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Archive for the ‘Strategy’ Category

History of BankingThe pace of progress is quickening as we begin this, our second in the series of our history of banking as if it occurred in one week.  But, it isn’t until 7:26 on Wednesday morning that the story of American banking starts to unfold. The actual date is 1741 and the problem is tight British control over the number of coins entering the Colonies. Americans are tired of relying on crop notes and barter, and decide to start banks of their own. The predictable response is a legal roadblock. The British prohibit banking and the experience sours many American Colonists on financial institutions.

This Wednesday of our banking week closes with a very significant American event, the end of the Revolutionary War. It is 14 minutes after midnight on Thursday before Alexander Hamilton establishes a federally chartered Bank of the United States over Thomas Jefferson’s strong objections. Yet the charter of the bank runs just 20 years and by Thursday evening it is dead.

In fact, when the U.S. Government needs to borrow $11 million to buy Louisiana – in our time sequence this 1803 event takes place at 9:29 on Thursday morning – no U.S. bank has enough clout to finance the deal. Fortunately, a British institution steps up to the plate. For America, Thursday turns into a very long night filled with the nightmare of the Civil War.  Yet as Friday dawns, the United States enters a promising new day. The country is unified and state banks are flourishing. Though state banks in the South had weakened or disappeared, a rebirth has begun.

It is mid-day on Friday – 11:31 a.m. – when the National Bank Act of 1863 passes. The leaders on this Friday are men of integrity like Israel Lash, who launches the First National Bank of Salem (N.C.) to serve thrift-conscious Moravians, after it becomes clear that The Bank of Cape Fear’s Salem branch (Lash’s former employer) will not be part of the revival. Late this Friday morning, Alfred Austell founds one of the oldest banks in Georgia in his home. Though the Reconstruction Act absolved Austell from any obligation to redeem his former bank’s Confederate money, Austell depleted his personal fortune to exchange this money for gold, an act of faith his former customers clearly remember. As the National Bank Act strengthens federal control over banking and currency, Austell, Lash and fellow bankers are encouraged to make new beginnings.

Over the lunch hour that Friday, it appears American banking has finally gained a stability that has been very elusive during its first two days of life. At long last the nation has a uniform currency, gained primarily by taxing state-chartered bank’s notes, rendering them of insignificant value.

On Friday – the fifth day in our banking week – the nation is charged with great creative energy. Before Friday ends, Thomas Edison produces the first commercially viable electrical lamp and George Eastman markets his first box camera. Yet as Friday – and the first five days of modern banking history – draw to a close, surprisingly little has changed in the way banks operate. The Monday morning customers of Amsterdam Wisselbank would feel comfortable in the Friday evening banks of the United States.

However, there are blips on the radar screen that predict a storm of activity. For example, when transatlantic cable is laid in the 1870s – 3:43 p.m. Friday in our time line – some bankers realize they can take advantage of small price differences in New York and London markets to profit on arbitrage. This begins a much more creative time and one that evidences strategic innovations that will ignite a tremendous leap forward in the pace of change, yet one that also will elevate that risks and develop new challenges for the industry.

We will discuss those changes over the next few weeks.

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ClockA few years ago, a well known and well respected bank CEO observed that in today’s world three years of change seem to be compacted into every six months of banking history.  I hardly ever disagreed with him, but in this case I believe that his compression idea is on target but a little too conservative.

After meditating on the observation, I thought it might be interesting to try to condense the history of modern banking into a single week—a mere seven days.  While daunting, I think it will depict just how much has happened in a relatively short span of time.  For the next few months, follow along with me as we review the 7 short days of the week and  the evolution and the rapidity of that change.  In this context, banking as we know it has developed within the last hour.  And, in the next few minutes, banking is almost certain to be changed beyond recognition by profound technological, economic, political and cultural changes buffeting our business.  Today, it is not change, but the pace of change that is unique and creates banking challenges of a new magnitude.  Creative strategy becomes a necessity, but difficult to tackle.

So, to depict how history’s pace has quickened, try to measure banking events in terms of one ordinary Monday-through-Sunday week.  The first day of this week – a Monday – marks the arrival of modern banking, while the latter part of Sunday represents 2009, the 400th anniversary of modern banking.  We will have just gone to bed when the first four years of the next century begins – and what a beginning!  For this exercise, the first minute of Monday – 12:01 a.m. – is the year 1609.  It is when the Amsterdam Wisselbank opens its doors – an excellent beginning for our modern era.

Of course, many aspects of banking predate 1609 and set the stage for our four century banking week.  But the banking week we have defined is more than adequate to demonstrate the accelerating pace of change.  On the Monday modern banking arrived, Shakespeare was busy writing sonnets, trade was flourishing and the merchant class was on the rise.  The Amsterdam Wisselbank opens with a broad charter – to accept deposits and bills of exchange, transfer payments among customer accounts, mint coins and lend money.  This institution thrives for 200 years – about 4 days in our compressed time capsule.

Throughout the wee hours of Monday morning, growing numbers of English goldsmiths who safeguard customer deposits discover that owners never demand more than a fraction of their reserves in payment.  So they gain more and more confidence about using promissory notes to lend on deposits.  These goldsmiths’ paper certificates serve as currency, increase the money in circulation and fuel economic expansion.  One might say that their strategic vision was to enable customers to build businesses through providing credit and thereby enhancing profitability.  It is now a short step to a bank check.  The first check is written at about 9:00 Monday night.  This 1659 check evolves from the practices of British institutions that specialize in mortgages and legal services.  Adding additional products and services has already begun.

By the end of the century –2:13 p.m. Tuesday, London has become a major financial center and the Bank of England has begun to serve as a role model for central banks.  Next time we will see what Tuesday evening and part of the rest of the week brings as the pace of progress is beginning to quicken.

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For years, larger companies have routinely budgeted to increase base salaries of employees by a few percent based on what everybody else is doing. Then, the annual increase is usually spread among employees based on where they are paid in their job’s policy salary range and, hopefully, based on a merit performance score. There is a good deal of logic in such a process, but it is worth rethinking given the realities of today’s labor market.

payrollWhy does an annual increase in the guaranteed base salary make sense? The fact that it is routinely done at the same time each year gives employees a sense of security and if your strategy emphasizes low risk, steady growth with retention of a stable staff, then this approach to base salary management makes sense. On the other hand, if your organization’s strategy is for more risky growth where high levels of performance can make a big difference, perhaps a different approach to base pay would make better sense.

Maybe some of the base should be shifted over time to incentive pay. Perhaps base salary reviews should be done less often with bigger increase potentials when salary increases are eventually granted. How you mix pay between the guaranteed portion and the at-risk portion is a matter of strategy and to be effective, your pay strategy must support your business strategy. We hear HR professionals worrying about the annual 2% to 4% increase having become an entitlement. However, management of companies that have had depressed revenues during the recent economic recession have little patience for any entitlement attitude. HR professionals need to think about how their office can better support the organization’s strategy. Rethinking the annual base pay increase entitlement is a good place to start.

Of course, every organization is unique and there is no one-size-fits-all solution to managing base salaries and overall compensation. Having worked with hundreds of organizations, for-profit and not-for-profit, fast growing and declining, risk-averse and risk-tolerant, we understand the need for a custom solution. As the economy slowly improves, this is a good time to step back and question your organization’s compensation management. We would appreciate your thoughts. Please email, call or comment below.

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At the end of last year we emphasized how strategic planning is critical for the survival of banks in the future, no matter how hazy the road to the future may be currently. Let’s drill down a little further.

Thinking strategically requires creative leadership—the ability to develop, sell and cultivate an idea from inception through implementation. Executives who want to lead their institutions as they build strategic plans must add varied skills to their management repertoire, especially skills as teachers and leaders.

Dynamic change is part of any good strategic plan

Strategic planning is a job that never ends. Because the environment and competition often prompt base assumptions to change, strategies need to be revisited at least every 12 to 18 months. Even if major tenets remain constant, strategic plans still should be reassessed periodically. Questions that bankers should ask themselves touch on internal attitudes as well as the outside world:man-with-questions-200x200

  • What have we done successfully?
  • How has the competition reacted?
  • What is different in our environment?
  • Should we continue on our current path or make changes?
  • Are any failures due to poor strategy or poor execution?

Obstacles to Success

The road from strategic planning to success may not be completely smooth. But, if executives are alert to common roadblocks, they can steer around them with as few serious detours as possible. For strategic planning to succeed, a CEO must view the process as an ongoing commitment and not an exercise to satisfy regulators. Strategic planning is a process, not a sheaf of paper.

Poor communication between an institution’s management and its board can present problems. If these two groups do not have a shared vision and are pulling in different directions, strategic planning has little chance of success. The secret is to engage both groups in the earliest planning sessions. Elitism also represents another common obstacle. In an elitist planning mode, a CEO and one or two top people may complete a strategic plan without involving any of the individuals who will actually execute it. This approach is fraught with peril. First, the planners fail to get input from people who often know far more than they do about operations, customer attitudes or competing products. Second, if middle-level managers do not play a role in developing strategy, they have little personal investment in its outcome.

A putting-out-the-fire management style can create other difficulties. In this case, the institution’s CEO and board may eagerly invest time in developing a strategy, but quickly lose interest when it comes to monitoring progress and overseeing implementation. As soon as the first crisis comes along, interest is diverted and planning is forgotten. A management team does not have to go through many planning-to-oblivion cycles before it loses complete faith in the process.

Strategic planning does not and cannot forecast the future. We have already acknowledged that while the road to the future is hazy, there is hope down the road. Planning cannot predict the exact time a quake might hit your institution, or the size and duration of the tremor. Accept the fact that you will make wrong decisions as well as right ones.

While strategic planning is not infallible, it will help you learn your institution’s strengths and weaknesses and how your resources can be marshaled to survive and thrive. Strategic planning strips change of its power to frighten and immobilize management. It offers executives the power and the skills to harness the energy of change as an engine of creativity.

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Citi is finally getting CEO pay plans right! After losing their shareholder “say-on-pay” vote at the 2012 Annual Meeting of Shareholders, new Chairman Michael E. O’Neill, who just took over as Chairman last April, interviewed a large number of important shareholders. He was told that paying their CEO a $6 Million Incentive based on a two-year (2011 and 2012) cumulative pre-tax profit of $12 Billion, may sound like a good deal for the shareholders, but it was fraught with problems.

carrots

Incentive Pay Must Be Carefully Designed

To begin, the Company had 2010 pre-tax profit of approximately $12 Billion. So, the hurdle for earning the $6 Million was half of the actual earnings in 2010. Yes, the economy has made earnings difficult to produce, and yes, Citi is trying to overcome internal problems, but shareholders were unwilling to allow a hurdle rate that low. There were other problems with the design of the Plan.

Cumulative two-year pre-tax earnings ignores the fact that the bank could grow assets at a decreasing return on each dollar and meet the earnings hurdle while increasing their capital requirements significantly. Using volume of profit as a management performance measurement always has this inherent problem. In fact, increasing volume of profit can and often does result in lower returns on equity in banking. For that reason, shareholders can lose as management earns more, and a lose-win plan is never good.

Finally, building on the last point, there is no clear link between shareholder returns and management pay in the Plan Citi was using. A common objective of executive compensation plans is to align the interests of management with those of the shareholders. The old Citigroup, Inc. Plan did the opposite to some degree. The Board of Citigroup consists of intelligent and successful people, but they got some bad advice along the way. After Chairman O’Neill spoke with shareholders, he tasked the Board’s Compensation Committee to redesign the CEO’s Compensation Plan to address the shareholders’ concerns. He was not about to get a negative “say-on-pay” vote after his first year as Chairman.

Now, in my many years of studying and designing executive compensation plans, I have yet to see the perfect plan. It just does not exist. Business is too complex to allow for such a thing, and the need to keep the plan as simple as possible is an important constraint.  Yet, the new Citigroup, Inc. Management Compensation Plan addresses shareholder concerns with an elegantly simple design.

Executives will be granted units worth a certain amount in three years if certain performance is achieved.  Citigroup stock must perform in the top three-quarters of a carefully selected peer group of stocks of similar companies, and Citigroup’s Return on Average Assets over the three years must beat a hurdle equal to the previous year’s actual or there will be no units rewarded.  Furthermore, if the Return on Average Assets over the three years is better than the previous year by a significant percentage, then a target number of additional units will be awarded.

This design is superior to the old design because it clearly:

  1. aligns management’s interests with those of the shareholders and
  2. it is tied to relative performance compared with peers as well as the Company’s strategic goals.

There are some potential draw backs to such a plan, but the new plan is so much better than the old plan, I will not spend words on the risks in this particular blog.  Perhaps in the future, we can look at some of the potential flaws.  In the meantime, I say congratulations to Mr. O’Neill.  I may go buy some Citigroup stock!

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It is never too soon to start developing a succession plan for the top executive positions in an organization. Such plans take time to develop and come to fruition. Here is a brief outline of the steps:

Planning

This step should be in process continuously. It involves determining which positions need successors and what knowledge, skills and abilities will be needed for those positions in the future to have a successful enterprise.

company-organization-chart

Development, when affordable, should start early.

Development

This, too, is ongoing. It is the training and development of the inside candidates and the search for and recruitment of outside candidates that fit the ideal candidate profiles. This step takes time to implement…maybe years if you hope to develop talent internally.

Selection

Here you are screening, selecting and negotiating terms with the successor. Often, you will need to circle back and revisit plans and development steps if strategies change. Eventually, though, a successor must be chosen.

Transition

This is the handing off of the baton from a retiring executive to his or her successor. It is fraught with risk and should be carefully planned and

monitored. Most new employment relationships that are going to go bad will do so during the first six months while a transition is occurring.

There is a lot to do to make succession planning work. We will be happy to present an overview of the process to your executive team and/or Board at no cost

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Click here and request a contact, or call me at 919-732-2716.

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Last month we discussed the alarmingly similar events and reactions that occurred in the periods of 1988-1992 and 2008-2012.  Yes, strategic planning is perhaps needed more today than at any time since the 1980’s; however, the challenges are daunting, and the road ahead has gotten hazier each day.

foggy road ahead

The road has gotten hazier

The good news is that for the banks and bankers who stick it out and survive over the next five years, the future does look bright because the very pressures bankers feel today will eventually and inevitably squeeze out lower performing banks enabling a return to rational pricing.   It is going to take some time for this to occur, but the path appears set.

A wise banker said recently, “there is a long way to go, and the journey has just begun.”  Well, just how long is that journey and just what is the future?  The regulators have given us a peak into their minds.  Here is some of their thinking:

  • The core deposit franchise will need to be nurtured and managed
  • An efficient, lean operation will be critical
  • Capital management will be essential
  • Sound strategies will be critical
  • Good financial skills and in-market knowledge will be required of Boards
  • Credit and Operational risks will be equally challenging

There are a litany of challenges and issues that will need attention for the future.  But, any way you slice it, making money in a prolonged low-interest rate environment, providing a decent return to your shareholders, dealing with over reactive regulations and returning to good old-fashioned fundamentals are the underpinnings of success in the future.

Strategic planning is not a panacea, but it is critical to survival.  As we stated before, good planning establishes objectives to achieve desired future results.  Though it cannot forecast the future, strategic planning does attempt to look at future possibilities so decision makers can rationally choose between courses of action that involve risk.  Strategic managers are proactive managers.  They tackle questions of structure and focus so they are prepared long before seismic activity is sensed.

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