Chief Executive Officer, President & Director, Cboe Global Markets
Leaders on Leadership: Craig Donohue
Larry Fobes interviews Craig Donohue, CEO of CME Group. This is a business you may NOT know, unless you're a financial ...
About Craig Donohue
In a 2015 interview, Craig Donohue discussed his leadership approach and the strategic direction of CME Group, where he served as CEO. He described derivatives markets as a mechanism for hedging and transferring risk, comparing them to insurance. Donohue stated that demutualization and becoming a public company unified stakeholders around shareholder value creation. He emphasized taking a long-term view, including continued investment during the recession, and pursuing growth through large-scale mergers and acquisitions that generate cost synergies. Donohue also noted that innovation in a technical, regulated environment is "an art not a science" and that calculated risk-taking, including occasional failure, is acceptable as long as lessons are learned. Donohue addressed regulatory and ethical topics, stating that preventing financial scandals requires ethical leadership and a conservative approach. He argued that derivatives are useful for risk transfer but that the regulatory framework for over-the-counter markets had not kept pace with their growth, unlike exchange-traded markets. He also said that CME Group has focused on its competitive advantages rather than diversifying for investors, who can seek their own portfolio diversification.
Transcript (51 segments)
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Narrator0:00
We're recording this show in Chicago, well known for its stunning skyline, amazing architecture, beautiful lakeshore, world-class museums, music, theater, art, and pizza. It's also a world-class commercial center. Our guest leads a Chicago-based company that you may not know if you're not a financial trader. It's the leading exchange for futures, derivatives, and options. Three billion transactions a year, a million billion dollars of valuation. Craig Donohue, CEO of the CME Group, is this week's Leader on Leadership.
Knowing when to ask for help is critical when you're in a leadership position. It's getting the best out of people. It's the essence of leadership.
Major funding for Leaders on Leadership is provided by Greenleaf Trust, helping people manage their wealth, accumulate assets, and preserve those assets for generational continuity. Implies trust. We are sitting down on the same side of the desk as you are. We're planning for your financial needs.
Additional funding provided by the Wayne State University School of Business Administration.
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Larry Fobes1:39
Welcome to Leaders on Leadership. I'm Larry Fobes. We're in the global command center of CME Group. We thank CME Group for hosting us in this amazing place and for the support and participation of their broadcast media group. Thanks for being here, Craig.
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Craig Donohue1:52
My pleasure.
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Larry Fobes1:54
A little bit different than working in your father's pharmacy when you're a kid.
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Craig Donohue1:58
A little bit different.
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Larry Fobes2:00
When people, most people who aren't in the financial industry, don't really understand what CME Group is and what you do. So in layman's terms, can you explain what the company is, what it does, how it does it?
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Craig Donohue2:12
Well, most people understand insurance and the need to protect themselves with insurance. And I like to think of us as a large insurance company. We have businesses that are operating in commodities, or in oil and gas markets, or that are engaged in borrowing or lending activity or investing activity. And what our markets really do is allow people to hedge and transfer risks to other people. So if you think about it like an insurance company, it's basically transferring risk through a risk structure to other people. And that's really been the key to our success.
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Larry Fobes2:47
But you didn't start in this business. You started your career as an attorney. And while you're an attorney, you went back for another degree in financial services regulation. Were you planning to move into some other career than law?
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Craig Donohue3:02
Well, you know, I've always been a lifelong learner. And I first started practicing law in the area of securities, and Chicago was really all about commodities and futures and derivatives. And so I wanted to broaden my understanding of derivative markets, and my master's of law in financial services regulation was really a way to achieve that. And then afterward, I became more interested in sort of the fundamental business aspects versus the legal and regulatory aspects of what we were doing. And so ultimately, I went back for a master's of management at Northwestern University as well. So that sort of followed, or I guess maybe led to, the transitions in my own career.
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Larry Fobes3:44
Now, when you joined the exchange business at the Chicago Mercantile Exchange, 15 years later you're CEO. It's obviously a very progressive path. As you're going through the corporate training program, the experience building steps, you're always the new person in the group, trying to be an effective leader but also learn that job. How do you do both at the same time?
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Craig Donohue4:10
It's a great question. But I think a lot of great leadership is being a learner and a listener. One of the things that I think has helped me a lot is really understanding history and where the organization is and why people think the way they do. But at the same time, thinking about the future and thinking about the steps that we need to take to continue to really thrive and survive. So I have to say, in every job that I've had at CME Group and elsewhere, it's always been a learning on the job type of experience. And I still feel that way today. One of the reasons I love being here is I get to learn every day.
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Larry Fobes4:52
So even people who have achieved a CEO level position need to keep learning, need to keep studying.
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Craig Donohue4:56
Oh, absolutely. Especially in a business like ours that is so dynamic and always changing and highly innovative. Every day I'm learning something new. And I think that's not unique to me. I think that many of my colleagues would say the same thing, and it's what makes this such a fascinating and fun place to be.
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Larry Fobes5:18
Now you got to put that MBA learnings to good use in a couple of interesting transactions. You were a senior leader at Chicago Mercantile when they demutualized, went IPO, and became the first publicly held exchange. How does the leadership viewpoint change when it's no longer a private club and now there's external investors bringing in outside viewpoints?
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Craig Donohue5:42
Well, it's a great question. Sometimes I would say it's very different, and sometimes I would say it's very similar. In that, even as a mutual organization and being member owned, we had always a tremendous amount of pressure to remain innovative and at the forefront and to expand the business. And in fact, for 40 years we were always a growth company, even though we were really a private member-owned organization. But the people who preceded me in leadership here were tremendous leaders and thinkers and visionaries. And so in that sense, the shareholders are very similar to the members. What is different, though, is that as we demutualized and became a public company, it really unified everyone's interest around the core concept of shareholder value creation. In a mutual organization where you have such a variety of different constituencies, it's harder to get to that single common denominator of interest that allows you to easily drive the organization forward. So we were right to do what we did, and it is difficult to transition a 150-year-old institution from that type of ownership structure to what we are today. But I have to say that I think our board and our management has done a very good job.
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Larry Fobes7:00
Now you had another transition to make. In 2004 you became CEO of Chicago Mercantile, and a couple years after that you led the Chicago Mercantile, the smaller exchange, to buy the bigger Chicago Board of Trade. That had been rumored as something that should happen off and on for 20 years. What made you think that was the right time to do it, that you could actually pull off the David and Goliath acquisition?
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Craig Donohue7:25
Well, all of us in leadership here have, I think, always had our eye on the external environment and forecasting forward what's happening in the world, how will things be different five years from now. And I think it was at that time that we recognized that these markets were going to consolidate, they were going to become more global. We, as an applied technology company, needed the size, scope, and scale advantages that were really necessary for us to compete on an international stage. And we were fortunate because we had led the transformation of the industry both in electronic trading as well as in demutualization and converting to a vibrant for-profit company. What then followed was other domestic exchanges did the same thing. The Board of Trade very successfully, and also NYMEX very successfully. And so the timing was right. And while we had been competitors, the reality was we were now competing with people in Europe, Asia, Latin America, the over-the-counter derivative markets. And so the timing was right and the logic was right.
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Larry Fobes8:38
A couple of years later you expanded again and you made the purchase of NYMEX and COMEX in New York and took controlling interest of the Dow Jones Industrial Index. Is it harder or more difficult to merge cultures when the partner, the new partner, is across the street versus across the country?
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Craig Donohue8:58
I think geography definitely plays a role in that. It's easier to assimilate when you're next door to each other each and every day. And long distance definitely makes it somewhat more challenging. But I don't think there's a one-size-fits-all answer to that question. What we have found is that we're trying to create effectively a new culture for the combined company. And I think one of the things that we're finding, which is fascinating, is that it's not so much about LaSalle Street or Wacker Drive in Chicago, or Chicago and New York, because very quickly on the heels of our combination with the Board of Trade and then our combination with the New York Mercantile Exchange and COMEX, we have been all about globalizing our business. And we're looking for new distribution, new products, new customers in all of the developing and emerging markets in Latin America, Asia, the Middle East, Europe. And so our culture is really one of focus on being a global company that provides global risk management solutions to our customers. So we haven't had time to worry too much about New York pizza versus Chicago pizza.
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Larry Fobes10:15
You've said a couple of times in other venues that when you look at potential merger acquisitions, you look at them from a cost energy viewpoint, not just an opportunistic growth opportunity. When is growth good and when is growth bad?
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Craig Donohue10:32
Well, growth is always good. But I think you have to be very careful about how you pursue growth. And in our particular case, we've been motivated in terms of large-scale mergers and acquisitions, as you mentioned, by the attainment of cost synergies that really create value for shareholders. In our business, we're largely electronic, we're globally distributed, we have customers in more than 150 different countries around the world. And our ability to develop new products that might meet particular trader or investor needs in Latin America or Europe or Asia is pretty high. The barriers to entry in distributing our products and services around the world are pretty low. And so mergers or acquisitions aren't really necessarily the driving force in terms of our continued organic growth.
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Larry Fobes11:24
After all these mergers here in town and on the East Coast and the relationships with other exchanges around the world, there's a little thing happened called a recession. How do you lead a company to keep focused on merging all these disparate pieces into the one new business model and dealing with the fallout and trading that the recession caused?
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Craig Donohue11:46
Well, it's a great question. We have really prided ourselves on taking a long-term view, which is very hard to do in today's financial markets, and certainly in terms of shareholders' and investors' appreciation for that type of dedication. But that's the thing that has always distinguished us. And so even where the temptation might have been to stop investing in growth and cut expenses or reduce capital, we know that we have a growth company. We know that we are very solidly positioned for continued growth and expansion on an international basis, including into the over-the-counter derivative markets and the index services areas you mentioned before with our acquisition of the Dow Jones Industrial Average Index. And so this is a time for us to invest and to take the long-term view of where we want to be five and ten years from now. And so that's really been our overriding focus here at CME Group.
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Larry Fobes12:51
Obviously it's worked. I mean, if you look at the annual reports from CME Group, you see earnings per quarter of a half billion dollars, you see operating margins over 60 percent. As a leader of the organization, how do you help keep the energy up in the face of that wonderful success, keep people from going complacent, keep driving, keep not being satisfied with the status quo?
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Craig Donohue13:15
Well, again, I'm lucky because when I first came here more than 20 years ago, this was already a very dynamic, very innovative place that had a can-do attitude. And so I credit my predecessors over many years with building that culture. And it's been my job, along with my team members here, to really kind of perpetuate that same can-do emphasis on innovation and change, and really embracing change as a way to become more successful at what we do. I think the biggest challenge we have is balancing that sort of culture and appetite with the hard work. People here work incredibly hard, and what we do is very sophisticated and complex. And so there's a biorhythm that has to have the right balance. We can't burn people out, but yet we want to push them as hard as we can.
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Larry Fobes14:14
Thanks for being here, Craig. We're going to take a quick break. When we come back, we're going to talk with Craig Donohue about leading for innovation at CME Group.
Welcome back to Leaders on Leadership. We're talking with Craig Donohue about leading for innovation and creativity at CME Group. One of your mentors, Leo Melamed, once made the comment that the old Chicago Mercantile was built on the backs of pork bellies originally, but now it's built on innovation. You've talked about leading for innovation and creativity as being one of the main roles of being a CEO. How do you lead for creativity and innovation in a company like CME Group that is so technical, so structured, so regulated?
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Craig Donohue15:09
Well, it's an art, not a science. But fortunately, it's really part of the culture here. Part of the way we do that is by talking about it and really accentuating the value of innovation and the history of innovation. Because when people have an appreciation for history and what has been achieved through our innovations in the past, whether it was new markets or new products or Globex and new technology, they get to understand the role that they can play in actually bringing new innovations to market. So part of that is just the dialogue around here and the emphasis that we place on it. One of the things that we do is we really try to applaud and recognize innovation. We have an inventors program here, for example, where we recognize with monetary awards and other important acknowledgements the value of people who are developing new products or new technologies or new risk management capabilities. In some cases, they're patentable ideas. We have a patent innovators program here. And so that's a large part of it. But when we see people who have successfully developed a new innovation, we really bring great attention and great emphasis to it. And that's what sort of informs the way people think.
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Larry Fobes16:38
The CEO, how can you help create the culture in the company so that employees are really willing to bring out revolutionary ideas and not feel they're in trouble if it doesn't work or if it's not quite right?
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Craig Donohue16:54
Well, that's always a challenge. One of the things we try to do as well is we try to really emphasize that taking calculated and measured risks and sometimes failing is actually okay. And there's a lot of people around here who really believe that as long as we learn from our mistakes and as long as our mistakes are fewer than our successes, we're actually on the right track. And it's when we're never failing or never taking risks that we may not likely be successful in the long run. So that's just an emphasis that we have to drill into our employees and our team here.
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Larry Fobes17:31
Another issue around creativity. The couple of visits I've made to CME Group, this is a very fast-paced place. People are very, very busy. How do people segment their work time so that they can keep up with the relentless pace of just getting the work done, but also carve out a few quiet moments to let the aha idea surface?
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Craig Donohue17:52
Well, that's a tough thing to do because, as you mentioned, people here are focused in real time on supporting global markets and trading activity and customers around the world. But we do pride ourselves on our human capital. We've been aggressively acquiring more talent over the course of the last decade so that we can be sure that we have enough people and enough capacity to actually focus on the what next. And so I think we strike a pretty good balance, but people work very hard around here.
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Larry Fobes18:25
That's clear from the visits. Over the last few years, we've seen people in other organizations who have been overly creative in their finances. I'm thinking Enron, I'm thinking Madoff. How does a CEO of any company, what can they put in place to make sure that it doesn't happen to them?
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Craig Donohue18:43
Well, I think it starts with great people with a great sense of ethics and effectively the right tone at the top, which is not just myself, it's the board and the other management here. And I think that you have to communicate values. In our case, our values are that we want to operate and hold ourselves beyond reproach. So we're a conservative company. We take the conservative view. We live in a fishbowl. We're a very large and very visible financial institution, and people around the world entrust a lot to us in terms of their hedging and risk transfer requirements. And so it's very important that we uphold that high standard of integrity and values in anything and everything that we do.
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Larry Fobes19:34
You've talked a couple of times about your leadership style, which is to focus CME Group on what it does best. Right. When I started my career a long time ago, diversify, diversification was king. Everyone said we're in other markets, we manage our risk that way. What's happened over my working career that CEOs have moved from focus on diversification to focus on core?
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Craig Donohue19:58
Well, first of all, our investors and shareholders obviously can seek their own diversification in their own portfolios, so they don't really need us to do that for them. And I think where many companies go wrong is when they begin to think that their success in a given business or a given industry is extensible always into adjacent areas. And for us, we've really prided ourselves on staying focused on where are our competitive advantages, where are we better than everybody else or most everybody else that we compete with. And so we've really tried to stay focused on that. We are the leading product innovator. We have the most robust, resilient, and globally distributed electronic trading platform. And we have the most highly regarded central counterparty clearing operation in the world. And so we really capitalize on those strengths in extending ourselves into new areas.
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Larry Fobes20:59
Some of those new areas that you've mentioned earlier that you're extending yourself into is growth markets, emerging markets around the world. With all the technology that we see and all the technology you've talked about in this interview, is going to these new markets just buying more computer capacity and running some ads, or do you need to be face to face in those other markets?
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Craig Donohue21:18
Well, we definitely need to be face to face. And one of the things that we're very proud of here is that as we have begun to really extend ourselves as a global company, we now have probably eight to ten percent of our workforce outside of the United States in the EMEA region and Asia Pacific, Latin America. And so our job there is to develop distribution channels, to educate customers, to work with customers to gain access to our markets and understand how they can use insurance products or hedging and risk transfer products to basically protect the value of their businesses and their profits.
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Larry Fobes22:00
In the last couple of years, the popular press has said that the recession we're hopefully working our way out of was caused by derivatives and mortgages and the leaders who implemented them. Warren Buffett chimed in assuming a similar opinion recently. Your response?
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Craig Donohue22:21
Well, I would say first of all, it's clear that the economic crisis was largely caused by excessive credit, excessive lending, poor lending standards, the real estate and mortgage crisis. And then it played out into other areas, including the over-the-counter derivative markets. But it was first and foremost and fundamentally those things that I mentioned. Secondly, I would say that it's clear that derivatives are highly useful and necessary parts of today's world in terms of hedging and transferring risks. The problem that we had in the over-the-counter derivative markets is that the regulatory framework had not kept up with the growth in the markets. And this is in distinct contrast to what we do in the exchange traded markets. We've been regulated for 150 years, and in fact we operated flawlessly during the economic crisis. And our model, which really is a centralized market with transparency that then incorporates what we call central counterparty clearing, is what has been adopted and emulated by lawmakers now for the over-the-counter market. So we've got a very strong foundation for the future, given that we're really the role model.
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Larry Fobes23:39
Craig, I've got one last question. You've made a career starting with a smaller Chicago Mercantile, growing that into a world-class group of exchanges in your business. And that group is there to manage risk, as you said. Let's put you in a hypothetical situation. You're now CEO of a small organization that's based exactly on risk. You're now CEO of a small casino, one of the old family casinos in Las Vegas, with the mission to take them into the largest global group of casinos in the world. How would you approach that?
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Craig Donohue24:15
Well, I don't know that I know enough about the casino business. That's an awfully different business than what we're involved in. But throughout my career, you acquire skills that are definitely transferable skill sets. And so one of the things that I've prided myself on is being strategically focused, really thinking about, as we were talking, what are we good at and how do we maximize that? But as well, what are the smart ways to extend ourselves or expand ourselves? And so I'd have to give that a lot of thought. I told you I'm a lifelong learner. I'd have to learn a lot more about that business.
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Larry Fobes24:55
Thanks for being here, Craig.
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Craig Donohue24:56
Thank you.
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Larry Fobes24:57
Please join us again next time for another edition of Leaders on Leadership. See you then.
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Narrator25:38
Major funding for Leaders on Leadership is provided by Greenleaf Trust, helping people manage their wealth, accumulate assets, and preserve those assets for generational continuity. Implies trust. We are sitting down on the same side of the desk as you are. We're planning for your financial needs.
Additional funding provided by the Wayne State University School of Business Administration.
An encore presentation of Leaders on Leadership is available online for viewing at dptv.org.