Establishing Goals: The First Step to Maximizing Shareholder Value

Setting goals is one of the most powerful and long-lasting statements a CEO makes. I am personally amazed at the impact of one clear goal.

Over the past few months, I’ve met with approximately 500 leading CEOs in groups of 20 at our Affiliation Peer Group meetings. The purpose was to discuss establishing goals. The meetings were focused, highly interactive, and most important, very informative. Most of the participants were CEOs of banks with $100 million to $5 billion in assets. Some of the CEOs were 100% owners of their banks, others managed locally owned banks, and still others managed publicly held banks. I would like to share some of the insights from these meetings.

The importance of goals

Establishing goals is the first step to maximizing shareholder value and, in many ways, the most critical step because everything else follows. Here is an overview of our Seven Steps to Maximizing Shareholder Value:

1. Establish the Goals

2. Develop Strategies and Tactics

3. Manage Risk

4. Improve Earnings

5. Capitalize on Growth Opportunities

6. Use the Right Technology

7. Continually Build the Team

Who really sets the goals?

In virtually all the banks represented at the meeting, the CEO sets the goals, sometimes with two to five other members of senior management. Not surprisingly, the smaller the bank, the more likely the CEO is to set goals alone. Whatever the size of the bank, goals are most often driven by the CEO’s perspective of what the bank should be earning and how fast it should be growing.

A number of CEOs indicated that they set goals in conjunction with senior management by providing “guidance.” When asked, “Has your guidance ever been overridden?” approximately 90% said, “Never!” For many CEOs, a hierarchical organizational structure does seem to have a distinct advantage.

After setting the goals, the next step is gaining management buy-in, which, in most banks, is not a big issue. Once the bank’s goals are set, the emphasis quickly shifts to developing supporting functional and divisional goals.

The changing role of the board

The board’s traditional role in goal setting was most often described by the meeting participants as “approval” or “affirmation.” One CEO, however, said that his bank’s board is “very involved in setting the goals.” And then he added, “Three of us own 100% of the bank, and we are the board.”

In the future, governance considerations are going to set higher standards of involvement for the board, especially if the bank is publicly held. Experienced directors with substantial personal net worths at risk will become much more active, not only in governance in general but also in redefining the traditional role and function of the board.

How high to reach?

The greatest sin of all is low aim. Goals that are too low or too unimaginative do not inspire the management team to reach beyond its comfort zone. The challenge is to adopt goals that stretch the organization and its people.

During the meetings, the key words that kept coming up to describe ideal stretch goals were “believable” and “achievable.” The participating CEOs generally used five objective criteria, in various combinations, as reference points for setting goals:

1. Historical performance;

2. Peer group performance;

3. Stock market expectations for publicly held banks;

4. Realistic incorporation of current risk factors; and

5. Concern about the future economic environment.

One of the best observations about the economy was simply that many customers are taking a “wait-and-see” attitude because of economic uncertainty, the possibility of war, and the volatility in the stock market. Few good small-business customers are ready to commit to major expansion in the current environment.

Many of the CEOs said they are reducing their risk exposures, especially regarding credit and interest rate risk. In addition, many are preparing for tougher regulatory exams, based on the recent experiences of other participating banks. Most interestingly, a significant number said they are emphasizing expense management in anticipation of narrower interest margins.

Focus: The hedgehog and the fox

Last year, my 29-year-old son, Alex, who is my hero, gave me a book, The Hedgehog and the Fox by Isaiah Berlin. The whole premise of the book is based on the following ancient Greek parable: “The fox knows many things, but the hedgehog knows one big thing.”

I have found that the winning banks tend to be hedgehogs, focusing on one big thing that relates to their market opportunities. The goal can be broadly stated, for example, “to be the best community bank in our market.” The important thing is to focus, focus, focus-always with an eye on increasing long-term shareholder value, which in some cases will mean trading current earnings for future earnings growth.

The power of goals

Some banks have established what can best be described as “audacious” long-term goals. Often, audacious goals become a powerful focusing force within the organization. For example, Bill Ray, CEO of BankPlus in Belzoni, Mississippi, set ambitious goals 10 years ago when the bank had $90 million in assets and a stock price of $1.80. He challenged his organization to become a $1 billion bank with a market price of $17.50 in 10 years. Today, the bank has $1.1 billion in assets and a market price of $22.50. In this case, an audacious goal helped the bank reach even higher levels of performance than initially targeted.

I know many CEOs running $100 million to $300 million banks who have a personal goal and sometimes an organizational goal of being a sound, highly profitable billion dollar bank in a five- to 10-year time horizon. A significant number of them are well on their way to achieving their goals or have already reached them-and likewise with $1 billion banks striving for $5 billion. The bottom line is that, even if the $100 million bank fails to reach $1 billion and only becomes a very profitable $300 million bank, it still has been extremely successful.

Goals, the management team, and shareholder value

I firmly believe that, if you have clearly established, high goals and an excellent management team, maximizing shareholder value has an exceptionally strong probability of becoming a reality. The truth is simply that banks with high goals and excellent teams consistently (and dramatically) outperform banks with low goals and average teams.

The single most important goal

If a CEO and senior management team wants to establish one overarching goal, it might well be to have “the very best person for each position.” Just think for a moment about the very best person in the bank for the position he or she is in, and then imagine what it would be like if every position were filled with the very best person for that position. From the CEO’s and board’s perspective, building the bank then becomes both highly rewarding and fun.

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