Activist investors take aim at chief of Bank of New York Mellon

The Wall Street offices of Bank of New York Mellon are steeped in the history of its famous founder, Alexander Hamilton. Yet among the 18th century artefacts there is no sign of the founding father's duelling pistols.

"JPMorgan has those," says Gerald Hassell, who has silently entered the room and answers the query. The pistols, says BNY Mellon's chief executive, belonged to Aaron Burr, who killed Hamilton, and founded his own bank, which today is part of JPMorgan Chase.

Mr Hassell is involved in his own battle for survival and needs all the firepower he can muster. He is threatened by activist investors who are mounting an unusually fierce challenge at the oldest US bank, in a sector usually considered too tough for campaigning shareholders to take on, on the grounds that returns are too low and costs are out of control.

Trian Fund Management, led by Nelson Peltz, fought for and won a seat on the board last year - a perch from which to orchestrate change at the world's largest custody bank, which does foreign exchange, securities lending and clearing for institutional clients and looks after about $28.5tn of assets.

Marcato Capital Management, an upstart San Francisco-based group, has gone further, arguing for thousands of job cuts among the 50,000 workforce, including Mr Hassell's.

"This management team has time and again both failed to reach its own, tepid goals and failed to keep up with its competition," says Mick McGuire, who founded Marcato in 2010 after earlier working for Bill Ackman's Pershing Square. "We sincerely doubt that meaningful progress will be achieved without new executive talent. Bank of New York is a great business and a great franchise. It deserves great management."

Trian is ostensibly friendlier. "Everyone seems open to new perspectives and constructive debate," says Ed Garden, chief investment officer of Trian and the new BNY Mellon director. "To be clear - the board supports Gerald and the management team and we will hold them accountable for meeting the company's financial targets. We are on the right path now but need to stay very focused on continuing to improve operating performance."

It has suited both Trian and BNY Mellon to play down the hostility between the two sides.

"When I first met the Trian team I said, 'Look, if you've got ideas to make us better I'm all ears,' " says Mr Hassell. "I like dealing with people who are smart and knowledgeable and factual because you may disagree but you can have a constructive dialogue, and we've had a constructive dialogue."

According to two people familiar with the matter, Mr Hassell resisted giving Trian a seat on the board and Trian, in spite of suggestions to the contrary, threatened a damaging "proxy fight" to rally other shareholders.

It is not the first period of strife in the recent history of the bank, which merged with The Mellon Financial Corporation in 2007 and has never since produced a return on equity of 10 per cent.

Mr Hassell, 63, a 40-year veteran of Bank of New York, was appointed after his predecessor Bob Kelly was ousted in 2011, an unusual move for a large financial group's board. It is an open question whether directors who have thrown out one chief executive are more or less likely to keep his successor.

Everyone accepts that BNY Mellon has been hit hard by the ultralow interest rate environment, which depresses the margins between the rate the bank pays on its large deposit base and the rate it earns on its investment. The question is whether Mr Hassell could have done more to mitigate the impact.

He concedes that the results could have been better but says that that is a side-effect of a structural overhaul, which is starting to pay dividends.

"I was very focused on changing some of the culture, some of the dynamics, putting a stake in the ground on the operations, dealing with the regulatory environment, dealing with litigation environment and investing in things for the future, all simultaneously," he says. I think shareholders said, 'That's great, but I'd like more current performance as well,' "

Mr Hassell said he always believed that changes he made, such as bringing a vast technology team in-house at considerable expense, would pay off. "What I could see that the investor couldn't see was that I knew it [the improved performance] was coming but it wasn't coming fast enough."

A strong first quarter has given Mr Hassell breathing room from the activist attacks, after the bank handily beat analysts' expectations. But Marcato, in particular, remains dissatisfied.

Reasonable people can disagree about the health of the business and the strength of management. Mike Mayo, analyst at CLSA, agrees with Marcato that the bank's expenses are too high and suggests that it should consider spinning off its asset management arm.

Betsy Graseck, an analyst at Morgan Stanley, says that expenses are not out of line with rivals such as State Street. "The truth is that the investment servicing business is labour intensive," she wrote in a recent note.

But the activists have brought - or at least coincided with - a more intense focus on costs. The 1 Wall Street building where Mr Hassell sits, with its grand art deco entrance hall bedecked in blood red and gold mosaics, has been sold for $585m and BNY Mellon is moving to a less ornate space across the road from Goldman Sachs.

Mr Hassell has resisted the calls from Marcato to cull thousands of people, but he has frozen a defined-benefit pension scheme and says "the number of employees should come down" with increased automation. The efficiency drive has extended into the post room where BNY Mellon is mailing out less bumph, at a saving of $17m.

Still some analysts and shareholders contrast BNY Mellon's cost-cutting effort unfavourably with those of State Street, which has had its own brush with Trian. It has launched three rounds of redundancies in three years and said this year that it would wring further savings through technological improvements.

"We have not stepped down our efforts at all," Jay Hooley, State Street chief executive, told the Financial Times recently. "You should do everything you can to drive efficiency, and if you don't, someone else will."

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation