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Reflections of a Maverick Banker
BY KENNETH CLINE
Wells Fargo chairman Richard Kovacevich attributes his "maverick" success to mixing quantitative and "soft" skills.
|SYNOPSIS | Wells Fargo chairman Richard Kovacevich, in an interview, looks back on his career as a ?maverick banker? and attributes his success to a combination of quantitative and ?soft,? or people, skills. He says he picked up the quantitative skills in engineering school and the soft skills on the sports field, where he learned the value of motivation and teamwork. Kovacevich says quantitative skills are required to make decisions while soft skills help you implement them. He also explains how paying attention to the numbers kept him from making further major acquisitions after Norwest and Wells Fargo merged in 1998.
A commonly accepted definition of “maverick” is “one who shows independence in thought and actions.” Wells Fargo & Co. Inc. chairman Richard M. Kovacevich is one who clearly meets the criteria for “maverick banker.”
During his 23 years in banking, Kovacevich has often defied conventional wisdom, which is why BAI asked him to address its upcoming BAI Mavericks in Banking event. Kovacevich was an early believer in the value of a broad-based financial services institution, as opposed to a narrowly focused bank, and led Wells Fargo’s predecessor company, Norwest Corp., into insurance and investments long before others in the industry. He’s still the industry’s most visible (and successful) advocate of cross-selling to generate organic growth.
Kovacevich’s contrariness probably shows up most strongly in his approach to acquisitions. He did one “transformational” merger in his career—the 1998 combination of Wells Fargo and Norwest—but has sat tight on big deals ever since, despite numerous opportunities to take his company into other geographies. As he explains in the following interview with BAI’s Banking Strategies, empire-building for ego enhancement is not for him if the numbers don’t work.
This firm adherence to disciplined quantitative analysis, derived from his engineering background, combined with “soft” or people skills learned on the sports field, is ultimately what sets Kovacevich apart. And despite Wells Fargo’s recent problems with its home equity portfolio, which has been scarred by the subprime mortgage crisis, Kovacevich’s long-term record clearly shows the value of being a maverick.
Q: How do you define maverick in a banking context? And, based on that description, how do you fit into that category?
Kovacevich: I think other people describe you as a maverick when they think that you’re a non-conformist—that you don’t follow conventional wisdom and seem to be doing things quite differently from the pack.
I don’t consider myself any of those things; I think I’m just a rational decision maker, who thinks very unemotionally and evaluates things in a quantitative way. If you think things through rationally, the ultimate decision becomes pretty obvious. What would really worry me is if I ignored the facts and just did what everyone else is doing. It’s still hard for me to understand why that’s a maverick approach when it seems so logical and you’re not worried that you’re making the wrong decision because you have arrived at your decision in a rational and logical way.
Q: Banking itself is a highly regulated industry compared to, say, consumer products, where you spent the early part of your career. How much innovation is actually possible in banking?
Kovacevich: Innovation is harder in banking but, because of that, it is more valuable. If you figure out a way to do something that others haven’t thought of and it is permitted by regulators, then the benefit is much greater than if everyone is free to innovate without regulators interfering. There are often creative ways to do what you want to do, even within the constraints of regulation.
A good example is our predecessor company Norwest, which was a pretty broad financial services company with reasonable geographic breadth at a time when interstate banking and certain products and services were, theoretically, not allowed. Fortunately, Norwest was grandfathered to be an insurance company back in the 1950s. We were also in several states, again because Norwest was grandfathered in.
Innovation in our industry is more a matter of how to innovate within the regulation while adhering to its spirit.
Q: What elements in your life and career have contributed the most to your mindset of looking for new ways of doing things?
Kovacevich: Athletics is certainly something that influenced me, mainly because I spent more time in athletics than I did studying. I played football, baseball and basketball nearly every day of my life from about four years old. I played baseball in college, although I actually went to school on a basketball scholarship. I just couldn’t do both since I was in engineering.
A lot of the intuitiveness of how you form an effective team was learned on the athletic field. I certainly don’t recall differential calculus being important to business success.
Later, I was surprised by the stilted and hierarchical nature of corporate America. Most people didn’t enjoy what they were doing; they weren’t excited. Work was work instead of something fun to do. I wondered, what if you could change that? Wouldn’t it have a tremendous impact upon people? For the last two decades, that emphasis on motivating and energizing employees has been an important element to what we are as a company.
Q: So, the people skills you learned came from sports and the quantitative derived from your engineering training? Is that a simple way of putting it?
Kovacevich: Exactly. My engineering background influenced my extensive use of deductive reasoning, the importance of analyzing data intelligently, the ability to ask relevant questions, to understand what assumptions were being made and how sensitive those assumptions were to the modeled results. It helped me thoroughly understand the quantitative elements and the risk versus rewards aspects of the decision-making process.
But when I got into the business world and started implementing those quantitative things I learned in engineering and business, I discovered their limitations. My professors said, “Just run this linear program and you maximize profit.” Well, it doesn’t work like that in the real world. You really have to bring the team together.
If you’re going to be effective in business, it’s all about what happens at the point when the customer first interacts with the company. That is the key place where things happen, either good or bad. The quantitative tools that we give our people to make that an effective interface are not particularly innovative—anyone could do that—and whatever improvement you make in that area has a very small impact.
So, I just experimented with the motivation part because, as I said, people were unhappy in their jobs. They didn’t like coming to work. I asked why does it have to be that way? Why can’t we be very professional, have all the tools that are available in business, but make it enjoyable as well? If the employee is not really enjoying what he or she is doing while interfacing with the customer, the customer is not going to be convinced you have a great place to do business.
If you want to have an impact on a customer in a service business, the most important and effective way is to have an impact on your team. You can’t fake it. If the employee is not happy, the customer is not happy and vice versa. That’s why we came out saying that the most important constituents we have are our team members. It’s your people who affect the attitude of your customer. If your people are happy and enjoying what they are doing, your customers are likely to be happy, too. Everyone says it’s the customers and I agree. But if you start with the customer in this business, you don’t get there.
That’s why a lot of companies use advertising. I came from General Mills, where the thought was, we’re going to do a great ad here and customers are going to come running in. But banks are notorious for the disconnect between the reality and their advertising.
So again, being very quantitative, I saw this. The quantitative results forced me over to what I call the “soft skills” because they produced better results. The same thing happens in sports. It’s the motivation and the interaction dynamics that win you the championship, not the skills alone. It’s the best five players that win basketball championships, not the five best players.
The more I moved down this path, the more the results were beyond anything I could have possibly imagined. And almost instantaneous too—you could just see the difference.
My whole point is that the ability to differentiate in business on the quantitative or technological side is very small. But on the margin, the soft skills have the biggest impact. The soft skills are almost inexhaustible in their impact while the quantitative stuff either has a short life or you really can’t improve it much on the margin, comparatively.
You need quantitative skills to make decisions. And then, when you start the implementation, you find that, on the margin, what can separate you more from your competitors is how you handle the soft skills. You can do all the advertising you want. But if it doesn’t match with what happens at the point of interaction with customers, it’s worthless.
Q: If you move away from the hierarchical, top-down environment to one that energizes employees, what implications does this have for leadership?
Kovacevich: I use the analogy of a football team. Generally, the leader of the football team is the quarterback. I was a quarterback, for example. But it didn’t take me long to understand that a football team full of quarterbacks would not only lose every game, the quarterback of that team would get killed. Everyone has a role and a specialty to play. You try to take the physical skills and the mental attitudes of people and place them in the right place. It’s a team and because the skills needed at each position are different, the people should be different as well.
In corporate America, leaders often choose people like themselves. But a team full of quarterbacks makes no sense whatsoever. You’ve got to have all the skills necessary to move forward and that’s what I try to build: a team of people who are different. Of course you’re naturally more comfortable with someone who’s like you. But you’ve got to appreciate the differences, just like you do on a football team.
The truth is, I didn’t “run” Wells Fargo, which has over 80 businesses. The business heads run those businesses. They report to group heads, who are the CEOs for their group of businesses. They should act more like coaches than bosses.
People at the top should, above all, be leaders. Quite often, they act like managers, who administer things. Managers need control and rely on systems. Leaders innovate and rely on people. My job as CEO was to hire, retain and reward the best people and then coach them to be effective leaders. Give people the responsibility and accountability to run their own businesses and then get out of the way.
Q: You developed your soft skills at Norwest. But in 1998, you faced the challenge of integrating Norwest with legacy Wells Fargo, which had the reputation of being a more quantitative, technologically-oriented bank. How did you bring these two dissimilar entities together and maintain the required balance between quantitative and soft skills?
Kovacevich: You can exaggerate these things, but I would describe legacy Wells as a very quantitative organization. They were very profit-oriented but had not yet learned the value of the softer skills. Norwest had a more warm and fuzzy reputation.
All I did was get back to the quantitative, meaning just look at the results. We had about 84 businesses and they had around 25. Some didn’t overlap, but where they did overlap I said, let’s compare results from the Norwest business model and the Wells Fargo model. Equal teams from both sides came together to choose the best model, either Norwest or Wells Fargo or something in between.
Basically you had smart people trying to do the right thing and come up with the right decision. The new company ended up with a retail bank closer to the Norwest model, with a broad product line, while the commercial side of the business became more like Wells Fargo. So, we took the best from both companies.
As you know, legacy Wells Fargo had some retail problems and they blamed it, correctly, on expanding from a California bank to one that served a larger geography (in the 1997 merger with Los Angeles-based First Interstate Bancorp). They came to Norwest saying, “We don’t know how to do this and obviously we screwed it up; you guys are the experts.” So, I said, “You’re right, we do it better than anyone else, but the reason is, we out-local the nationals and out-national the locals.” That means, against our smaller, local competition, we had to have better products, sophisticated technology and broad and varied distribution channels. Against our larger competition, we had to be better at the softer skills such as providing personal service, engaging actively in the community and providing philanthropy.
Q: The Norwest/Wells Fargo merger was clearly the transformational deal of your career. Why no encore? Why have you been more reticent than most of your peers to do large deals?
Kovacevich: Because I know that 80% of mergers don’t add to the buyer’s stockholder value at all, and it’s pretty understandable why. What value is created if you basically take two under-performing companies and put them together? Even if you save a little money, you save it for one or two years, and then you’re back to being mediocre.
You don’t get better by being bigger; you get bigger by being better. And the bigger you are, the less likely you will change and the more you will behave like the other guy and have even more trouble implementing because now you’ve got all these new people to deal with.
So, it starts with a quantitative observation: deals don’t work, basically. Now in the case of Norwest/Wells Fargo, we were following our deal-making criteria.
We said early on at Norwest that we wanted to be in a ring of states around where we were headquartered (in Minneapolis) and then to the west. We never said we wanted to be east. We also said we were going to expand through small acquisitions because the big acquisitions were too expensive. We know how to add and subtract.
So the Wells Fargo merger was totally consistent with our strategy of going west and it was also consistent with the pricing because we did merger-of-equals pricing, meaning not much premium. In this case it was 10%, compared to about 20% on the small deals we were doing. Others were paying a 40% premium for big deals. So, it was totally consistent with the strategy.
Q: Weren’t you ever tempted to go for a big eastern franchise, just to achieve a coast-to-coast presence?
Kovacevich: That’s not necessarily rational decision-making; that’s ego. You don’t make decisions on ego or on feel good or something like that. You make it on quantitative analysis, then you implement on the soft skills. But you can’t let the soft skills make your decisions for you. The numbers are the numbers.
As I said, these are not hard decisions to make if you know that doing a big deal isn’t going to add to the bottom line, earnings per-share wise. Why would you do it?
When big deals are done, it’s usually for somebody’s ego or they’re not doing very well today. They say, this is for economies of scale and I’ve got to get bigger. Well, that’s illogical. It’s going to be much harder to get better if you’ve got a big organization you have to change rather than a little one. The time you want to make all your changes is when you can visit all your stores personally, like I used to do at Norwest, and do all the experiments you want. You make all your business model changes when you’re small. Then, when you get big, you know how to do it and you’ve just got to teach the new players. You don’t want to make big business model changes when you’re big.
So, again, it’s a very quantitative, logical and rational procedure. Everyone else says, “I’m going to get big first and then figure out how to fix my business model.” No wonder things aren’t working too well.
The only thing that I have found that consistently adds profit over a long period of time is revenue growth. Again, I start with a very quantitative analysis.
I look at metrics all the time. I look at efficiency ratios. I look at how people feel about themselves. I look at technology. I look at innovation. These are all wonderful things. But if they don’t add to revenue, what good are they? You can measure your customer service, but the ultimate quantitative measure of all those things is when customers vote with their feet. I mean, if it’s not moving the revenue, what good is it? If people are voluntarily giving you more of their money, you’ve got to be doing something right. And if they’re not, you’ve got to be doing something wrong. It’s pretty simple really.
So I came to the conclusion that in a merger, for example, if the revenue growth of the combined companies is not greater than what the sum is of the revenue growth if each company remains independent, you shouldn’t do a deal.
I don’t know of anyone in corporate America, bank or non-bank, who has that standard. But ultimately, that’s the only way you add value. If you can grow your revenue, then even if you’re not the most efficient bank in the world, you’re still going to grow your profit. You can have money to invest in technology. I mean, all your problems are kind of solved, or if they’re not, you can do something about it.
But if you’re not growing revenue, how do you invest in technology, how do you be competitive, how do you do anything?
Banks get into this efficiency ratio spiral where they keep getting smaller and smaller, because they aren’t growing revenue, and then they have to cut some more. Finally, they wake up and say, “We’ve got to get bigger and we can’t cut any more so let’s go out and buy someone and cut their cost because our revenues are falling faster than we can cut costs.” That model doesn’t work. It can work for three, four, five or ten years, whatever, but eventually, the law of large numbers catches up with you.
And, when you change your business model at that size, it can’t be done. You can’t change a cost-cutting model to a warm-and-fuzzy revenue model when you’re $200 billion in assets.
Q: Your business model has shown its staying power through many different business cycles. How does the current one compare with other downturns you’ve seen in the past?
Kovacevich: There are huge differences. The media thinks this is a really tough business cycle. They’re saying this may be the toughest one around and I couldn’t disagree more. The reason the media thinks this is because this is one of the toughest downturns for the financial services industry and the financial services industry has a big mouth. People listen to it.
Yet only three industries are really in trouble: mortgage/housing, auto and financial. Even though we had 3.8% GDP growth in the second quarter, 4.9% in the third, everyone thinks it’s bad. How many times did we have a bad economy when the two previous quarters were averaging over 4%? How can that happen? Because it’s the financial services industry and it has a bigger mouth than other industries.
How many times have you seen the financial industry in trouble when its customers were not in trouble at all? Usually, our customers get into trouble and drag us down. But our customers are doing just fine, with the exception of housing, which is about 9% of the economy. So, 91% of the economy is doing just fine. Interest rates and unemployment rates are low. Remember 20% interest rates in the 1970s?
Usually in a tough market, you have all industries in trouble, including financial services, interest rates are high, unemployment is high, and the world economy isn’t doing very well and you’ve got to change all of those things to fix it. We’ve only got to fix problems in housing, which by the way were caused by doing stupid things. It’s not fundamentals here. And dumb things are easier to correct than fundamentals.
As usual, I look at the data and say, what is everyone so worried about? The Fed is alert to the problem and reducing interest rates. The Administration is working on a stimulus package. People say there’s a credit crunch, but every time I read the paper, someone is putting $5 billion into a troubled financial institution. That’s not a credit crunch. There is all kind of money around. Liquidity is everywhere. The problems of the 1970s and 1980s were far worse than now and we didn’t have a strong worldwide economy.
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