It's hard to muster any sympathy for Merrill Lynch's John Thain, or Morgan Stanley's John Mack. The CEOs of both firms are passing on their bonuses for 2008 (this is the second straight year Mack refused his bonus). Such decisions should be expected from CEOs steering their organizations through difficult times, and more corporate chieftains should follow their lead.

Okay, Thain got a push in the right direction, after initially arguing he deserved a bonus of up to $10 million. That he orchestrated the sale of Merrill to Bank of America - staving off the firm's seemingly imminent demise - is what he was supposed to do, given the extraordinary circumstances, to protect shareholders from further losses.

It's a question of what's right, not what's defensible. A year ago, Merrill's stock price was at $62.56; it's at $14.50, as of Dec. 9. Similarly, Morgan Stanley's stock price dropped from $55.39 a year ago to $14.97. Morgan's liquidity issues prompted it to seek a $10 billion infusion from the government.

An email from Mack to employees outlining changes in compensation policies will spark heated debates on Wall Street. His intention to introduce a "claw back" clause would allow the firm to rescind the bonus of any individual who causes the firm harm (i.e. losses).

While this punitive policy will make people think twice before they put a business at risk, thereby compromising the integrity of the financial firm, it fails to address the obvious: what kind of leadership produces profits and rewards shareholders? Referred to as "The Leadership-Profit Chain," The Ken Blanchard Companies' research suggests that strategic and operational leadership capacity is vital to producing profits. Strategic leadership (vision, culture and strategic imperatives) and operational leadership (policies and procedures, leader behavior and fairness and justice) have a direct impact on employee-customer relationships, which, in turn, have an effect on the company's vitality and bottom line.

These leadership traits are woefully absent at some of the firms hardest hit by the financial crisis. Compensation policies only matter if the leadership is focused on the right things. The consequences of poor leadership are clear. It will take more than claw-back clauses to restore integrity on Wall Street.

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