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?