Full Steam Ahead

When John G. Medlin, Jr. stepped down as CEO of Wachovia Corp. at the end of 1993, conditions might have seemed ripe for a messy boardroom situation.

Widely acknowledged as one of the finest American bankers of his generation, Medlin, then 60, remained board chairman of the Winston-Salem, N.C.-based company. Never known as an autocrat, nonetheless Medlin’s stern hand had indisputably directed Wachovia’s ship for two decades.

Like it or not, Medlin had become renowned for his antipathy for the gutsy, turf-eating, high-wire acquisitions that enabled his peers Hugh McColl, Jr. and Ed Crutchfield, Jr.u00e2u20ac”only 90 miles south in Charlotteu00e2u20ac”to build their colossal institutions.

When Medlin became CEO, Wachovia was roughly the same size as NationsBank and First Union. When he left, Wachovia’s profit ratios still topped the industry, but the bank was much smaller than its in-state rivals.

So just how much space would Medlin allow his handpicked successor, veteran Wachovian Leslie M. “Bud” Baker?

It took three and a half years, but the answer came resoundingly in 1997.

Wachovia undertook four acquisitions that turned it into Virginia’s third-largest bank and marked its entry into Florida. More surprisingly, the bank made a massive offer for Florida powerhouse Barnett Banks, Inc., losing by a nose to high-bidder NationsBank.

That Wachovia, with assets of $60 billion, would bid for $44 billion Barnett set the banking industry on notice: The days of John Medlin’s view of the world were history. Baker now vows to get Wachovia to $100 billion over the next three years.

“Basically, I think Wachovia is a great company,” said John Mason, a veteran analyst at Interstate/Johnson Lane, whose reports had sharply criticized the company in 1996 for falling so far behind its Charlotte rivals.

“Whereas some [investment analysts] like Wachovia because of its past record and accomplishments, I like them because I think Bud is serious about growing his company. If they were to make another acquisition in the next few months, I’d cheer them on.”

What’s perhaps most remarkable, observers say, is that Wachovia’s new aggressiveness is occurring with nary a word of internal boardroom strife. After sticking with the Medlin strategy of profitability over growth, the board now is backing Baker’s aggressive expansion plans.

“Wachovia has a history of wanting to protect its premium price/earnings ratio, which it earned because it made wise investments and didn’t go after growth for growth’s sake,” says director James Johnston, a former CEO of R.J. Reynolds Tobacco Co., historically Wachovia’s most prominent client.

“Nevertheless, consolidation has taken place and caused banks to assess their place in the future competitive structure. And some good opportunities have come along and Wachovia has taken advantage of them.”

Baker says adapting to change is part of the magic of Wachovia, which has had only five CEOs in its 118-year history.

“This isn’t a place where people think about turf,” he says. For dramatic boardroom intrigue, he adds, Winston-Salem isn’t the place to look.

That’s definitely the case, says director Wyndham Robertson, a former Fortune magazine assistant managing editor who joined the board in 1995.

“I’ve been on several boards, and when you are on one like Wachovia that is well run and has good leadership, you sometimes feel like you don’t earn your pay,” she says.

Baker says there is no prospect for strife in the boardroom because of the mutual respect he and Medlin have for each other.

“The reality is that we had what I think was the best CEO of any bank in the nation in John Medlin,” he says. “When he chose to retire at 60, only a fool would have let him leave and not take advantage of his skills and experience. What’s misunderstood is that he didn’t have to retire, and he could have stayed as long as he wanted.”

During Baker’s first year as CEO, Wachovia completed a strategic review that set five objectives: strengthen its lines of business; become more technology oriented; manage capital effectively; create a growth culture; and use mergers and acquisitions to grow.

The message was obvious: Wachovia could no longer rest on its laurels.

In October 1994 the strategic plan was set in place. Wachovia moved aggressively to expand its credit card business, offering some of the nation’s lowest rates while retaining strict underwriting standards. It beefed up its ATM and telephone banking systems, exceeding industry standards for customer service. It developed a line of successful mutual funds, retaining assets from its well-heeled client base.

Befitting Wachovia’s tight culture, the changes occurred with the departure of only a handful of senior executives who voiced barely a peep of dissent.

By 1996, senior managers were convinced that the growth initiatives were working and that Wachovia was ready for significant expansion outside its North Carolina, South Carolina, and Georgia roots. (Wachovia had expanded into the latter two states in the mid-1980s by buying South Carolina National Corp. and First Atlanta Corp.).

“We had always been open to mergers, but we weren’t willing to pay huge premiums for another banking company with the same problems we had and not bring them solutions,” Baker says.

That attitude perplexes analyst Mason, who notes that bank acquisitions are much more expensive now than several years ago when First Union, NationsBank, and others were bulking up.

“You can’t blame Bud because it was John’s responsibility. And his attitude was that nobody was as good as Wachovia, so ‘we won’t buy anybody,’” Mason said. “Meanwhile, the other banks were saying ‘You’ve got to get ’em and then bring them up to your standards, otherwise you’re going to get outgunned in the revenue departments.’ ”

A southern investment banker who asked to remain anonymous is more critical. “OK, so they now say they want to build the bank to $100 billion,” he says. “If that’s the right strategy now, why was it not the right strategy five or seven years ago when there was plenty to buy? Now, the pickings are mighty slim and the prices sky high.”

Baker says a growth-minded Wachovia now can offer something special to the customers of Virginia’s Central Fidelity Bank and Jefferson Bankshares and Florida’s 1st United Bank and Ameribank. Those are the four banks that Wachovia agreed to buy in 1997, adding a total of more than $15 billion in assets.

Had Wachovia bought Barnett, Florida would have gained another strong banking competitor and thousands of jobs might have been saved.

But Barnett’s board opted for NationsBank’s higher bid. Now, with NationsBank and First Union dominating Florida banking, Wachovia’s options in the Sunshine State are quite limited. Many analysts expect Wachovia to mate with Atlanta-based SunTrust, but years of rumors haven’t panned out.

Baker expresses no regrets. “For Barnett to join us would have been a wonderful way to pull our two companies together. But it didn’t work out.”

In tune with management throughout the process, Wachovia’s board has also stepped up its pace.

“We are in much more frequent contact with management and with each other than several years ago,” says Johnston. “In addition to regular board meetings, we’ve had six or eight other meetings either in person or by telephone in the past years.”

Wachovia’s board is looking at the future more than ever, Johnston said, reflecting the industry’s dramatic change. Directors now often gather the afternoon before a regular meeting to kick around ideas and study specific areas of the bank in a more relaxed setting.

“These sessions are especially helpful because they are done on a separate day, and there’s not as many time crunches with people running to catch airplanes,” says Johnston, who spent five years at Citibank between stints at R.J. Reynolds. “Moreover, you have evenings to chew things over with people.”

The product of a Moravian community that prizes collegiality and integrity, Wachovia has prided itself on its corporate governance standards almost as much as its steady earnings performance.

“Going back to the mid-1970s, Wachovia has always been ahead of others in making sure its directors know what is going on and have a sense of responsibility for the company,” Medlin says.

Examples of that approach include a willingness of inside directors Medlin and Baker to leave the room during each meeting so the outside directors can talk among themselves. “We don’t always do it,” adds Johnston, noting that the practice remains rare in corporate America.

Wachovia also issues an annual questionnaire seeking comments from directors on various board issues such as if they are receiving adequate information in a timely fashion. The chairman of the corporate governance committee, who is always an outside director, reviews the responses.

“It covers all the sensitivity points, and it gives board members the immediate opportunity to speak up,” Medlin says.

Despite Wachovia’s history of success, director Robertson says it’s not a “rubber-stamp” board willing to accept anything proposed by Baker. “I think it’s a collegial group, although there are people who, by the nature of their longevity, have a certain weight,” says Robertson, who retired in 1996 as communications director of the University of North Carolina system.

Medlin, who first served on a corporate board in the early 1970s, knows plenty about director dynamics. He was an RJR Nabisco director during the period made famous in the book, Barbarians at the Gate. He now serves on seven major corporate boards. In turn, the top execs of three of those companiesu00e2u20ac”BellSouth, Burlington Industries, and National Service Industriesu00e2u20ac”serve on Wachovia’s board.

“The whole business world is more complex now, and the opportunity for mistakes is so much greater,” he says. “Boards just have a lot more to be concerned about.”

Wachovia’s board has for many years had two fundamental rules, according to Baker: You must retire at 67 and you probably won’t be reelected after retiring from active employment. That ensures a steady flow of fresh people and ideas, he says.

That policy seems to suggest that four of the five directors with terms expiring at the April 1998 annual meeting will be leaving. They are Johnston, Robertson, Robert Holder, Jr., and Sherwood Smith, Jr., all of whom stepped down from executive posts in recent years.

Indeed, of Wachovia’s 18 outside directors, all but three have joined the board during the 1990s.

Though no longer dominated by Winston-Salem and Atlanta businessmen, the board retains its southern roots; none of its directors hail from outside the bank’s five-state region. Three additional directors were added as part of the Central Fidelity transaction.

Mason predicts that the board will take on a more international flavor in coming years because of the importance of expanding Wachovia’s strong base of Fortune 500 clients. “There is some question whether Wachovia is developing sufficient international banking skills to hold on its clients,” he notes. Recent board additions, such as Peter Browning of Sonoco Products, Inc. and Robert Ingram of Glaxo Wellcome, have strong international experience, however.

While the industry has been critical of Wachovia’s acquisition approach, Baker defends the board for sticking with a proven strategy.

“I give this board a lot of credit because there has been a lot of criticism for us not doing deals,” he says. “Then, when we announce two deals in one month as we did [in 1997], people say we are doing too much.

“The board has made clear that we won’t be doing a favor for Wachovia by doing a crazy deal that bends our growth rate down and dilutes the good things about our company that serve us so well.”