The conventional wisdom in banking for the past decade or two has been that banks must have as their top priority maximizing shareholder value. While it's difficult to quarrel with that general proposition, something very important is missing from the equation: a time horizon.

Should the management of a bank be charged by the board of directors with maximizing shareholder value in the short term or long term? The time horizon set will likely have a profound impact on the strategies adopted by management.

Analysts and the investment community will generally want the time frame to be short. Regrettably, their interest is all too often in quick returns, not long-term viability.

Banks have been losing vast amounts of market share in their traditional businesses for the past two decades. Banks reacted at first by taking on more marginal customers. The results were disastrous, as evidenced by the enormous increase in loan losses and the huge number of bank failures in the 1980s and early 1990s.

Many banks shifted to almost a retrenchment strategy by slashing expenses, increasing fees charged to customers, and returning capital to the shareholders. Many of the mergers in the industry are driven by a desire to reduce capacity and costs.

It's indisputable that shareholders have benefited greatly in the short term. Returns on assets and equity have grown enormously for the industry as a whole, as have bank stock prices.

It's far less clear whether and how bank customers have benefited from these short-term strategies. Thousands of offices have been closed, tens of thousands of loyal employees have lost their jobs, and the charges for services have increased.

Shareholder value will ultimately be determined by bank customers. If banks offer products and services that customers value sufficiently, shareholders will do quite well. If banks focus on maximizing short-term profits by cutting service quality and hiking fees, customers will walk and shareholders will suffer.

Bankers are cognizant of these marketplace realities, but many of them believe they are in a Catch-22. The industry, shackled by repressive government regulation for more than 50 years, has been tossed into a tough competitive free-for-all.

Banks with low price/earnings multiples are being gobbled up by those with high multiples. There's nothing like fear for your life to get your attention riveted on the issues immediately at hand.

A number of banks have taken charge of their destinies with well- thought-out, long-term strategies for adding value to their customers. They have spent considerable time and energy looking for new markets or market segments in which they can earn above-average returns. They have made the necessary investments to serve those markets in an efficient and effective manner.

To be successful these days, banks must have very strong and capable management teams and boards of directors. Management must spend a great deal of time helping to educate the board and investors on where the industry is headed and on both the opportunities and the challenges facing the bank.

Bank directors and investors are inundated by literature about how tough it will be for banks, particularly smaller ones, to survive. The media commentaries are reinforced by investment bankers and others trying to generate fees from bank mergers.

Bank directors and investors who have not been kept well informed by management have every reason to be very skittish. They can hardly be faulted if they abandon management when the inevitable offer to buy the bank comes along.

One of the most important responsibilities of a bank chief executive these days is to convince the board of directors and shareholders there can be a bright tomorrow for the bank if it invests in that future. It's clear that without long-term strategies and investments, there will be no tomorrow.

Mr. Isaac, former chairman of the Federal Deposit Insurance Corp., is chairman and chief executive of the Secura Group, a financial institutions consulting firm based in Washington.

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