When Bank Director hosted its first Acquire or Be Acquired Conference 25 years ago, Whitney Houston’s “I Will Always Love You” held the top spot on Billboard’s Top 40 chart.
Boston Celtics legend, Larry Bird, was about to retire.
Readers flocked to bookstores for the latest New York Times best seller: “The Bridges of Madison County.”
Bill Clinton had just been sworn in as president of the United States.
And the internet wasn’t yet on the public radar, nor was Sarbanes Oxley, the financial crisis, the Dodd-Frank Act, Occupy Wall Street or the #MeToo movement.
It was 1993, and buzzwords like “digital transformation” were more intriguing to science-fiction fans than to officers and directors at financial institutions.
My, how times have changed.
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When we introduced Acquire or Be Acquired to bank CEOs and leadership teams a quarter century ago, there were nearly 11,000 banks in the country. Federal laws prohibited interstate banking at the time, leaving it up to the states to decide if a bank holding company in one state would be allowed to acquire a bank in another state. And commercial and investment banks were still largely kept separate.
Today, there are fewer than half as many commercial banks—of the 10 banks with the largest markets caps in 1993, only five still exist as independent entities.
It’s not only the number of banks that has changed, either; the competitive dynamics of our industry have changed, too.
Three banks are so big that they’re prohibited from buying other banks. These behemoths—JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp.—each control more than 10 percent of total domestic deposits.
Some people see this as an evolutionary process, where the biggest and strongest players consume the weakest, painting a pessimistic, Darwinian picture of the industry.
Yet, this past year was the most profitable for banks in history.
Net income in the industry reached a record level in 2018, thanks to rising interest rates and the corporate tax cut.
Profitability benchmarks in place since the 1950s had to be raised. Return on assets jumped from 1 percent to 1.2 percent, return on equity climbed from 10 percent to 12 percent.
Nonetheless, ominous threats remain on the horizon, some drawing ever nearer.
- Interest rates are rising, which could spark a recession and influence the allocation of deposits between big and little banks.
- Digital banking is here. Three quarters of Bank of America’s deposits are completed digitally, with roughly the same percentage of mortgage applications at U.S. Bancorp completed on mobile devices.
- Innovation will only accelerate, as banks continue investing in technology initiatives.
- Credit quality is pristine now, but the cycle will turn. We are, after all, 40 quarters into what is now the second-longest economic expansion in U.S. history.
- Consolidation will continue, though no one knows at what rate.
But it shouldn’t be lost that certain things haven’t changed. Chief among these is the fact that bankers and the institutions they run remain at the center of our communities, fueling this great country’s growth.
That’s why it’s been such an honor for us to host this prestigious event each year for the past quarter century.
For those joining us at the JW Marriott Desert Ridge outside Phoenix, Arizona, you’re in for a three-day treat. Can’t make it? Don’t despair: We intend to share updates from the conference via BankDirector.com and over social media platforms, including Twitter and LinkedIn, where we’ll be using the hashtag #AOBA19.
Five years after the passage of Section 954 of Dodd-Frank adding new provisions on clawbacks, we expect the Securities and Exchange Commission (SEC) to make some minor adjustments to its proposal and adopt a final rule before summer’s end.
First, have a whistleblower policy/program in place, now, so that if/when a claim arises, the board is prepared to handle it effectively, appropriately and lawfully. All employees should be trained on the policy and encouraged to report up the chain, pursuant to the policy, any corporate misconduct they discover. It is far better in the end if the bank self-discovers and remedies the problem, than if the government does it for you. Second, work hard to maintain the confidentiality of the whistleblower. Maintaining confidentiality, and even anonymity, helps to ensure no retaliatory action is taken against the reporting employee. At all costs, avoid retaliation. Finally, conduct an independent internal investigation, and do so with the understanding that the reported misconduct could lead to criminal and/or civil litigation. Engage your legal counsel early in the process to ensure preservation of evidence and legal privileges.
Banks should handle possible whistleblower complaints very seriously. Regulatory agencies have shown a more severe response to banks over the last few years and whistleblower complaints can reinforce a perception, however inaccurate, that some banks do not have a proactive approach to compliance issues generally. Banks should have procedures for dealing with such claims and allow employees to air their concerns without fear of reprisal. Some may wonder whether this approach may encourage the raising of false claims, but at least banks would have an opportunity to triage employee concerns and demonstrate that they take those concerns seriously.
Bank boards should authorize their audit committees to handle complaints concerning securities law violations. An audit committee’s charter should make clear that the committee may retain appropriate advisors to investigate such complaints. The board should also ensure that management promulgates guidance for internal reporting on violations. Employees should be encouraged to report violations to appropriate representatives of the compliance, internal audit or legal staff. Recipients of complaints about violations should be instructed to forward them to the chairperson of the audit committee. Upon receipt of a complaint, the chairperson should ensure that it is investigated thoroughly. If no violation is found, the complainant should be so informed within 120 days after the complaint was made. If a securities violation is found, the bank should decide whether to report the violation to the Securities and Exchange Commission. A report to the SEC should be made within 120 days after the complaint was made.
Both public and private banks have potential exposure to Dodd-Frank and Sarbanes-Oxley whistleblower claims. Therefore, a bank should have proper compliance and anti-retaliation policies in place (reviewed regularly) setting forth behavioral expectations, encouraging reporting, and establishing protocols for handling reports. The bank should also designate a team to investigate and respond to reports. All employees should be thoroughly trained regarding these policies and, in particular, managers should be trained to identify when an employee is reporting and the need to escalate the report within the organization, as many employees do not use “hotlines” or Internet-based reporting mechanisms. Most important, the bank’s senior leadership must lead by example. Senior leadership needs to sincerely and repeatedly promote the virtues of the bank’s compliance, ethics and code of conduct policies. Reporting questionable conduct, no matter how insignificant, must be genuinely encouraged. And finally, senior leaders must demonstrate integrity in all that they do.
Whistleblower complaints need to be treated seriously. Avoid the temptation to view all whistleblowers as disgruntled employees who are asserting claims against innocent individuals to further their own selfish goals. Failure to promptly address a legitimate complaint will only exacerbate the problem. Regulators look favorably on companies that take prompt action and see them as having strong and effective management. The opposite is true for companies that are unresponsive or hostile to employees’ concerns. Plus, treating whistleblower complaints seriously sends the message that employees will be treated fairly and sets a tone at the top that should foster stronger ethical behavior within the company. The board needs policies and procedures for investigating whistleblower complaints and coordinating corrective action and must communicate them to employees. Doing so will create the conditions necessary for the effective management of whistleblowing.
Bankers are routinely inundated with “alerts” and “updates” from advisors setting forth current developments in the law as it applies to banks and their business. As authors and recipients of such updates, we understand your pain, but also believe the information conveyed is critical to making informed decisions. However, every so often (now for instance), it’s important to reevaluate established practices and procedures to make sure we’re not forgetting something important.
After the passage of the Sarbanes-Oxley Act, audit committee members experienced an increase in the intensity of the spotlight the public and regulators placed on them—and the focus didn’t just affect public companies. The current financial crisis again has put a spotlight on the responsibilities that all boards and audit committee members face. Although audit committees are actively engaged with their management teams and internal and external auditors, it can be difficult to know what should be the focus of those ongoing discussions.
For decades in this country, the vast majority of Initial Public Offerings (IPOs) were for companies raising $50 million or less. Smaller public companies, including community banks, could thrive in the public markets, with equity research coverage and retail brokers driving investor interest in growth-stage companies. However, in recent years, the 