Saturday, August 22, 2015

Banks Are Far From Amazon

If you haven't read the New York Times article on Amazon working conditions, you should. By trying to create a meritocracy, the unintended consequence included nothing more than petty zinging and flaming. The kind you see on social media. Except at least Amazonians do it to your face, but in a public setting. My response to reading the article is in my tweet below.

Jeff Bezos refutes the characterization of Amazon in the article as a soulless, dystopian workplace, stating it's not the Amazon he knows. Possibly true. Using anecdotes to make your entire case is lazy. What is the company turnover rate? How much overtime do they dish out? Because the article indicates nights and weekends are the norm. A little facts supported by anecdotes would have been more effective, and in keeping with journalistic standards. Not that I'm an expert on journalistic standards, but when a blogger like myself comments on lack of facts from the Old Gray Lady, journalism in the USA is in trouble.

While reading the Amazon article, I thought to banking. How far from a meritocracy we have become. In some financial institutions, the inertia reminds me more of a government agency than a shareholder owned company. One bank chairman said that when he wants to get something strategic done quickly in his company it takes two weeks. In banking, it takes two years.

Regulation counts as a progress inhibitor. Especially since the financial crisis. Bankers are wary of charting a different path for fear of how regulators would react. Plain vanilla business models receive the most favorable examiner reactions. Veer off the norm, scrutiny is sure to follow.

Internal to our banks is the inertia that comes from compartmental-ism, mediocrity, and old-school leadership. While there is not much we can do about regulatory attitudes towards moving our industry forward, there is plenty to do about our business models.  Here are a few suggestions to create a greater meritocracy that rewards moving the bank forward while minimizing the unintended consequences that Amazon is likely dealing with.

1. Create incentive systems with meaningful and transparent awards for achievement. I have spoken and written on this subject often. Use incentives as a positive means to reward behaviors positive to your institution. At Amazon and in many other meritocracies, incentive systems are wielded like sledge hammers to drive underachievers into the ground. Instead, lift achievers up. Persistent underachievers will self select out or be shown the door.

2. Fire people. When an executive tells me about the issues they are having with a subordinate that is hurting the bank, I always ask if the subordinate is an employee at will. Why? Because you can fire them! As one banker told me, there is nothing more motivating than a strategic firing. If an employee is not putting forth the effort, has a bad attitude, or simply doesn't care or works against where you want the bank to go, FIRE THEM! The remaining employees will take note.

3. Build a collaboration culture. Some banks have tried this and it morphed into a crazy number of meetings. But you must forge forward with the pre-eminent question being "how should this be"? Usually the answer is obvious. Get the people you need to move an initiative forward into a room and don't leave until you work it out. You don't need standing meetings for this. Be bent on taking action once the talking is done.

4. Promote learning from failure. Do not penalize failure. This is true if a bank employee is working to innovate and move the institution forward, but the initiative fails. I often hear about bank employees getting "written up" (an audit comment, examiner comment, or supervisor action) for trying a process that may not have worked or unknowingly violated an esoteric rule. Wrist slaps are for employees that ignore supervisory directives, or knowingly violate policy. Not for trying something that doesn't work out. That's called innovation.

What do you recommend for creating a meritocracy without pounding your people into the pavement?

~ Jeff

Saturday, August 15, 2015

Bankers: Don't Hate the Dividend

Me to Bank CEO: Have you considered, instead of a growth strategy, maximizing profits and paying out most of it in dividends? CEO: *crickets*

And so it goes with my suggestion that slow growth, superior profits and high dividends is a viable strategy. Particularly for financial institutions in slow growth markets. This strategy could also manifest itself in mutuals and credit unions, as they can pay a bonus dividend to core depositors out of their robust profits.

But as I told one banker yesterday, not many are drinking my Kool Aid. 

Growth is sexy. With growth comes accolades. Management gurus spew bromides such as "grow or die". And so our industry has been cut in half in the past twenty years, because so many of us chose the latter.

I think it may have been a business professor that told me growth above and beyond market growth would only last for a short time. The bank CEO, mentioned above, was asking for my opinion on his growth and acquisition strategy. His market grew at 3.6% the prior year. The market leader, of the "too big to fail" variety, actually grew market share from the prior year while the CEO's bank declined in market share. So they weren't succeeding taking business from the 800 pound gorilla to sustain growth. Nor was their market growing at a pace that would fuel book value and EPS. Hence my suggestion.

When I suggested it he sought examples. I didn't have the answer off the top of my head but he motivated me to look at the strategy from a total return perspective. I have an affinity for total return because it focuses on what you deliver to your shareholders, regardless of how you deliver it. Capital appreciation plus dividends, no matter the proportion. My suggestion to the CEO was 4% EPS growth combined with a 5% dividend yield delivering a 9% total return.

Getting back to my research, I reviewed all publicly traded banks and thrifts with between $1 billion and $5 billion in total assets. I eliminated any bank with greater than a 2% non-performing asset/total asset ratio to control for credit quality challenges that impacts profits and trading multiples. The results are in the below table.

I admit that the lower dividend paying banks delivered a better three-year total return than the higher dividend banks. But not materially so. Certainly not a slam dunk that motivates the vast majority of bankers to opt for a lower dividend, higher growth strategy.

The remaining ratios are very similar: ROAA, price/book, and price/earnings. Shareholders don't appear to penalize the higher dividend strategy by ascribing lower trading multiples to those banks' stock valuations. In fact, by growing slowly, maximizing profits, and paying the majority of profits in shareholder dividends (or depositor dividends for mutuals and CUs), one could argue that this is a lower risk strategy and avoids the roller coaster "high-highs" and "low-lows" that banking's high fliers tend to experience during economic cycles. Lower risk shareholders should expect slightly lower returns. So it is intuitive, right?

But no. Instead, those in slow growth markets set sail hoping to perpetually grow faster than their markets will allow, and rely on acquisitions to stoke their growth. Grow or die. Are we going to get a different result than we have gotten?

~ Jeff

Saturday, August 01, 2015

Bankers: Play to Win

I recently read Playing to Win: How Strategy Really Works by A.G. Lafley, Chairman and CEO of Procter and Gamble, and Roger L. Martin, Dean of the Rotman School of Management at the University of Toronto.

The book identified five choices businesses have to make to win, called the Cascade of Choices, because each one cascades from the prior one. And I thought, bravo! But then I tried to think of banks that are making these choices.

Banks rarely had to choose. Instead of focusing on small and medium sized, closely held businesses and the personal banking/wealth needs of their owners (note: Cobiz Financial), we choose to be everything to everyone in towns where we operate. This has sapped resources to the point of ineffectiveness, never committing to any particular path for fear of being wrong. 

In sports, you can never be the hero without the risk of being the goat. In our risk management meetings deep within the bowels of headquarters, we work diligently to avoid being the goat, never allowing us to be the hero.

Here are Lafley and Martin's Cascade of Choices, with my commentary following each one.

1. What is your winning aspiration? The purpose of your financial institution, the motivating aspiration.

I've called this vision, future-picture, high definition destination, and aspiration. It's all the same thing. What does your financial institution aspire to be? If you hear someone say that aspiring doesn't matter, ask yourself: Are they holding you down?

2. Where will you play? A playing field where you can achieve your aspiration.

Equally important, where will you not play in achieving your aspiration? I recall banks that went toe-to-toe with the old Commerce Bank of Cherry Hill, New Jersey on locational convenience. Commerce paid top dollar for prime locations touting extended hours and dubbing themselves America's Most Convenient Bank. Today, those banks are unwinding excess branch expenses that resulted from playing on Commerce's turf.

3. How will you win? The way you will win on the chosen playing field.

On Service! I take my liberties poking bankers on the service imperative because superior service must graduate beyond the platitude it has become. If you will win on your chosen playing field on service, then you focus on customers proven to appreciate service, price accordingly, hire capable employees that can be of service, develop them to hone their skills, and reward their success. 

4. What capabilities must be in place? The set and configuration of capabilities required to win in the chosen way.

The author of a recent American Banker article opined that it wasn't likely millenials will replace human interaction with financial technology. They still wanted someone to advise them and help them with their budget. Do banks have this ability now? If a millenial walked into your branch for financial advice or to help with their budget, could your bankers do it? 

5. What management systems are required? The systems and measures that enable the capabilities and support the choices.

I recently penned a BAI Banking Strategies article Linking Accountability to Strategy. I took the wild leap of faith that a bank would have branch and officer profitability reporting abilities. My experience tells me many don't, and they often revert to lender production and portfolio size to maintain accountability. This may have unintended consequences that is not consistent with your strategy. So in moving through the Cascade of Choices, make sure you have the management systems in place to execute on your strategy.

There you have it. I highly recommend the book. P&G thought so highly of Lafley that they brought him back shortly after he retired. In the introduction to the book on Amazon, the pitch read:

"This is A.G. Lafley's guidebook. Shouldn't it be yours as well?"

~ Jeff