September 19, 2005
Wall Street's Catch-22
By CAREN CHESLER
Lila had a telephone voice that positively purred, so no one at her firm-the New York-based securities arm of a foreign bank-was surprised when she landed what became one of its biggest trading clients over the phone. The client himself was known as a notorious playboy, so no one was surprised when he wanted to meet her in person. For a year, he badgered Lila to come see him in Chicago-a prospect that made her male colleagues shudder, as Lila's appearance in no way matched the sultriness in her voice. The client finally gave the firm an ultimatum: either Lila came to Chicago, or he would yank his business. Lila gave in, and even used her own money to make the trip. After the face-to-face, the client churlishly pulled his business from the firm.
That single act decimated Lila's sales numbers-and slammed her firm's, as well-to the point that her continued employment seemed in doubt, regardless of the blatantly sexist reason behind the tumble. "If she were a guy [with similar numbers], she would have been fired," recalls one of her colleagues. "But she was a woman. They were afraid to fire her. They were afraid she'd sue."
That fear is not uncommon on Wall Street, say sources involved in the hiring and firing process in the securities world. Having been slapped with a couple of costly lawsuits, firms are so afraid of being sued for discrimination that they sometimes handle women and minorities-especially at professional levels-differently than they handle other employees. To be sure, many of the Street's difficulties in this regard are of its own making, as its record in hiring and promoting women and minorities-all the happy talk about diversity aside-is not a good one. Some 53% of employees in the securities world at year-end 2003 were white males, as were 79% of its executives, according to a demographics study by the Securities Industry Association.
Nonetheless, Street managers and human resource departments find themselves mired in a dilemma. They need to hire more women and minorities to meet quotas or internal goals, but they can't officially ask a search firm to send only those candidates, as such a request would be discriminatory. The vast majority of those hires work out fine, but a certain percentage-as in any group-turn out to be underperformers. And therein lies a sticky issue.
Firing white male professionals for underperformance-or almost any reason at all, in some cases-has never been a problem for Street managers (indeed, one CEO of a bulge-bracket firm said in an aside to an IDD reporter in the mid-1990s that he found a senior European banker at his firm to be competent but "really boring"; within months, the banker was gone). But firing the small percentage of female and minority employees who are underperformers, especially at professional levels, can be a big problem.
Sources involved in the process say that Street managers not infrequently give professional minority and female employees who may be underperforming falsely neutral or even positive reviews-what one employment attorney calls "review inflation." That, in turn, directly undermines a firm's primary defense against discrimination lawsuits: documented underperformance. Thus the Catch 22: The firm can fire the underperformer and risk a legal action, with all its nasty publicity, or it can continue to employ someone who would otherwise be fired.
Street managers who give falsely positive reviews put their firm in an indefensible position should the employee file suit later, according to Jay Gaines, president of New York-based retained search firm Jay Gaines & Co. "If the firm gives the employee a good review and then gives them comparably lower compensation, it has no legal ground for paying them less. The person can claim my reviews were good,' and the firm is hamstrung," Gaines says. "It's an awkward situation that has to be set up and managed objectively, because employers could be accused of discrimination for the poor review itself."
Kenneth Taber, an employment law attorney with Pillsbury Winthrop Shaw Pittman, says that if one of his firm's Street clients is being sued, he'll ask human resources to go back and pull the employee's reviews. What he finds is that people are reluctant to write down their reviews, and when they do, they don't reveal what they really think about their subordinates, especially when employees have access to the reviews.
"We'll be told by the firm that this person is terrible, and has been terrible for years, but when you go back and look at the formal reviews, what you see is wishy-washy-that's a common scenario," Taber says. "It's a human tendency not to say bad things about people, or to water it down so as not to irreparably damage a working relationship."
At the end of the day, what firms are doing defies logic, says Rod Williams, a consultant with outplacement firm Lee Hecht Harrison in New York. "If you discharge someone, your best defense is to have a paper trail, records showing they were underperforming. It doesn't make sense to not give bad reviews," Williams says.
Regardless of the merits of the individuals involved, two recent cases have ratcheted up the anxiety level on the whole topic of Wall Street's hiring and promotion practices. One was a sex discrimination suit that the Equal Employment Opportunity Commission brought against Morgan Stanley in September 2001, which the firm settled in July 2004 for $54 million. The EEOC claimed there was a pattern of discrimination at Morgan Stanley, alleging that the firm denied promotions to scores of women while less productive men were paid more money.
The suit's lead plaintiff, Allison Schieffelin, painted a picture of a hostile work environment where men made sexist comments and her own clients were brought on firm-sponsored trips to strip clubs, while she and other women at the firm were excluded. Schieffelin was fired in 2000 after complaining about not being promoted to managing director. Just two years earlier, she had earned more than $1.3 million.
The more recent-and perhaps more painful-case was Zubulake vs. UBS. Laura Zubulake, now 44, was an Asia equities saleswoman for UBS who sued the firm for sex bias in August 2001. Zubulake claimed her boss, Matthew Chapin, belittled her publicly and failed to give her important client accounts. Zubulake ultimately complained to the EEOC, and contended she was fired in October 2001 as a consequence. UBS says she was fired because she undermined associates and disobeyed Chapin, who oversaw the Asia equities desk.
The case was notable not just because it went to a jury-most bias complaints are settled, dismissed or resolved through arbitration-but because Zubulake earned only $650,000 a year, yet the jury gave her $9.1 million in actual and a whopping $20.1 million in punitive damages.
"If Wall Street firms needed a reminder of the importance of this issue, the Zubulake case was that reminder," says Pillsbury Winthrop's Taber, who notes that Zubulake represented one of the largest-ever punitive awards on a bias case in New York State. "What it did for everyone on the Street was underscore the kind of potential exposure that can come from this kind of litigation. I don't think anyone considers a $29 million verdict an acceptable cost of doing business."
UBS, for its part, says it does not tolerate discrimination in the workplace and that the claims made were without merit. It plans to appeal. The punitive portion of the $29.2 million judgment is still subject to post-verdict review by the court. "We are disappointed with the verdict rendered by the jury and will seek to have it set aside by the trial judge and, if necessary, the court of appeals," says Kris Kagel, a spokesman for UBS. "We do not agree with the excessive amounts awarded and will demonstrate that the liability and compensatory awards should be reconsidered by the courts and rejected."
Meanwhile, even firms that service Wall Street are feeling the pinch. Morrill Associates, an executive search firm in New York, recently had to fend off a discrimination claim by one of its clients. The gentleman complained to the EEOC that the firm was not sending him out on interviews because of his ethnicity.
"I didn't even know his ethnic background," says Pat Morrill, president of her eponymously-named firm. She says the client wasn't sent on certain interviews simply because he wasn't qualified for those jobs. The EEOC ultimately agreed, but Morrell had to pay thousands of dollars in legal fees to prove its point.
Diversity as defense
One of a firm's main defenses against discrimination is having a diverse workforce. To that end, most firms say they have extensive diversity initiatives in place.
"All of the bulge-bracket firms realize diversity is a huge vulnerability, and if they don't get their diversity recruiting right, they will be in deep, deep trouble," says David Schwartz, a financial services headhunter at Highland Partners in New York.
Firms request a diverse group of candidates in their searches, Schwartz notes, but it's a lot easier to get diversity candidates through at the entry level. "The diversity of the organization is more difficult to implement as you get toward the top," he says.
Another recruiter adds that some firms are solidly behind diversity, but others "think it's a pain in the neck, and they wish they didn't have to deal with it."
Nonetheless, diversity proponents have made headway. Schwartz says there was a time when Wall Street was indeed a white man's world, but that has changed over the last 15 years. "Trading and sales was not very female-friendly, and capital finance and M&A was not very color-friendly. I think that is really a very different situation now," he says.
Schwartz, who worked at Goldman Sachs in London in the 1980s, says things really began to change in the early to mid-1990s after some of the bulge-bracket firms were hit with some high-profile lawsuits. "It changed the way they do business," he says. "Goldman in London in 1986, it was just a different firm. But it lost an important racial discrimination case in 1995, and that really changed the way the firm did a lot of things. Diversity, in terms of employee recruitment and leadership development, became more important."
Wall Street as a whole is making some headway in that regard as well. In 2001, some 81% of all managing directors in the securities industry were white males, but two years later, that figure had tumbled to 76%, according to the SIA (see accompanying charts).
To be fair, a firm looking to diversify its staff faces a quandary from the moment it makes that decision. It's unlawful to ask a recruiter to send only minorities in for a job, just as it is unlawful to ask for only Caucasians. Sometimes recruiters know which firms are actively looking for minority candidates, but they can't even tag the people in their own database as minority or female. If they put a code in there, they are asking for trouble, attorneys say.
But the larger problem may be that firms sometimes do it for the wrong reasons. Employment sources say diversity hires are often made to avoid lawsuits or because the investment bank wants to do business with the federal government, which often requires that a firm have an affirmative action program in place. But such a program does not have a significant effect on a Street firm's bottom line. For that reason, and despite all the rhetoric, diversity is not high on the agenda of most Street firms, according to a human resources official at a big foreign bank on Wall Street.
The truth is, the official adds, the typical Street firm's clients are not that diverse. If they were, investment banks would be falling all over themselves to hire diversity candidates, he adds. "The demographic of their customer base is not that broad," the official says. "It's just not a focus."
In an effort to avoid lawsuits, some firms have created elaborate mechanisms internally to encourage employees to report problems such as discrimination and abuse. The intent is to identify and address problems before they wind up in front of a jury.
In some cases, those problems get resolved. But in others, firms are so litigation-averse that even if problems are identified, their officials are afraid to do anything about them-particularly if it involves firing a woman or minority employee at the professional level.
At one Street firm, a female employee complained she was being abused by her female supervisor. The supervisor, in turn, was documenting performance failures by the female employee. The company had sufficient evidence to terminate the employee for poor performance, and there was no indication of actionable discrimination-given that both employees were women and of similar ages-yet the firm was so concerned about litigation that it was afraid to implement what would have been a "proper dismissal," says employee attorney Taber.
"The fact that she made the complaint protected her in a way that it shouldn't have, because they were so gun-shy about litigation," Taber says.
Indeed, some firms are so concerned about the issue that diversity can be a bigger concern in the firing process than in the hiring process, particularly for firms that are downsizing, some employment experts say. That's because they're particularly vulnerable to lawsuits when they're laying people off. "Everybody who gets downsized thinks they're being discriminated against," says Williams of outplacement firm Lee Hecht.
That's why firms hire companies like his, to help laid-off employees bone up their resume-writing and interviewing skills and get back to work quickly. "They don't want 1,500 disgruntled former employees out there talking to Channel 7 news," Williams says.
Too much discretion?
Alan Johnson, a compensation consultant with Johnson Associates in New York, believes many of Wall Street's legal problems in diversity matters stem from the discretionary nature of bonuses and promotions. There are no clearly delineated pay scales or grades as there are in the public sector. And pay can vary widely, depending on how well a particular business sector is doing. The result is that a Street professional who has been working at Merrill Lynch for 15 years can make anywhere from $300,000 to $5 million, Johnson notes. Even if an individual is making a million dollars, if that individual is female, minority or disabled, he or she can claim "you would have paid me $2 million if I were a white man," Johnson says.
He blames the system. "[Street managers] have gotten themselves into an impossible situation because the money is too big. They may have felt they were being fair, but now, it's impossible to prove that."
Johnson suggests an advocate for the employee, someone who would sit in on the salary negotiations and add a layer of color to the process. That way, he says, not only is the individual better protected, but the firm is as well. Should a jury on down the road hear a discrimination claim on the matter, it won't have to rely on the word of "12 old white guys" to explain how the salary decision was made. "I suggest it all the time, but they're not interested," Johnson says.
In the handful of diversity cases in which he has participated-though on behalf of the Street firms-Johnson says the individuals who brought the suits were clearly devastated and felt victimized. "The lawyers will say to their clients, I've never seen a case where they think so little of you.' And you look at the objective data, and it's clear to a layman that the firm messed up, but it wasn't bias. It may have gotten the pay wrong. But it was just a mistake."
If a firm has harassed or abused an individual, then shame on that firm, Johnson says, but in his estimation, that is usually not the case. Wall Street's yardstick, by his reckoning, is the ability to bring in revenue. Street firms would hire purple people if they could sell bonds, Johnson says.
Copyright © 2005 Investment Dealers' Digest Magazine and SourceMedia, Inc. All Rights Reserved.