John Allison on Entrepreneurial Banking
John Allison (JA) is the President of CATO Institute, and the former CEO and Chairman of the Branch Banking & Trust Corporation (BB&T), based in Winston-Salem, North Carolina. Under Mr. Allison’s leadership from 1989 to 2009, BB&T grew from $4.5 billion to over $152 billion in assets to become the tenth largest financial institution headquartered in the USA. Almost as impressively, while many banks failed or received bailouts during the 2009 financial crisis, BB&T remained healthy and profitable. Mr. Allison was also the Distinguished Professor of Practice in the Business School at Wake Forest University. He spoke with Savvy Street’s Stephen Hicks (SH).
SH: You were appointed president of the bank [BB&T] in 1987. You were relatively young at that time—39.
JA: Yes, very young. When I joined the bank it was very behind. And it had kind of a vacuum in that there were a number of older people there, there were only a few people in the middle-aged group, and they were finally hiring some young people. In 1980, we had an unintended revolution, for lack of a better word. There was a president, a very nice person, and he had two guys reporting to him, one of which was very incompetent and very hard to get along with. The president wouldn’t deal with that issue, so several of us confronted him, but it really wasn’t intended to be a confrontation. We told him we could not stay unless he fixed this problem. And to his credit he did something about it. He created an executive management team that included a number of us younger people, in 1981. I was 33. The presidency came out of this informal revolt.
SH: Come 1987, what did the BB&T board see in you that led them to select you as president?
JA: I think I had the ability to communicate a vision. The banking industry had been very stale for a long period of time. When interstate banking comes along in the early 80s, the industry starts going down a much more rapidly-changing path. We were deregulated in certain aspects; we were more regulated in other aspects. But I think I was able to communicate to the board clearly what we needed to do. I think they appreciated that.
SH: Two years later, at age 41, they appointed you CEO and Chairman. What led to those appointments?
JA: It was an unfortunate event. My predecessor died suddenly. He had a heart attack and so the Board had to choose a successor. Of course they could have chosen to go outside, but they did choose to give me an opportunity to be CEO.
SH: How big was BB&T at this point?
JA: It was $4.5 billion in assets.
SH: BB&T experienced explosive growth under your leadership. What were the major growth areas?
JA: We grew on a number of fronts. On one front we did lots of mergers and acquisitions. In the late 80s and early 90s there was a huge shakeout in the thrift industry. I think two out of three thrifts in the U.S failed.
We identified that the thrift industry was a bifurcated industry. There were unhealthy thrifts; they had been poor credit intermediaries. There were a number of healthy thrifts that had stayed in the traditional bread-and-butter home loan business and had a lot of discipline.
The other thing we decided to do was grow rapidly in the insurance agency business. Today we’re the sixth largest insurance distributer in the world. We built that from one agency in eastern North Carolina, and that became a real strength of our organization, although we went through a long learning curve on how to master the insurance business.
SH: How did the typical merger come about? BB&T actively researching opportunities? Other banks being put up for sale actively?
JA: We were very successful in the merger and acquisition business partly because we were very process-oriented, but mostly because we focused on the human systems. We did a very systematic analysis of our potential acquisition candidates. We started looking first at the economics: Would this be a good economic fit?
And secondly we started a careful study of cultures: would this organization fit with our culture? There were companies that were well-off economically but we thought the cultural transition would be too much. We took those companies off of our list.
We developed the best reputation in the industry for mergers and acquisitions because of how we handled the post-acquisition process. We came to a conclusion based on our own culture that you aren’t really buying the loans and deposits; it’s really the human system that matters. So we focus a lot on the human systems.
SH: As BB&T grew, did managing large numbers of people come naturally to you, or was it something you had to work at?
JA: It’s something I worked really hard at. I am naturally mathematical, analytical. I discovered something very early in my career that became very valuable to me. And that is, unless you just want to be a technician (which is fine if that is what you want), you’re going to have to leverage other people to be productive. I had an interesting early work experience. I had been with the bank for three or four months, and I had a secretary I was working with. She was a young lady just out of high school. I was very “productive”—I was dumping a ton of material on her. And one day I walked out to her desk with a big pile of stuff, threw it on her desk, and she looked at me and said, “I’m not doing this.” I don’t remember exactly what I said to her, but in my own mind I said, “Holy shit! I can’t type very well and she won’t do this. I’m not going to get the job done.”
I made a resolution that I had to help her be more successful in her job if I was going to be successful in my job. And that if I did that, maybe she would take a lot of stuff off of me over a period of time that I didn’t want to do. So instead of just dumping stuff on her, if I could help her, train her up, control the work load and also get her more vested in what we were trying to get accomplished here, instead of just being work, give her a sense of purpose out of it, we would have a bigger success.
SH: BB&T has a strong corporate values philosophy. How did you make it a living part of BB&T’s culture rather than just nice words on a website?
JA: That’s a great question. This was an evolution process. Some of the philosophy was always there, but there were aspects of it that were very inconsistent. And we were a very paternalistic organization early on in my career. This was dangerous because we would tolerate non-performance.
BB&T chooses to invest very heavily in employee education. We operate our own university.
BB&T chooses to invest very heavily in employee education. We operate our own university. For every job category, like a teller, we have a certification process. In the certification process you get the technical skill. But you also understand: how does this apply to our philosophy and how does our philosophy apply to your job? In other words, given BB&T’s philosophy, how do you react with clients? It’s not just, “Here is how you push the buttons.” Obviously, the level of intensity varies with the complexity of the job but it’s built into all our training processes.
It is hard and easy. Easy, in the sense that we are a principle-driven organization. You have to be willing to live consistent with your values. For example, we had some high performers in terms of production who violated our philosophy—we fired them. We have fired people who worked for us for 25 years who did something that was against our values. They knew it; they were fully warned. I hated it on a personal level. They weren’t bad human beings but we had fundamental principles. I always thought if we tolerated a person violating our values, what’s the message it sends?
SH: During your tenure, there were many revolutionary technological changes in banking and finance—computerization, ATMs, credit and debit cards, online banking. Did that factor in BB&T’s growth?
JA: This is an issue that we struggled with a lot. If you look at BB&T, we were a very innovative organization: we figured out how to acquire savings and loans; we figured out how to get into the insurance agency business; we developed learning systems; we developed a unique culture.
However, I did not believe, in our business, that being a technological leader is an advantage. Almost nothing is patentable in finance, you can replicate the competitor’s technology, and you can typically replicate it better if you wait a little bit. So we had a conscious strategy to be a close follower in technology. We would let Bank of America spend a ton of money on some new technology, get it up to the point where it’s ready to work, and then we would try to pass them. We might introduce it a year later.
SH: In 2004 you put BB&T’s growth on hold. Why was that?
JA: One of the things BB&T had been doing was investing very heavily in leadership development. Each year we hired a top group of people out of good colleges and universities, had a leadership development program, and trained them up.
But we were doing so many mergers and acquisitions that, even though we had invested heavily in leadership development, we out-ran our internal investment in people. Also, we were to some degree outrunning our technology. We called it “indigestion.”
SH: After a few years of digesting, so to speak, by 2007 how big was BB&T?
JA: BB&T was probably about at $135 billion.
Here is where an interesting thing happened. We got the chance to get back in the merger business in 2007. We did a couple of deals but most of our growth was still driven internally. The reason for that was—this goes to a fundamental discipline issue—we started running our mathematical models, and what had happened in the merger business was that the prices had gone up while the quality of the companies for sale was deteriorating. We would review our models and we chose not to do acquisitions.
We had many banks who wanted to sell come to us. However, we decided we could not even pay the current stock price for the companies much less a premium. A number of the large regional banks that had serious trouble early on in the financial crisis were companies that acquired these banks. They just paid crazy prices. It was hard on us, though, because at the time financial analysts wanted us to do mergers.
In retrospect, that seems easy. At the time it was hard because banks that were doing these acquisitions were actually getting temporarily rewarded in their stock prices. Analysts would indicate that’s a great deal in Florida; you can’t miss. But we had financial models that we developed. Over time, an operating concept we used was inspect what you expect. When we did mergers we provided a report to the board every year that outlined what we said we were going to do and what we did. So we knew that what our models predictions were right. The way financial models work, you can tweak the assumptions and have any outcome you want. We refused to fudge our assumptions because we knew we would just be misleading ourselves.
SH: Your career is focused on money and, as you know, our culture has wildly different evaluations of money—from seeing the love of it as the root of all evil to seeing it as a wonderful invention that facilitates production and trade. What do you think about the moral status of money?
JA: In a broad context, in a free market, money’s a good thing, in the sense that it is an identifier of productive economic activity.
However, I think there’s a little truth in the criticism of money in this sense: Some people think that money is the end of the game; money is an end in itself. Money is not an end in itself. Money can be a means to an end. And as a feedback mechanism, it’s a very valuable tool in a free society. One of the problems is we aren’t in a free society, so you’ve got some manipulation where people (i.e., crony capitalists) get money that is not earned.
Money is a good thing in a fundamental sense. But it’s a means to an end. The end is happiness in the Aristotelian sense of a life well-lived. Money is a just reward for productive work, but it’s in the context of the pursuit of happiness.
SH: In the wake of the Supreme Court’s 2005 Kelo decision, BB&T received a great deal of publicity about its decision not to do mortgages for deals that involved eminent domain. What was the reasoning behind BB&T’s policy?
JA: In a certain sense this was a hard and an easy decision, which our board unanimously endorsed. It was a hard decision in that we were worried about the economic consequences, in that we do business with a lot of municipalities that use eminent domain, and we knew that some would move their business from BB&T. On the other hand, given our value system, we simply could not in good conscience finance one individual using the government—the power of a gun—to take property from another individual. We couldn’t finance a big box retailer throwing some poor little old lady out who didn’t want to sell her home. If she wanted to sell it, fine. But the government taking your home is inconsistent with a free society, it’s inconsistent with the principles that underlie property rights, and it’s inconsistent with BB&T’s belief system. I couldn’t look my employees in the eye and tell them that we were going to do that.
Now here is an interesting thing about what happened. While we were worried about the economics, it turned out to be a home run for us. We did lose a few municipalities, but we had thousands of people move their business to BB&T. It was an unexpected reward. And a lot of people said, “Look we’re so happy to see a business that operates on principle. Businesses will do anything for a buck and you obviously made a principled decision and I want to deal with an organization that makes decisions based on principles.” It was great. It was uplifting.
SH: Even though BB&T was financially healthy, it was required to participate in the federal government’s Troubled Assets Relief Program (TARP). Why was that?
JA: I was personally adamantly opposed to TARP. Particularly—this is a little complex—as it was originally presented. I thought saving unhealthy institutions was bad for the economy in the long-term. I was the only CEO of a large financial institution who wrote Congress, actively lobbied against TARP, met with Congressmen, etc. I failed, obviously.
The day after TARP passes we got a nice call from one of our regulators. They would say they said something different than this, but this is really what they said. In bureaucrat-ese they said: “Look we’ve had these capital ratios for banks for 20 years, and you guys have way more capital than you need by these ratios. But we have decided, under this current environment, we need new capital ratios. We don’t know what these new capital ratios are going to be, but we know that you don’t have enough capital under these ratios unless you take the TARP money, and we’ve got an audit team ready to come in to audit you unless you take the TARP money.” We said, “Please send us the TARP money.”
It was a rip-off, by the way, for healthy banks because we had to pay a high, above-market interest rate, and the government took warrants in our stock, and we didn’t need the money. Of course, they came back in and did the “stress test” and decided we were already properly capitalized.
SH: After seeing BB&T through the crisis, you retired at the relatively young age of 60. What led to that decision?
JA: There are two reasons, one from an organizational perspective and one personal. Organizationally, I have observed a number of very successful, long-tenure CEOs where the organization did very poorly after they left. I think a CEO ought to be judged five years after they leave. One of their obligations is to have a succession plan so there is reasonable probability the company is still going to be doing good for five years because of the people they put in place. So I felt a moral obligation to help ensure BB&T’s success after my retirement.
Five years before I retired we put together a conscious plan and talked with the board about it. We brought in new members to executive management who were younger, yet who had been with BB&T a long time, were proven managers, had largely come out of our management development program, but were the next generation. One of our team wanted to stay, my successor Kelly King, which worked well for everybody. We just executed that plan.
Now on a personal level, this was good for me. I truly loved the job, but being CEO for 20 years you run a risk of becoming arrogant even if you try to fight it. I felt like I would enjoy doing something different that took me out of my comfort zone and, as exciting as the CEO job was, I could visualize being interested in other things and excited about other things. I told people while I was technically retiring, I didn’t think of myself as retiring—I thought of myself as changing jobs. In fact, my wife says I flunked retirement, and that’s fine. I wanted to do something different.
SH: Looking back, what was the best thing to you personally about being CEO of a top ten bank?
JA: Well, the process of building a business is great fun. It was enjoyable having a vision and seeing the creation of that vision. On a personal level I really enjoyed seeing people grow and be fulfilled in their work. I saw some people do jobs they never would have expected they could do, and do them extremely well. I felt like maybe I’d helped them do it.
SH: What was the most challenging thing for you about being CEO of a top ten bank?
JA: For me the regulatory environment was always difficult because, not only was it a problem practically, philosophically it was a deeper problem. I felt like we were constantly being forced to do things that were economically destructive in the name of “politically correct” dysfunctional ideas. There was a huge waste of resources in the economy and a huge waste of resources in our industry, driven by policies that sounded good where people did not understand the consequences. The power-lusting of regulators was very difficult to deal with.
SH: Is there anything your college education could have better prepared you for?
JA: In business school, they didn’t really teach us much about working with human beings, motivating them. They didn’t talk about purpose and passion. It was much more technical. We can do a better job on how to motivate human beings to produce better results.
SH: In closing, what advice would you give to young people just starting out in their careers?
My first advice would be to read Atlas Shrugged. This will give them context for their college experience.
JA: My first advice would be to read Atlas Shrugged. This will give them context for their college experience. They’ll have some really good professors and they’ll have professors who are not very good. Just because they’re professors doesn’t make them good. The students have to develop their own judgments of whether this person is giving them the right information and taking them in the right direction. Students must think independently and challenge the professors to prove their positions based on the facts. You must think for yourself.
And the other big thing that they need is to be clear about is developing a sense of purpose as early as they can, and the purpose is not just to get through college. If your end is to get through college, you might just care about your grades instead of learning. If you are in college to do something you consider important, you’re going to care a lot less about your grades and a lot more about learning. You’re going to approach every course differently. Your good professors will get that and they’ll help you. Your bad professors won’t care and you’ll know who they are. So, it’s having a sense of purpose that drives beliefs that drives behaviors that produces superior results.
This is an excerpt of an interview that first appeared on the Kaizen Newsletter of the Center for Ethics and Entrepreneurship at Rockford University in Illinois.
About the Author: Stephen Hicks
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