To Whom Should a Bank Be Loyal?
I had been watching the stock of a bank that had done some creative financing a couple of years ago fall steadily from the mid-30s to a price below $5. Then, after this 80% drop, the company sent out a notice that "to enhance and protect shareholder value" it was instituting a poison pill that would in effect make it impossible for any outsider to buy the bank unless the board approved the deal.
What I was witnessing was not an attempt to protect shareholder value, since shareholders would have been better off had someone come in and bought the stock, bidding up the price. Instead, it was an effort to protect management and directors' jobs.
At first, one can become mad about this. After all, the shareholders placed their funds in the bank, and now the bank is saying, in effect, our jobs and perks mean more than your investment.
Ripping Off the Public
This is the case with so many poison pills, which make a takeover attempt by an unfriendly outsider prohibitively expensive.
The arrogance was equaled by a Wall Street firm that sold the public a fund to bankroll the purchase of an ailing thrift. Failing to find one worth buying, the firm gave back the money, except for commissions and fees. Isn't that great - raising money and having no use for it but charging 10% for doing nothing!
No wonder so many people look at the market and say, "No way!" And no wonder it is so hard for companies to raise capital from the individual investor.
But the shareholder-value question has two sides.
Looking Out for No. 1
The real question is: What public does a bank serve? The shareholders? The employees? The community?
In the 1990s, one can understand why middle-management employees who do not have "golden parachutes" might think only of their own interests. They have seen that far too many banks and other companies ignored employee interests.
A person can work 30 years for a bank and then be let go because of a merger, a change in management styles and goals, or the development of new operating techniques and equipment. Will this person, whose daily fear is the arrival of a pink slip, think first of shareholder value or of No. 1? (Hint: The kid's college tuition bills keep arriving.)
Robert D. Pierson, president of the northern division of New Jersey's Collective Federal Savings Bank, recalls that when he was at Johnson and Johnson, the pharmaceutical company had a hierarchy of loyalties:
1. The users of its drugs.
2. The doctors who prescribed them.
3. The employees.
4. The communities where company plants were located.
5. The shareholders.
Johnson and Johnson justified putting shareholders fifth by observing that without the first four there would be no return for the shareholders anyway. Pierson solidly agrees.
People who fear for their jobs because their company is downsizing are certainly less effective revenue producers than people who believe their employers puts their welfare before making security analysts happy.
An example is Delta Airlines, 97% of whose employees gave up one-sixth to a one-tenth of their salaries one year to buy their employer a Boeing 767. It was their way of saying thank you to the company for putting their interests first during a recession.
Such loyalty is bound to improve bottom-line performance, even though shareholder value did not get top attention.
No Clear-Cut Answers
What should a bank's top priority be? Obviously, there are no definite answers.
Some might say employees and the community deserve more attention than shareholder value does. But I recall a former S&L executive who said:
"When a thrift served its community and then died because of the questionable risks it took, no one cried for it; borrowers and depositors went on to some other bank, and most of the employees were hired by the acquirer. But the shareholders were wiped out."
Maybe this objection was more valid in the past. Today employees have a harder time getting a new job, and the community does suffer when a financial institution that provided it with credit goes under.
Which bank public is most important? All of them. Synergism is what makes a bank work. Without customers, loyal employees, and adequate capital provided by shareholders, there is no bank.
But at least let's be honest and call things what they are. A poison pill touted as protecting shareholder value when all it really protects is the board and top officers is a patent fraud.