Felix Rohatyn: taking the measure of today's boards; investment banker, corporate director, municipal savior, United States Ambassador... Felix Rohatyn has counseled the powerful and provided powerful counsel for 40-plus years and counting.

• Position: Interview

INTERVIEW BY HOFFER KABACK

FELIX G. ROHATYN was appointed by President Clinton in 1996 to be U.S. Ambassador to France, a sought-after and prestigious post. Yet only those ignorant of the past 40 years of American corporate finance history could think that Rohatyn's official service in Paris even remotely encompasses his career. For an appreciable portion of those 40 years, Rohatyn, then a partner at Lazard Freres, was one of the top investment bankers in the world. He worked particularly closely on deals for Harold Geneen, CEO of ITT and one of the most prolific corporate acquirers in history. He knows the inside of boardrooms.

Additionally, Rohatyn has had a public life pre-dating by 20 years his ambassadorial role. Asked for help by New York Governor Hugh Carey, a man he had never met, Rohatyn was instrumental in saving New York City from bankruptcy in the mid-1970s (see sidebar on page 20). Not many investment bankers can claim celebrity-level name and face recognition from ordinary citizens. In New York City, Felix Rohatyn can.

Having worked at Lazard Freres as a summer clerk during his undergraduate years, Rohatyn, upon his graduation from Middlebury College in 1949, started at the investment banking firm full-time. After Army service during the Korean War, he rejoined Lazard and worked in the firm's foreign exchange department. He subsequently asked to switch into mergers and investment banking. That move enabled him to develop a close relationship with the legendary -- and tyrannical -- head of Lazard, Andre Meyer.

As revealed by author Cary Reich in Financier, a deeply sourced, detailed biography published in 1983, Andre Meyer considered his own nominal partners at Lazard to be little more than clerks, there to do his bidding unquestioningly and instantaneously. "His basic attitude," Reich tells us, "was that the only way to succeed in a treacherous world was to have total control of your environment, and of yourself."

Meyer insisted that Lazard partners report to him even the most trivial aspects of matters on which they were working. He insisted that they be available by telephone at all times (seven days a week). He demanded punctuality at very early-morning meetings. A partner who once arrived a few minutes late for such a meeting provided Meyer with the seemingly unassailable explanation that his train had caught fire. Meyer's reaction: The man should have taken an earlier train.

Autocratic and pathologically controlling though Andre Meyer was, he was also indisputably a giant figure in the world of finance and power, a confidant of a wide range of powerful people, including French politicians, major European businessmen, Lyndon Johnson, David Rockefeller, and Jackie Kennedy. Rohatyn became a protege of Meyer's and began to develop his own relationships with Lazard clients like Geneen, Charles Percy (then of Bell & Howell and later a U.S. Senator), and David Sarnoff of RCA. As the 1960s drew to a close, Rohatyn, then just past 40, clearly had made his own mark on Wall Street as a significant corporate financial adviser and as a major player in the M&A world.

AFTER COMPLETING his service as Ambassador to France, Rohatyn did not return to Lazard; instead, he formed a new, small firm of his own. In the conversation that Rohatyn and I had at his Rockefeller Center office in early February, we talked about a range of topics, befitting the wide expanse of his experience. A particular focus, of course, was corporate governance.

Rohatyn has strong opinions on the subject. They are necessarily influenced by his own time in boardrooms, both as an adviser and as a director. His past directorships include board seats at ITT, MCA, Owens Illinois, Pechiney (the large French aluminum company), Pfizer, Schlumberger, American Motors, Avis, Eastern Airlines, and Comcast. Currently, he is a director of Fiat, Suez, LVMH, Publicis, Lagardere Group, and EADS (which owns Airbus Industrie). He is also chairman of a small pharmaceutical company, Aton Pharma.

Rohatyn has said that "I always felt I owed Geneen a great deal. He put me on his board when that was a daring thing to do. In those days you didn't put a young, nonestablishment, Jewish investment banker on your board when you were a big white-shoe company, which ITT was at the time. In fact, Andre Meyer wanted to put a more senior and more established partner on the board, and Geneen wouldn't hear of it."

Rohatyn believes strongly that institutional investors should propose specific individuals as board members for companies in which such institutions are important shareholders. We discussed this approach -- the idea of creating a cadre of professional directors -- at some length.

FELIX ROHATYN'S overall perspective on business -- and life -- is heavily influenced by his experience of having fled wartime France in 1940 (see sidebar on page 19). People who have not had that type of experience cannot truly understand it. For example, one of 12-year-old Felix's responsibilities was to remove the paste from his family's toothpaste tubes and to stuff the empty tubes (from the bottom, of course) with as many gold coins as possible.

The measure of a refugee's wealth is his own person and what he carries with him. In my conversation with Rohatyn set forth in the Q&A below, the point of view of a refugee is never too far frorn the surface.

Planning for the worst

You have said that you are a pessimist and always plan for the worst. Currently, what would be the contours -- in the world and in business -- of such a pessimistic view?

It would be that we're headed for an unknown struggle, in terms of the security of the West, with an Islamic radicalism, a situation that we haven't encountered since the religious wars of the Middle Ages. It's a struggle that will be done on the basis of rules that are very foreign to us.

The rules of conflict among nations were relatively simple: There was a winner, there was a loser, industrial and military might determined the outcome and, at the end, there was a settlement. There was a peace settlement; there was a negotiation. Somebody won; somebody lost -- but at the end you still had a world that functioned by the same rules.

This might not be that. This might not be something that can be "settled" on the basis of people sitting around the table and deciding on a new set of relationships -- which is a very destabilizing thought when you begin to look at it. You could see some very difficult scenarios coming out of conflict in Iraq or in North Korea or in Pakistan. When there was that faceoff between Pakistan and India, the press was reporting -- rather casually, I thought -- that there were some estimates that in a nuclear exchange between the Pakistanis and the Indians there could be 12 million casualties.

So, I would say that the pessimistic view is a continued highly unsettled situation in terms of the security of the world, and our security as a Western democracy, against an opponent that so far we haven't defeated. At the same time we have the proliferation of weapons. They don't all have to be nuclear or biological or chemical to do a lot of damage. And all of this in an economic climate of deflation.

You mention deflation. There are those who believe that there are parallels between today and the 1930s, not the least because each was preceded by a decade involving a substantial financial bubble and other excesses. Do you draw that sort of analogy? Do you think that there are substantial differences? Or do you think that the world might face a revisitation of stagflation?

Well, I think [the latter] is probably more like it. On the other hand, I do think that a kind of perverse result of globalization, which has many advantages, is the fact that technology and education are hugely mobile and that there isn't very much that we do here or in France or in Germany that, ultimately or even now, can't be duplicated in India or in China at a much, much lower price. And then at the same time you have commodity producer countries, trying to get out from under a lot of debt, that maintain constant downward pressure on commodity prices, At the same time, you also have a very, very large overhang of debt in the developed world. I think there will be enormous and continued pressure -- as long as we maintain free trade, which I think we are going to try to do -- on prices and profits.

I have also thought that in developed countries like the United States we needed 3% to 3 1/2% inflation to lubricate the system and to allow the social services, the labor contracts, the things that maintain some kind of a viable distribution of benefits in a sufficiently growing economy.

You are saying that less than 3% to 3 1/2% inflation is a bad thing?

Yes.

What advice would you give a CEO in terms of what to plan for? Or is there no such advice?

At this time, my advice is to...