Speaker Name: Edward E. Crutchfield, Jr.
Speaker Title: Chairman and CEO
Speaker Company: First Union Corporation
I am honored to be here and to participate in your "Distinguished CEO" series; and I'm particularly honored to follow Gene Gunter, whose speech I was able to read at lunch. Appalachian State University is one of the finest and fastest growing universities in the Southeast.
First Union also has its roots in Western North Carolina and we are very proud of that heritage. In 1957 the bank in Charlotte merged with the First National Bank in Asheville. That was the first merger the two banks ever had; it created a $60 million bank and we thought it was bigger than the World Bank at that time. As a matter of fact, Appalachian and First Union have kind of grown together. We both started as relatively small Western North Carolina entities and both have done quite well and come to some national prominence and status.
At First Union, we look to your graduates and we like the way they have performed. Tom Muse, our vice president in charge of consumer real estate lending, is an Appalachian grad. We think he represents the kind of talent that we can both be proud of.
On a personal basis, it's a thrill and a pleasure to me to return to the mountains of Western North Carolina. I've spent some of my happiest times here, a lot of them walking in a trout stream. Just the idea of coming to the mountains appeals to me and particularly to speak to you. It's exciting flying to Boone from Charlotte. You go up to 4,000 feet, head northwest, and these beautiful mountains just seem to rise up to meet you.
Flying is getting to be a very exact science. There are satellite navigation systems that can tell you your position within a hundred yards. There are weather predictions that you can almost set your watch by. And airborne radar that can pick up a storm hundreds of miles away. They're a lot of help for the pilots.
Unfortunately, there are not many scientific aids to help the CEO set the course of a large corporation in today's environment. As a matter of fact, running a major bank today is a little like flying without any instruments. There's a lot of automated equipment, a lot of computerized storage and retrieval systems; but running a major company is really an art and not a science. Its first requirement is to respond to people's needs and to be able to count on them to do their jobs.
I'm more familiar with the banking industry than I am others and I will use that industry as an example. Banking is a service industry. It's a service-driven, people-oriented, trust-demanding business.
Fundamentally, what were selling is confidence; all banks money is the same color. But selling confidence that the bank will act in the customer's best interest is more intangible. If you go to work for a bank, what you're selling is the confidence that the customer can have in you on a personal level. It is a very sophisticated form of selling. No matter how big and powerful that bank grows, at the end of the day, it is still selling confidence. For that reason, we continually try to attract young people who will project that kind of confidence and who can deliver on the projection that they make.
I assume that many of you who are business and accounting majors have been given hours and hours of accounting, quantitative analysis, and financial management. All that's good; it's valuable, and you're going to need it. We have to use that information to make the best decisions possible. It's important, but success in business is still far more dependent on the judgments of one person about another person, especially in the banking business. As sophisticated as we get in quantitative analysis, at the core, it still boils down to judgment. We still have to count on the willingness of people to keep their word (an old-fashioned thought) but also on the ability of people to achieve their goals and to take accountability for what they say they'll do.
I'd like to leave the accounting and the financial management subjects to your very able professors and, instead, focus on the subject of people. I'll share a few thoughts about how we at First Union try to meet the needs of customers and employees. Those two groups have very different needs which, in fact, are sometimes in contradiction. I'm sure that most of you have been following the scandals on Wall Street lately. It's been a tragic testimony of human failure. I know I speak for my fellow CEOs when I say it's been an embarrassment to those in the banking industry, the furniture industry, the insurance business, or any other business to have these characters paraded across the television screen and for you to see the worst elements in a business setting.
I think it could have been averted. But, unfortunately, you and I know it will happen again someday. It would be easy to dismiss the whole thing as the misdeeds of a few rotten apples who went astray. But that's too easy and a little bit untrue. The truth is that management lost sight of ethics and values. What simply happened in that Wall Street mess is that values and ethics got lost in the pursuit of deals and dollars.
In many of the big New York companies and brokerage firms, the business environment became one of expediency and slickness. Get the deal done, don't worry about it, make a half million dollars before you're 30 years old and it will all come out fine. The deals became important, and the values were lost in the shuffle. If the right ethical environment had been established by the top people in those organizations, the first rotten apples would have been identified and the crisis could have been averted.
If someone had slapped a young Ivan Boesky's fingers the first time he bent the rules, he wouldn't be in jail today. More importantly, dozens of other impressionable young people who were taught to deal based on insider information would also not be in jail.
At First Union, we believe in rewarding people for performance. We are a very incentive-driven organization. We have more people earning more of their compensation based on pure dollar incentives than any other bank in the United States. And were proud of that. But, we don't believe in a code that says reward results no matter how they are obtained.
You keep hearing about people who say they have to make a choice between good business and sound ethics. Let me say "point blank" that there is no difference between good business and sound ethics.
Ethics are fundamental to good business. You can make an occasional deal or so by cutting corners or by making shady transactions. But, that only serves to lure the big dealer into cutting more corners and making even shadier transactions until, in the final analysis, the bottom falls out of the basket. We think at First Union that ideas--creative good ideas on how to do something better-- flow from the bottom of our organization up through the ranks to the top. On the other hand, ethics have to flow from the top down. That doesn't mean that the people in the lower echelons aren't ethical. It means that if the top person doesn't set the standard, he or she can't look at other people and say, "Why did you violate the standard?" At First Union that starts with top management.
To say it more clearly, the first duty of a corporate leader is to establish an ethical working environment. That's not a duty that you can delegate. If you're managing an organization, no matter how large or how small, you can't assign that to somebody. You're the officer in charge of ethics and integrity.
You've got to have an environment where dishonesty is clearly not acceptable. Occasionally, we hear a supervisor tell an associate, "I don't care how you do it, just get it done." If I say that I want something done and I really don't care how you do it, I have set up an environment for dishonesty and disaster. Not only will I get a wrong outcome, but I will have tainted my value as a manager and a leader whether it's one person or 25,000. I don't think employees and companies are innately dishonest. But there are lots of people who can be enticed to do dishonest acts if they're working in an environment that rewards getting the job done, and says, in parentheses, I don't care how you do it.
Let me shift to talking about the needs of the employees. If you are going to lead a group of employees who will serve customers and do it with care and concern so that the customer really knows that the teller, the loan officer, or the salesman cares, then it's axiomatic that you're going to have to treat your employees the same way. That's not just good ethics or good sense, it's good business.
I would not try to convince you that all 20,000 employees and 60,000 stockholders of First Union are living in a state of euphoria. That's not true; but we do our best to listen to our stockholders and to our employees. Our feeling is that if we take care of our employees, our employees will take care of our customers. These three constituencies--employees, shareholders and customers--don't all feel the same way. They don't respond to the same things; and in trying to deal with their needs, we often encounter conflicting interests. We try to be fair and reasonable. But, we cant always be a winner with all three audiences.
Let me give a couple of practical examples of how fundamental concern for people has served the growth of First Union. To do that, let me give you a little background. I know that many of you have read about the major shakeout occurring in the financial services industry. What you may not fully appreciate is that changes in bank regulations and laws in the past three years have brought about a totally new banking environment.
Prior to 1985, interstate banking (branching into another state) was against the law. Every bank in the U.S. had to operate in one state only. As a matter of fact, North Carolina was one of the few states that even allowed branch banking across the state. In some states, such as Kansas, banks were restricted to one location with no branches.
We are fortunate that our ancestors in the state legislature supported statewide banking because that's why today North Carolina is home for three of the nation's twenty largest banks. During the 1980s, three factors are causing a major, fundamental groundshift in the banking industry:
- the first is the legalization of interstate banking;
- the second is the computer revolution that is causing management to place great reliance on economies of scale; and,
- the third event is the ever-growing number of so-called "non-banks" like Merrill Lynch and Sears Roebuck.
Let me first comment on bank deregulation. In June 1985, the Supreme Court declared that regional interstate banking was legal. Here in the Southeast, thirteen states, in essence, formed a pact. I'll never forget the morning the Supreme Court handed down that decision. It was 10:00 o'clock, June 10th; I know where I was sitting when I read the telegram. Ever since that moment the pressure to consolidate the banking industry has been intense. Deregulation permitted the formation of very large banks, but computerization and economies of scale demanded it, required it, made it almost nonnegotiable. I hope you have all seen automatic banking machines. I'm told there are 30,000 transactions a month on the two green ones in the middle of town and on the Appalachian campus. They cost about $70,000 each to install.
What you don't see are the check and account processing computers that cost millions of dollars and are only economically feasible when crunching a huge number of transactions when they're hooked to several hundred of those automatic teller machines. The computer has had another major impact. It has permitted "non-banks" like Merrill Lynch to compete with banks for a very major share of the financial market.
From a standing start in 1985, over a dozen very large regional banks have been formed. Since the advent of interstate banking, the financial world has become to be what one fellow called a "Darwinian maze" of acquirers and acquired. We at First Union chose to be acquirers. Through what the New York Times referred to in an article not long ago as an "orgy of mergers"--twenty to be exact--First Union has grown.
It has grown from a $7 billion bank in 1984 to a $28 billion bank this year. We began a very fast series of interstate acquisitions just as interstate banking became legal in 1988. When I think about mergers, I like to think about our merger--that really put the bank on the road--First Union with Northwestern Financial Corporation.
Working with Ben Craig, who was then CEO of Northwestern and, until his death a couple of weeks ago, president of First Union Corporation, was a real joy and a great experience for me. Many of the visiting CEOs here today worked with Ben and know what a warm and people-sensitive person he was. Ben's death was a sad loss for First Union, obviously, and for me personally, and I know for a number of you. The point of bringing that up right now, other than the fact that I'm in a part of the country which he loved, was that Ben's trademark was to worry about the welfare of the people who worked for him. During the merger--which was not an easy one to pull off--Ben and I knew that when we eliminated many of the redundancies between our two banks, jobs would be eliminated as well. We also knew that the new bank we were creating was a critical strategic move. Without the merger of Northwestern and First Union, neither of us would have survived interstate banking. We would have both been acquired, probably by an out-of-state bank, and disappeared from the world.
Working together, we identified a surplus of people, probably a thousand eventually, whom we knew would be initially dislocated by that merger. There was a lot of overlap in the markets that we served, particularly in the cities. We had a lot of administrative staff that we didn't need. Everyone whose job was destined to disappear as a result of the merger was put into a "talent pool." From then on, whenever there was a need for a new employee anywhere in the newly expanded company, the manager first had to go to that talent pool.
We didn't make any guarantees to those people but we told those who were displaced by the merger that we would do our best to find them comparable jobs. During the first year, several hundred people passed through our talent pool, and all of those people but seven were found comparable jobs. And, even the seven who could not be offered jobs were provided what we felt was a very generous severance arrangement. We created that talent pool because it was the right thing to do. We had no obligation whatsoever, no legal obligation, to those people.
When interstate banking began, many good out-of-state banks sought us out to acquire them because we had established our credibility as people-sensitive partners. It was an unintended side effect of that merger. We also found that, in approaching good banks with a plan to join First Union, we could point to our merger with Northwestern as an example of how their employees would be treated.
In addition, the managements of our acquired banks could point to our action with Northwestern to calm the fears of their own employees when they heard that the company they had worked for was about to be acquired by another, unheard of, company. As I mentioned earlier, caring and fair treatment of people is not only consistent with good business, it really is the essence of good business. It is the reason that our later acquisitions went as well as they did.
The single toughest problem in the last several years during all this acquiring has been managing the impact on peoples lives. It doesn't show up on the balance sheet, but that has been the ulcer part of doing it. As part of a relatively small bank, we became accustomed to dealing with familiar people. You can't do that with a company that's gotten as big as ours has.
In 1984, First Union was a $7 billion bank, in one state, with only 200 branches and 4,000 employees. As First Union has grown in the last three years from 4,000 to 20,000 employees, we have tried to maintain that same spirit of closeness and interaction that had been our style. I'll be honest with you, it's been very hard, and we have not been completely successful.
For the top people in a five-state bank to talk face-to-face, many have to travel two-three hours one-way by air. To grow to a $28 billion bank in three years, we have acquired and absorbed over 20 separate bank holding companies, some 45 banks, and 16,000 new employees.
Our number of banking branches has grown from 200 to 750. The number of customer accounts has increased by several million. We've absorbed over 20 separate computer hardware systems and several hundred software systems. Obviously that means change; that's the reason for giving you the facts. And we know that change creates anxiety and stress and that creates problems for human beings.
Let me ask you to tax your imagination for a minute. Think what it would mean to each of you if this morning you were told that Appalachian State had been acquired by the University of Tennessee. And then, in a week or so, all the A.S.U. signs began to come down and were replaced with U.T. signs. I think you would agree there would be a little bit of agitation and a lot of anxiety.
You might agree that both students and faculty would experience a sense of alienation and dislocation. It would be stressful. The faculty would ask if their tenure would be respected. Many of you would immediately begin to ask questions. "Will this change my classes and professors?" "Will my credits transfer?" "Are the courses the same?" "How will it affect my tuition?" "What will happen to student loans and scholarships?" "Will we still have an A.S.U. team playing on campus or will all of our games now be played in Tennessee?" "Will my diploma read Appalachian State University or University of Tennessee?"
Many of you would be mad. A lot of you would blame the A.S.U. leadership for "selling out." Some of you would swear never to wear Tennessee orange colors. Some of you whose fathers or mothers had gone to Appalachian State would feel like a home dynasty had been ended and poisoned. I think you get the idea. You can understand some of the human trauma when the company you work for is being merged.
The success of a merger is still more dependent on employee morale and attitudes than any other single factor. The employees of an acquired company see their heritage vanish almost overnight. But they must get over their anger at being acquired by the bigger bank or company, and they must identify with the new organization as soon as possible. It's usually an economic necessity; they don't have any choice and that makes them even madder.
The acquiring corporation has to not only show but actually feel empathy and understanding for the people in the acquired company. It's the only way that the acquirer company will be successful.
We have had to understand and to empathize with their sense of betrayal and dislocation.
We have to accept and understand a certain degree of anger and hostility towards us.
And, probably the toughest thing, we have to learn to admit mistakes in the process.
We have come up with five rules of the road, or principles, that I think managements ought to consider when making changes that greatly affect the lives of many people.
Communicate, communicate and then communicate some more; get out to see people face-to-face whenever possible; respond to questions; and set up quick reaction communications such as 24-hour hot lines where people can get information about the new company, quick news bulletins, and interviews. I say this to you because the odds are very, very strong, almost certain, that you as an employee or executive of a business concern will acquire or be acquired during your business life.
Get the bad news out fast. Bad news is like a bad house guest--the longer it hangs around, the worse things get.
Look at everything you say and do from the other person's perspective. One middle-level manager in a bank we were merging with was asked what he thought about First Union. The young man narrowed his eyes and said, "I don't know anything about First Union and its all bad."
Set up merger teams as soon as possible and make sure they contain representation from all functions of both companies. Almost immediately after we announce an acquisition, we and the newly acquired company set combined steering committees to oversee the merger process.
This is simple and was developed before mergers were ever heard of, there's the old "Golden Rule" which is: "Do unto others as you would have others do unto you." Follow that and you can't go wrong.
So my closing thought to each of you who aspires to a career in banking or business is very simple: don't ever take your eye off the human factor. Numbers are good tools, obviously necessary. But behind all the numbers there's always a person and there's always the lives of other people. We must never forget the human touch. When we radically change peoples lives, as in an acquisition, we will cause a surge of anguish or trauma in many of them. On the other hand, if we don't restructure the banking industry into companies that can deal with the future and with competitive forces, the companies will go down painfully--they'll go the way of the dinosaur. That causes a different kind of trauma in peoples lives. We're trying to avoid that as well.
We bankers have an obligation to our stockholders and our employees to prepare our companies to survive and prosper in the 21st century. And again, that means change.
Whether you're a management trainee or a chief executive...or somewhere between...what you do affects people...probably in a more dramatic and drastic way than you realize. We would all like to make decisions where everyone is happy. But, frequently, the choices available to top managers and the decisions they make are not easy.
Today's top executive in business must balance legitimate needs of at least four groups: the employee, the customer, the shareholder, and the general public. You can't rule out or ignore any of them. I believe that management is an art and not a science. Fundamental to that art is the need to care for people whose lives are in your hands.