Governance Award

It can be said that the marriage between Robert Sznewajs and West Coast Bancorp began as a blind date. A former vice chairman at U.S. Bancorp, Sznewajs was out on the street looking for work. And Portland, Oregon-based West Coastu00e2u20ac”the amalgamation of a couple of previous mergersu00e2u20ac”needed a no-nonsense chief executive officer to whip the underperforming company into shape. But Sznewajs had never heard of West Coast, and nobody there knew anything about him.

u00e2u20acu0153In the CEO acquisition business, you kiss a lot of frogs,u00e2u20ac says West Coast Chairman Lloyd Ankeny, who oversaw the recruiting process. Working with a headhunter, Ankeny and the banku00e2u20acu2122s board of directors eventually came up with five good candidates. After an extensive series of interviewsu00e2u20ac”much of which focused on strategyu00e2u20ac”the board chose Sznewajs in 2000 because it liked his vision of where he would take the company.

u00e2u20acu0153I will tell you that the guy is good,u00e2u20ac Ankeny says.

It has been a happy marriage thus far, in large part because Sznewajs has done what he said he would do. Working with a team of seasoned managers that he later brought into the companyu00e2u20ac”and in close consultation with the boardu00e2u20ac”Sznewajs has transformed West Coast from a small community bank with a very thrift-like balance sheet, product set, and funding operation to a $2.3 billion commercial bank capable of going toe-to-toe with some of the largest institutions in the United States.

The reward for all this hard work has been a dramatic improvement in the companyu00e2u20acu2122s financial performanceu00e2u20ac”and a new following among institutional investors. Through the first nine months of 2006, West Coast posted a 1.35% return on average assets (ROAA) and a return on average equity of 16.83%. (The banku00e2u20acu2122s return on tangible equity rises to 17.41% when the goodwill from previous acquisitions is stripped out.) Kenneth S. James, an equity analyst with FTN Midwest Securities Corp. in Nashville, credits Sznewajs and his management team with consistently delivering strong financial results in recent years. u00e2u20acu0153I think he has done an excellent job,u00e2u20ac James says.

Oftentimes the best corporate governance is largely invisible to those outside the company. And what makes this story even more impressive is that while Sznewajs was transforming the bank, its board was also evolving into a stronger, more effective group capable of overseeing the larger, more complex company that West Coast was becoming. Five new directors have joined the board since 2001. Ankenyu00e2u20ac”who joined the board in 1995 but didnu00e2u20acu2122t become chairman until 2002 u00e2u20ac” says the makeover was driven by the belief that if it wanted to be a bigger bank, West Coast would u00e2u20acu0153have to attract a different kind of director.u00e2u20ac

Over the past few years, the company has delivered to its shareholders the happy combination of strong financial performance and a vigorous governance process. Indeed, West Coast scored 99.9 out of a possible 100 points last year on Institutional Shareholder Servicesu00e2u20acu2122 corporate governance scoring system, a widely followed rating of the governance practices and policies of public companies. Only one company scored higher in the bank and thrift group. The West Coast boardu00e2u20ac”with Sznewajs as the only insideru00e2u20ac”also excels at something which is more difficult to quantify and yet goes to the very heart of the governance process. The companyu00e2u20acu2122s independent directors provide strong oversight without usurping the authority of management to run the company. Because of the excellence it has demonstrated in overall corporate governance, West Coast has earned Bank Director magazineu00e2u20acu2122s Governance Award for 2006.

In the 59-year-old Sznewajs, West Coast was getting a veteran banker whose prior experience had been in much larger organizations, including a one-year stint in the early 1990s running Bank of America Corp.u00e2u20acu2122s credit card division. Sznewajs joined U.S. Bancorp in 1994 and became a vice chairman after the Portland-based bank was acquired by First Bank System Inc. in Minneapolis in 1997. (The merged entity was headquartered in Minneapolis but retained the U.S. Bancorp name.) A few years later, Sznewajs left U.S. Bancorpu00e2u20ac”u00e2u20acu0153We mutually agreed that it was probably time that I went and did something else,u00e2u20ac he says.

u00e2u20acu0153I was trying to find something that I could have fun with and something that I could run,u00e2u20ac he says.

It was perhaps telling that when Sznewajs was first approached about the CEO position at West Coast, he had no familiarity with the company whatsoever. u00e2u20acu0153I had never heard of the bank even though I [had worked] in Portlandu00e2u20ac”thatu00e2u20acu2122s how obscure it was, not only to me but to the marketplace,u00e2u20ac he says. Sznewajs adds that while there may have been a degree of skepticism on the part of some directors about his large bank background, the board was supportive of his turnaround strategy from the beginning.

When Sznewajs took over in 2002, West Coast was an underperforming bank that was greatly in need of new management and a new strategy. The product of several mergers including a merger of equals, the company at one point had maintained a co-CEO arrangement. But that approach had not worked out and there was u00e2u20acu0153a certain amount of unsettledness and anxiety in the company,u00e2u20ac Sznewajs says.

His prescription was simple enough in theory, even if it took a few years to implement. Sznewajs inherited a balance sheet that was quite liability sensitive, and one of his most significant accomplishments has been to introduce a series of commercial deposit products that have increased the banku00e2u20acu2122s percentage of low-cost core funding. He also expanded the banku00e2u20acu2122s commercial lending operation by hiring approximately 50 experienced loan officers, and he significantly improved its ability to originate home equity loans. Putting on a large volume of interest-sensitive loans, combined with what he was doing on the liability side of the balance sheet, has enabled Sznewajs to significantly reduce the banku00e2u20acu2122s interest rate sensitivity while also boosting its returns. A central aspect of Sznewajsu00e2u20acu2122 strategy has been the renewed emphasis he has placed on relationship banking, which plays to West Coastu00e2u20acu2122s advantage as a community bank in a market dominated by much larger banks.

Today the company operates a network of 59 branches in Oregon and Washington and successfully competes with several of the countryu00e2u20acu2122s largest financial institutions, including Bank of America, U.S. Bancorp, and Washington Mutual. u00e2u20acu0153The way that community banks make money is by taking market share away from the megabanks,u00e2u20ac says James at FTN Midwest. u00e2u20acu0153They have the ability to compete head-to-head with them. That has been especially evident this year.u00e2u20ac

The companyu00e2u20acu2122s performance targets are a 15% return on equity and 10% earnings-per-share growth per year. Sznewajs says that may seem on the low side, but his goal is to produce an earnings stream that is both predictable and sustainable. u00e2u20acu0153Theyu00e2u20acu2122re very good at balancing the need for current earnings with investments in the future,u00e2u20ac says James. And the fact that institutional investors own 52% of the companyu00e2u20acu2122s stocku00e2u20ac”which James says is unusually high for a bank of its sizeu00e2u20ac”u00e2u20acu0153shows recognition by the institutional investor community that this is a good investment,u00e2u20ac he adds.

As a publicly owned corporation traded on the Nasdaq Stock Market, West Coast is subject to a variety of corporate governance requirements, including those contained in the Sarbanes-Oxley Act of 2002 and the listing standards that Nasdaq put into effect the following year. But Ankeny is quick to point out that West Coast became fixated on good governance well before then. u00e2u20acu0153We really started to talk about this 10 years before it became popular,u00e2u20ac he says.

One driving force was strictly defensive. u00e2u20acu0153We were trying to figure out how to run the company without falling into the pit of a shareholder suit,u00e2u20ac Ankeny says. But the board had also come to believe that a stronger corporate governance process could boost the companyu00e2u20acu2122s profitability. u00e2u20acu0153It was an idea that a well-run companyu00e2u20ac”one that cared about the shareholdersu00e2u20acu2122 interestsu00e2u20ac”could also be a high performing company,u00e2u20ac Ankeny says. u00e2u20acu0153The connection seemed to be there.u00e2u20ac

An important characteristic of the companyu00e2u20acu2122s governance philosophy is the division of the chairman and CEO rolesu00e2u20ac”Ankeny believes a separation of power is in the best interest of shareholders. u00e2u20acu0153The board of directors is [the shareholdersu00e2u20acu2122] advocate, and the chairman is pretty much in charge of the board,u00e2u20ac he says. And when the CEO also serves as chairman, he adds, u00e2u20acu0153the shareholder has no buffer.u00e2u20ac

Sznewajs admits he was a little concerned about not holding the chairmanu00e2u20acu2122s title when he joined West Coast as CEO. u00e2u20acu0153Quite honestly it did bother me, although I never said anything about it,u00e2u20ac he says. u00e2u20acu0153But very quickly it didnu00e2u20acu2122t matter.u00e2u20ac Sznewajs believes that separating the roles enables the board to go about its business without the suspicion that he may be trying to influence its decisions in service of his own agenda.

Ankeny also argues that a nonexecutive chairman can be an important resource to the CEO, although it may take time for them to develop a good working relationship based on trust. u00e2u20acu0153He doesnu00e2u20acu2122t need to love me, nor I him, but the respect needs to be there,u00e2u20ac Ankeny says. u00e2u20acu0153You have to find a bond that works most of the days of the week.u00e2u20ac Ankeny believes the two men have developed a good, straightforward working relationship. u00e2u20acu0153My confidence in him is very, very highu00e2u20ac he says.

Ankenyu00e2u20acu2122s self-described role as nonexecutive chairman is primarily twofold. First, he tries to be both a resource and a sounding board for Sznewajs. u00e2u20acu0153Most of my time is spent on being there for Bob to discuss anything he wants to discuss,u00e2u20ac Ankeny says. And of course, he also manages the affairs of the board, which includes setting the agenda for meetings but also entails being a communications link for all the other directors.

In an era when many corporate boards are gradually moving toward having a predominance of outside directors, Sznewajs is the only member of West Coastu00e2u20acu2122s board who does not meet Nasdaqu00e2u20acu2122s definition of independence. Other ways in which the board is ahead of its time is that it has done both full board and peer evaluations for several years now. The board also beefed up its audit, compensation, and governance committees well before Sarbanes-Oxley and Nasdaq made that a requirement. And recently Sznewajs recommended that the board elect directors annually rather than on a staggered basis as it does now.

In the six-plus years since he took over as CEO, the West Coast board has tried to work closely with Sznewajs on the development and execution of his strategy. When the board decided to recruit a new CEO, it did not try to impose a predetermined strategy on that person. Instead, the board was looking for a leader who couldu00e2u20ac”in Sznewajsu00e2u20acu2122 wordsu00e2u20ac”develop a new positioning for the company and u00e2u20acu0153take it in a direction that would create long-term shareholder value, and also give it staying power in terms of being able to control its own destiny.u00e2u20ac

Ankeny says that West Coastu00e2u20acu2122s board has always seen a clear delineation between the roles of management and those charged with corporate governance. u00e2u20acu0153The board has always considered that it was in the policymaking part of the business and not the management part of the business,u00e2u20ac he says. In fact, Ankeny says he wouldnu00e2u20acu2122t respect any executive team that allowed its board to intrude upon their prerogatives. u00e2u20acu0153If management will let me push into their domain, then I have to wonder if I have the right people,u00e2u20ac he says.

But thatu00e2u20acu2122s not to say West Coastu00e2u20acu2122s outside directors havenu00e2u20acu2122t involved themselves in the banku00e2u20acu2122s strategic repositioning. The board takes a deep dive into Sznewajsu00e2u20acu2122 one- and five-year business plans at its annual planning session every September. It also conducts a quarterly review of his progress against that yearu00e2u20acu2122s plan, including a variety of performance targets.

Ankeny says that West Coastu00e2u20acu2122s independent directors arenu00e2u20acu2122t afraid to ask pointed questions, even though they have a great deal of respect for Sznewajsu00e2u20acu2122 management capabilities. u00e2u20acu0153Many boards have a tendency to accept a plan or a budget if it looks like itu00e2u20acu2122s well thought out,u00e2u20ac Ankeny says. But that would also be an abrogation of the boardu00e2u20acu2122s oversight function. And as Ankeny puts it, u00e2u20acu0153We hold ourselves accountable for the acceptance of that plan.u00e2u20ac

Ask Sznewajs to define good corporate governance and heu00e2u20acu2122ll put it this way. u00e2u20acu0153To me, it means doing the right thing, but also showing balance between whatu00e2u20acu2122s right for the company and whatu00e2u20acu2122s the popular thing to do,u00e2u20ac he says. Not only does West Coast seem to be doing things the right wayu00e2u20ac”it seems to be doing things right.

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