Key lesson from a top 5 "thoroughbred" bank

ERM should always consist of three key components: (a) Strategic risk management (risk taking); (b) Risk reduction management; and (c) the analysis of key risk indicators, which help you modify (a) and (b) as necessary. Sometimes in "enterprise risk management" we forget the "risk taking" side of the equation. 

There are not enough hours in the day to share the great experiences I encountered working for a bank that has proven year after year to be one of the 5 most profitable privately held banks in the nation. One strategy that stands above all the rest is the concept of consistently requiring the taking of managed risk. From their tutelage, I would like to share with you one key concept. I call it the "thoroughbred theory".

I grew up learning to ride horses on Shetlands, then the slow horse, then the old horse, until I eased into a horse that might actually get into a gallop if you were on your way back to the barn. I would be dangerous on a big fast horse. 

My best friend at the time, whose dad trained horses, did the opposite. He went big. He put his son on horses that were wild and crazy from day one. Granted this was risky, but my friend only raised the bar from there. He eventually became a successful professional thoroughbred jockey.

The Slow Horse

Some of you are like me. Because you have grown up in an environment where 5, 10 or 15% returns on equity (i.e. a slow horse) have been the norm year after year, you can't imagine yourself in any other situation. In fact, if you were to push it (return expectations that is) you would probably be dangerous.

Train Them to Ride a Big, Fast One

It seems risky and dangerous, but you have to start setting higher expectations for your team. You need to require return expectations that might even seem unhealthy at first if you want to get to somewhere eventually that you have never been. Train the team through these expectations that you expect them someday soon to be riding a bigger and faster horse. What does this mean for you? You guessed it. It means a lot more work and supervision. It means you might have to set the example and show them a thing or two about how to handle that portfolio.

Set a Return Threshold

Make it simple. Most banks don't set return thresholds at all. I can tell you, however, this simple exercise is part of the secret sauce. Require a minimum return on every investment whether it is investing, lending or an operational investment. 

This might seem like a crazy time to start demanding returns. Personally, I think it is the perfect time. This is the kind of market that will start to soften and degrade the portfolio as banks start to fight over transactions. We see it already. Some banks have already began slashing margins and credit requirements to stay afloat. 

Increase your return expectations (without changing your conservative lending policies), and your team and the transactions you start to see will rise to the equation. 

What are some of the strategies you employ to ensure your organization takes the appropriate level of growth oriented risk?

Money Ball Banking

I love baseball.

Needless to say, I enjoyed the movie Money Ball. If you haven't seen it, the main character changed the game of professional baseball. The manager of an underdog team with very little money chose players strictly on their historic ability to get on base. 

Other teams continued to choose players based on the "gut feel" method. A player's looks or even fan support might get him on the team. For the Money Ball team it was all about the numbers.

To effectively manage efficiency risk, community banks must adopt the "money ball" concept. Most financial institutions, including very large organizations, do not track the numbers. Most banks do not track individual personnel productivity. 

Many organizations track sales performance, but banking is a game of nickels and dimes. In order to be highly successful, banks must track individual personnel productivity at all levels throughout the bank.

This is why high performers leave your bank. They are not chased or challenged. When a bank fails to track productivity, the result we find is that at least 33% of the staff are poor performers. You don't realize they are poor performers because they show up to work on time, and they have a great attitude.

The game has changed for the community bank. To win going forward, your most valuable resource might be the new college grad with her nifty spreadsheet and fresh perspective.

What is your opinion - measure productivity or not? 

Franchise the Bank CEO with ERM

Oklahoma State University was my favorite summer past-time. Each summer in high school we attended the OSU baseball camp. At the time the team was very successful under the leadership of coach Gary Ward. In the first five minutes of our time with Coach Ward he had franchised one of his most important baseball techniques. He told us we would live this philosophy before we left and never forget it. He was right. It's been a lot of years, and I still remember his words. He taught us "sequential unlocking of body parts to maximize bat speed at point of contact." This has become more than baseball for me, but rather a leadership foundation throughout my career. We can discuss this more later.

As the leader of your organization you do a great job of managing risk. When something crosses your desk you know what to do. Nine times out of ten you make the right decision. The real question is, "Have you done a good job of franchising your decision making skills." What happens when a key business decision does not cross your desk? Do you have a manual or training to teach people throughout the organization how you think? I didn't think so. Like Coach Ward, your best decision making tools must be franchised throughout your financial institution in order to effectively compete in today's market. In our economy every bad decision is magnified and impacts the bottom line in one way or another. 

You have great decision making skills because you have seen enough bad mistakes to have taught you well. You have good perspective. The bottom line is that your team needs your perspective. More importantly, they need you to franchise your decision making process. If not, your team is likely to make the same mistakes you work to avoid. 

I bet you clean up a lot of messes that someone on your team should have resolved. You probably deal with questions that you were solving years ago. You are right, but the reason decisions are not being made that meet your expectations is because you have not franchised your decision making approach. It's on your shoulders. Enterprise risk management is the solution to this problem. ERM creates a process for baking the best of your organization's decision making ability (and people) into every aspect of your organization. ERM organizes your key business decision making and, like Coach Ward's batting advice, ERM brings power to the organization from the legs of the organization (the real power) up. 

How do you currently franchise good decision making in your financial institution?

My ERM Career Journey - Tell Me About Yours

ERM on the Farm?

Eight of us graduated high school together in a small school in the southern part of the USA. Farm work, taking care of cattle, building fence were all just part of our daily life. Believe it or not, farmers and ranchers are the ultimate entrepreneurs. My grandfather always seemed to know what to do and when. He knew when to bale hay and when to sell livestock. He took advantage of the best opportunities at just the right time. I never seemed to really catch on to the big picture, so I mostly did what I was told. 

Mapping What Could Go Right and Wrong

I became intrigued with ERM when it was first introduced to me as a manager at Arthur Andersen. Andersen got a bad rap, but to this day I have never seen another organization invest more in people or customers. ERM tools and training were provided so we could help our clients succeed in strategy execution.

What I loved about the concept from the beginning was how we started with a holistic map of "business risks" every company faced. The more I dug in, the more I realized that this "risk map" stuff actually represented the issues every entrepreneur thinks about on a daily basis without even knowing it.

ERM helped me understand how my grandfather used to think and prioritize his time and mine. He had his own little ERM risk map for the farm in his head.

Franchising the Business Owner's Thought Process

ERM in reality is the process of franchising throughout the organization the type of entrepreneurial thinking that goes on inside the mind of the business owner. It helps to create a holistic process for asking the right questions, "What risks should or could we take?" and "What risks should I avoid?"

My journey started with a technical understanding of ERM. Over time I had the opportunity to apply and practice the concept. In the organizations I have been involved with, watching ERM become a key way of thinking has honestly been some of my most memorable career moments. 

Your Story?

Tell me about some of your most memorable career events. I would love to hear them.  ty  

Banks That Communicate Better Execute Better

Communication is an elephant size issue for community bankers. Limited resources reduce training and technology budgets larger banks take for granted. Customer and employee relationships are often tight and long-term. Community bank officers and employees often have extensive influence in the community. All of these conditions put stress on communication. 

A significant form of internal communication today for any organization is email. Have you ever considered the fact that strategy execution can be stopped or slowed through ineffective communication? Internal communication risk is one category of over 500 key business risks we look for in an enterprise risk assessment for a community bank. Reducing business risk and improving strategy execution by improving the way your bank manages email is very possible.

7 Steps to Better Strategy Execution with More Effective Email Management

My favorite book on the subject is, "The Hamster Revolution: How to Manage Your Email Before It Manages You", Mike Song (Author), Vicki Halsey (Author), Tim Burress (Author). When you improve email communication, you improve your ability to execute strategy with zero cost. 

Some of the key concepts I have taken from this book and others for managing email effectively in your community bank are as follows:

1. Don't send email if you don't want an email back (reduce output and reduce your input, limit reply to all)

2. Powerful subject line - Make your "Subject" both powerful and consistent

3. Always call to action - Summarize the call to action for every email (this works well for company agendas too)

4. Summarize content - Prepare a summary of the email content

5. Concise - Make the detail as concise as possible

6. Stand alone - Make the email stand alone and without jargon and informal abbreviaitons

7. Appropriate - If the email were on the front page of the business section would your employer think it appropriate (skip anger, criticism, wisdom, jokes, etc.)?

In my experience managing email in this manner puts the burden of communication appropriately on the sender and not the receiver. I had to train myself to take the time and effort necessary to make my email communications effective. Here are a couple of examples of my own emails before and after. I think you will get the point from this.

Poor Email Example

To: COO, SVP Ops

After brief discussions with retail P&P committee members (regional managers, BC managers, Me) today, I learned that the resolution is a document that prints from Pro Systems. It was included in the set of forms that came with the software, but Legal has reviewed it. One should be printed and signed for each account opened under a company; however, it is possible to print these prior to selecting a specific account from a drop down box for that company. It was several committee members' perception that this document would take precedence over a signature card. When signers change on a company account new signature cards are not signed, but new resolution documents are. Resolutions also provide more lines for signature than a signature card. All this begged the question, "Why do we need a signature card then?" I was told the signature card states the account terms and agreements and the resolution does not. With all this said, I am thinking we need to snag the signatures on the resolution and not the signature card. I will continue to ask questions to various departments before taking that path. Just wanted you to know what I know so far. 

What's Wrong

a. Why is this email going to senior management?

b. What action is required?

c. There is a lot to read and interpret.

Not Perfect, But More Effective Email Example

To: Mike

Subject: Action Request - Use John's assistant to pull data for asset reviews

Hi Mike  – I hope you enjoyed some time off.

Action Requested

• Move forward with using Patti, John Boston’s assistant, in the pulling of data and file document images for the Asset Review staff. 

Background

1.As we discussed, in my work with the Asset Review staff they can spend often times 30% of their time gathering data and pulling images to prepare for the performance of a file review. 

2.Asset Review maintains several database forms which must be populated through interaction with Banker’s Systems. 

3.Critical images must be pulled from FileNet in order for the team to begin a file review.  

4.Once Asset Review determines a particular document or other information is necessary to complete their review the staff spend a good deal of time following up to ensure these documents are received. 

5.These tasks could be performed in a more cost effective manner by an administrative person. 

6.Patti has noted that she has available time and has volunteered to assist us in this capacity.  This is all work that could be performed at her desk, and replaces work she was performing for Accounting recently that has now gone away.

Mike – I am excited about the opportunities your unit has to improve the Asset Review process and enhance the value derived by management from the results of your team’s efforts.  Thanks.

The Bank CEO, the Church Pastor and Enterprise Risk

I have often compared the role of the community Bank CEO and the pastor of the local community Church here in the United States. They both have tremendous influence in the community. Not always, but in most cases, both the Bank CEO and the pastor get results through their strong relationships. They both see the big picture. Because of the trust required, one poor decision can kill their organization. And last but not least, they both have limited resources. Some community bank staff might even claim they are "volunteers". 

Enterprise risk management is a perfect solution to these conditions. ERM is a tool for collecting and organizing strategic issues and business risks. Once organized these risks can be prioritized, making resource allocation more effective. Collecting and communicating risks throughout the organization increases transparency. As more members of key management personnel and the BOD become exposed to more bank issues on a consolidated basis, the risk of making a bad decision go down materially. How have you seen ERM reduce risks for the community bank CEO? 

How the BOD, Management, Audit, etc. Work Together to Accomplish ERM

ERM Governance is sometimes a barrier to enterprise risk management implementation. One way to break down this barrier is to first walk through at least one way that the Board of Directors, ERM, the management team and the assurance teams work together to make risk management an enterprise effort. Consider the attached pictorial review of one method of making enterprise risk management fit into your financial institution. 

Management and the assurance functions feed the ERMC key risk indicators, strategic priorities, risk reduction effort and resource allocation summaries. The ERMC, consisting of key members of the executive management team, assess this information on a monthly basis. The ERMC then feeds risk information on a consolidated basis to the Risk Committee of the Board of Directors. The outcome can be very powerful and eye opening for the BODs. This is just one communication method that can be very successful and coordinated. What are your thoughts on the organization of an effective ERM function?

The Common Thread Between Bankers, Doctors and Enterprise Risk Management

One of my favorite books on enterprise risk management theory is a book titled, "How Doctors Think" by Jerome Groopman, M.D. The book isn't actually about ERM, but it provides helpful insight into how you and I think. In his book Groopman points out that most doctors will make a patient diagnosis in less than one minute. They will ask the patient a few questions, observe his or her physical appearance and perhaps go on to run other tests. However, the mental conclusion of the doctor many times has already often been drawn.

The reality is that many of us in business and in banking think the same way. We diagnose the quality of a loan, or a problem with the operation of the bank, or our ability to meet a compliance requirement in a matter of seconds. Our thought process is driven primarily by our own personal experience. We might take more risk when we have had good experience or more knowledge in a particular industry. When we know the people involved we might take more or less risk with a vendor than we would otherwise. When we have had a hand in building a certain process, we are more likely to expect the process to work as designed. When we have hired certain people, we are more likely to have more faith and trust in that person than otherwise would be prudent. This is a natural human nature.

Many decisions in our community bank are made by the senior officer in charge of that area without much outside input. This approach can be very powerful and rewarding when decision makers are thorough, intuitive and experienced. However, often this silo based decision making can leave dangerous blind spots that only someone with outside perspective can see. At a minimum, when decisions are left in the hands of one key officer these decisions are subject to the 60-second rule above. 

Regrettably, in some cases no one takes responsibility for decision making. Recently I interviewed all three levels of management within the lending function of one community bank. Each officer reported proudly that they were "hands off" managers. Each level communicated the benefits of empowering their people to make key decisions. At the end of the day no one took responsibility for managing the details. Unfortunately, the organization was strapped with the fruit of this approach. You can imagine that the outcome was not pretty. Some would say that committees solve this problem, but in many organizations we all know that the committee is likely to agree with whatever the senior officer (to whom most of the committee reports) wants to do. Committee decision making is often what accountants call "form over substance".

Enterprise risk management for our community banks helps to solve this problem. ERM provides better perspective. ERM provides a governance structure that supports bringing collective thinking of key decision makers to bear on every key strategic decision, risk management decision and resource allocation decision for the organization. ERM provides focus on key decisions. It lessens the focus on individual decision making. This approach reduces risk for individual decision makers and the bank. Collective thinking and ongoing measurement of key risk indicators provides better and more thorough perspective to the Board. More thorough analysis and better perspective provide better long-term decision making. Agreement on priorities across the organization provides better deployment of resources. Both of these improvements result in reducing the barriers between strategy and execution.

Top 10 Questions Bank CEO Should Ask Before Adopting ERM

Enterprise risk management is the process of managing the gap between strategy and execution throughout the bank. In other words it is a management tool to help ensure more certain implementation of goals and objectives of the shareholders, Board of Directors, management and the customers. However, ERM is not for every bank. Your organization's structure and processes may already achieve the objectives of ERM. You may only need to define the process as such. Here are 3 of the 10 questions the CEO should ask to determine whether ERM is right for his or her community bank:

1. Are key initiatives driven clearly and directly by the company's vision, mission, values and its strategic plan?

If you answered no, you are not alone. Often we discover that community banks have a documented strategic plan because it is required. However, more often that not these organizations do not use the strategic plan and there is no defining vision for the bank. Management tends to spend more time firefighting and little to no time implementing changes necessary to ensure the business strategy becomes a reality. The ERM process utilizes existing resources to more effectively understand, communicate and implement business strategy and eliminate risks that could stop or slow strategy execution.

2. Do regulators have recurring findings that are similar in nature?

If your answer is "yes", it likely means there are parts of the organization not effectively guided by strategy, personnel or processes. In this case, ERM processes could materially reduce the headache and surprise caused by the regulatory examination process. ERM will help your organization identify and correct process gaps creating these reportable conditions.

3. You, as the bank's CEO, spend very little time managing issues that others in the organization should have identified before you got involved?

No is the common answer to this question. Most community bank CEO's have 8, 10 or 12 direct reports. He or she is the go to person for the BOD and the shareholders and is most usually the "chief relationship officer". With these issues in play there is little time to inspect the expected from the management team. Time for analytics and strategy development or deployment is just not there. ERM helps simply organize and streamline the flow of communication surrounding strategy, risk management and the information necessary to make good risk management decisions on a daily basis.

More of the Top 10 questions your financial institution CEO should ask before adopting enterprise risk management to come.

What is ERM for a Community Bank?

The OCC has created capital guidance that will push more community banks to adopt an enterprise wide risk management approach.  Most community bank CEO's want to know "What is ERM or enterprise risk management?" To them it is another compliance matter they must deal with. We want to take a few minutes to give you a more useable definition of ERM. This might help you see why ERM is becoming increasingly popular with community bankers and credit unions.

The Treadway Commission's Committee of Sponsoring Organizations (COSO) first formally defined ERM in 2004. The COSO team describes the need for ERM as arising from, "a series of high-profile business scandals and failures where investors, company personnel and other stakeholders suffered tremendous loss." The purpose of their initial report on ERM was to better enable management to meet its most critical challenge of "determining how much risk the entity is prepared to and does accept as it strives to create value."

In its most simple form we describe ERM this way: "ERM is the process of managing the gap between business strategy and execution of that strategy."

One of my early mentors used to say that "ideas are money and execution is for monkeys". After managing a large part of a large financial institution myself, today I would beg to differ with this comment. From experience, you and I both know that ideas are truly a dime a dozen. Making ideas a reality is where the rubber hits the road. The reason implementation is difficult is because there is a "gap" between the idea and the implementation. 

As my grandfather used to say, "boy you don't know what you don't know". This gap that is so difficult to overcome - the one between strategy and execution - is uncertainty. Uncertainty is the definition of risk. So, when we talk about managing risk on an enterprise wide basis we are really saying "let's see if we can do something about issues we know about or should know about that could stop or slow down what we are trying to accomplish for the shareholders and for our customers." ERM is truly the process of managing the gap between strategy and execution. 

ERM in its best and most usable form uses the existing management team and structure. However, a process is created to help management measure, track and implement business strategy and implement changes necessary to reduce risks that could impair that strategy. In either case, the result is more certain strategy implementation.

As a key manager of risk in your community financial institution, what are some unknown issues that have become a reality and stopped or slowed execution of strategy in your organization?