Scaling Up [S4.E4]: The Ultimate Servant Leader with Ethan Berman, CEO of RiskMetrics (1998-2010)

Ethan is one of the great leaders of our time and has been a deep inspiration to many of TDM's operating principles and beliefs. Jim Collins would call him Level 5, although he'd never describe himself that way. We're honored to have him on Scaling Up to share his story.



Ed (02:41): Ethan, welcome to Scaling Up. This an episode that I and the rest of the TDM team have been looking forward to. We were meant to do this in person in New York City last year, but it’s a treat to be able to do it over Zoom, so thanks for taking the time.

Ethan (02:59): Yeah, my pleasure.

Ed (03:01): One of the joys of interviewing people who are out of the company that they built or that they ran is they have these great reflections that come through just the passage of time and it’s just the joy of the reflections that we’re all keen to hear. And I’m going to pick out some key themes and I think the story of RiskMetrics will emerge through these themes. But maybe to kick us off, give some color to your own journey from playwriting in Paris to being the founder and CEO of a multi-billion-dollar business.

Ethan (03:35): Okay, well that’s a pretty good story. Certainly not one Intended. I majored in theater grew up in the us, moved to Paris, cause Paris a wonderful city and was that sort of starving artist on the left bank with the long hair and the little Garrett and didn’t speak a word of French. So that lasted about a year wrote plays for a year, figured was probably going to need to move back to the US if I was going to make it as a playwright writing in English. So moved to New York, got a job in the mid-eighties and like all sort of theater people was waiting on tables and a friend of mine who was an actor said you can make more money as a temp on Wall Street. This was the go-go years of the late eighties in Wall Street.

Joined the temp agency Tiger Attempts, and it was great because I would write during the day and then I lived in Brooklyn. They would send a car to pick me up, they would buy me dinner, they would drop me off in the copy room and they’d send me home in the black car going home, paid me $18 an hour, I couldn’t believe it. Then JP Morgan, they said you’re the best temp we’ve ever had. I’m not sure what that really meant, but could you just work for us? I said, Well talk to the temp agency. So, they talked to the temp agency, and they asked that I would be always going to JP Morgan. I evolved from the copy room to work in some back-office issues that they had in their trading operation. Then about three months later, a play mine won a contest and I quit my $18 an hour job with dinner and cars was replaced by my $200 stipend for a play that I spent a year and a half writing.

And then six months later JP Morgan called me and said, that problem your had been working on in New York in the back office, we have the same one in Japan in Tokyo. Would you go to Tokyo? And I was single at the time. My play had come and gone and was not a hit. And I said, well, if you’ll pay for the plane ticket, they said, we’ll send you a plane ticket, but you have to become a full-time employee. So that’s how I joined JP Morgan. I went to Tokyo; I slept on a friend’s couch because I didn’t know they would pay for housing. So, I was there for a year and just became obsessed with markets, got to know the traders quite well, started trading government bonds, then was brought back to New York as a trader, got involved in derivatives, got involved in risk management, left JP Morgan twice to go back to right plays, and then it’s the mid-nineties.

And my boss who ran risk for the firm, the person who had started this research project called RiskMetrics left and he asked me to take responsibility for it. And the one thing you learned being at a bank is you don’t want to be a research organization. You don’t want to be a cost center. You want to be a revenue generator. And it was the late nineties and sort of the .com thing was happening. And for the first time I was noticing sort of young kids bright young kids that JP Morgan was trying to fire, were not joining JP Morgan, they were joining this thing called something.com. I talked to them, why didn’t you take the job? Well, they’re giving me stock options. And I’m like, well, what are the stock options? Oh, we got a hundred stock options. So, I got a thousand stock options.

I said, well, do you know how to value a stock option? So, I saw this sort of, the talent pool was moving and were a cost center. I approached the bank about the idea of skiing this research group out of the bank and becoming a separate entity. And that really was the start of, of RiskMetrics with a group of 20 people that I ran at the bank. The other comment I would make is at the time I got all the young kids who were just starting and didn’t have families. So, it was the, as they were referred to by someone, the young immortals these young kids who said, Sure, why not? that was the start of his metrics.

Ed (07:26): Incredible story. I’ve got two sort of follow up thoughts. One is just how rare it is for any business to be spun out of these huge global investment banks, let alone a software company. Were there any impediments to you simply going to the bank and, and saying, I feel as though this should be a revenue driver rather than a cost center?

Ethan (07:52): Well, it’s funny because when I first pitched the idea, the bank sent it to the private equity arm, Morgan Capital. Morgan Capital looked at us and said, this will never work. We’re not interested. Instead, what the pitch became was it was 1998, long term capital had just blown up. It was very bad year for the banks, and everyone was cutting costs. What I said is, you’re going to cut several million of cost out of doing this. They basically figured they could save 2 to 3 million a year by spinning it out. And they only had to put in 5 million of capital. So, they put in 5 million of capital. It was not put in the private equity business, it wasn’t an investment, it was just a line item in corporate and then we had this sort of crazy internet phenomenon and suddenly this little company that I mean now people will laugh, but at the time our big innovation was we sold our software on a subscription basis.

So, in 1998, all our competitors had the traditional model, you buy the software and there’s a 20% annual maintenance. We had this model of you pay every year in annual subscription. So, we were sort of a SaaS business very early and a year later with a million dollars of revenue, they were telling us were worth a hundred million. So, we brought in a very eclectic group of shareholders. This is March of 2000, that was the peak of the.com bubble. We had Intel Proctor and Gamble, Sony, Deutsche Bank, American Express, all make investments in RiskMetrics. And a year later, all the people who made those investments had been fired. So were orphaned. Then in 2002, so several years later, three private equity firms purchased the corporate shareholders. And that’s when I think the growth trajectory of the company and how were sort of governed changed pretty dramatically.

Ed (10:01): There’s so much to dig into here, and I’ll pick out a few themes as we go along. And it’s worth transporting our minds back to the late nineties, as you say, you were one of the first SaaS business. I think Sales force had just kicked off.

Ethan (10:16): Salesforce, we were their pilot client when they did their first conference, the person in our technology group who gave the keynote talking about how we used Salesforce. So pretty good juxtaposition though how successful they were relevant to were, but no, they were just starting out and were the sort of pilot client.

Ed (10:37): Incredible. One thing that does come to mind and we’ll get back to the business, is this creative pursuit of writing plays. And last week we had Howard Lerman on the podcast. He sang operas a kid. Bill Magnuson the week before is in a band still plays the guitar. There’s something about creating a business that is obviously deeply creative in itself. And is there any reflection upon that skillset that you tapped into during that time of really building RiskMetrics?

Ethan (11:15): Interesting question. I certainly hadn’t linked the two before. What I would say now on a personal note is what I found was I did much better working creatively with a group of people than I did on my own. That the sort of playwriting on my own, I was not as successful as sitting around the table and trying to create with a group. I certainly would say that people would, at RiskMetrics would say having a meeting, we would be open to many ideas that it was clearly a creative process. What’s interesting is that as we got bigger, we started needing, and I say this not in a negative term, less creative people. We needed a balance. And it’s funny, many people at RiskMetrics, I think would say always innovating, always coming up with a new way of doing something.

But as we got bigger, it was important for us to have also a culture of a group of people who basically said, I want to do the same thing I did yesterday, only slightly better, and I want to do the next day the same thing I did, only slightly better. So, I’m not that person, I never want to do the same thing twice. So, I’m happy to get to I did this pretty well, now let’s move on to something new. I think there’s other people who just say, I want to get this perfectly. And I think finding that right balance in a company is pretty important. Again, back to sort of the creative aspect, I definitely think that helped me with creating a company that the aspect that I believe is undervalued, certainly from my point of view that isn’t talked about is discipline.

And when I was a playwright in Paris, I lived by myself. I had no deadline, and I wrote 4 to six 6 every single day, every day. And it’s just who I am. As I then evolved to becoming a trader, I don’t think I knew anything more about the markets, but I think what you find about traders is they’re incredibly disciplined and I was incredibly disciplined. And then in starting a company again, I started with this creative and that would be sort of what’s exciting and driving, but I think that that discipline in the back end is really what’s important because without it, I think that the creativity goes too far, and it doesn’t tend to end well.

Ed (13:42): I’ve been lucky enough in my life to be exposed to some very high performing people, and there is no doubt that there is an undercurrent of deep, deep discipline to every single one of them. You can’t achieve anything without it. So that was an interesting call out. As I said, I think the story of RiskMetrics will emerge as we go through a few of these themes, but from sort of 98 to early two thousand, RiskMetrics is one of the fastest software companies in the world. I think zero to a hundred million dollars in five or six years. The role and the life of a CEO is changing dramatically, as you say, 20 people can probably all fit in your office. And then there are these scaling challenges, not only just for the business, but for your role as well. Maybe you can give some insight into how those formative years, how your role changed.

Ethan (14:36): Yeah, I mean, great question. And you started this talking about reflection. And I think that if there’s anything that I now have a perspective on is what it really means to be a CEO of a growth company. And I know the Bill Gates’s and Michael Bells and Jeff Bezos’s are celebrated everywhere because they’ve been so successful. But to be a CEO and to understand how a company scales and the changes of what a CEO has to do to do that, it takes a remarkable person. I mean, these are remarkable people. I mean, and I say I didn’t do it, I couldn’t get to that level. I could get to a certain level, but I can’t even imagine what it takes to continue that kind of scaling. My own story I think is reasonably typical in that were a product company and without being arrogant, I was the best product manager.

I knew the product inside and out. I knew the client use cases, et cetera and I was the best salesperson of that product, and I was the best designer of that product. And that was day one of RiskMetrics. And there was a vision and all that. By the time were a hundred people, I was no longer the best product manager. I mean, I’ll give you one sort of anecdote we’re several years into the company and our chief technology officer said to me I really think we should move our software from a floppy disc to the equivalent of the cloud. It wasn’t called the cloud, but online

Ed (16:07): Internet, yeah.

Ethan (16:09): That was the idea. And I said, I don’t think that’ll ever work because your primary clients were banks, and they have firewalls and they’re never going to download data and upload data and software over the internet because of regulation. The issue went away and six months later he came back to me and said, Listen, I really think this important. I think this where it’s going. And I said,lListen, you don’t believe me. Let’s ask our clients. We’ll go out to our clients. So, we sent out a survey to our clients Do you want this over the internet? Et cetera. And they resoundingly said no. Okay. Six months later, actually it was Norges Bank, the big fund in Norway came to us and said, would you be prepared to do this online? And I’m like, really? And they were a big client of ours, obviously an important client. They said, we’d love to do that, that’s where we’re taking our whole thing. I said, wow, it’s interesting. I don’t know how long it’s going to take us, et cetera.

So, I went back, I was with the client at the time, I went back to the head of technology, and I said hey this, someone’s interested how long would it take to do it? He says, oh, I already did it. They had already written it, so it was already on the cloud before. I mean, they didn’t listen to me anyway. So again, just an example of going from being in charge of the product to not knowing where that goes. And I think sales and clients became important, but the most important change ultimately was I became the head of HR at first. I was slightly, I don’t want to say frustrated, I was worried that was not where I should be spending my time, but I basically said I spent almost all my time on people issues internally, hiring, growth, organization structure, culture, et cetera.

And it dawned me at some point that when you’re in an intellectual capital business, which we are, your primary assets are your people, and therefore as the CEO of the company, you’re ultimately first and most important responsible for that group of people, every person at the company. When were at 75, people reported directly to me. We had no structure and that actually led to a Wall Street Journal article written about us, which then led to a Harvard Business School case written about us. And that case started helping me think through how do you do this? And it was about how do you create structure when you have a CEO who is directly involved in everything, knowing that I was becoming the bottleneck, I was slowing the company down because everything had to go through me. And how do you from my point of view, let go and from another point of view, grow into a management team. And again, there was no one with any management experience, not skill experience when we started. The part of business school case was, do you bring in a quote number two from the outside?

Ed (18:53): We might get onto hiring, firing, and retaining a bit later, but while we’re on your own leadership style, and it was interesting to describe yourself at that point in time as, as a bottleneck to decisions getting made. You were a very consensus driven, very collaborative leader. I think I’ve heard you say three decisions in 11 years that you asked your senior management and didn’t listen to them. And one was around the distribution, the internet. That was a great story of empowering people, evidently for your cto and go and do it in the background despite being told not to. How did that leadership style change? And, and in many ways, you were probably a reluctant leader and how that interacted with your team?

Ethan (00:19:39): Going back to the story of the Wall Street Journal article, the reporter said to me people want a CEO with a big corner office because they want somebody to aspire to, they want someone to look up to. They want to think that that’s where they can take their career. And of course, I didn’t have that. I had this sort of tiny little office in the middle of the floors that were on, and there was nothing grandiose about it. I did not have a personal assistant or anything like that. And it was this sort of image of what a CEO is. And I think that, I mean, it’s not who I am. I would call myself; I’ve been referred to as a reluctant leader. I’m an introvert, not an extrovert, just from a Myers Briggs or whatever term you want to use.

I think that that allowed people to feel that they could make decisions and build it online even when I said, no. On the other hand, there are a handful of times whereas the CEO, you have to make the decision and you have to be firm, and you have to be consistent. Finding that right balance of these are the non-negotiables, for lack of a better term, and then figuring out how do you create consensus with a significantly larger team. When you have 20, it’s one way to get consensus when you have a hundred, it’s a different way of getting consensus. And when you get to over a thousand people, I didn’t know everyone for the first certainly 150 people, interviewed every person who joined the company.

And in fact, not only did Interview them, I would go out to lunch with them four to six weeks after they joined, saying, Okay, what surprised you? What did we do a bad job of coming across an interview process? I did 75 end of year performance reviews. To hire 150 people and then do 150 lunches and all that. That was my time. But that was the key to, I would say more than anything, that was the key to our success. We made some good strategic decisions, we made some bad strategic decisions, we built some good products, we built some bad products, but at the end, we had the right people to get us to where we need to be.

Ed (00:21:53): It sounds like the greatest value creation that you saw as a CEO was making RiskMetrics the employer of choice, not just in the states as you grew, but also around the world as, as your offices popped up. I’m curious around the hiring process and assessing cultural fit. And I know it was something very dear to you, and you touched on interviewing the first hundred people, but what were the key flags that you would look for when hiring even the first hundred, or knowing that you were employing other people to hire people on your behalf?

Ethan (00:22:29): Well, we always had a very strong head of HR, always reported directly to me. I, again, I mentioned Proctor & Gamble became one of our investors. And that was linked to a relationship I had developed with the company when I was at JP Morgan. And through that, I got to know the company quite well and at Proctor & Gamble, the CEO and the head of HR talked every Sunday night about people every Sunday night religiously. And it was about constantly thinking about people. So, for me, having a head of HR direct report to me who really understood what we’re trying to do, that were completely aligned, was crucial. So had a huge amount of influence over the organization. I think that why do you want to work at RiskMetrics or what are you trying to get out of work?

I think we’re a very collaborative group. I remember we had a terrific programmer, a fantastic program, became very successful, wasn’t a team player, and we had to ask him to leave. And he was very successful. I mean, it wasn’t a case of he wasn’t smart, he wasn’t talented, he didn’t work hard, all those other things, but it just wasn’t part of our culture. So, I think that is it. Unfortunately, I don’t have sort of a scientific formula. It was one of those, you’d see it when you’d see it, you’d be in a room and you’d be connecting with someone and you’d just say, this is the person. I remember a story quite well. I was interviewing someone right after the head of HR, and she came in to see me afterwards and said, Ethan, you can’t offer her the job in the interview.

So, what are you talking about? Says you’re going to love her; you’re going to offer the job. You can’t do that. Just promise me you can’t do that. So, I’m halfway through the interviewer saying, this person has to work at RiskMetrics. So, it we got to a point where we kind of knew if you connect that way. And the other thing is you mentioned sort of the job. I my objective from year, certainly from year six on, and I said this, and everyone would say it, Ethan’s job is to make RiskMetrics, the world’s best employer and that’s what we want to be. Because if you are the world’s best employer, you will be successful regardless of what business you’re in. And I said this, I said our competition is not other risk management firms.

Our competition at the time was Google, was Goldman Sachs was McKinsey the places that parents want their kids to go and kids getting out of the top schools want to join. I think that that really became sort of our mantra on what our success was going to be. And that’s hard as a small company and the most important thing I learned from that was, you don’t get there by simply saying, we’re going to pay people more money. That is not going to be the key to being the world’s best employer. In fact, you could argue that they tend to go inverse, that if you need to be the highest employer, then that is the only thing you have and if that’s the only reason people work at your company, then I don’t think that’s a long-term sustainable.

Ed (00:25:33): One of the themes we’ll talk about is remuneration. Because I know that you have some strong views on this, but while we’re telling the evolution of your role, one of the evolutions came as you to a public market CEO. And we’re now sort of moving through to late 2007 transitioning, just rewind our own minds back, 2007 subprime mortgage crisis had kicked in, but there was this lag the stock market hadn’t quite worked out what was going on at all. And you listed 2008, I think February 2008,

Ethan (00:26:11): Bear Stearns failed in March.

Ed (00:26:13): Beat me to the punchline. So, this transition from private market CEO to public market, CEO quarterly reporting’s, how your role changed and how you felt it affected you?

Ethan (00:26:28): It’s interesting. Were a pretty transparent organization that I think that was an important part of sort of making a great employer. I think to be transparent and to be open and honest with, with employees on a personal basis. I was, I don’t know if it’s pleasantly surprised, but I didn’t find myself change a lot. What I would say is, and I was quite fortunate, is the person who really bore the brunt of being public was our CFO, who loved being a public company CFO. He loved talking to investors, he loved reporting, he loved that, and he really drove that process. So, for example, as you mentioned, we went public in January 2008. It was funny because every month they have newspapers always say the best performing IPO of the year. And of course, we were always that because there were no more IPOs after we were, so we were not the best, not the worst.

There weren’t many IPOs after that. But Bear Stearns was sold to JP Morgan mid-March, and it happened to be school vacation in New York for many schools. So, both myself and our CFO had gone away on vacation that week. I was in the Galapagos; this was a big family trip. It had been a crazy year getting public, all the work, et cetera and I said, all right, we’re just going to get away. He went skiing and basically this happened, and I said, what, I’m not coming back. RiskMetrics is fine, it’s a tough time, but RiskMetrics is fine. And he spent his time in a hotel room with ski boots on talking to investors. So, there was only one investor that I had to talk. He said, you have to talk to this one investor. I said, okay, but that was it, I did one investor call and that was it.

I said, one memo to the company. I did one investor call, and I enjoyed the Galapagos. I think the one change that I think employees would say is we reduce some transparency for regulatory reasons. So pre being public, we would talk openly about financials in between quarterly reports. And we stopped that. I get asked by private company CEOs, what’s it like to go public and is it really a pain and all? And I found you have the right CFO I didn’t find it that challenging. You have to sign a lot of documents. I’d get all these documents and there was a little joke about they would have sticky sign here and the blue ones were just, you can sign them. The red ones were, if you sign it and it’s wrong, you go to jail. So, I knew those were the ones I had to read the papers beforehand. But other than that, that I found again is an overrated change. I didn’t find that as, as dramatic. And I think part of that is that were, again, a reasonably disciplined company ahead of time so that we had a good financial operation and HR, I mean, we had gotten that right, I think early.

Ed (00:29:28): So much to distill here. Interesting call out in regard to that relationship with a CFO that has gone on to wonderful things as many people from that finance team have. I think at last count, there are seven CFOs that worked at RiskMetrics, which suggests that not only was the culture strong, but it was a great breeding ground of talent. The vision of you swimming with ancient turtles while the financial world literally collapsed around you and you sending a memo to the company saying, we’ll be fine. I’ll be back in a couple of weeks. That says to me how you viewed and dealt with crisis generally.

Ethan (00:30:04): Crises happen. I mean, there’s no company that’s going to be able to avoid those. Hopefully. I mean, that one’s not self-imposed. There were a couple self-imposed ones we can talk about, but that one was not self-imposed in my mind. First and most important thing is a company should recognize when there’s a crisis, I don’t think a company should make believe there isn’t a bad thing going on, if there’s a bad thing going on, people aren’t dumb. They can see that there’s a crisis. So, you have to address it and then how you address it and how you react to it is what they’re looking for in the CEO. And I think it was important at that point in time, a number of people said, you’ve got to come back. There’s a lot going on. The stock price has gone down, et cetera, et cetera.

And I looked at the situation. I said, number one is the company at risk Is the company truly at risk? Let’s just talk basic safety, safety of employees. No, okay. We were in New York City for 9/11. Our offices are right next to the Twin Towers. That’s a different crisis, right? Then you have to deal with differently. Our clients, frankly, were suffering far more than were. We are in the risk business and it’s a time when risk is important. So, there was a great demand for risk. The issue we had was our clients were suffering the fact that our stock price was going down wasn’t going to impact anything. The read here was A, if I come back, it means there’s a bigger panic and B, if I come back, I’m not sure what I would’ve done differently.

The take on that one was a very different approach just says, listen, if we stick with what we are, who we are, what we do, we will be fine. And that was the clear message and I think that that brought a level of calm to the company that my being there wasn’t going to make a difference. I contrast that with a situation, I mean, 9/11, our offices were right next to the World Trade Center where we are in a different mode where we’re basically saying, we’ve got to find every employee at that time, believe it or not, we had actually had a sales conference for our sales team from all over the world, had come to New York that week. So, they were all in New York and they had families that are saying my husband or wife is in New York City and this happening and I can’t connect with them and all that.

That was a very specific people crisis. We had a crisis where, it’s going to sound a little specific, but we basically as a firm received over the internet client positions. So, we have positions of all the hedge funds of all the major hedge funds in the world would be sent to us. And then we would run analysis and send it back. There was a day that we sent one client, someone else’s positions. So that’s a self-imposed crisis that is our doing. And that required me to get on an airplane and fly to see that client and sit down on both sides, both the client who received it, and the client whose positions had been sent. So those are three things that I think would be called crises at RiskMetrics, which all I think were treated differently. Ultimately, hopefully not in panic mode that you have to keep that. But the results or the sort of next steps are going to be different.

Ed (00:33:44): A word that has emerged a couple of times through this conversation is transparency and I know how you communicated with many of your own employees through these beautifully crafted memos that you wrote. I’ve said to you earlier that I think you should release these because they are such wonderful works in their own right. But just on the theme of transparency, I’ve heard you say that you wanted RiskMetrics to become a bad news organization. You wanted to make sure that people were empowered to deliver bad news, but what level of transparency is appropriate and the pros and cons of being ultra-transparent. And I guess at the other end of the spectrum, knowing when some kind of opacity is required.

Ethan (00:34:31): Yeah, I mean, there aren’t a lot of times where I don’t think you’re supposed to be transparent. There, there regulatory, there’s regulation where you have to do things and that again, would be the big difference between public private. But as a private company we touched a little bit on renumeration. I believe trust matters more than money. And I think that if you don’t trust your employees and your employees don’t trust you, you’re not going to have a great company. And I think trust comes out of transparency. That means that if someone’s underperforming, you’re going to be telling them that well before it’s at a point where you have to say to them, hey, you’ve got to leave the company. The bad news organization came very specifically as an experience that I had at JP Morgan in the nineties. I was not part of the senior management of the firm, but I was invited once to what was called the senior management meeting they have once a week where all the senior managers spoke around, they went around the table, and they would talk about what was going on in their businesses.

I remember listening, I’d never been there before. I remember listening to everyone go around the room and everyone was just saying something good. And the good weren’t even that good, like we’re seventh and underwriting. It was just no one wanted to say anything bad and I went to my boss, who was part of the senior management team afterwards, I said there’s just nothing bad here. You’ve got to become a bad news organization. That’s the only way you get better.  that was a theme that I talked about at RiskMetrics, bad news organization, it’s nice to hear good things. It’s nice, it makes you feel good. It doesn’t help you hearing bad things is how you can improve.

And we’ve got to be a company where you can sit there and say, you are not penalized. In fact, you are applauded for saying, hey, I’m worried about this. This isn’t working because that’s the only way you’re going to get better. I mean, when we release the data to the wrong company everyone knew that wasn’t said, hey, don’t tell anyone. That was a, yep that’s what’s going on, that’s a problem. So obviously as a company gets bigger it gets trickier because you have less connection. But I sat there, and I said, listen I know my direct reports and they should know their direct reports and they should know their direct reports to the point that if you have a direct report that you don’t trust, they shouldn’t be at the company again to share a story.

When we sold the company to MSCI, the CEO of MSCI, very successful and has continued to be even more successful. Henry Fernandez, he said to me, Ethan, you’re too trusting. We do not have processes. We didn’t count vacation days. We didn’t have two people sign off on expense statements. We didn’t have, we didn’t have any of that infrastructure, all of which we had at MSCI. And to be clear, we had an incident where an employee stole some money from the company. It happened and we caught it, we fired them. That was the end. Everyone knew about it. But you could sit there and say, well, if you had all the controls in place, it wouldn’t have happened. That’s true. We would’ve saved $12,000. I think the cost of those $12,000 were for all the other was far outweigh it.

Ed (00:37:37): You talk of this trust and transparency being absolutely central to the culture of RiskMetrics and it nowhere more did it come through than the general philosophy in relation to remuneration. Maybe it’s worth just digging in here a little bit with some general principles that you held deep high employee ownership was, was very important. But also, just sharing the rewards with the team. So maybe it’s just worth touching on how you viewed remuneration.

Ethan (00:38:08): My Andy Warhol one minute of fame came out of a letter I had written to the board about compensation that then was published in the New York Times. And in it, I was pretty explicit about my views on compensation generally. It goes into some sort of detail about salaries, bonuses, and ultimately equity and benefits, which I guess are the four parts of compensation. I mean, I feel quite strongly that salaries are going to be linked to experience and roles and responsibilities. Someone who’s been doing something longer and has more responsibilities are going to have a higher salary than someone else. It’s not linked to performance; it’s linked to the role that you have. Obviously, the performance gets you to the position you have, but the actual salary is different. I’m a firm believer that benefits should be all the same for everybody.

That you shouldn’t give better benefits to higher paid people. Like my health needs are no greater or less than someone who’s got less responsibility in their job. So, I feel strongly on that. I feel things like 401k’s and matching and all that should be not linked to a percentage of salary, but to just an amount that everyone gets. Bonuses are certainly in the financial industry, the place where I think you’re supposed to make distinctions and you should truly pay for performance there. I think it’s a rare year where the head of a group is the best performer in the group. It can happen, but it if you have a group of 15 people, the likelihood that the same person’s, the best performer every year is not that high. I would think that they’re going to be someone in the group whose bonus should be higher than the person who runs the group.

And I put myself as the CEO in the same category. I should not be getting the biggest bonus because I’m the CEO. I should be getting the bonus that’s equivalent to the performance relative to the other performances of my team. And I’m guessing that most years someone in my team did a better job than me. I hope I’m in the top half every year, but not necessarily the best. And then I think the thing that probably maybe is most extreme is equity ownership, where again, I feel very important that ownership is crucial to building a great team culture, et cetera. So, everyone should own equity and that you get to a point where giving more equity to someone who has a lot of equity is of zero value to anybody. It’s bad for shareholders because you’re giving away equity. It’s not going to change that person’s performance in any way and frankly, I would worry about any company where the CEO would do their job differently if they were given more equity. I feel that quite strongly and I think it’s kind of ridiculous that people do that. It just doesn’t make sense from a shareholder point of view, a company point of view, et cetera. If you have a situation where you’ve brought in a new CEO who has no equity and they’re trying to build up that position, that’s different.

Ed (00:41:06): I’m just going to call this letter out that you wrote to the board of directors that was leaked, as you say to the New York Times. I might just read a little bit out and I’ll put it in the, the show notes a link to the document because it’s a fantastic read. As the company had a terrific year this year, far better than last, I’d ask that overall subjective bonuses be significantly higher than last year. Perhaps surprisingly however, I do not feel my own performance was as strong as in previous years. I therefore ask that my own discretionary bonus reflect this by an appropriate amount. Instead, the firm stronger than expected performance was driven by a large number of employees in other roles. And I’d like to say the bulk of my direct reports, in fact, many of their direct reports paid greater bonuses than I received. So here you are writing to the board of directors, talking yourself out of a bonus, which is, I think the subject of a letter that Warren Buffet wrote you in response. Having seen the, the article in the New York Times.

Ethan (00:42:08): It’s interesting. I mean, I would say any less dollars I received in that I more than made up for increases share value of RiskMetrics by a multiple. And when I talked to employees of all the things that they shared with their families about RiskMetrics, that letter was probably at the top of the list. And I think that that’s the type of thing that creates a place that people want to work. It wasn’t the intent of the letter, the letter was specifically sent to the board and the compensation committee and

Ed (00:42:45): You’re getting uneasy as we heap the praise upon your actions. I mean, there was some history here because previous memo, you’d actually given half your own equity bonus to the kids of employees as a sign of family sacrifice and recognition that those employees had given to the company over and above their own family. So, there was some history and you being incredibly generous in how you thought about remuneration. One thing that I do want to touch on at the top of the interview, you talked on options and it was a world where options were being handed out like chocolate bars at the candy store, but RiskMetrics was very disciplined in regards to giving options away.

Ethan (00:43:29): Everyone at RiskMetrics were given options when they started. Obviously as the company became successful, the number of options you got was lower. You created a little bit of this culture of oh, I wish I was one of the first people because that they got the same member of options, but they’re worth so much more. So, you have to deal with that issue, which is a good issue in the sense of the share values going up. But it’s still an issue from a culture point of view. You need to make sure that the people you’re giving options to are valuing the options fully and that if you get to a point where you’re giving away options where someone with an equity hat on says, that’s worth a lot, but the receiver saying I don’t really put those in part of my compensation, then you’ve got a bad program.

So, you really need to make sure that it is linked to an understanding of the value because you’re not going to get enough benefit if you are giving away options that the receiver thinks are worth half as much as what you think they’re worth or something like that. The other thing that we did, again, back to culture and success factors, is we gave out option awards for representing success factors. So, every year we had five success factors, and we had the employees vote for a person that they thought embodied that success factor and whoever got that vote was given 500 options in the company. So again, they can be used in other ways as well to promote themes and it sends a message of what you think is important.

Ed (00:45:08): Still a really pertinent conversation in the modern-day attraction of, of great talent and something that I think people will find really valuable. Your discussion on in regard to fundraising, I mean you were lucky in many senses that the private capital fundraising that you did do was secondary liquidity. But there are some interesting anecdotes to flag here and one is that you only ever raised or sold ordinary equity and obviously there was at the time and there still is a big preference for preference shares for venture capitalists to buy preference shares which protects them in the case of any kind of downside. But all your raisings were ordinary. What was the philosophy behind this?

Ethan (00:45:56): I think preference shares are a terrible thing. Here’s a very good example of entrepreneurs misvalue the optionality and the value of preferences. They sell them far too cheaply and private equity and venture capital recognize that, and they buy very cheap shares because of it. The entrepreneur only sees the upside the entrepreneur says there, sure, I’m going to hit all those targets, so the preferences are not going to matter because I’m going to exceed them. The preferences are worth this because it all converts into common. But the truth is, markets don’t tend to work that way. And the number of CEOs that I watched five years later who basically see their company about to be sold, where the private equity investor gets their 10, 12% return and they get nothing, they get nothing because the company’s not worth more than 10% annual compounded over five years afterwards.

All the equity value goes to the venture capitalist. So, we did our round and when we did our round with private equity investors, no one did common deals. Everyone did preferences. And I basically said, it’s a non-starter. If you’re not interested in doing a common deal, we can’t talk anymore. I don’t care how much value you have; I don’t care what price you’re going to pay; you’re going to own the same shares as I own. We’re in this together because that’s the pitch. I mean the pitch the equity players make is we’re in this together. I said, okay, we’re in this together, we have the same equity, and they change that. Well, we need a preference because of this. Why do they need a preference? They’re not working harder; they’re not spending more time on it. I could argue I should get the preference. I’m the one who has to live off of this.

You’ve got a portfolio, we’re one of 10 companies, 20 companies in your portfolio. So, I feel very strongly on that, and I can tell you the one investor who liked the company a great deal, who said, I can’t do a, I went to my investment committee and said, I can’t do a common deal. He today says to me, biggest mistake, in investment he made, he didn’t push for it, and he wasn’t part of the deal. On that note, the other thing I should say, and again, this would be somewhat controversial potentially, but when we do a secondary deal, I want the lowest share price, not the highest share price. And I don’t understand why people want the highest share price because the truth is the people who are leaving are the ones who get the price and the people who are coming in are the ones who are paying the price.

So, I would much prefer with a secondary deal, having my new shareholders come in at the lowest price possible rather than the highest price possible. So common shares low price. I mean, I will tell you when we’re negotiating our deal with Spectrum Equity, we’re on a conference call and were negotiating a deal and I was saying, it’s got to be common. We agreed to common, and we actually received an offer to buy the company from another company to buy it outright at the same time. And the managing partner at the firm said to us, all right, we’ll raise the price by a dollar a share. And I said, you don’t have to. And there was this mute that they obviously went on mute, and I’m told later by a colleague said, he said, did he just say we don’t have to raise the price? Yeah, I think so. So, he says, all right, we’re doing this deal.

Ed (00:49:11): Couldn’t agree with you more, perhaps the only founder to talk down one of the great growth equity businesses of all time out of giving you a higher price. It’s a wonderful anecdote. Maybe we can touch on your views on M&A perhaps to frame it the Bolt-on major M&A. You did both, there was a large acquisition of ISS I think at the time was sort of doing $50 million in revenue. It was going to make up maybe a third of your own revenue base, and it was just before the IPO in 2008. You flirted with other major acquisitions after that. But your experience of the acquisition of ISS, I know, I think I’ve heard you say that the six months after this acquisition was the worst of your time as CEO.

Ethan (00:50:02): I mean, just to be clear, the actual numbers were, they were almost as large as us. It wasn’t even a third. Their revenue was almost as large as us and they were twice as many people. So, it was a very large deal. And I certainly would say that the biggest high profile management mistake I made was managing that combination. Not doing the deal, which was good. But the actual, as you say, first six months, so the going in proposition, they were a very different company than us. Very different, very different company, very different culture and very sales driven. Were much more product driven, much more traditional much more opaque, not nearly as transparent, very hard driving, extroverted CEO in contrast to me, successful again, it wasn’t better, worse, just different styles. And the going in proposition, again, being a consensus driven organization as a company, which they were not they were very top down.

Our model was let’s take the best of both cultures and create a new culture. So, these are things we do well, these are things they do well, let’s create this new culture. I was the CEO, he was the president, and it was a disaster. It was terrible because there was no clarity whatsoever and people didn’t know really what were the values, what was the culture again, back to a lesson learned from both Proctor & Gamble. And I got to meet the person who was the head of GEs HR and were talking about the same thing. And he said, M&A is, there’s no such thing as a merger of equals. They all say that in the press release, but the truth of the matter is there is a buyer and a seller, and the buyer needs to determine this the culture.

And that was a harsh message for us. It’s not stylistically the way we operate. It’s certainly not the way I operated. It was very top down. But I’ll share a story. We bought this company ISS. I go down, I run one of my town halls, which I run on a regular basis at RiskMetrics. And they’re asking me questions, I’m being honest, I’m answering honestly, transparency and all that. And a week later I hear, well, they didn’t believe you. I said, what do you mean they didn’t believe me? They don’t believe you. I said, But I told them the truth. You don’t get trust for free. You don’t just sort of walk in and say, okay, I’m a good guy, trust me. We really had to redo all of that. We basically replaced all the management team. I mean, again, there were some people from ISS who stayed on and were very successful. It wasn’t a case of we had good people and they had bad people at all. It was just the management styles were so different and it had to convert and some people at ISS were comfortable with that new management style and some people weren’t.

Ed (00:52:50): It’s great insight into the cultural merger being much more important often than the bottom line to make sure it was a success. But you did make a success. You obviously went public. The GFC then really took shape, and it was almost two years later that RiskMetrics was sold to MSCI. I’m keen just to dig in here, what led to it, some color on the process and why? To me, at that point in time, the big vision and picture for RiskMetrics was greater than ever, really. The role of the ratings agency was well and truly coming to question the perverse incentives for anyone that has seen the Big Short, I’m sure many people have, they were complicit in what had happened throughout and caused the GFC, and yet there was this lack of change and RiskMetrics could have been a force for good in this change. What led to you selling the business?

Ethan (00:53:47): Yeah, I mean, clearly one of the toughest periods for, certainly for me as a leader, as a CEO, it’s funny, we spend a lot of time thinking about starting things, and we don’t spend a lot of time thinking about any things and companies have to end. So, number one as CEO you’re responsible for three constituents’ employees’, shareholders, and clients, and the priorities change over time. But I think that you have to find that right balance. So, I’ll start with from a shareholding point of view. There was clearly while we had gone public, our three private equity investors remained large shareholders, they did not sell in the IPO. And they had now been invested for approximately their typical time. They were looking for a return they could certainly have done that over time through the public markets but would obviously like a larger premium.

We had started to get approached by more and more companies. So, there was that premium and need. So, we had that happening and with a pure shareholder hat on, there were some quite attractive opportunities. I think that on a personal basis you started asking a little bit about how my role had changed, and it was clear that for us to continue to be successful independently, we had to continue to grow at that rapid rate that we had been growing. I had been given a book, wonderful book called Small Giants by someone at RiskMetric’s that was about companies that were successful and didn’t want to grow. They were successful companies and they had expansion opportunities, and they said, what? We’ve got a good little company here. We just want to be a great little company.

They stayed a great little company, and they made money and the employees liked it and the clients liked it, et cetera. But there was no concept of growth and that was not me as a person, and I don’t think it was the culture of the company. So, we needed to continue to grow that, this idea of continuing to grow not just incrementally, but exponentially was important of just really brand-new opportunities. And if I looked in the mirror, there were times where I said, what? I’m not sure I have what it takes to do that next step. It is all consuming experience. It was everything to me. I’m fortunate to have a wonderful family, and it was family and work, and that was it. I was not the person who spent golfing on the weekends and friends and various other things.

The question was did I have it in me personally, and did I have the skills to go to that next level where big new businesses, much bigger dollars, much more risk? There was much more at risk. When you’re a startup, how much is at risk, okay, it didn’t work out, you move on, people are young, et cetera. The employee base, which were the young immortals, and there are 25 are now 35 and 40. They’ve started families and they’re the ones earning that good living and that they’re the ones who are no longer going to say, hey, why don’t I go to a startup and start all over again? So, I don’t think that we had, we as a group, I, as a person had that ourselves. I sat with the board and talked about that.

We explored outside people bringing in a president who had then become CEO, and there wasn’t anything imminent about that, but there was clearly an issue on that front. So that was two and then three you had just gone through the financial crisis. We had come out very well and so, we had just gone through that period. It wasn’t sort of the go-go years, it’s now 2010. Our stock price had recovered. The business had recovered. Our clients were still suffering a little bit. It was not clear where this was going to go. So, we had very lengthy and real disagreements with the board. And again, I will say here another thing that I feel quite strongly on that I think many CEOs sort of make a mistake. You want a strong board. You want a board where people disagree with you, push you, and don’t just say yes.

I think many CEOs just want I’ll get my friends, and everyone will say yes, and I can just run my business. That is a huge mistake. It’s great when things are good, but when things are difficult, you want a very strong board and a dynamic where you can openly talk about these issues. And this was hotly debated, and I had board members disagree with me, openly disagree with me, and we knew that, and I disagreed with them. And we had healthy discussions. And there was transparency. I mean, we’d had these board meetings and I would get a call from board member and often they’d say Ethan, I’m not going to agree with your recommendation. And I said I really appreciate you telling me that ahead of time. I completely respect your opinion. Let’s have the debate. I think that having a strong board with people who really are looking at things from a different perspective is crucial to being a successful CEO.

Ed (00:58:56): That’s one of the core beliefs that TDM in terms of that high performing board and the role that that can play in these wonderful businesses. But you summed it up perfectly. I mean, personally interested, do you ever regret that the legacy isn’t changing the way risk was measured in this brave new world that had emerged after the GFC?

Ethan (00:59:20): Not in the slightest. I don’t on a, I hate to say it on a grander vision, but I think as we had a mantra change the world, have fun, make money in that order. And the truth is, were successful in the opposite order. We made a lot of money, we had some fun, we didn’t really make a dent in the world. And I think that it was time to try to find a different way to make a dent in the world. And I think that the financial crisis sort of just reiterated to me that a risk company wasn’t going to do that, and that there were other problems that needed to be worked on. And I don’t want to sound sort of self-centered on that, I think that that’s true of many people at RiskMetrics.

I think that while there are clearly risk experts who that was their passion, I would say the bulk of the people were people who were driven to that mantra and more so than I want to figure out how financial risk gets measured. The ones who love risk are still at MSCI, thriving, doing very well. The company’s done very well. Since the product is done well, the clients have been well served, so that’s been all good. And those who were stuck to the how do I change the world or onto other things, and trying to do that in their own way.

Ed (01:00:43): I don’t think you can underestimate changing the world one person at a time. And the ripple effect of the culture that you created, those that you touched there were over a thousand people that were impacted as they got to learn what great work looked like, what great leadership looked like, and can lean on those learnings as their careers and went off into the world. But in terms of changing the world, this leads to the last topic, and that is your new project I2 learning, because this fundamentally, I think will change the world, but schools and, and school districts transforming their classrooms into STEM learning labs, and it started as camps to use underutilized campus space, but now is full year long programs, much like CS in schools here in Australia is doing. Is this passion of yours to change the world? Has, that been transplanted into I2 learning?

Ethan (01:01:40): No question. I mean it’s funny and I basically said the next venture we can focus purely on change the world and have fun. We don’t even have to worry about making money. It’s a nonprofit so I’m in the very fortunate situation that RiskMetrics gave me I don’t take that for granted. It’s also allowed me to meet many people who have a similar passion and have the means to support efforts like this. I now run a nonprofit where it’s very clear there’s now two messages with a heavy message on changing the world. But I think having fun is important and many of the cultural aspects of RiskMetrics have moved to I2 learning in a different, in a very different environment. But around transparency and the others, we don’t have to worry as much about equity and options and things like that in a nonprofit world.

And you learn working with a different group of clients, schools are very different than hedge funds. In fact, you could argue couldn’t be more different. Metrics are much more difficult to measure. When you say how do you change a kid’s life? And again, similar to the CS program in Australia that isn’t about increasing test scores. That’s, we get too caught up in that. It’s can you change a child’s life? Can you give them an opportunity that they wouldn’t have otherwise? And I think that it is clear, I think all the events have shown these, this great divide that has been created within our societies globally between the haves and have nots. And how do we close that? And I, on my own basis, I think that people who’ve been fortunate, like myself it’s one thing to give money away, and that’s a great thing.

I’m not trying to discourage it in any way, but it’s another thing to give time and your talents. And I’d like to think that my talents are worth more than my money. I think that’s true of many of the people who’ve been successful. Even the richest it’s really the talents that they bring that have gotten them those riches in most cases.  how can you bring that talent and skills insights into ventures that are not about measuring risk of hedge funds, but in changing kids’ lives.

Ed (01:03:52): As you said, there’s nothing more valuable than someone’s time. And that’s why I’m so deeply grateful for yours today, Ethan. It’s been an absolute delight. Thank you for sharing so many learnings and lessons drawn over a decade and a half of running an incredibly successful company and thanks for being on the podcast.


Scaling Up: Seasons


Scaling Up: A TDM Podcast


Scaling Up: A TDM Podcast


Scaling Up: A TDM Podcast


Scaling Up: A TDM Podcast


Scaling Up: A TDM Podcast


Scaling Up: A TDM Podcast


Scaling Up: A TDM Podcast



Scaling Up: A TDM Podcast


Scaling Up: A TDM Podcast


Scaling Up: A TDM Podcast


Scaling Up: A TDM Podcast


Scaling Up: A TDM Podcast


Scaling Up: A TDM Podcast


Scaling Up: A TDM Podcast


Latest Insights

Stay informed, receive Insights first.