Culture is fundamental to the success of the deal, so it’s top of mind for bank leadership teams working with Richard Hall, managing director for banking and financial services at BKM Marketing. In this video, he explains why transparent, candid communication is key to retaining customers and employees, and shares his advice for post-pandemic strategic planning.
Year in and year out, Bank Director’s surveys tap into the views of bank leaders across the country about critical issues: risk, technology, compensation and talent, corporate governance, and M&A and growth.
But 2020 has been a year for the record books. It’s been an interesting time for me as head of research for Bank Director, with the results of our recent surveys revealing changes that, in my view, will continue to have far-ranging effects for the industry.
As boards plan for 2021 and beyond, here are a few things I believe you should be considering.
The Great Tech Ramp-Up The Covid-19 pandemic dramatically accelerated technology adoption by the industry, an issue we explored in Bank Director’s 2020 Technology Survey.
Sixty-five percent of the executives and board members responding to that survey told us that their bank implemented or upgraded technology to respond to Covid-19, primarily to issue Paycheck Protection Program loans. As a result, most banks reported increased spending on technology, above and beyond their budgets for 2020.
The primary drivers that fuel bank technology strategies remain the same — improving customer experience and generating efficiencies — and pressure has only grown on financial institutions to adapt. More than half of the survey respondents told us that their bank’s technology plans had been adjusted due to the pandemic, with most focused on enhancing their digital banking capabilities.
“The next generation will rarely use a branch,” one survey respondent commented, “so a totally quick efficient comprehensive digital experience will be necessary to survive.”
The 2020 Compensation Survey confirmed that most banks dialed back on branch service early in the pandemic; by the time we fielded the Technology Survey in June and July, bank leaders finally recognized the digital channel’s preeminence in terms of growing the bank and serving customers. (The previous year’s survey found respondents placing equal emphasis on digital and branch channels.)
The Technology Survey revealed gaps in small business and commercial lending as well — deficiencies that have been laid bare as a result of the pandemic. More than half of respondents that have adjusted or accelerated their technology strategy indicated they’d expand digital lending capabilities.
Some bankers I spoke with about the survey results indicated concerns that banks could dial back on technology spending due to the profitability pressures facing the industry. However, given the changes we’ve seen, I don’t believe it’s sustainable to dial back on this investment.
That leaves bank leaders facing a few key challenges, starting with determining where to invest their technology dollars. It’s difficult to gauge where the wind will blow, but the survey provides solid clues: 42% believe process automation will be one of the most important technologies affecting their bank, followed by data analytics (39%). Almost 40% believe the security structure to be vitally important; cybersecurity is a perennial concern for bank leaders and as banking grows more digital, this will require additional investment.
Additionally, 64% told us that modernizing their bank’s digital applications forms a core element of their bank’s strategy.
Implementing new technology requires expertise, and the 2020 Compensation Survey found most respondents (79%) telling us that it’s difficult to attract technology and digital talent.
But this may not mean bringing data scientists or other highly-specialized roles on staff. Olney, Maryland-based Sandy Spring Bancorp hired a senior data strategist who is responsible for the use, governance and management of information across the organization; that individual also reviews vendor capabilities and identifies areas that help the bank achieve its goals. “The senior data strategist should be on the lookout for ways to find opportunities for and through data analytics, whether that’s predicting customer trends or finding new revenue-generating opportunities,” said John Sadowski, chief information officer at the $13 billion bank.
Finally, 69% told us their bank didn’t streamline vendor due diligence processes in response to Covid-19. As technology adoption accelerates, consider whether your bank’s third-party management process is sufficiently comprehensive, while still allowing it to quickly and efficiently put new solutions into place.
Work-From-Home Will Alter the Workplace The 2020 Compensation Survey found that banks almost universally implemented or expanded remote work options as a result of the pandemic; the 2020 Technology Survey later told us that for many banks (at least 42%) that change will be permanent for at least some of their staff.
In late October, $96 billion Synchrony Financial — a direct, virtual bank — announced that remote work will become permanent for its employees, allowing them to choose from three options. Some can simply work from home. Others can schedule office space, while some will have an assigned desk. This third group includes executives, who will be asked to work remotely at least a couple days a week to reinforce the cultural shift.
It’s a move that the bank believes will make employees happy, but it also promises to yield significant cost savings by cutting real estate expenses.
It could also yield competitive benefits for banks seeking top talent. Glacier Bancorp, for example, doesn’t limit hires to its Kalispell, Montana-based headquarters — instead, it hires anywhere within its multi-state footprint. That helps the $18 billion bank recruit the technology talent it needs, human resources director David Langston told me in May.
Remote work is a cultural shift that many bank executives will be reticent to make. But even if a long-term remote work option doesn’t align with your bank’s culture, offering flexibility will help support employees, who have their own struggles at home with virtual schooling or caring for high-risk family members.
A recent McKinsey study finds that a lack of flexibility, among other issues, drives women in particular to leave the workforce. The authors also advise that companies “should look for ways to re-establish work-life boundaries” — putting policies in place to assure meeting times and work communications occur within set hours, and encouraging employees to take advantage of flexible scheduling. Unfortunately, employees often worry that taking advantage of these benefits will damage their reputation at work. “To mitigate this, leaders can assure employees that their performance will not be measured based on when, where, or how many hours they work. Leaders can also communicate their support for workplace flexibility [and] can model flexibility in their own lives. … When employees believe senior leaders are supportive of their flexibility needs, they are less likely to consider downshifting their careers or leaving the workforce.”
Flexibility and remote work can help companies retain valued employees.
It’s difficult to change a culture, especially if you believe that what you’re doing works. But sometimes, culture can change around you. I’d encourage you to approach these issues with fresh eyes to ensure your leadership team can direct the change — not the other way around.
Don’t Put Diversity on the Backburner Almost half of respondents to Bank Director’s 2020 Compensation Survey told us their bank doesn’t measure its progress around diversity and inclusion, indicating to me that they don’t have clear objectives around creating an inclusive culture that hires, retains and rewards employees despite race, ethnicity or gender.
Further, just 39% of the CEOs and directors responding to our 2020 Governance Best Practices Survey told us their board has several members who are diverse, based on race, ethnicity or gender. And almost half believe that diversity’s impact on a company’s performance is overrated.
Employees and customers take this issue seriously. Rockland, Massachusetts-based Independent Bank Corp., which has been recognized for LGBTQ workplace equality by the Human Rights Campaign since 2016, incorporates inclusion in its “cycle of engagement.” This starts with engaged employees who provide a higher level of service that delights customers, resulting in strong financial performance for the institution, allowing the company to invest back into its employees — continuing the virtuous cycle.
The $13 billion bank’s culture promotes respect, teamwork, empathy — and inclusion, COO Robert Cozzone told me in a recent interview. “Think about working for a company where you enjoy being around the people that you work with, you enjoy the work that you do, you buy into the mission of the company — you’re going to be much more productive than if you don’t have those things,” he says. Today, “It’s all that more important to show [employees] care and empathy and understanding.”
Small, rural banks may believe it’s difficult to hire diverse talent, making it nearly impossible for them to tackle this issue. Expanding remote work options, mentioned earlier, can help. But ultimately, it’s an issue that companies nationwide will need to address as the demographics of the country change. “We all need to do better [on] diversity and inclusion,” one survey respondent wrote. “Many of us out in rural America don’t have as many opportunities, but we need to keep this topic front of mind, and [read] information and stories on how to be more intentional.”
Directors Must Be Engaged and Educated The 2020 Governance Best Practices Survey also found 39% indicating that at least some members of their board aren’t actively engaged in board meetings; 36% said some members don’t know enough about banking to provide effective oversight.
That survey, conducted just before the pandemic effectively shut down the U.S. economy, found executives and directors identifying three top challenges to the viability of their institution: pressure on net interest margins (53%), meeting customer demands for digital options (40%) and industry consolidation and the growing power of big banks. Further, most directors said that staying on top of the changes occurring in the industry is one of the great challenges facing their board.
Confronting these issues will require engaged and knowledgeable leadership.
Bank Director’s 2020 Compensation Survey, sponsored by Compensation Advisors, surveyed 265 independent directors, CEOs, human resources officers and other senior executives of U.S. banks to understand trends around the acquisition of talent, CEO performance and pay, and director compensation. The survey was conducted in March and April 2020.
Bank Director’s 2020 Technology Survey, sponsored by CDW, surveyed more than 150 independent directors, CEOs, chief operating officers and senior technology executives of U.S. banks to understand how technology drives strategy at their institutions and how those plans have changed due to the Covid-19 pandemic. It also includes compensation data collected from the proxy statements of 98 public banks. The survey was conducted in June and July 2020.
Bank Director’s 2020 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner, surveyed 159 independent directors, chairmen and CEOs of U.S. banks under $50 billion in assets to understand the practices of bank boards, including board independence, discussions and oversight, engagement and refreshment. The survey was conducted in February and March 2020.
A prolonged flat yield curve, economic contraction, increasing compliance and technology costs, not to mention the pandemic-induced pressure on stock valuations, have left banks in a difficult operating environment with limited opportunities for profitability.
Yet, there is an untapped opportunity for banks to capitalize on a strong and growing talent pool and profitable customer base: women. Research repeatedly shows that increasing gender diversity on bank boards and in C-suites drives better performance. Forward-thinking banks should look to women in their communities for growth inside and outside the institution.
Women now receive nearly 60% of all degrees, make up 50% of the workforce and, prior to the pandemic, held more jobs in the U.S. than men. They are the primary breadwinner in over 40% of U.S. households and comprise more than 50% of stock owners. A McKinsey & Co. report found that U.S. women currently control $10.9 trillion in assets; by 2030, that could grow to as much as $30 trillion in assets. Women also started 1,821 net new businesses a day in 2017 and 2018, employing 9.2 million in 2018 and recording $1.8 trillion in revenues. Startups founded by women pulled in $18.6 billion in investments across 2,304 deals in 2019 — still, lack of capital is the greatest challenge reported by female small business owners.
Broadly, research also supports a positive correlation between a critical mass of gender diversity in leadership and performance.
A study of tech and financial services stocks found a 20% increase in stock price momentum within 24 months of appointing a female CEO, a 6% increase in profitability and 8% larger stock returns with a female CFO. And they may achieve better execution on deals. In a review of 16,763 publicly announced M&A transactions globally over the last 20 years, boards that were more than 30% female performed better in terms of stock price and operational metrics than all-male boards.
Note: Performance metrics are market-adjusted Source: M&A Research Centre at Cass Business School, University of London and SS&C Intralinks: “Gender Diversity and M&A Outcomes; How Female Board-Level Representation Affects Corporate Dealmaking” (February 2020)
But as of 2018, women held just 40 CEO positions at U.S. public banks, or 4.31%. Nearly 20% of banks have no women board members; the median is just over 16%. Banks should start by gender diversifying their boards; gender-diverse boards lead to gender-diverse C-suites.
Usually, boards feature an “accidental” composition that results from social norms: board members source new directors from their social and immediate networks. An intentional board, by comparison, is deliberate in composing a governance structure that is best equipped to evaluate and address current demands and future challenges. Boards can address this in three ways.
Expand your networks. The median male board member has social connections to 62% of other men on their boards but no social connections to women on their boards. Broaden the traditional recruitment channels to ensure a more qualified, diverse slate.
Seek diverse skill sets. Qualified female candidates may emerge through indirect career paths, other sectors of the financial industry or are in finance but outside of financial services. Women with nonprofit experience and small business owners can bring local market knowledge and relevant experience to bank boards.
Insist on gender diverse slates. A diverse slate of candidates negates tokenism, while a diverse interviewer slate demonstrates to candidates that your bank is diverse.
But diversity in recruiting and hiring alone won’t improve a bank’s performance. To be effective, a diverse board must intentionally engage all members. Boards can address this in three ways.
Ensure buy-in. Support from key board members when it comes to diversifying your board is critical to success. Provide coaching for inclusive leadership.
Review director on-boarding and ongoing engagement. Make sure it’s welcoming to people with different connections or social backgrounds, builds trust and facilitates open communication.
Thoughtful composition of board committees. Integrate new directors into the board’s culture and make corporate governance more inclusive and effective.
The long-term performance benefits of a gender diverse board and c-suite are compelling, especially in the current challenging operating environment for banks. Over time, an intentional board and C-suite that mirrors the gender diversity of your bank’s key constituents — your customer base, your employee base and your shareholder base — will out-perform banks that do not adapt.
The coronavirus pandemic has upended how people work, and how they feel about that work — changes that may persist over the long term.
While many companies have adjusted to working remotely, the uncertain duration of the pandemic has left some employees feeling a sense of malaise and listlessness. Bank Director reached out to Brendan Smith, who holds both a clinical therapy degree and an MBA, to learn more about how office workers, managers and business leaders can address these feelings and prepare for the future.
As “The Workplace Therapist,” Smith helps companies eliminate workplace dysfunction through workshops, executive coaching, consulting and content on his blog, podcast and books. This conversation has been lightly edited for length and clarity.
BD: What is your read of where the U.S. workforce is, five months into the coronavirus pandemic, based on what you’re hearing? BS: 2020 has been an interesting year from the workplace standpoint. The biggest word I’m hearing from people who come to me is “motivation.” They’re not motivated anymore. Part of the reason why is they’re stuck. Every day is the same thing: coming down into their office, getting on the same Zoom calls at the same time. There’s no variety.
The other interesting thing that happened is that when people first started working virtually, they said, “I have all this free time because I’m not commuting.” Everyone realized that and started using what would have been commute time to schedule meetings. A lot of people I talk to have meetings starting at 7:30 or 8 in the morning, and have meetings that go all the way to 6:30 in the evening.
BD: A lack of motivation is also a problem for workplaces even in normal environments. What’s different about this broader lack of motivation? BS: The lack of motivation before was really tied to lack of growth: I’m not growing at the pace I want, I don’t have the right opportunities in front of me, I’m wanting something else. This is different. This lack of motivation is tied to feeling stuck or trapped: I don’t have options, I’m stuck doing the same thing over and over again, I can’t go out and explore. People feel like they’re out of options.
BD: Why is a lack of motivation detrimental to the workplace and why do employers and managers need to address it? BS: The lack of motivation results in people doing the bare minimum. That’s detrimental right now because everybody has things they need to be working on: pivoting, changing, adapting to survive. Survival requires more than the bare minimum. If everyone at your company is doing the bare minimum, you’re a sinking ship.
BD: What are you telling people dealing with this unique lack of motivation? How can people adapt or transition to this new environment and new reality? BS: What’s happening is that we thought things would come back to normal by this point but now, it feels more a rollercoaster: we’re going down another hill, and we’re not sure when the coaster will end. That uncertainty breeds anxiety, and it contributes even more [to the] feeling of [being] trapped.
Let’s talk about how you get out of this. There was a famous theologian at Emory University’s theology school named Jim Fowler who used to say “You want to give people hope and handles.” Hope and handles is the best antidote for the time we’re in now.
With hope — people need to anchor to something in the future that motivates and excites them. We know that there will be some kind of normal, at some point in the future. We just don’t know when.
What handles represents is “What can I do now?” In times of uncertainty, one antidote is clarity. While we can’t be clear on how things are going to look a month from now, we can be clear on this week. What’s something people can do this week that either leads them towards something they’re excited about in the future, or gives them what they need?
BD: Do you recommend fewer Zoom calls as well? Or is there anything that managers can do to bring hope and handles for their employees? BS: Hope and handles is for everybody. But one thing that managers need to do in times of chaos is create more structure and consistency, while also mixing in some variety. Maybe it’s not always a Zoom call — I’ve been recommending people switch video calls into phone calls.
From a motivation standpoint, I think it’s healthy for managers to have some hope and handles conversations right now with members of their team, to help people reframe and feel a little more in control. Something like, “I know we’re stuck in this hamster wheel now, but when things get back to normal, what is one thing you want to either do more of, change or improve for your role specifically?” Or for something a little more structured, there’s a simple technique of asking three questions: Stop, start, continue. “What’s one thing that you think we should stop? What’s one thing we should start doing differently? And what’s one thing we should continue?”
The other thing I would say to managers is to really work on honoring and protecting boundaries. Boundaries are really important for us in life. The way technology has evolved has broken down all natural boundaries between work and home. For me, protecting boundaries is not doing work calls outside of certain hours. Managers need to recognize that everyone’s experiencing the blending of work and life now, and be respectful of people’s boundaries and the needs of their particular situation.
BD:I understand that a lot of the advice for helping people cope is to remind them of a more-normal future. But do you have any advice to help people become more comfortable with the ambiguity in the present? BS: Let’s talk about this from a business or banking standpoint. There’s a school of thought that strategic planning is silly, because no one can see into the future and there are too many variables.
What you should consider doing instead is an exercise called “scenario planning.” You map out different scenarios and factor in the variables that may change; for example, rising or lowering Covid-19 infection rates. If it lowers and then everything gets to a healthy point, then what [does] the economy look like? If it goes up, what happens? If it stays flat, what happens? While you can’t predict the future, you’ve got enough different scenarios of what might happen so that when the future does start to unfold, you just map it to one of your scenarios.
It probably would not be unhealthy for managers to do a bit of planning with their teams on how they want to handle the remainder of the year. We’ve got enough months under our belt doing this virtual thing that it would probably would be a healthy exercise for teams to create a plan of how you want to operate, assuming that this is going to be the way that that we roll.
Financial leaders face new and unique challenges as the navigate the remainder of this year and well into 2021.
The early reads on credit quality, credit access, operational and execution risk, regulatory oversight impacts and dimming growth prospects paint a bleak picture. Underlying this environment is an ongoing consideration for consolidation forcing institutions to assess their long-term viability. A closer examination of tangible book values clearly demonstrates who could be the buyers and potential sellers.
So, what is so different for M&A now? I have always believed that no two deals are the same —and that remains true. In the past, we may have looked solely at regulatory good standing, loan concentration, deposit pricing and distribution like geography and branches. While these remain fundamentally most important at the core, we now fully expect to see a heightened focus in due diligence around key layers of bank leadership, corporate culture and values, ability to deliver digital offerings to key customer segments, financial literacy programs and community investment.
A recent study by Deloitte noted that more than ever, bank M&A strategies need the right tools, teams and processes — from diligence through integrations — to pull off successful mergers. Additionally, buyers need to consider the compatibility and integration of any digital tools and how they will meet customer expectations. Can your bank deliver what these customers expect?
Most institutions looking to acquire or be acquired need to address several non-financial topics when considering how to proceed. Five in particular are consistently under-communicated by acquirers and will be even more impactful moving forward. These items speak to the fit of the merger partners — the intangible elements that cause the difference between a high customer retention rate with a platform for organic growth or a tepid retention rate with little sign of future organic growth.
1. Strategic Leadership How an institution’s leaders navigated the recent Covid-19 pandemic says a lot about what investors, employees, customers and communities can expect if it merges with another bank. For example, the Small Business Administration’s Paycheck Protection Program may have given some banks lessons and plans that may make them potential partners worth exploring. No one knows what lies ahead, but strategic leaders must be able to think, clarify and execute during these new M&A conditions.
2. Bank Culture and Values Most banks have a mission, vision and values statements. Until the current environment, how leaders must lead to make employees feel included and valued had not been challenged. But in almost every M&A engagement, there are significant segments of impacted employees and customers that experience uncertainty and fear. Demonstrated values can go a long way to secure trust and help the execution of these transactions succeed.
3. Digitization Expectations for Employees and Customers Many institutions were not prepared for what occurred earlier this spring. Disaster recovery and business resumption plans were a solid start, but many were insufficient for this type of event, requiring operations and services to move off-site in a matter of days.
But aside from the initial challenges of the PPP, most banks appear to have done an outstanding job of helping employees work from home without too much customer disruption. This operating model will be the new way forward in banking. When banks merge, it is important to understand how each institution’s plan worked, and how much or little displacement that model could be for employees and customers going forward.
4. Financial Literacy and Inclusion The reality of how our country has operated over decades has come into focus during the pandemic. One issue that many banks have identified is access to capital and providing banking services in a service-blind manner going forward. Financial literacy and inclusion must be a tenet in creating a more-effective banking system. Aligning how these programs can work, collaboration and inclusiveness can create a platform for capital distribution that works with any institutional strategy and grows exponentially after a merger.
5. Community Investment Many institutions have invested significantly in community programs over the years. In a merger, these groups need to understand what the plan for that support will be going forward. The pandemic has made it even more important to discuss and support these investments in communities, given the struggle of many organizations these days. While these five items are not exhaustive, we know that they are among the top issues of executives, employees and customers at prospective selling institutions.
In the early 2000s, The LEGO Group was on the verge of collapse.
It sounds hard to believe today, since the company is one of the largest and most successful toy sellers in the world. But in 2003, the Denmark-based company was on the brink of insolvency, with massive debt and a negative cash flow of DKK $1 billion.
LEGO needed new leadership. It promoted Jørgen Vig Knudstorp, a former consultant, to CEO. Along with Chief Financial Officer Jesper Ovesen — a former banker — Knudstorp gradually righted the ship by instilling organizational discipline and forming a strong financial foundation for the company.
The new executives were brutally honest with LEGO’s board and employees about the challenges the company faced. To survive, everyone needed to focus on turning things around, correcting the company’s problems so they could plan its future.
That required clear thinking and a dose of reality.
“Before LEGO could even begin to reignite a sense of what was possible for LEGO, they first had to persuade people that decades of unfettered growth offered no assurance that the company would ever get its groove back,” writes David Robertson in “Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry.”
Crises come in all shapes and sizes. They can be small and isolated in a single company, like LEGO’s need to refocus itself after years of mismanagement. Or they can be caused by broader, external factors that affect industries and economies.
No matter the source, crises call for strong leadership. The coronavirus pandemic is just the latest example.
Carla Harris, vice chairman of wealth management and a senior client advisor at Morgan Stanley, shares what leaders today must do to weather the current crisis in a discussion that kicks off Microsoft’s Envision Virtual Forum for Financial Services.
First, great leaders are visible, says Harris. “There’s something powerful in being able to see the person that you’re following.”
They’re also transparent and empathetic. Employees and other stakeholders “want to see empathy, but they also want to see confidence and positivity,” she says. It’s an uncertain environment, and we’re all feeling a wide range of emotions due to the health and economic consequences of this crisis.
“One of the biggest learning moments for me as a leader was watching financial services leadership during the financial crisis. There were some leaders who didn’t really say anything to their people, and there were some leaders who were out front every day,” she says. Harris has spent over three decades on Wall Street, joining Morgan Stanley in 1987. “There was a regular cadence that people came to rely on, and that was frankly empowering.”
While the unfolding crisis is unique even among crises, with an especially broad range of potential outcomes, leaders have arguably never been better equipped from a technology standpoint to take action. Companies may be locked down for the most part, with employees largely working remotely, but leaders can still communicate directly with staff. For example, Boston-based State Street Corp. uses video conferencing technology to host virtual forums where employees can interact with senior executives to get answers to their questions.
Harris also recommends that leaders be flexible in today’s environment and open themselves up to input from diverse viewpoints. Strategic goals may shift in response to the Covid-19 environment, or leaders may need to consider new ways to achieve their objectives. “Don’t have rigid views of what you think things are going to look like on the other side” of this crisis, she says. “This is the time now to be an inclusive leader, and the hallmark of being an inclusive leader is to solicit other peoples’ voices.”
I’d suggest one addition to the actions Harris outlines, based on my conversations with business leaders like Horst Schulze, the co-founder and former president of the Ritz-Carlton Hotel Co.
Lead with purpose.
There is no one-size-fits-all personality for leaders, and leadership skills are developed over time. But all great leaders share one trait: They have a vision and inspire employees to achieve it.
“We need leadership,” says Schulze. “Leadership implies, ‘I have a destination in mind.’ It means, ‘I show my people the destination, and I show them how it’s beautiful for them, how it’s great for them, how it’s exciting for them, how they should join me in reaching that destination.’”
Great leaders are rare. But in times like these, they can be the difference between surviving a crisis or thriving despite it.
If you want to understand innovation and success, a good person to ask is Jeff Bezos, the chairman and CEO of Amazon.com.
“I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question,” Bezos said in 2012. “I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two, because you can build a business strategy around the things that are stable in time.”
In few industries is this truer than banking.
Much of the conversation in banking in recent years has focused on the ever-evolving technological, regulatory and operational landscapes. The vast majority of deposit transactions at large banks nowadays are made over digital channels, we’re told, as are a growing share of loan originations. As a result, banks that don’t change could soon go the way of the dinosaurs.
This argument has merit. But it also needs to be kept in perspective. Technology is not an end in itself for banks, it’s a means to an end — the end being to help people better manage their financial lives. Doing this in a sustainable way calls for a marriage of technology with the timeless tenets of banking.
The report is based on interviews of more than a dozen CEOs from top-performing financial institutions, including Brian Moynihan at Bank of America Corp., Rene Jones at M&T Bank Corp. and Greg Carmichael at Fifth Third Bancorp. It offers unique and invaluable insights on leadership, growth, risk management, culture, stakeholder prioritization and capital allocation.
The future of banking is hard to predict. There is no roadmap to reveal the way. But a mastery of these tenets will help banks charge ahead with confidence and, in Bezos’ words, build business strategies around things that are stable in time.
The Six Tenets of Extraordinary Banks
Jonathan Rowe of nCino describes the traits that set exceptional banks — and their leaders — apart from the industry.
Since taking over as CEO of
Amalgamated Bank in 2014, Keith Mestrich has demonstrated his management chops
by reengineering the $5.3 billion institution’s balance sheet and improving its
But that experience pales in comparison to the challenge of running a company headquartered in New York City, which is ground zero for the Covid-19 pandemic. Most of Amalgamated’s 400 employees have been working from home since mid-March, including Mestrich. “I never thought that I’d be in the sixth week of running a bank from the basement of my house, by myself,” he says.
The pandemic has had a devastating
impact on the U.S. economy; the likelihood of a severe recession requires
management teams to carefully monitor their banks’ vital signs, including loan
losses, liquidity and regulatory capital levels. But most bankers are
experienced at this, most recently during the Great Recession in 2008. They
know how to manage balance sheets through an economic downturn.
Managing employees through a crisis of this magnitude is another matter entirely.
One obvious way in which the current
situation is starkly different from the last recession is the incredible
personal stress the pandemic has placed on employees. Social distancing and sheltering
orders have forced most employees to work remotely, either isolating them or
requiring them to juggle work and parenting if young children are in the home.
These stresses are layered on
top of the fear of infection. In New York City, where most of Amalgamated’s
employees work, there were more than 138,000 confirmed cases of Covid-19, with nearly
10,000 confirmed deaths and more than 5,000 probable deaths through April 22,
according to the New York City Department of Health and Mental Hygiene. And of
course, the news has been full of stories about the city’s overcrowded hospital
emergency rooms and the desperate, daily search for ventilators and protective
People are frightened, including many Amalgamated employees. One of Mestrich’s jobs now is to be counselor in chief.
“I spend a huge amount of my
time just checking in with people at all levels of the bank,” Mestrich says. “People who have to come in and work have different levels of fear
and … and that is calibrated by their own family situation. I talked to one
woman who works in one of our branches, who has three kids, and she’s a single
mom, and knows that if anything were to happen to her, [it] could be really
devastating, so her fear level is very different than somebody who’s a single
person and relatively young and healthy.”
He has also heard positive stories
from his employees. “I got a great message from one guy – the only member of
our staff who I know was actually hospitalized – [that] he was going back to
work,” Mestrich says. “He’s recovered and doing well.”
The fear that some Amalgamated employees experience could magnify when they’re asked to return to their old work environment. “I think coming back is going to be really challenging, especially for organizations that are in hot spots,” he says.
Will companies be required to test
their employees and verify the results, and will social distancing requirements
remain in place in the office? Amalgamated will rely on guidance from the
government in repatriating employees, although Mestrich notes that “guidance
right now, as of today … is very all over the place.”
No matter how this normalization process is executed, Mestrich says it will have to be done with great sensitivity. “I think we’re going to have to be unbelievably empathetic to people who have any number of situations, whether they’re a little bit older worker or they have underlying medical conditions or they still have kids at home and don’t have any other childcare arrangements or they’re just fearful,” he says.
Amalgamated has its roots in the U.S. labor movement. The bank was founded in 1923 by the Amalgamated Clothing Workers of America to provide banking services to its members and is still 40% owned by the union’s modern day successor, Workers United. Mestrich says many of the private sector unions that bank with Amalgamated have “seen significant layoffs and a lot of stress, both in terms of trying to figure out how to service their members, but also concerned about revenue dropping from dues income.”
And of course, many union members lave been laid off as well. In early April, Amalgamated launched the Frontline Workers Fund to provide financial support to workers impacted by the pandemic, including health care, grocery, cleaning service, food service, domestic and retail workers. It contributed $50,000 to stand up the fund and will donate 10 cents whenever a customer opens a new account or spends over $10 using the bank’s debit card. Amalgamated will donate proceeds from the fund to other union organizations for distribution.
The Amalgamated Foundation has also joined several other large foundations to establish the Families and Workers Fund. This fund will also focus on workers, families and communities that have been impacted by the pandemic. It has an initial commitment of $7.1 million, with a goal of raising $20 million. Amalgamated will also manage the fund’s operations.
In one sense, these two initiatives are just larger examples of the empathy that Mestrich has for his own employees. After all, what is philanthropy but empathy in action.
Leadership is a central aspect of banking. Not only do bank executives lead their institutions, but directors who sit on bank boards tend to be leading members of their communities.
Indeed, it’s no coincidence that the biggest and tallest buildings in many cities and towns across the country are named after banks.
That’s why leadership was one underlying theme of this year’s Bank Director’s Acquire or Be Acquired Conference held at the JW Marriott in Phoenix, Arizona.
It was the 25th anniversary of the conference, one of the marquee events in the banking industry each year.
The conference opened with a video tracing the major events in banking since 1994—a period of deregulation, consolidation and innovation.
In that time, the population of banks has been cut in half, Great Depression-era regulations have rolled back and the internet and iPhone have made it possible for three-quarters of deposit transactions at some banks to be completed from the comforts of bank customers’ own homes.
It was only fitting then to bookend the conference with some of the greatest leaders in the banking industry throughout this tumultuous time.
The first day concluded with the annual L. William Seidman CEO Panel, featuring Michael “Mick” Blodnick, the chief executive officer of Glacier Bancorp from 1998-2016, and Joe Turner, the CEO of Great Southern Bancorp since 2000.
The banks run by Blodnick and Turner have created more value than nearly all other publicly traded banks in the United States. Glacier ranks first in all-time total shareholder return—dividends plus share price appreciation—while Great Southern ranks fifth on the list.
As Blodnick and Turner explained on stage, there is no one right way to grow. Blodnick did so at Glacier through a series of 30 mergers and acquisitions, building one of the leading branch networks throughout the Rocky Mountain region.
Turner took a different approach at Great Southern. He and his father, who had run the bank from 1974 to 2000, focused instead on organic growth. They built a leading footprint in the Southwest corner of Missouri, and then, in the financial crisis, completed five FDIC-assisted transactions to spread their footprint into cities up the Missouri and Mississippi rivers.
One consequence of this approach was it enabled Great Southern to consistently decrease its outstanding share count by upwards of 40 percent since originally going public, as it never had to issue shares to buy other banks.
Asked what one thing he wanted to share with the audience, Turner talked about the importance of ignoring shortsighted stock analysts. Despite Great Southern’s extraordinary returns through the years, it has rarely if ever been “buy” rated by the analyst community.
Why not? When the economy is great and other banks are growing at a rapid clip, Great Southern tempers its growth to avoid making imprudent loans. Then when times are tough, and a pall is cast over all stocks, Great Southern surges ahead. Blodnick’s advice focused on M&A. For sellers, the goal should never be to get the last nickel, he explained. Rather, the goal should be to establish a partnership that will maximize value over time.
The conference also had a parallel track of sessions, FinXTech, focused on technology.
These sessions were often standing-room only. It was an obvious indication about what the future leaders of banking are focused on now.
Don MacDonald, the chief marketing officer of MX Technologies, took a particularly broad approach to the subject. Although his session ostensibly focused on harnessing data to increase growth and returns, he put the topic into historical perspective.
The question MacDonald was trying to answer was: How do we know if the banking industry has reached a genuine inflection point, after which the rules of the game, so to speak, have changed?
The answer to this question, MacDonald said, can be found in developing a framework for assessing change. That framework should include multiple forces in an industry, such as regulations, customer expectations and technology.
It’s only when multiple major forces experience change at or around the same time that a true strategic inflection point has been reached, explained MacDonald.
Has banking reached such a point?
MacDonald didn’t answer that question, but given the environment banks operate in right now with the growth of digital distribution channels and the ever-evolving regulatory regime, one would be excused for coming to that conclusion.
Given these two tracks—the general sessions focusing on banking and the FinXTech sessions focusing on technology—it was fitting that the final day of the conference was opened by John B. McCoy, the former CEO of Bank One, from 1984-99. McCoy hails from the notoriously innovative McCoy banking dynasty, preceded by his father and grandfather. Bank One was one of the earliest adopters of credit cards, drive-through windows and ATMs, among other things.
Furthermore, it was McCoy’s approach to acquisitions at Bank One, where he completed more than 100 deals, that helped to inform Blodnick’s approach at Glacier. Known as the “uncommon partnership,” the approach focused on buying banks, but allowing them to retain their autonomy.
The decentralized aspect of the uncommon partnership left decision-making at the local level—within the acquired banks. It allowed Bank One and Glacier to have their cake and eat it too—growing through M&A, but leaving the leadership of the individual institutions where it belongs: In their local communities. This resulted in lower customer attrition, the scourge of most deals.
One overarching lesson from Acquire or Be Acquired is that banking is about facilitating the growth of communities, and the best people to spearhead this are the ones with the most on the line—the leaders of those communities.
There comes a point in the process of mastering a subject (in this case, banking) when reading books or articles, or studying data, begins to offer diminishing returns.
After reaching that point, the best way to maintain a steep learning curve is to speak directly with authorities on the topic.
There are lots of authorities on banking—academics, consultants and lawyers, to name a few—but the ones who know the most are seasoned executives sitting atop high-performing banks.
I had many conversations with top-performing bankers in 2018. Here are four of the most valuable insights I picked up along the way.
1. The benefit of skin in the game People in business talk all the time about the importance of a long-term mindset. Thinking long-term is especially critical in banking, given the leverage used by banks and the severe cycles that afflict the industry.
Unfortunately, in a world geared toward quarterly performance, maintaining a long-term mindset is easier said than done. When times are good and there are no signs of economic trouble, it’s only natural to relax lending standards to maintain market share.
Steering clear of this requires discipline. And one way to impose discipline is through skin in the game. If executives own large stakes in the institutions they run, they’re less likely to take imprudent risks.
This was one of the takeaways from my conversation with Joe Turner, CEO of Great Southern Bancorp, one of the industry’s top-performing banks over the past four decades.
“There are always going to be cycles in banking, and we think the down cycles give us an opportunity to propel ourselves forward,” he said. “Having a big investment in the company plays into this. It gives you credibility with institutional investors. 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.”
2. The pace of innovation in banking It’s tempting to think the pace of innovation in the banking industry has accelerated over the past few years.
Even most millennials can probably remember when they had to visit a branch to make a deposit or check their account balance. Today, by contrast, three-quarters of deposits at Bank of America Corp., the nation’s second biggest bank by assets, are completed through its digital channels.
But this doesn’t mean bankers are strangers to change, because they aren’t. The industry has been in an acute state of evolution since the 1970s, when laws against branch and interstate banking started to come down.
Furthermore, while change is indeed happening, perhaps even accelerating, one benefit associated with operating in a heavily regulated industry is it won’t change overnight.
This was one of the takeaways from my conversation with John B. McCoy, CEO from 1984-99 of the notoriously innovative Bank One, which is now a part of JPMorgan Chase & Co.
“The digital thing is happening—it’s changing things—but it’s not going at warp speed or anything,” said McCoy “Maybe one of the reasons is that banks are still highly regulated, so it’s hard for an outsider to come in and disrupt the whole system. … But absolutely it’s going to make a difference, and in 10 years things will look totally different than they look today. But I don’t see any one thing that will change things overnight.”
3. Continuous self-improvement In 2015, Phil Tetlock, a Wharton Business School professor, published his book, Superforecasting: The Art and Science of Prediction.
Don’t let the corny title fool you. Tetlock is a leading authority on the accuracy of predictions. The book walks readers through an experiment he conducted to determine whether some people can forecast more accurately than others.
Not only did Tetlock find some people were in fact better at forecasting than others—the so-called superforecasters—he also found those people shared certain traits.
Foremost among those traits is perpetual beta, “the degree to which one is committed to belief updating and self-improvement.” According to Tetlock, perpetual beta was nearly three times as powerful a predictor as its closest rival, intelligence.
It should be no surprise then that many top executives at top-performing banks share a similar trait, dedicating large amounts of time to learning and self-improvement.
Here’s how Brian Moynihan, chairman and CEO of Bank of America, answered my question about what he reads:
“It’s an eclectic mix, but basically newspapers, periodicals and I get a lot of books sent to me. It’s mainly just a lot of articles. The world has changed. It used to be when I delivered papers in college that I’d read The Boston Globe, The New York Times and The Providence Journal because I delivered them every morning. I still read them, but where I pick up most stuff now is from the article flow on a given day coming through all the feeds.”
He went on:
“Reading is a bit of a short hand for a broader type of curiosity. The reason I attend conferences is to listen to other people, to pick up what they’re thinking and talking about. So it’s broader than reading. It’s about being willing to listen to people and think about what they say. It’s about being curious and trying to learn. That’s what we try to instill in our people. The minute you quit being educated formally your brain power starts to shrink unless you educate yourself informally.”
4. Continuity of leadership Some sort of panic, crash or credit crisis has struck the banking industry an average of once every decade going back to the Civil War. Yet, every time a crisis strikes, it catches bankers by surprise and leads to legions of bank failures.
The problem is that each new generation of banker has to re-learn the lessons of history. And these lessons are often learned the hard way.
This is why it’s important for banks to maintain institutional consciousness, passing lessons learned from the older generation of bankers down to the younger generation.
One bank that’s done this particularly well is First Financial Bankshares, the dominant locally owned bank in West Texas and one of the top-performing regional banks in the country over the past two decades.
There are a number of explanations for First Financial’s success during this time, which encompasses the financial crisis, but one is that its current chairman and CEO Scott Dueser lived through an acute banking crisis in Texas in the 1980s and is determined to avoid doing so again.
“The 1980s was this super education,” said Dueser. “I learned what not to do. And I learned how to get out of problem loans. I’m so glad I went through it because I remember it today and am not ever going to go through it again. And that’s why in the 90’s [and through the financial crisis] we did so well. That’s the value of having somebody like me in a bank that remembers. All these young guys, they don’t remember that. So how do you teach them? Well, you just tell them this is what happens when you do that.”