So far in an era of intensifying corporate accountability brought on by shareholder activism, banking executives have been coasting along mostly unperturbed.
Angry shareholders have forced out chief executives at some of the largest U.S. companies, including at Pfizer Inc., Boeing Co., Walt Disney Co., Merck & Co., and Morgan Stanley. Dire speculation swirls about the fates of the CEOs at Time Warner Inc., Dell Inc., and H.J. Heinz & Co.
The activism generally is considered a product of the increasing influence of hedge funds, and whether their influence - currently $1.5 trillion plus leverage - is a good thing for financial markets is hotly contested. For now, when banking executives think about hedge-fund risks, they are worrying about counterparty credits, not activist mercenaries.
Bank stocks tend to be less volatile than shares of companies in unregulated industries. Strong performance and healthy dividends have pacified an investor base that is already perceived as being more conservative than confrontational.
"Banks have a moat around them," said Nell Minow, a co-founder of the Portland Maine, governance firm The Corporate Library LLC. "In industries that are subject to heavy regulation, there is an overwhelming policy interest in institutional consistency and reliability. That does not make them very susceptible to anyone from the outside coming in."
In July, Citigroup Inc.'s largest shareholder, Saudi Prince al-Waleed bin Talal, urged "draconian" cost cuts. "I'm patient, but enough is enough," he said. What in other industries might sound like vague warnings from an important investor was akin to bomb-throwing in the banking industry, where shareholder complaints are virtually unheard of.
The closest thing in recent years to an activist attack in the banking industry was Relational Investors LLC's campaign last fall against Sovereign Bancorp Inc. of Philadelphia. The San Diego investment adviser was incensed by the thrift company's plan to sell a stake of just under 25% in itself to Banco Santander Central Hispano SA - and use the proceeds to buy Independence Community Bank Corp. of Brooklyn, N.Y. - without submitting the transaction to a shareholder vote.
Relational summoned an impressive army of lawyers and public-relations specialists to take its case to Sovereign's shareholders, but the effort could not stop the transaction. Relational reached a settlement with Sovereign in March, dropping its opposition in exchange for a board seat.
There was no riper activist target among large banking companies than Sovereign. It has been dogged by a credibility deficit with investors for more than a decade. Research analysts and governance experts almost unanimously condemned the transaction with Santander. Sovereign's largest shareholders fumed in a number of forums about the company's lack of accountability.
And yet, by gaining board representation, Relational achieved what was widely perceived as a modest victory at best. The fight with Sovereign became just another example of the industry's insularity, rather than a powerful display of activism.
(It is worth noting that Sovereign's shareholder troubles are not over. Last week the California Public Employees' Retirement System sent Sovereign shareholders a letter urging them to vote for the pension fund's proposal to declassify the company's board; doing so would force every director to seek annual reelection.)
Agitated shareholders face substantial challenges in taking action against banking companies, not the least of which is the relative lack of volatility in their stocks. Without volatility, it is hard for activist investors to outperform markets.
Hedge fund managers "are driven by alpha - they are not driven by absolutes of right or wrong," said Adam Dener, a partner at the financial services consulting firm Capco. "They are investors who are looking for above-average performance, and victory is generating a return that is some multiple of an index for their investors."
The relative lack of volatility and outperformance compared with other industry sectors over the past five years have killed much of the incentive to seek bank targets.
"There isn't a whole lot of vigorish left for an activist to get excited about," said Christopher Whalen, of Lord, Whalen LLC's Institutional Risk Analytics. "If these things were more volatile and fell to single-digit P/Es, then you'd see people pounding on the bad performers."
Cheaper valuations alone might not be enough. Notwithstanding the success of some fund managers in agitating for change at the industry's smallest public companies - particularly thrifts - it is still difficult for activists to gain traction with bank boards.
"Particularly in the universe of the second and third tiers of banks, you tend to have more community-oriented board relationships," Mr. Dener said. "If you are going to pick a fight, the fights that make some sense to pick are the ones that basically have a leverageable payoff - and that is likely to be where there are directors who have a broader perspective than the local interests."
Complaints about underperformance usually fail to resonate with bank directors, who, as the bank's best customers, tend to be fiercely loyal to the CEO.
Activists' usual arguments also do not translate well in the banking industry. The usual playbook is to note underperformance and suggest a specific course of action. Trying to persuade the company to abandon unprofitable ventures or sell assets the market does not value appropriately are common tactics.
But large banking companies with discrete business units are already aggressively considering their comparative advantages, unleashing a wave of asset sales and divestitures without much prompting from shareholders.
"It's easy if you are an activist shareholder to go the company and say 'I want you to sell off your noncore assets,' " Ms. Minow said.
Patrick McGurn, an executive vice president at Institutional Shareholder Services Inc., said, "A lot of the hedge fund plays are purely looking for balance-sheet gains." Those gains frequently are not available on bank balance sheets, so there just are not that many compelling proposals for activists to advance.
The only strategy left is selling the entire company, but sellers need buyers, and right now there are not many for underperforming banking companies.
Also, regulatory restrictions on ownership make it difficult for hedge funds to amass large positions in the banking industry. Few funds want to go through the trouble of applying with the Federal Reserve Board for permission to hold controlling positions. That leaves most of banking shares in the hands of retail and institutional investors, who have shown little inclination to rock the boat.
Asked to describe the type of retail investors that banking companies attract, analysts generally conjure images of grandmothers squirreling away share certificates for the local bank in a safe-deposit box.
But banks' historical isolation is hardly a guarantee that they will remain so.
"The hedge-fund, wolfpack mentality tends to jump from industry group to industry group, and it could just be that no one has figured out a short-term way to leverage value out of the industry yet," Mr. McGurn said. "It doesn't mean somebody won't."
The change could come sooner rather than later, particularly as a foundering housing market, shaky commercial loan growth, thin margins, high interest rates, and inevitably higher credit costs take their toll on bank earnings.
"I think you'll see some people who will take stabs at it, because a bunch of these banks will get too cheap not to take a stab at it," Mr. Dener said. "It's a question of who it is going to be."
And hedge funds, because they frequently employ substantial leverage, do not have to force a sale to deliver for their investors. The very process of agitating for a sale can push share prices up, and with leverage, a modest increase can translate into a substantial gain.
For the hedge funds, "declaring victory is like the dog chasing the car," Mr. Dener said. "It doesn't have to get in the car and drive it, and it doesn't care who gets in the car and drives it. It just may need to catch it."
If the technique proves successful once or twice, watch out.
"If a hedge fund thinks an asset is undervalued, and they think they can mine that value out, they will go to extraordinary measures to try to unlock that value," Mr. McGurn said. "Hedge funds have definitely shifted the landscape."