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Diversifying Internal Management and Controls

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Expansion and diversification at home and abroad necessitated a reorganization of Kidder, Peabody's internal management and controls. Until the end of World War II Kidder, Peabody, like most investment banking houses, was a small informal organization. The total staff in its Wall Street office in 1945 numbered 261, with another 147 men and women in the firm's Boston, Philadelphia, and Chicago branches. There were no formal departments and individual responsibilities were not strictly defined. The partners and the senior staff moved from one area of operations to another depending upon an individual's talents and what needed to be done at the moment. "Everyone participated in everything," said one of the firm's senior employees. Each of the partners had several primary responsibilities. Gordon, for example, headed the new business group, as well as the committee dealing with underwriting and direct placements; others directed the sales, trading, and commission business; and Webster and Ames were designated managing partners and were charged with supervising the firm's internal operations. Overall responsibility rested with Gordon and Webster, Kidder, Peabody's top policy team from 1931 through 1945. But it was Gordon more than anyone else who kept close watch over the entire firm. Weekly reports from the chief accountant, first Brick then Loverd, kept Gordon and Webster fully informed about the firm's income, expenses, and which areas of the business were making or losing money. "In those days," Gordon said of the pre-1945 era, "we enjoyed the luxury of a small organization."

It was not only Kidder, Peabody's growing volume of business that made this small, informal organization no longer practicable. The SEC and the New York Stock Exchange also contributed to the firm's internal restructuring and to the adoption of tighter supervisory measures over office practices and procedures. In May 1945 Webster informed the partners that "the rules of the Stock Exchange, S.E.C., and other government bodies" required a "definite allocation of the partner’s responsibilities," not only in the New York office but in the firm's branches as well. The plan he proposed and adopted at all Kidder, Peabody offices established seven major departments. One or more partner was assigned to supervise the various functions of each department. Russell, the partner assigned to the stock exchange department, for example, supervised enforcement of the various SEC and New York Stock Exchange regulations dealing with manipulation, long and short sales, and bookkeeping practices. He defined the jobs of every member of his staff and conducted "periodic reviews" of the entire department's performance, not only to ensure compliance with all federal, state, and stock exchange regulations but also to determine income and expenses. Each department's performance was reviewed at the partners' weekly meetings where overall policies were established.

Frequent, comprehensive review of the firm's internal procedures and practices led to other changes designed to equip Kidder, Peabody to deal with its mounting stock exchange business more efficiently and at less cost, without reducing services to clients. In June 1947 Ames, one of the partners charged with supervising the firm's internal operations, initiated a broad review of back office practices that eliminated much duplication, simplified several procedures, and concentrated many of the support services in New York, among them the Boston branch's billing, bookkeeping, and payroll work. None of these changes or similar ones adopted subsequently, important as they were in cutting costs and increasing efficiency, affected the way Kidder, Peabody conducted its business as much as the decision taken early in 1945 to convert much of the firm's back office operations to punched card tabulating equipment, the first step toward its complete automation. Kidder, Peabody not only employed the new technology to improve its support services, but also-after testing it for two years and finding it satisfactory-made early and full use of it in other areas of the firm's operations. In 1961, when R.C. A. set up its Data Processing Center in New York, the firm subscribed to its service. Not all of Kidder, Peabody's business systems were coordinated with the R.C. A. Center's computers; the firm continued to use several of its own tabulating machines, but its stock exchange transactions after 1961 were assigned entirely to R.C.A/S computers. The machines took care of all the firm's trades and at the end of each day the Center sent Kidder, Peabody the customers' bills and buy or sell confirmations. Conversion to computers not only brought greater order and efficiency to the firm's back office, reduced the size of its clerical staff, and cut the cost of handling each trade but, unknown at the time the system was adopted, made it possible for Kidder, Peabody to avoid serious difficulties later in the decade when a huge increase in the volume of stock market transactions created an avalanche of paperwork that nearly toppled some firms unable to cope with it.

Mechanization and the ongoing restructuring of the firm's internal operations, combined with a huge increase in personnel-total employees in the New York office alone increased from 261 in 1945 to 840 in 1969-turned Kidder, Peabody into a much more tightly structured organization. The restructuring did not, however, alter the roles of Gordon and Webster. They remained as in the past the two chief policy makers, the firm's seniors in every sense of the word. In 1952 they invited the forty-seven-year-old Erwin Stuebner to join the small high-level group. He had been the manager of Kidder, Peabody's Philadelphia office, leaving it in 1938 to accept a vice presidency with the Fidelity-Philadelphia Trust Company. In October 1947 he returned to Kidder, Peabody as managing partner of the firm's Chicago regional office, and in 1952 he was elevated to senior partner and made a member of the policy committee. No further changes occurred in the group's membership until Webster's death in November 1957. The next year Ames, who had taken up much of Webster's capital in the firm, was made a senior partner and joined Gordon and Stuebner as a member of the policy group.

Ames' elevation came at a time of transition when the firm, like so many others, was moving toward incorporation. During the 1950s many investment banking houses abandoned the securities industry's traditional forms of organization (sole proprietorships and partnerships) and started to incorporate. In 1950 securities corporations accounted for slightly less than 28.5 percent of the 3,908 broker-dealers registered with the SEC; by 1970 incorporated houses represented nearly 73.8 percent of the 3,982 registrants. Tax benefits for the shareholders (the former partners), continuity of the firm, the ability to use retained earnings to build capital, the fact that the shareholders' financial liabilities were limited whereas those of general partners were unlimited, and, most importantly, the opportunity to widen ownership-to retain and attract able young employees by giving them an interest in the business-made incorporation increasingly attractive, particularly after May 1953 when the New York Stock Exchange amended its old rule denying seats to corporate officers and directors.

Kidder, Peabody's decision to incorporate was not reached easily or quickly. Some of the partners, proud of the prestige associated with the positions they had attained, were reluctant to abandon the traditional form of organization; others feared incorporation would destroy the close flexible relationship that distinguished investment banking partnerships and lead to rigid institutionalization and increased costs. Opposition within the firm and uncertainty about the tax advantage offered by incorporation led to a compromise decision, the organization of a corporate affiliate (Kidder, Peabody & Co. Incorporated) to take over the firm's corporate underwriting business. Set up in January 1956, the affiliate offered some of the more important advantages of full incorporation-limited liability in a high risk area, executive positions to key employees, and organizational continuity-without sacrificing the tangible and intangible benefits of the partnership which continued, as in the past, to conduct the firm's other activities: brokerage, corporate and municipal over-the-counter trading, and municipal underwriting.

Organization of the underwriting affiliate marked the beginning of Kidder, Peabody's slow transition to full incorporation, which was finally accomplished late in 1964. Two considerations probably more than any others made full incorporation desirable: the "unanticipated great success" of the underwriting affiliate and the cut in federal income tax rates approved by Congress earlier in the year. Some thought was given to continuing the partnership and having it conduct only the firm's brokerage business. That arrangement presented such "extraordinarily difficult operating problems," in the words of the firm's counsel, that the proposal won little support. Forced to decide between changing back to a full partnership or moving toward complete incorporation, the partners opted for the latter.

Kidder, Peabody & Co. Incorporated, a Delaware corporation, took over the entire business of the old partnership in January 1965. The shift to the corporate form of organization involved no fundamental changes except, of course, in the firm's legal entity. The thirty-two general and nine limited partners became the corporation's stockholders. Their holdings in the corporation were determined by the share of the business they formerly held in the partnership. Gordon, the head of the house at the time of incorporation, became chairman of the board of directors, and the other two senior partners-Stuebner and Ames-were made president and vice president and chairman of the executive committee, respectively. Most of the other general partners became vice presidents, and another twenty- seven members of the firm also were elevated to that rank, not all of whom were stockholders. The number of common stockholders, the equivalent status of former partners, grew from thirty-two, at the time of incorporation, to thirty-six by the end of the decade.

Nor did incorporation bring about any significant changes in Kidder, Peabody's functions. The firm remained what it had been, a diversified investment banking house, serving the needs of a varied clientele-individuals, corporations, and governments-both at home and abroad.

More traumatic, perhaps, than the decision to incorporate fully was the one compelling the firm to give up its Wall Street address. Since 1891, when Baring, Magoun & Co., Kidder, Peabody's New York partnership until 1908, occupied offices at 15 Wall Street, the firm had held space on that famous, narrow thoroughfare. The decision to move, dictated in part by the need for more space, was forced upon the partners by the New York Stock Exchange which also needed larger facilities and owned the building at 17 Wall Street where Kidder, Peabody had occupied offices for more than a half century. The first member to move into the Exchange's new building, Kidder, Peabody also was the last one to vacate it, moving to 20 Exchange Place in November 1961. Its new location allowed the firm to bring together in one building all of its departments.

Loss of its Wall Street address, while disturbing to some of the firm's more sentimental partners, did not impair Kidder, Peabody's ability to conduct its business or recruit new clients. By the end of the 1960s it ranked among the top corporate banking houses in the country. Unlike some investment firms whose corporate clients were concentrated mostly in a single industry or composed chiefly of mature companies in or about to enter the so-called billion dollar club, Kidder, Peabody's listing reflected the firm's long-time commitment to serving the needs of ably managed, growing businesses. Some of the companies it financed repeatedly-Burroughs Corporation, Cessna Aircraft, General Tire & Rubber, Carnation, among others- chose Kidder, Peabody as their banker because of the diversified services it could provide and its ability to distribute all types of securities throughout the Unites States and the world. During the 1960s the firm ranked tenth in dollar volume ($6.7 billion) and eighth in the number (375) of security offerings managed or co-managed by the top forty investment houses in the country that headed issues in that decade amounting to $500 million or more. The firm's underwriting participations in that ten-year period-2,017 with a value of nearly $2.3 billion-put it in third place in number of participations and ninth in dollar value. The firm's private placements between 1960 and 1969, valued at nearly $3.7 billion, also placed it among the top houses in the business. In 1969 Kidder, Peabody ranked first in the number of direct sales (eighty) and third in dollar volume ($440.7 million).

For Kidder, Peabody, the quarter-century following the close of World War II was a time of remarkable accomplishment. In 1945 the firm was a recognized national distributor of securities; by 1969 it had become top originator and underwriter of corporate and government offerings as well as a leader in private sales. The marked increase in Kidder, Peabody's capital from $4.5 million in 1945 to $30 million in 1969 provided compelling evidence of the firm's progress, as did Finance's widely read yearly survey of the capital positions of the country's 100 leading underwriters. In 1969 that monthly's listing ranked Kidder, Peabody in twenty-eighth place. No one contributed more to the firm's rise to prominence than Gordon, who steered Kidder, Peabody back to a position of leadership at least equal to if not surpassing the one it had occupied in its greatest pre-World War I days. But neither he nor the other senior executives were content to rest on past accomplishments or the firm's long history. "We are proud of our whiskers," said one of them, "but we are too concerned with the present and future of the business to sit back and admire them."

There was good reason for their concern, despite the great underwriting and brokerage booms that made 1968 one of the most profitable years in Wall Street history. The optimism generated by soaring profits-the total capital of 424 underwriters surveyed by Finance increased 31 percent in 1968, reaching almost $3.5 billion-failed to dispel the widespread uneasiness and uncertainty that blanketed much of the country as the "go- go" decade of the 1960s drew to a close. The divisive war in Vietnam and racial violence, civil disorder, and assassination at home disheartened millions of Americans and undermined their confidence in the nation's institutions, including Wall Street, which faced serious problems of its own. Kidder, Peabody, along with the rest of the securities industry, was about to enter another period of difficult testing, in some respects the most serious since the far-away depression years of the 1930s.
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