Delivering Shareholder Value

In addition to serving clients, Merrill Lynch is committed to delivering superior value to shareholders.
     Merrill Lynch seeks to deliver returns to shareholders through appreciation in our common stock price and cash dividends. The price of a Merrill Lynch common share has grown at an 11% compound annual rate since our 1971 initial public offering. Merrill Lynch has also consistently paid a quarterly dividend since 1971. While in the short term Merrill Lynch's share price is subject to fluctuations in market conditions, we believe that over the longer term, the distinctiveness of our franchise, combined with our focus on consistent earnings and disciplined growth, will drive superior stock price performance. The following elements are central to our ability to deliver shareholder value:

>> Revenue Growth and Diversification
Since 1971, Merrill Lynch has increased net revenues at an 11% compound annual rate. By strategically positioning the company to benefit from continued global growth and innovation in financial services, we have established worldwide leadership positions in our three business segments. Underlying growth prospects for each of these businesses favor sustained revenue expansion. Revenue diversification and growth initiatives that leverage Merrill Lynch's competitive strengths, scale and client relationships across asset classes and geographies offer the opportunity to enhance the consistency of our performance across market cycles. Investment in fee-based and recurring sources of revenue also affords more consistent financial performance across economic and market cycles.

>> Operating Discipline
Growth in revenues drives expansion in net earnings through focused operating discipline, appropriate scaling of capacity and profitable market share. Since going public in 1971, Merrill Lynch has increased net earnings at a 13% compound annual rate. Success in generating leading profit margins is driven by our resource allocation focus: the deployment of our people, financial, technical and other resources into areas that offer the most attractive returns or growth opportunities. To achieve superior performance in cyclical, market-driven businesses, an ongoing expense and capital management discipline creates operating leverage by limiting performance declines in cyclical downturns and increasing profit margins in upturns. This discipline also facilitates investment in the most attractive growth opportunities, and is integral to further enhancing Merrill Lynch's competitive positioning.

>> Capital Management and Planning
Merrill Lynch seeks to ensure that it has a strong and flexible capital structure while delivering superior returns on equity. In capital planning, Merrill Lynch considers equity capital necessary to support the risks and needs of its businesses, including investment for growth, diversification and other strategic initiatives. We assign each of our businesses an amount of equity that reflects the specific risks of that business, both on and off the balance sheet. We evaluate profit margins and risk-adjusted equity returns against internal and external benchmarks. We recognize that equity capital used to support business risks may not always be adequately measured through quantitative models or ratios and thus do not rely solely on such measures.
     Merrill Lynch's dividend policy is to maintain a competitive market yield, considering conservative increases that do not impair capital planning flexibility. In the event that capital is generated beyond the opportunities to invest in businesses that are strategically attractive and offer appropriate returns, management is predisposed to returning equity capital to shareholders through stock repurchases rather than substantially increasing dividends.

>> Liquidity and Funding
Merrill Lynch assures sufficient liquidity at all times, across market cycles and through periods of financial stress, as part of its core funding policy. Our primary liquidity objective is to maintain alternative sources of funding so that all debt obligations maturing within one year can be repaid without raising new debt or requiring the liquidation of assets. Our liquidity policy ensures that sufficient long-term debt and equity capital are in place to fund the firm's assets, commitments, contingent obligations and regulatory capital needs. We also assure sufficient liquidity is available at each bank subsidiary to meet deposit obligations under stress market conditions. We diversify our funding sources, including deposits, globally to minimize our overall cost of funding and maximize available sources of liquidity.

>> Risk Management
Growth, consistent returns and capital are jeopardized if risk is not controlled. Merrill Lynch's market, credit and operating risk management framework seeks to reduce volatility in our operating performance and lower our cost of equity by managing risks both within and across businesses. We limit our risk profile by diversifying risk and revenue sources, growing fee-based and recurring revenues, and minimizing the break-even point by carefully managing fixed costs. Other risk management objectives include focusing our trading activities on client-driven business, limiting proprietary risk-taking, and closely monitoring our long-term exposure to illiquid assets. We continuously look for opportunities to strengthen our worldwide market and credit risk controls, with particular attention to avoiding undue concentrations.
     At all levels of the organization, Merrill Lynch recognizes that sound corporate governance and oversight policies and employee integrity are critical to effectively managing risk and protecting the interests of shareholders.

>> Aligning Employees with Shareholders
Profitability objectives and shareholder interests are firmly embedded in our compensation structure. We tie incentive compensation to earnings and returns on equity for senior management, and we may use additional role-specific measures such as revenue generation or profit margins for other employees. To further align the financial interests of key managers and revenue producers with those of shareholders, a significant portion of incentive compensation is paid in stock, in lieu of cash. We determine the mix of stock-based and cash compensation, as well as the type of stock-based compensation, by considering the impact on our financial results, the need to retain key talent, and the potential dilution to existing shareholders. We also believe that it is important that our stock-based programs vest over time to further reinforce the alignment of employees with other shareholders.