There are a lot of places you would expect to find one of the highest performing banks in the country, but a place that wouldn’t make most lists is Springfield, Missouri—the third-largest city in the 18th-largest state.
Yet, that’s where you’ll find Great Southern Bancorp, a $4.6 billion regional bank that has produced the fifth best total all-time shareholder return among every publicly traded bank based in the United States.
Since going public in 1989, just two years before hundreds of Missouri banks and thrifts failed in the savings and loan crisis, Great Southern has generated a total shareholder return, the ultimate arbiter of corporate performance, of nearly 15,000 percent.
What has been the secret to Great Southern’s success?
There are a number of them, but one is that the Turner family, which has run Great Southern since 1974, owns a substantial portion of the bank’s outstanding common stock. Between CEO Joe Turner, his father and sister, the family controls more than a quarter of the bank’s shares, according to its latest proxy report, which places most of their net worth in the bank.
The importance of having “skin in the game” can’t be overstated when it comes to corporate performance. This is especially true in banking, where a combination of leverage and the frequent, unforgiving vicissitudes of the credit cycle renders the typical bank, as one of the seminal books on banking written over the past decade is titled, “fragile by design.”
The trick is to implement structural elements that combat this. And one of the most effective is skin in the game—equity ownership among executives—which more closely aligns the interests of executives with those of shareholders.
“Having a big investment in the company…gives you credibility with institutional investors,” says Turner. “When we tell them we’re thinking long-term, they believe us. We never meet with an investor that our family doesn’t own at least twice as much stock in the bank as they do.”
An interesting allegory that speaks to this is the way the Romans and English governed bridge builders many years ago, as Nassim Taleb wrote in his book Antifragile:
For the Romans, engineers needed to spend some time under the bridge they built—something that should be required of financial engineers today. The English went further and had the families of the engineers spend time with them under the bridge after it was built.
To me, every opinion maker needs to have ‘skin in the game’ in the event of harm caused by reliance on his information or opinion. Further, anyone producing a forecast or making an economic analysis needs to have something to lose from it, given that others rely on those forecasts.
The most important thing having skin in the game has done for the executives at Great Southern is the long-term approach to their family business. “Our dad turned a valuable asset [stock in the bank] over to me and my sister [a fellow director at the bank] and my goal, when I’m finished, is to turn that over to my kids and have it be worth a lot more,” says Turner.
This becomes especially evident when the economy is hitting on all cylinders. “When institutional investors and analysts…are rewarding explosive growth, you need to have a longer-term view,” says Turner. “For instance, the explosive growth you can get from acquisitions is great in terms of the short-term boost to your stock price, but over the longer term that type of thing can reduce your shareholder return.”
Having skin in the game also addresses the asymmetry in risk appetite that otherwise exists between management and shareholders, where the potential reward to management in short-term incentives from taking excessive risk outweighs the potential long-term threat to a bank’s solvency, a principal concern of shareholders.
A long-term mindset promoted by skin in the game also causes like-minded, long-term investors to flock to your stock. This is a point Warren Buffett has made in the past by noting that companies tend to “get the investors they deserve.”
“That point is probably right,” says Turner. “We have a much larger proportion of retail investors than a lot of other companies do. I understand where institutional, especially fund, investors are coming from. It’s great for them to say they’re long-term shareholders, but they have investors in their funds that open their statements every quarter and want to see gains. So it’s harder for big money managers to be truly long-term investors.… It’s a different story with retail investors, who, in my opinion, tend to be longer term by nature.”
This cuts to the heart of what Turner identifies as the biggest challenge to running a successful bank.
“The hardest thing is balancing different constituencies,” says Turner. “We have a mission statement that is to build winning relationships with our customers, associates, shareholders, and communities. What we’re talking about is building relationships that are balanced in a way that allow each of those constituencies to win.”
The moral of the story is that, much like bridge builders in ancient Roman and English times, one of the most effective ways to construct an antifragile bank is by putting skin in the game.