As top bankers discuss the goals of their organizations, shareholder value is usually at or near the top of their lists.
This should not be surprising. Managers of any private enterprise should aim to provide good dividends and increasing value to the owners.
But in banking, this focus is a recent development.
Until well into this century, bank stock buyers faced double liability. If their banks went under, they not only lost their entire investment but were assessed additional amounts equal to the capital value of their shares to help cover depositor losses!
In addition, bank shares were treated differently from other investments. There was no disclosure - not even earnings reports. The reasoning was that bad news would bring bank runs, and it was felt the regulators would do enough to protect the banks.
In most instances you could not get a quote on the value of a stock. And if you asked the dealer or the bank to buy your shares from you, you would be told: "The last trade was at $6, so we will pay at $6."
Obviously the growth of the bank did not accrue to the investors' benefit under such pricing.
I remember one financial reporter buying one share of each major bank, so he could at least get the annual information that had to be published. And when I covered the annual meeting of the old Hanover Bank as a young reporter in the 1950s, the meeting lasted exactly one minute and 12 seconds. That was the only opportunity in the entire year for shareholders to learn how their investment was doing.
Not exactly full disclosure.
Today we've had a 180-degree turnaround. One obvious reason is that in an area of mergers and acquisitions, a high price/earnings ratio is for both acquirers as well as those to be acquired. The former want their share prices to be high so they can acquire with less dilution in a share-for- share exchange; the latter want their own prices high so offers must be more attractive to win shareholders over.
Attractive share-price action is considered a sign of strength even in banks with no interest in merging. The best magnet to attract customers looking for a sound bank is a P/E boosted by analysts and institutional investors who judge your bank to be well run.
But though shareholder value and an attractive P/E have become prime bank goals today, achieving higher share prices on the market remains an enigma.
Earnings that rise over time and honest public communications are the best ways to convince analysts, investment bankers, and institutional investors of the worth of the stock.
But many a bank has reported a solid year of profits only to suffer a price decline because these professionals felt it should have done even better.
And efforts to hype stock through dog-and-pony shows for analysts often have a perverse result - a price rise followed by a drop when the analysts feel the run-up has run out of gas.
Buying back your own stock is another way to boost the P/E. But this involves a dilution of book for the remaining shareholders if the bank is selling above book value.
Some boards of directors will take the risk if they think their stock's P/E is below that of equivalent earners, so they'd be buying their own stock on the cheap.
But others feel that in banking, book value does have meaning. Book represents cash and marketable securities, and has far more value in banking than in companies where it represents machinery and equipment whose liquidation value would be at scrap prices.
No, building shareholder value is not easy. But the priority it now gets is a tremendous improvement.
There's no reason to be nostalgic for the days when the shareholders were considered nuisances whose job was to buy the shares and keep their mouths shut.
Mr. Nadler is a contributing editor of the American Banker and professor of finance at Rutgers University Graduate School of Management.