and Elizabeth Arden both spent some 50 years building up their respective companies, and both died without giving up effective control or planning for succession. It's almost as if they thought themselves immortal; or that if the firm ceased to exist without them, so be it.

PIMCO's future is somewhat uncertain without either its iconic founder or El-Erian – and no one can say how many investors will jump ship and invest in Gross's fund at Janus.

In fact, a joint study conducted earlier this year by Stanford University's Rock Center for Corporate Governance and the Institute of Executive Development on succession planning and talent development came to some eye-opening conclusions about an overriding lack of preparation on the part of most corporations for CEO and C-suite succession. Among them:

• Less than half of respondents (corporate executives and directors) have a formal succession process in place for key executive positions.
• Only one-quarter of those surveyed could point to an adequate pool of succession candidates for their firm's CEO position.
• Related research has indicated a negative correlation between the length of a company's succession period and its future operating results.

The study, like others before it, points out that corporate boards often feel they can outsource the search for a successor chief executive to an outside recruitment firm – and often do.

The research also makes a compelling argument for companies to put in place a more well-defined, continuous succession plan, which should involve the participation of board members, senior management, and – yes, "support staff" such as human resources. This last point may be the most important takeaway for HR professionals.
Even if it means initiating cultural changes at our organizations – and it very well might, as the Stanford study points out – it's high time that HR took its place at the succession table. Of course, organizations have to first see that the table is set.

Read 4637 times
Rate this item
(0 votes)

Visit other PMG Sites:

PMG360 is committed to protecting the privacy of the personal data we collect from our subscribers/agents/customers/exhibitors and sponsors. On May 25th, the European's GDPR policy will be enforced. Nothing is changing about your current settings or how your information is processed, however, we have made a few changes. We have updated our Privacy Policy and Cookie Policy to make it easier for you to understand what information we collect, how and why we collect it.