How do you judge a bank CEO? One way would be to simply look at how the stock does during his tenure. After all, the only reason we buy a stock is to make money, so one view could be that the CEO whose stock performed the best is the best CEO. As simple as it seems, however, there are a number of things wrong with this assessment.
First, the CEO's bank could be riding a wave where all bank stocks are doing well, like the internet stocks in 1998-99 or social media stocks today. A rising tide lifts all ships, but the ship's captain can't be given any credit for this.
Second, what about the CEO who is doing everything right and producing great earnings without moving the stock price upward? Stock prices ultimately follow earnings, but ultimately can be a long time.
Moreover, a CEO could generate good short-term earnings, which are driving the stock upward, while taking on too much risk. We can all think of examples of this type of behavior.
Many people discount stock performance in assessing an executive, recognizing that he or she has very little control over stock price. I agree, but you need to take the stock performance into account at least a little bit. Maybe it's only weighted 10%, but stockholders are a major constituency, and you can't completely discount the one thing that means the most to them.
Microsoft is an interesting nonbank example worth looking at. CEO Steve Ballmer couldn't get the stock price up, but he had the bad luck to start as CEO just before the stock crashed in 2000. A CEO like Ballmer who comes in when the stock is at an all-time peak is almost always going to look worse than a CEO who takes over when the stock is at an all-time low.
For the very small community bank, liquidity is very important, and many people won't buy these stocks because they're so hard to buy or sell. If we believe a CEO has little control over the stock price, one thing he or she can do for shareholders is work on increasing liquidity in the stock. Being able to buy or sell the stock easily is almost as important as the price, so promoting the bank and the stock to get more liquidity could also be part of a formula used to judge performance.
What about the family-owned bank or one with just a handful of shareholders where there is no real market price for the stock? The board should obviously look at things like the return on assets and equity, credit quality, the Camels rating and earnings. However, absent a stock price, perhaps a big part of judging a CEO should be simply by how much tangible book grows.
Finally, bank CEOs are often judged by the acquisitions they do. A bank with a growth and acquisition strategy has to judge its CEO by the ability to do acquisitions and execute on them – that's a given.
But shouldn't we also try to judge CEOs by the deals they don't do? These are deals that a bank looked at, maybe even issued a letter of intent on, and then walked away from after due diligence. Or, perhaps, they're just deals that a bank CEOlooked at, but never even issued a letter of intent on because it was just too expensive.
The public investor will never know about these deals, but the board certainly does, and they should factor this in when doing their annual CEO review. Sometimes the best deals are the ones that don't get done.
Joe Garrett is a principal in Garrett, McAuley, a bank advisory firm in Berkeley, Calif. He had been the CEO of two community banks.