We received such fascinating feedback on our post on relationships in commercial banking being a double-edged sword (see, “The Most Expensive Word in Banking? ‘Relationship’”) that we wanted to capture it in a follow on piece. Based on many of the war stories we heard, the topic touched close to home for many. Most wondered why relationships have gotten away from commercial banks. A large group argued that the pendulum has simply swung back to the side of commercial customers – who now benefit from lower search costs and increased access to a wider selection of innovative capital providers. These companies are now simply returning the favor to certain banks that relied heavily on status quo and inertia while failing to provide compelling products and services to key customers in the past. Others lament the lack of training and the high turnover of qualified bank lending officers as key culprits. They point to the loss of formal one-year credit training programs which have been replaced by three-week-sales-pitch-rehearsals with nifty names, acronyms, and canned scripts. [Note: On training, I wish I could find the cartoon that showed two managers talking: #1: “What if we train them and they leave?” #2: “What if we don’t train them and they stay?”] We have also treated this topic of inexperience – especially in leveraged lending. See, Baby on Board? The Risks of Inexperience in LBO Lending.
But what of Executive Oversight in the lending process? Most readers agreed that, in theory, this can be an excellent tool for keeping experienced bank professionals in the deal loop while junior bankers learn the ropes. Unfortunately, time-after-time, it seems underperforming banks implement this oversight via ad hoc meetings late in the deal process – often at the frustrated request of a credit committee or deal screen review, “let’s get Pytr out to meet management.’’ (More about Pytr below.)
He is not only dull himself, but the cause of dullness in others. – Samuel Foote 1720-1777
Optimally, meetings should be used in a proactive program to bring credible, bank decision makers face-to-face with the companies early in the deal where supportable distinctions can be made in the bank’s capabilities and worthiness as a partner. Note well, this presupposes that the executive in question actually has some background in credit and lending. One reader from a large regional bank laments this is less frequently the case as high-performing lenders bolt from marginal bank groups to land at more sophisticated bank platforms or non-bank outfits where their skills are more valued (and their rewards superior) in a true meritocracy. Meanwhile, back at Mediocre Bank & Trust, these vacancies are, unfortunately, too-often backfilled by entrenched desk jockeys scrambling for relevance – not deal people with applicable experience in the field. Alternatively, readers report that drive-by resources might be foisted on lending teams by a slew of management trainees getting their tickets punched by rapidly rotating through regional offices; here, almost certainly the executive presence is – well – diluted, to be kind. Finally, we heard stories where, just as unfortunately, line management is worn out and simply “mailing it in”. If the executive in question has a lending background, but is well past his effective Use By date, we see what we call “The Late Show” meeting. [Note: as our regular readers know we often use caricature to illuminate real issues – as the old saying: “if you can’t laugh, you’d be crying”. So keep a sense of humor.]
This is how these meetings might progress:
Minutes 1 − 7: Waiting – As the ad hoc meeting had most likely not properly been set up with an agenda, pre-wires, or focussed collateral – and feels more like a “tea and cookies with the bank” – the customer might stay on phone with someone (anyone). Obviously, this is not a positive signal of the relative value of the budding relationship. Even more egregious, often it’s the senior bank executive, we’ll call him Pytr Pryncipal, who will be late (systematically late – to every meeting – harkening back to some 1980’s airport paperback on Projecting Power – “look, as I am a Master of the Universe with so many responsibilities, you can wait – oh, and I intend to leave early, too – and may need to take a call at anytime – I might decide to put my feet up on your desk, too, s’okay?”). You know the guy.
Minutes 8 − 11: Introductions – Again, with no clear agenda we never know if the right people are at the meeting – or if it’s just whoever was available. So, we introduce new people on the company side and new folks on the bank’s team (maybe even the poor credit analyst drug out to listen and take notes). Rather than think through who needs to be at the meeting to fill specific information gaps or provide credible expertise, some banks love to pad their team here – somehow hoping mass makes up for experience. The real risk is having unprepared bobble-heads with shiny lapel pins nodding furiously at any point made, however inane – but no one with insightful questions or points of view.
Minutes 12 − 16: Name Game – Here the senior company execs and bank leaders may play Six Degrees of Separation from Kevin Bacon. If this was used to bolster references or to triangulate data, brilliant; if it is a my-rolodex-is-bigger-than-yours exercise its a waste of time. To help evaluate the opportunity at hand and the management team, quality and relevancy of networks dominates the quantity of hands shaken at rubber chicken dinners and fundraisers.
Minutes 17-25: Golf Course Trivia – “Have you gotten to play on Burnt-Stone-Wood-Creek?” “Yep, played at a Member-Guest there last month.” “You ever played The Smelly Bull course at Rigor Mortis Ranch & Country Club?” “No, would love to do that someday – heard the traps are knee-deep, though.” “Well, I’ll have Newt and Biff, here, get us all out there later this month…” This can go on for 20+ minutes if left unchecked…
Minutes 26 − 35: Bank Advertisement. Understandably, Bank execs want to pitch the bank to the customer. But, inexplicably forgetting the signal that showing up late and unprepared has already sent, the Bank team plunges into a canned, generic spiel: “On a cold winter night, over 100 years ago our bank was founded… [probably will not tell the customer that the bank’s tech systems haven’t been upgraded much since then, either – but that is a topic for another post]. You can feel the air under the table “woosh” as customer iPhones come out for review (hopefully, not texting each other: “omg, where is this guy going??”). A well-prepared Exec could provide a compelling story about how the Bank is aligned with the company’s trajectory and has relevant, differentiated experience. That presupposes two things: 1) the lenders know what the real trajectory and need of the company are and will likely be, and 2) that they can prepare the bank executive to deliver the message. Neither is guaranteed – especially if it won’t fit in the slick pre-call worksheet from sales training.
Minutes 36 − 50: Too-often turned into a one-sided infomercial for the company. This is the easy route for both parties. The company loves talking about itself (and should) – and if the bank team is un- or under-prepared, they don’t want to risk showing it. But if this is all one-sided, it’s a missed opportunity to see how the company’s strategy, priorities, investments, etc. ‘hit the numbers’. Best practices would have a prepared Bank team with a key set of areas to touch on with the executive steering the discussion to those points (showing command of the topic). Worst practices have the junior banker reading a non-prioritized hand-written list of random follow up questions from committee.
Minutes 50 − 60: Wrap up – but too few Next Steps. Our MoU executive banker may be squinting at his government-grade Blackberry (not iPhone or Android, of course) as he’s trying to awe that demands of his schedule are so pressing – at the extreme, he’s already on the phone while still in the room with clients.
The tragedy of “The Late Show” meeting is not just the time wasted on surface-level prater. The interaction will certainly signal to the client the bank’s lack of seriousness regarding lending in this area and to this customer – actions do speak louder than words. And much worse for the long run, such feebleness significantly increases the probability of adverses selection (weak banks attract weak borrowers). High-performing banks that have made a commitment to evolving realities of middle market lending – especially as related to leveraged lending opportunities – know it takes a rethink of strategy, talent, and process to do this effectively. Banks will not retain, much less gain, market share by default. Though M&A may drive marginal share at the micro level, a bank viewing business as usual through 1990s lenses and business practices risks missing secular changes in the industry that leave them in the dust.