The greatest benefit of being a writer is that you get to talk with lots of interesting people. It’s a constant education. Particularly if you appreciate the opportunity and structure your conversations accordingly.
My style is to conduct broad interviews across a range of topics, whether all the topics are germane to the piece I’m working on at the moment or not. This has helped me construct a mental model of banking, but it also means that a lot of material is left on the cutting room floor, so to speak.
With this in mind, I decided to revisit some of the conversations I’ve had with bankers over the past few months to share the most interesting insights.
Foremost among these is a series of conversations with Robert and Patrick Gaughen, the CEO and president, respectively, of Hingham Institution for Savings, a $2.6 billion bank based in the Boston metropolitan area.
Since the Gaughens gained control of Hingham in 1993, following a two-year proxy contest with its former managers, it has generated a total shareholder return of more than 5,400%, according to my math. That’s more than double the total return of other well-run banks like JPMorgan Chase & Co. and PNC Financial Services Group.
One thing that strikes you when talking with the Gaughens is the depth and sophistication of their banking philosophy. All bankers understand banking. But some understand it on a deeper level than others — that’s the Gaughens.
They approach the industry as investors, or capital allocators, instead of bankers. This seems to be a product of the fact that both Robert Gaughen and his father — Patrick’s grandfather — practiced law before becoming de facto bankers in order to protect investments they had made in banks.
This may seem like a vacuous nuance, but it isn’t. It’s always tempting to subordinate the process of capital allocation to operational processes. After all, if your operations aren’t profitable, you won’t have excess capital to allocate.
What true capital allocators appreciate, however, is that the distinction between capital allocation and operations is nebulous. Everything can be viewed through the prism of capital allocation — from how many employees you hire to which technologies you implement to whether you increase your dividend or repurchase stock.
In this respect, capital allocation is less of a mechanical process than it is a mindset, concentrating one’s attention on measuring the return on each incremental decision.
Another interesting insight that came up in our conversations is the importance of studying other industries. Not only the importance of doing so, I should say, but why it’s so important to do so.
The drive to constantly learn is something that many people preach, but few people practice. This is an element of leadership that can’t be overstated. It serves as the common denominator underlying the performance of the most successful CEOs in banking.
It’s well known that banking is an acutely competitive and commoditized industry, and that those characteristics compress profit margins. But there are two other forces that lead to a lack of differentiation as well.
As Patrick points out, high consultant reuse and an overbearing regulatory schema contribute to a high degree of homogeneity in terms of the way banks are run. The net result is that studying other banks can be less fruitful than one might think.
This isn’t to say that a mastery of banking isn’t critical — it is. But after accumulating a critical mass of knowledge about best practices within banking, the incremental return from intermittently studying other industries, it seems, will exceed the return of concentrating exclusively on banking.
The final point that both Gaughens stress relates to the importance of skin in the game, or executive and director ownership of stock. In their case, their immediate and extended family owns upwards of 40% of Hingham’s outstanding stock. This provides a powerful incentive to care not only about the return on their capital, but also the return of their capital.
Many companies talk about the mystical benefits of alignment between executives and shareholders, as well as having employees that act like owners. But there is simply no substitute for having actual skin in the game. It hones one’s appreciation for the virtues of extraordinary banking, from efficiency to risk management to disciplined growth.
None of this is to say that the Gaughens have everything figured out; they would be the first to admit they don’t. But their philosophy and approach to banking is not only unique, but also tried and true.