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After reading the Ethan Berman (A) case, submit a written analysis of no more than 1200 words that addresses the following questions:What are the key organization and leadership challenges facing Ethan Berman?If you were Berman, how would you handle the issue of the senior hire? Be specific about what you would do and how you would go about it.How much does Berman influence others? How much should he change his style—if at all—as RiskMetrics continues to grow?Submit your answers in a Microsoft Word document using the Turnitin drop box
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Harvard Business School
9-400-066
Rev. August 1, 2000
Ethan Berman at RiskMetrics Group (A)
Ethan Berman settled his sheik’s turban securely on his head. RiskMetrics Group’s weekly
Friday meeting on October 29 had been more unusual than was the rule, for everyone in the risk
management software company was dressed in costume for Halloween. Despite the lively presence
of the Tin Woodsman, a large carrot, Garth Brooks, and a superhero called Data Boy, the meeting had
been productive. This week they had agreed on a process for sharing information and ideas.
With the noon meeting over, Berman still had other matters to contend with. Since its spinoff from J.P. Morgan in 1998, the one-year-old firm had more than doubled in size, yet was still
entirely flat and lacking formal hierarchy. Berman’s board of directors was getting antsy, though;
with no other senior executive, the firm was vulnerable. “What happens if I get hit by a bus?”
Berman mused. Having a second-in-command would also relieve Berman of the countless
administrative decisions that consumed much of his time. Though he enjoyed being intimately
involved with the workings of the company, leveraging his time was getting to be harder and harder.
But, the casual atmosphere at the start-up existed to a large extent because of Berman’s hands-on
managing style. Berman feared that hiring another top manager would relegate him to a corner
office, far from the pulse of the firm.
Employees at RiskMetrics also had ambivalent feelings about hiring another executive. They
recognized that an outsider could bring new skills to RiskMetrics and enable the firm to better
compete in the aggressive world of financial risk management. However, Berman’s staff did not
want to lose their direct channel to him. Further, they felt protective of their unique work culture and
questioned whether or not an outsider would understand them. They were even unsure as to what
skills they sought in another senior hire: did they want a high-profile rainmaker to help promote the
firm? Or, a more process-oriented manager to run the day-to-day operations?
The fall of 1999 was a point of critical decision making at the firm. A recent article in The Wall
Street Journal on RiskMetrics and its management had provided the firm with free publicity and had
resulted in a flood of resumes and advisory offers.1 On the table was whether or not to make an
aggressive move into the retail marketplace by teaming RiskMetrics with online brokers and financial
planning services. Berman turned his attention to the other things on his desk—messages from online
brokerages, Yahoo, and lots of resumes from job seekers. He had a long afternoon ahead of him.
1 Carol Hymowitz, “A new CEO worries: will hiring a No. 2 ruin his start-up?” The Wall Street Journal,
August 17, 1999, p. B1.
Research Associate Gillian Morris prepared this case under the supervision of Professor Herminia Ibarra as the basis for
class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Copyright © 2000 by the President and Fellows of Harvard College. To order copies or request permission to
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400-066
Ethan Berman at RiskMetrics Group (A)
Origins of RMG at J.P. Morgan
The RiskMetrics Group started as an in-house division of J.P.Morgan, the institutional
investment bank. Dennis Weatherstone, chair of Morgan in the early 1990s, wanted a simple, concise
daily report that measured the company’s proprietary risk at the end of each day. In the wake of
such financial disasters such as Orange County, Barings, Daiwa and Showa Shell, banks and financial
service firms recognized the need for accurate, clear measures of exposure to market volatility. A
team at Morgan developed the “4:15 report,” so called due to the time of its daily arrival on
Weatherstone’s desk. The risk management tool known as value-at-risk, or VaR, grew out of this
daily report. VaR attempted to answer the question of “how much can I lose with a 95% confidence”
using simple mathematical concepts of variance and probability. As one industry observer
commented, “VaR is so simple that it almost seems ludicrous. The innovation was not the idea or the
technology, but in bringing a simple number to the table.”
What started as a proprietary tool was quickly seen as a boon to Morgan’s client
relationships. With the simplicity of VaR, Morgan could “elevate the quality of the risk dialogue”
with corporate treasurers, fund managers, and even clients with little or no financial background.
VaR, and the related RiskMetrics software product, became an invaluable tool for financial officers
and investment managers worldwide. In October 1994, Morgan made their RiskMetrics database
(which contained the volatility measures and correlations among currencies used to compute VaR)
available gratis to their clients. Morgan’s reasons for doing so were threefold. First, they wanted to
make market risks more obvious and apparent to investors and managers; second, Morgan sought to
make risk management tools available to users who lacked the resources to develop their own
systems. Last, and most critically, Morgan wanted to establish their VaR system as the industry
standard. By the late 1990s, VaR calculations were required by financial regulators, for banks and
other financial institutions to set their capital reserves.
Serving about 80 clients, the Risk Management Service group functioned as a value-added
consulting and research support service for pre-existing Morgan clients. “We would go along with
the bankers to a client and be very nice; we would talk through our products and methodologies, but
we certainly didn’t put any pressure on them to license our products,” one RiskMetrics sales leader
explained. However, others in the group noticed that many clients wanted a simple software
solution to their risk management, without the high cost of advisory services or the expense of a total
financial processing system. To meet this need, the group devoted more of its resources toward
designing software products for Morgan’s clients and away from advisory and consulting services.
Spinning off
In the mid-1990s, other investment banks were closing down their risk-management groups
because of concerns over liability. Clients who used the RiskMetrics software could potentially hold
Morgan responsible for their resulting investment decisions. Till Guldimann, the creator of the initial
RiskManager product, noted that “RiskMetrics [software] isn’t a substitute for good management,
expertise and judgment. It’s a toolbox, not a black box.”2 Guldimann and others at Morgan did not
want the company to commit to an advisory role.
When Guldimann left Morgan for Infinity (now part of SunGard Energy Systems), Ethan
Berman saw an entrepreneurial opportunity. He thought the group could benefit from an
independent relationship to Morgan for several reasons. The financial software business would have
more room to grow because clients (i.e., other financial firms) would feel more secure in their
transactions; as a subsidiary of Morgan, Morgan’s own competitors were not likely to confide
2 Philippe Jorion, Value at Risk (Chicago: Irwin Professional Publishing, 1997), p. 22.
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Ethan Berman at RiskMetrics Group (A)
400-066
sensitive financial data to the risk management group. The Group could pursue small companies,
financial institutions, and fund managers more effectively by being outside the Morgan umbrella.
His group could also thrive under a looser and more creative small-firm working environment. By
the mid-1990s, Morgan had become a tightly organized corporate culture, with each division
operating independently yet subject to a hierarchy of decision makers. “As a result of a consensusdriven decision-making process, we couldn’t make the type of quick calls required in the software
business,” a long-time RiskMetrics member noted. “Morgan is a bank—that’s their core business,
and as such they need to mull over all angles and come to decisions that way.” Third, as Morgan
reoriented from commercial to investment banking, it streamlined cost centers and defined with
greater clarity its core businesses. RiskMetrics was not one of them.
Furthermore, the software industry had been revolutionized by the Internet. As Berman
recalled,
By then, I felt that the best and brightest were working in small
organizations. Ten years ago we would compete with Goldman Sachs. Today we
are competing with some company we’ve never heard of with 14 people working in
a garage. And that’s why I wanted to get in the game—small organizations were
where the talent was going.
As an independent software company, RiskMetrics Group could devote the energy, people, and
money to building up the Morgan risk management product without detracting from Morgan’s core
banking business. In fact, the differences between a banking culture and a software culture were
critical to convincing Morgan to let the group go; as one member recalled, “I think it was a big coup
to actually convince them to sell us. They divested with a view that they could make more upside by
getting rid of us and just being an equity stakeholder, and also generating goodwill in the industry.”
After about a year of negotiations, the RiskMetrics Group spun out from J.P. Morgan in
October 1998. Morgan retained a 22.5% stake in the company, with Reuters as the second major
outside interest. Its board of directors consisted of Steve Thieke from Morgan, Krishna Biltoo from
Reuters, and two employee seats (one filled by Berman). A condition of the spin-off was that all
employees would be shareholders in the company; to ensure that all future hires would also be
shareholders, Berman set aside additional shares in a pool. Of an original team of 29, 28 followed
Berman into the new start-up despite the fact that at the time of the spin-off, “we weren’t yet viable,
and we weren’t a company that could stand on its own,” remembered an early employee.
Ethan Berman
I’ve lived in New York, Paris, London and Tokyo. And I think I did it the right way.
I studied in London, I was an artist in Paris, and I was a businessperson in New York and
Tokyo. Because it would be a disaster to be a student in Tokyo, an artist in New York, and a
businessperson in Paris. None of that was planned—but that’s how it worked out. . . .
—Ethan Berman
Berman graduated from Williams College as a theater and psychology double-major, and
went on to give acting a try in New York. After two years of only playing “butlers and trees,”
Berman tried his hand at playwriting in Paris; as he ruefully recalled, “I came back to New York after
a couple of years realizing I wasn’t going to be able to make it as a playwright in Paris. I didn’t write
in French.” Working as a graveyard-shift temp on Wall Street paid the bills while he continued to
write during the day. Stints at Goldman Sachs and Drexel preceded his time at J.P. Morgan. At
3
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400-066
Ethan Berman at RiskMetrics Group (A)
Morgan, Berman was soon hired full-time to assist in the back office of their new underwriting
operation in New York. Berman then left J.P. Morgan to again focus completely on writing; only four
months later, he received a call from his old Morgan connections. Asked to solve an operating
problem in Tokyo, Berman moved to Japan and soon solved the problem; he then stayed on after
Morgan scaled back its Tokyo office to report on the Japanese markets to Morgan’s head bond trader
in New York. Brief business reports turned into longer exchanges; as Berman said, “He and I got on,
and he would tend to talk on the phone longer. So we developed a relationship and the next thing
you knew I was trading bonds.”
Four years later, Berman made Managing Director at J.P. Morgan in New York, trading zerocoupon bonds and options. Soon, though, Berman was on the prowl for new challenges. From a stint
in India, he proposed a business plan for a risk management group at Morgan. In October 1995, he
was asked to lead such a group.
Berman believed that the two personality characteristics that made him a good writer also
explained his success in trading: discipline and competitiveness. To the business arena, he also
brought a drive to be distinctively the best:
The pressure from my parents as a child was not about being excellent and it
was not about being unique—it was about being uniquely excellent. And I think a
lot of that drove me to what I was doing, and why I constantly try to differentiate
myself. So, becoming managing director was not good enough unless it was done in
a way that no one else had done. And no one else had in four years.
Berman brought his drive and passion to RiskMetrics, inspiring the same in his employees. He
would set planning meetings at 7:30 in the morning so as to not interfere with the working day, and
would often be the last to leave at night.
Co-workers described a personal and idiosyncratic management style: “Ethan manages
individuals, not groups. Every person at the Group has a direct pipeline to him.” Berman himself
recognizes that he spends over 50% on human resource issues, arguing that “if I was running a
factory I’d spend all my time on the factory floor. Given that my assets here are people, I think it’s an
appropriate use of my time.” On the other hand, Berman believed in a “Darwinistic approach to
management,” in the words of one administrator. “He believes that things will work their course.
Either they’ll succeed or they’ll die a slow death. At times, if I were him, I would be a bit more
interventionist in managing the firm.”
The Business of RiskMetrics Group
RiskMetrics Group came into being at a tumultuous time in the financial services industry.
By the mid-1990s, corporations faced heightened global competition, increased financial risk
exposure, and individuals managed their own assets through online brokerages, banking services,
and financial planning tools. RiskMetrics software was in demand as the industry standard, but even
their position was not secure. As one economist noted, “In this day and age, front-runner advantages
are short-lived. Industry standards can become passe seemingly overnight.”
The many players in the risk management software industry differentiated themselves with a
variety of approaches to account for and measure risk exposure, whether it be for financial
institutions, corporations, or mutual and money-market funds. Some firms, like industry giant
Algorithmics, used VaR calculations. Other firms, such as BARRA, based their estimates on
alternative mathematical models, such as beta measures. But the important way in which they
distinguished themselves was in the size of clients they sought (large firms vs. mid-market firms) and
4
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Ethan Berman at RiskMetrics Group (A)
400-066
the range of services offered. Success in the industry was predicated upon brand exposure, client
relations, and benchmark products, all factors that were up for grabs at the time of RiskMetrics’ spinoff from Morgan.
Global business trends indicated that the need for effective, understandable risk
measurement would only increase. By the end of the 1990s, large financial service firms routinely
invested in foreign markets; understanding the risk implications of such investments was critical and
becoming more so as the “global economy” came into being. The new financial interdependence also
impacted small to medium-sized corporations, which were able to enter new markets through the
Internet and global telecommunications. Newly exposed to a chaotic global economy, and hence, to
possibly catastrophic foreign-exchange losses, these firms lacked the size or competence to support
sophisticated internal risk management groups and sought external data and service providers like
RiskMetrics. In addition to these institutional needs for risk measures, individual investors were
increasingly responsible for managing their own assets and portfolio allocations. With the expansion
of 401(k) plans, concern about the Social Security system, and a bull market for U.S. equities, large
numbers of investors in the late 1990s turned to discount online brokerages and took a firmer hand in
managing their retirement. Analysts projected that this nascent retail market would explode by 2003
with more than 20 million investors managing their money online.3
Setting Up Shop
As the firm acquired its independence from Morgan, group members faced the unique
difficulty of starting a new firm with roots in the strong Morgan culture. “Unlike many start-ups, our
team was used to top-quality benefits and a regular paycheck—so we had to deliver that.
Unfortunately, due to economies of scale, making these benefits cost effective was a real challenge,”
recalled a RiskMetrics employee. Likewise, when the firm moved to its new office and was separated
from the Morgan infrastructure, all employees learned about “the nitty little things that you figure
out when you start a company from scratch.” A high-quality, reliable computer network was built
from the ground up, new relationships were cultivated with vendors, and a range of internal
processes were developed, including burning their own software CDs and ordering their own paper.
One member of the group wryly recalled, “It’s amazing to me that we were able to distribute new
products while building a company at the same time.”
A Start-up Culture
To insiders and observers alike, the firm’s work environment was distinctive among Wall
Street firms. Much more like a Silicon Valley start-up in feel, RiskMetrics was described as having
“an academic, relaxed feel” and a “family-esque environment.” One employee explained, “We joke,
we have margarita parties—and we work long hours together. It’s something that I never
encountered before on Wall Street.” Certainly, company morale was high in 1999. In midSeptember, the producers of television’s popular series “Law and Order” chose to shoot an episode at
the company’s Wall Street office, an event that reinforced the company’s “upbeat” and unusual work
environment. Berman noted that “all this excitement results in people telling their friends that our
office was on television, and that they have to watch it. And then they say, ‘gosh, what a cool place
to work.’ It seems trivial, but that excitement feeds on itself.”
3 Robert Sterling, Robert Leathern, Marc Johnson, “Financial Services:
Communications, July 1999.
Online Projections,” Jupiter
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