Entrepreneurial Leader: A Lifetime of Adventures in Business, Education, and Government

Authors

Preface

An autobiography or a memoir should be the easiest of art forms to produce. After all, what could be simpler or more interesting than writing about yourself? Most serious-minded people, however, do not want to create something boring, unrevealing, or self-important. Successful people do not want a chronicle of their lives to be a flop. So the pressure is on to be compelling and enlightening about people, events, and self while being fair, honest, and at least somewhat discreet.

I suppose most people who’ve lived an eventful life ultimately find themselves looking backward, reflecting on the momentous changes they’ve witnessed, the memorable people they’ve encountered, and the challenges they’ve confronted—and they begin to think about what difference it has made.

That has finally happened to me—perhaps a bit later in my case than in many others, simply because I have remained professionally active into my mid-eighties, so that it’s only recently that I’ve begun to ponder it all. It has been an enjoyable and varied life, one that has afforded me a range of exciting opportunities in all three sectors of our economy—corporate, government, and nonprofit. Glancing back on the story gave me the impetus to write this book.

But I didn’t want to write a book simply to record what happened. Still less did I want to settle old scores, grind some personal political ax, or burnish my own reputation. Instead, my goal is to offer some insights into the lessons of my life and work—insights that others active in the intersecting worlds of business, education, and government and their impact on the larger society might find interesting and useful.

I’ve become convinced that entrepreneurial leadership, and the management methods, structures, and incentives that go along with it, are profoundly relevant to the success of every sort of organization. Consequently, I find I have tried to apply the concept of entrepreneurial leadership to every major challenge in my professional life. As a result, I’ve often experienced significant success, while occasionally suffering failure, frustration, even heartbreak, when I either failed to live up to the mission or, in a few cases, pushed up against the limits of what entrepreneurial leadership can do.

It all began in 1959, when, with a pair of talented friends and partners named Dan Lufkin and Dick Jenrette, I helped launch the first major new Wall Street investment firm in decades—Donaldson, Lufkin & Jenrette (DLJ)—which revolutionized the profession of investment research, grew into one of the most respected firms in finance and the place where it seemed most everyone in the industry wanted to work, and then defied the rules of the New York Stock Exchange to become the first company of its kind to become a listed public company on that exchange.

Pursuing a lifelong ambition, I then took a leap into public service, joining Henry Kissinger’s State Department as an undersecretary of state. After that, I served as transition advisor to New York Governor-elect Hugh Carey and later as a special assistant and counsel to Vice President Nelson Rockefeller.

In 1975, I became the founding dean and a tenured professor at the new Yale School of Management, helping to launch an innovative professional school that addressed the complex management needs of a world in which business, government, and the nonprofit sector are intimately entwined. I tested the waters for a gubernatorial candidacy in New York before deciding, as the filing deadline loomed, that the inevitable fundraising and stump speeches part of politics wasn’t for me.

I served as chairman and chief executive of the New York Stock Exchange, shepherding that venerable institution through one of the most tumultuous times in its history, and sought to prepare it for a new era of global competition among marketplaces.

At an age when many men and women are decreasing their professional involvements, I was asked to spearhead a turnaround at Aetna, the giant insurance company, which was facing significant business and management turmoil. As CEO, I helped reorganize the business and recruited an outstanding team to transform Aetna from an industry laggard into one of the nation’s most respected companies.

And then, when the financial world suffered a massive loss of public confidence in the wake of the Enron and WorldCom scandals, President George W. Bush asked me, at the age of 72, to take over as chairman of the SEC, the national agency charged with investor protection and regulation of the securities markets. Assisted by a group of remarkable colleagues, including a key senior leadership team recruited externally, I helped to reform the agency and restore a sense of integrity to the financial industry—battling political opponents and selfserving industry insiders all the way.

As you can imagine, it all amounts to a stimulating series of adventures—most of them gratifying and successful, a few of them frustrating setbacks—with more than a handful of dramatic episodes and a cast of characters that includes many of our era’s most notable leaders, from the era of Dwight D. Eisenhower to that of Barack Obama. I suppose this is why friends, family, and colleagues have long been urging me to tell the whole story in a book—which has emerged as the volume you hold in your hands.

It has been gratifying, as I have worked on gathering the threads of my experience and recounting the story as fully as possible, to have the opportunity to reflect on my own motivations and to examine the origins of my deep-seated instinct to tackle all manner of professional and personal challenges.

I’ve been thinking about the part that entrepreneurial leadership has played in my life for a long time. Back in 1975, while serving as dean at the new graduate school of management at Yale University, I had the opportunity to teach a class in entrepreneurial leadership. I recently dug out my old class outline and was pleasantly surprised to find that much of it remains topical and relevant today. I invited a number of notable entrepreneurial leaders to address the students, from Fred Smith, the founder of Federal Express, to Robert McNamara, the Ford Motor Company president who went on to head the Department of Defense and the World Bank. Along with the students, I learned a great deal from the observations and experiences of these leaders.

This book is based on the main concepts I presented to those students, updated for today’s audiences and illustrated with stories and experiences from my own life and work as well as from the careers of leaders I’ve known and admired. I’ll describe both the successes and the failures I’ve experienced—because I’ve learned that both success and failure can be deeply revealing of a person’s character and of important truths about the world and about the challenges of leadership.

Having lived through my share of ups and downs in a career of more than sixty years, today I’m more certain than ever that entrepreneurial leadership as I envision it is the key to the potential revitalization of the institutions and organizations of our great nation. Perhaps some of the observations I’ll share in this book can help stimulate the quest for such revitalization. At the same time, I hope to offer some insight and inspiration both to current leaders and to a rising generation of young people who are searching for ways to apply their own entrepreneurial instincts to the profound challenges of today. If my book finds its way into their hands—and perhaps motivates a few of these leaders of tomorrow to strike out in new and exciting ways, launching the prosperity-building businesses, the world-transforming nonprofits, and the innovative public initiatives that will help to revitalize our society—I’ll consider it truly successful.

William H. Donaldson

New York City

October 2018

CHAPTER 1

Earthquake on Wall Street:

When DLJ Went Public

It was late afternoon on May 20, 1969, when Dan Lufkin, Dick Jenrette, and I met to sign off on the papers that we and our advisors had just completed. It was a momentous occasion for us. After months of plotting among the three of us, our underwriters, and several teams of lawyers, these papers would begin the process of enabling our hoped-for initial public offering (IPO) of equity in Donaldson, Lufkin & Jenrette (DLJ), the investment firm we’d jointly founded some ten years earlier.

Going public is a big event in the life of any corporation. The IPOs of famous businesses like Google and Facebook garner headlines around the world, create the financial basis for future growth, and excite millions with the possibility of untold wealth to be gained from owning part of a great, growing enterprise. But this IPO was no ordinary story of business success. Launching it would be a controversial decision that flew in the face of practices that had lasted generations.

DLJ was a member firm of the New York Stock Exchange (NYSE)—and such firms were forbidden by the rules of the Exchange to access public equity capital through a stock offering. Technically, the rules stated that the Exchange’s board of governors had to approve any new partner or shareholder in a member firm. But this in effect meant that public ownership was impossible—after all, how could the board of governors rule on the eligibility and appropriateness of, say, ten thousand individuals buying shares of a member company?

This rule reflected the long-standing culture of Wall Street. Many felt the NYSE had long been run as a kind of private club, with a strict though unwritten code of conduct that was even more important than the written rules. And because the Exchange was viewed as having a sacred public trust as gatekeepers of the world of high finance, the leaders of the Exchange believed it was their responsibility to ensure that dishonest operators were kept as far away as possible. History shows, of course, that the powers that be had often failed in this responsibility. Scams and deceptions have been a part of stock market lore and legend for as long as the market itself has existed.

Still, the members of the board of governors took their role as gatekeepers seriously. And they believed that keeping member firms privately owned was the best way—perhaps the only way—to prevent criminals and other unscrupulous types from taking over the firms and owning seats on the Exchange.

Admittedly, there were also some more self-serving motives behind the long-standing rule against public ownership of Exchange member firms. There was the fear that some of the big financial institutions, who were major customers of the stock exchange member firms, would buy seats on the Exchange if they could and therefore would no longer need the services of long-standing member firms to buy and sell shares of stock for them. Combine this sort of self-protective instinct (what my partner Dick Jenrette called, with a smile, the Exchange’s enlightened protectionism) with the high-minded rationale that you are guarding the integrity of the markets, and you have a powerful combination of reasons for the Exchange to cling to its rule against its members going public.

But by 1969, there were plenty of signs that the rule was on its last legs. And now the three of us—the young innovators who’d founded DLJ with the avowed intention of shaking up the old ways of Wall Street—were poised to knock it down.

Why now? And why us? There were many reasons.

The most compelling reason was the spreading atmosphere of fear and even chaos on Wall Street. During the previous year, there had been extreme volatility in the U.S. equity markets compounded by record-breaking volume on the NYSE. The trading frenzy that resulted had led to something called the paperwork crisis—an expression that seems almost incomprehensible from today’s vantage point, in a world where vast quantities of financial information are stored and shared via pixels that span the globe in nanoseconds. In the late 1960s, back offices charged with processing trades had become so backlogged that the Exchange had actually been forced to close for a number of hours each week to allow the documentation to catch up with the volume of transactions. Partly as a result of these problems, the prolonged bull market of the 1960s had turned bearish, and dozens of brokerage firms actually shut their doors as investors fled the market.

What did the paperwork crisis have to do with our going public? The problems plaguing financial firms, remarkably enough, were fundamentally due to lack of capital. Nearly all the firms on Wall Street at that time were partnerships; their ownership was split up among the leading employees, and most of that equity was divided and distributed at the end of every year—cutting up the melon, as the saying goes. (Only a few of the most far-seeing partnerships—Goldman Sachs, for example—would retain a slice of the capital every year for investment.) This meant that most Wall Street firms simply didn’t have the cash they needed to modernize and automate their processing systems—or, if they did, the partners who controlled the capital didn’t care to invest it in that way. Underinvestment by the NYSE and its member firms led directly to the paperwork crisis—and demonstrated the fact that Wall Street was desperately short of capital. One big reason was lack of access to the public equity markets—the markets that channeled capital from investors to the great industrial firms of the day, from General Motors and Procter & Gamble to Westinghouse and IBM.

The paperwork crisis wasn’t the only sign that Wall Street’s way of financing itself was hopelessly outdated. Another was the rise of the so-called block placement business. This was the practice of asking investment firms to buy and hold large amounts of stock that an institutional client wanted to sell, but which the market couldn’t profitably absorb all at once. Buying and holding, say, a million shares of stock pending the arrival of favorable market conditions took a lot of capital, far more than could be mustered by a traditional Wall Street partnership, where capital was effectively liquidated by distribution among the partners at the end of every year.

For a speech I delivered back in 1969, as the shortage of capital on Wall Street became more and more acute, I pulled together a couple of statistics that illustrated the nature of the capital crisis. First, I compared the growth in capital of the hundred biggest stock exchange member firms to the growth in stock transactions by the country’s major institutional investors—pension funds, insurance funds, mutual funds, and endowments—which themselves were undergoing explosive growth. I noted that, over the previous ten years, the volume of transactions had grown 2.5 times as fast as the capital possessed by the biggest Wall Street firms.

In other words, the business was growing much faster than the companies that were supposed to conduct that business. No wonder those companies weren’t keeping up!

Second, I calculated the average age of the owners of that Wall Street capital. The data revealed that about 60 percent of the capital on Wall Street was owned by partners or officers over 60 years of age—and 75 percent was owned by people over 55 years of age.

It didn’t take a genius to note that older people weren’t likely to want to invest a lot of their capital in the long-term growth needs of their firms. These men (and at the time they were virtually all men) were thinking about retirement, not about building businesses for the coming decades.

Statistics like these made it clear why there was a desperate capital shortage on Wall Street. The problem was, in part, a generational one. And that’s why the three of us running DLJ were determined to do something about it. Dick Jenrette, Dan Lufkin, and I represented a new wave on Wall Street. I was just 38 years old at the time, and Dick and Dan were close to me in age. We sensed it was time to act—to put the financial industry on a sound footing for the final years of the twentieth century—even if that meant challenging some rules and shaking up the status quo.

We weren’t the first people to point out that Wall Street needed access to more capital. Back in 1964, a commission had studied the issue on behalf of the Exchange and reached similar conclusions—but nothing had been done. (Blame the traditional Wall Street culture and the conservative practices of those who ran the Exchange.) Now it was time to force the issue. Shattering the rules of the stock exchange by going public wouldn’t be the first time DLJ had flown against convention. In fact, DLJ was widely recognized on Wall Street as a firm that had repeatedly questioned the status quo.

When we’d opened our doors back in 1959—three guys in our late twenties supported by funds we’d raised from a bunch of college friends and others willing to take a flier on us—we’d been the first new firm founded on Wall Street in decades. We proceeded to revolutionize the field of investment research by developing detailed, in-depth analysis in the form of lengthy reports on companies we believed in, based on extensive shoeleather reporting, customer and supplier interviews, and other investigative techniques like those an independent consulting firm might employ rather than merely reprinting financial statements provided by the firms themselves. We were among the first to direct investor attention away from the Nifty Fifty giant firms that had dominated the world of investing in the 1950s and toward the often smaller, innovative companies that would fuel economic growth in the decade of the 1960s and beyond.

DLJ pioneered in recognizing and servicing the rapidly expanding world of institutional investors—pension funds, college endowments, insurance companies, and others who were desperate for innovative but soundly researched ideas about where to invest their increasingly vast financial holdings. And we instituted managerial methods that were unusual in those days, especially for Wall Street: recruiting new employees not just by seeking people with business and financial experience, but also by seeking out the brightest young graduates from the leading business schools the way the greatest industrial corporations did; basing a team member’s annual compensation on 360-degree feedback from clients, supervisors, peers, colleagues, and direct reports rather than on cronyism or favoritism; giving women prominent and responsible positions in research and investment management; and even making having fun one of our published corporate goals.

So we at DLJ were comfortable playing the role of iconoclasts. We’d been doing it for a decade.

We also had our own, specific reasons for wanting to pursue a public share offering. We needed capital to enhance our ability to strengthen our brokerage execution operations as well as to invest in new businesses. We were great believers in diversification. We’d already moved from our original perch as an investment research firm and brokerage house into such allied fields as investment management, private equity investments, real estate, and venture capital, all building on our expertise at in-depth analysis. We’d even bought the famous Lou Harris polling firm as a way of bolstering our research capabilities. Now we had still other plans for diversification—but they all required capital.

Going public was something I’d long believed in. In fact, a decade earlier, when Dick, Dan, and I had launched the firm, I’d predicted that someday we’d want to become a publicly traded firm, and that eventually this would be the norm on Wall Street. After all, financial firms like ours made money recommending and selling shares of other businesses and touting the virtues of a public market for corporate ownership; why would we believe in the value of public ownership for everyone except ourselves? Our belief in public ownership and our quiet assumption that someday we would follow this path was one of the reasons we’d always published an annual report about our operations, results, and business strategies, even when we were privately held and therefore were not required to do so by any rule or regulation. Issuing this report was a way of expanding the public reach of our ideas and our activities. It also was one of the factors shaping our business strategy: We always sought to manage the firm with an emphasis on increasing its overall long-term value rather than on paying high salaries or bonuses to the top executives (including the three founders).

DLJ, in a sense, had always thought and behaved like our image of a well-run public company. Now we were finally ready to make that image a reality.

* * *

The decision process and the complicated preparations for the move had been under way for over a year, with all the deliberation and debate among our small leadership group that might be expected in contemplation of such a precedentshattering decision.

We picked First Boston as our underwriter. This was a prominent investment bank that was a top-flight underwriter of new securities. What’s more, First Boston was itself publicly traded, and therefore, under the existing rules, could not be a member of the NYSE. The folks at First Boston would have loved to get a seat on the Exchange themselves, and so they were sympathetic to our quest. Together we selected the prominent law firm of Sullivan & Cromwell to represent us. All three firms worked on our IPO plans in the utmost secrecy, keeping the information as closely held as possible. Within DLJ, we three partners of course were privy to the plans, but only a small handful of others knew about them. It was much the same at First Boston and Sullivan & Cromwell. Given the fact that plenty of powerful people on Wall Street would be shocked and appalled—and feel personally threatened—by our move, we knew it was essential to keep the details absolutely secret until we were ready to reveal them at the right time. Any advance leaks could have made it easier for the opposition to marshal its counterattack and possibly derail our effort.

Among other crucial decisions, we agreed that no one at DLJ would sell shares we owned in the public offering. Our goal in going public was not to allow any of us to cash in on the value of the company. Rather, it was to raise the new capital we needed to promote the growth of our firm and enable it to meet the rapidly expanding demands of our customers and the markets. We made the decision to forgo selling any shares in order to clarify our long-term commitment to DLJ in the minds of the public. No one would be able to point to one of us selling his shares and say, Look, the guys at DLJ are bailing out—that’s the whole reason they went public in the first place!

On May 20, 1969, the decision had been made and the legal and other preparations were completed: The SEC paperwork had been filled out, the official announcements for the press had been drafted, and the prospectus had been written. These documents reflected the facts that DLJ had enjoyed an unbroken track record of increasing revenues and rising profits, and that we boasted a stellar 50 percent rate of return on capital invested—a financial state of health of which we were justly proud.

Now we faced the issue of timing. We wanted to file our papers as quickly as possible to preclude any leaks. But by coincidence, the very next day would mark the first meeting of the newly constituted board of governors of the