Wells Fargo CEO: “What I’ve Learned Since Business School”

Wells Fargo CEO: “What I’ve Learned Since Business School”


>>Well, thank you very much, Dean Saloner. As Garth said, I was with the advisory council several years ago and got to know Garth very well. And I can certainly attest to a great selection that was made and Garth being the dean of our school. Well, good afternoon, everyone. It’s a pleasure to be back here at my alma mater and the GSB. In fact, I was a member of the first graduating class, back in 1967, when this building first opened as the brand new Stanford Business School.>>[laughter] And it really makes you feel old as you come back and see that the new school is soon to be opened. It is also ironic that early next year, as Garth mentioned, just a few months from now, that I will retire from Wells Fargo, 42 years after I first joined General Mills, having just graduated from the GSB. And again, as Garth mentioned ? and I hope that you all, when you are contemplating your next career move, would stay and be more flexible than I was. Because it is true that, when I was thinking of what to do upon graduation, I really did not know for sure what I wanted to do, but I was very certain of what I did not want to do. I was certain that I did not want to ever work for a bank or work in New York City.>>[laughter] And a mere eight years later, I became an executive of Citibank at 53rd and Park Avenue. So keep an open mind.>>[laughter] Since I have been around this business world a long time and about ready to “hang it up,” as we used to say on the athletic field, what I thought I would do this afternoon is share some thoughts with you entitled, “What have I learned since business school?” I hope this does not cause you to quit school and ask for a tuition refund, however.>>[laughter] As you will soon hear, I am quite passionate about certain ideas that have worked for me over my business career and have not usually been an important element of the curriculum at leading graduate schools of business. I began experimenting with these ideas shortly after my first general management job in 1969 at General Mills, but I did not put all of these ideas into an actual marketplace test until I joined Norwest in Minneapolis back in 1986 as vice-chairman, head of the banking group there. Let me briefly summarize our results from 1986 to now. Our assets have grown from 20 billion to 1.3 trillion, our net income from a hundred million to an estimate of $12 billion this year that analysts are forecasting, our market cap from 800 million to 135 billion, a compound rate of 25 percent. We had 15,000 team members back then; we have 282,000 today. We had 700 stores; today, we have 10,000. We have also today ranked as the 14th most admired company in the Fortune Magazine’s Annual Survey and Bearn’s magazine in the United States. And Bearn’s magazine ranks as one of the top 25 most- respected companies in the world. Now, I mention these things only to demonstrate what I think is the power of some of the things that I have learned since business school. And these quantitative and qualitative measurements at least give an indication that there has been some value to those ideas. I would also ? I also want to mention that I?ve had the privilege of meeting the faculty of this great school on many occasions and in many different ways where I have spoken about what I thought were important changes that needed to be made in the curriculum of all business schools. And I’m pleased to see that the changes that have been made by the GSB in the last five or ten years were very consistent with some of the thoughts and ideas I’ll convey to you today. What I learned at the GSB and in my engineering courses, in terms of quantitative methods and finance, accounting, strategy, and marketing, were obviously of great value and were very important, and I believe are very important to business success. But on the margin, they were not even in the same ballpark and important as the concepts of leadership, people as a competitive advantage, and what I would describe as ” management by culture.” But I am getting a little ahead of myself. And I want to mention that I think one of the values of the engineering background that I had, even though ? you should all feel good that, those of you who cross bridges at least, or work in tall skyscrapers ? that I was not a real engineer as such. I was an industrial engineer at Stanford, and industrial engineering really was a quantitative application of business principles. In fact, many of the professors were in the both the business school and the industrial engineering department. And it was things like statistical analysis, quantitative business methods, operations research, production efficiency, computer science, and so on. We all did take the same basic engineering courses of math, physics, and so forth. But while my liberal arts classmates were playing volleyball in the afternoon, we engineers were in the lab doing work. We were not on the baseball field, at least in my case. And, although I never practiced as an engineer, I do think that the engineering background did significantly influence the process that I use in making decisions. And that process does appear to be different from that of some other large companies’ CEOs. My engineering background influenced my extensive of use of deductive reasoning, the importance of analyzing data intelligently, the ability to ask relevant questions to challenge existing assumptions, and do sensitivity analysis on the various alternatives that could be modeled on what decision to make. In short, to thoroughly understand the quantitative elements and the risk vs. reward aspects of the ultimate decision. But I also learned a lot outside the classroom, especially on the athletic field and through actual business experience, by making a lot of mistakes, but hopefully never making the same mistake twice, ie. learning from one’s mistakes. The most important things I have learned in my 42 years in business and 34 years in financial services is that, success in the business world ? especially in the world of financial services or other service companies ? is less about brains at the 99 percent level, and more about people development, motivation, coaching, leadership, teamwork, integrity, culture, community involvement, vision, values, and a broad understanding of a variety of business disciplines, especially interpersonal relations. Intelligence above the 99 percent level might even be inversely correlated with some of these attributes. GMAT scores just don’t measure these skills. In today’s business world, we need broad generals to successfully run large and complex companies who desperately need leaders. This is where sports comes in, at least for me. From the age of 4 through 21, I played some form of competitive athletics for two to three hours almost every day. Sports helped me to understand human nature, teamwork, and how emotions impact performance. Sports helped me to appreciate the value of personal discipline, physical conditioning, and the use of time. But, perhaps most importantly, athletics introduced me to the power of interpersonal dynamics. I experience, as I know many of you have, that teamwork and team spirit causes a group of individuals to perform well above the level of their individual abilities. In basketball, for instance, it’s not the five best players who become champions, it is the best five players who do so. So what does it take to be successful in business? Well, if I had to do it all over again, perhaps the MBA I received is not the best degree to lead a company to success, after all. Perhaps you should seek four very different degrees. First, get a degree in believing. Believe in the enormous talent of people, people at all levels of your organization. To receive a degree in believing, your dissertation must answer this question. “Why do many people enter business being bright, well- educated, energetic, wanting to make a difference, and in a few years, feel bored, ignored, unfulfilled, and unimportant? Why is that?? Today’s MBAs need a second degree: in affirming. They must affirm their belief that almost everyone in any organization, profit or not-for-profit, wants to contribute, wants to do a good job. Receiving this degree requires that we treat everyone in our organization with respect as equals, as talented people, as important members of our team, working together toward a common goal, regardless of rank, education level, or compensation. Third, I would recommend a master’s degree in “M and F.? That stands for “Motivation and Fun.? Yes, you heard correctly: Fun. I know it may be surprising to you, but even bankers should have fun.>>[laughter] I define “fun” as ?Working with people to help them get excited about what they’re doing, help create an enjoyable work environment, have fun, and then recognize them publicly with great fanfare for a job well-done.? When people aren’t having fun, when they’re not recognized for outstanding performance, when no one says thanks, they do become disengaged and feel unimportant. Recognition, I believe is, on the margin, more important than salaries, benefits, and bonuses, because most all companies pay competitively. It is corporate America’s most underutilized, motivational tool. Try thanking someone too much for a job well-done. You can’t do it. So you need a master’s degree in believing, affirming, motivation, and fun. And then, you need a doctorate, a doctorate in leadership, the most advanced and important degree possible. What is leadership? There are probably as many definitions as there are leaders. I’m sure many of you have your own. I define leadership as the “Act of establishing and communicating a vision of the future, and the art of motivating others to align with and embrace that vision.” Leaders enable people to do such great things that they believe that they can continue doing them. Leaders take people from where they are to where they’ve never been. That’s why leadership is the critical skill for sustainable business success. But great leaders give power to their teams; they do not monopolize it. You cannot share a vision unless you share the power to achieve it. Leaders don’t point fingers, they point direction. They show the way by personal example. And I’m sure everyone here today is still familiar with Maslow’s Hierarchy of Needs, which I did learn in both my engineering and MBA classes. It arranges individual needs in a pyramid. And, as you well know, safety is at the bottom moving up through food, shelter, and at the top, a feeling of self- worth. In the same way, I believe there’s a pyramid of tools to lead any business to greatness. Importantly, but at the bottom, there are the fundamentals of the business enterprise: the accounting, the computer literacy, quantitative skills. You move up the pyramid to finance, manufacturing skills, sales marketing, and then to the top, empowering people, motivation, recognition, communication skills, and at the apex, leadership. The need for speed and adaptability in today’s world leaves zero room, in my opinion, for dictatorship, centralized command and control, and in the worst sense of the word, hierarchy. Hierarchy assumes the higher up you are, the better you are at making decisions. Here’s a secret: Almost every person at Wells Fargo knows more about their specific work than I do: tellers, assistance people, commercial bankers, store managers, you name it. They all know more about the needs of their customers. Because they know more, there’s no need to waste time coming to me for a decision. Make the decision yourself, and let me know what you’ve decided. If you think I can help you to make better decisions, I’m available to do so. I remember reading books in my MBA class that said, The maximum number of people who should report to someone else to have what was called ?effective control,? was six to eight, but never more than ten. Baloney! It should be 15 to 20 at least, maybe even more. The more people who report to you, the better. It forces you to delegate, give responsibility, and not interfere. It allows others a satisfaction of running their own show and being responsible for their own results. It also reduces layers between you and the customer. The truth is, I didn’t run Wells Fargo. We have nearly one hundred businesses, each with their own fully-loaded profit and loss. We are very decentralized. The business heads are totally responsible for their businesses. They report to six group heads, who are the CEOs for their group of businesses, and they should act more like coaches than bosses. My job was to select the best people to run those businesses and those groups, let them do it, coach them so they learn even faster, and assure we have a strong internal check and balance audit process that verifies that they are adhering to the principles and the policies that we’ve agreed upon. People at the top should, above all, be leaders; quite often, they act like managers. Managers administer; leaders innovate. Managers rely on systems; leaders rely on people. Managers need control; leaders rely on trust. Managers work on getting things right; leaders work on the right things. At Wells Fargo, we believe personal leadership is the key to success. We believe the answer to every problem, issue, or opportunity in our company is already known by some person or team in the company. The leader only has to find that person, listen, and help effect the change. By the way, the people with the best answers are not always the people with the most stripes. True leaders do not demand loyalty, they create it. They use conflict among diverse points of view to enable the team to reach new insights. They exert influence by reinforcing values. At Wells Fargo, we manage these hundred different businesses, spanning a wide geography across all of North America and internationally, by sharing a corporate culture that people believe in and align with, not by command and control or hierarchy. A good leader inspires a team to have confidence in him or her; a great leader inspires a team to have confidence in themselves. This may surprise you. At Wells Fargo, our most important constituent is not our customers; it’s our people. Because our people have the greatest influence on our customers and how our customers perceive Wells Fargo. Our people influence the attitude of our customers more than anything else. Our people are key to customer satisfaction and increasing market share. So, my job as CEO of the past 15 years was really quite simple: Cause the organization to focus on customers. Recognize that the key to consistent bottom line growth is actually the top line: revenue growth. Hire, retain, reward, and recognize the best people. Coach them to be effective leaders. Make sure they care. In selecting people, I don’t care how much a person knows until I know how much they care. Give people the responsibility, an accounted way to run their own business. Encourage them to be active in their communities, to be leaders in their communities. Create, describe, and communicate the corporate culture, its vision and values. Make sure everyone is having some fun. Then, just get out of their way and cheer, as they achieve consistent, record-breaking, industry-leading results. In short, what I learned on the athletic fields and from 40- plus years in the business world is that, success is all about people, especially in financial services or other service businesses. At Wells Fargo, we call it, “People as a competitive advantage.? Few, if any, of other large financial institutions really walk that talk. Our emphasis on people is the foundation of our company’s culture, our growth, and our success. Because we are so decentralized, and rely for results on individual business leaders ? which number in the thousands by the way ? we manage the overall company by culture, shared vision, and values, and coaching. Incidentally, I don’t remember these concepts ever being presented, let alone taught, when I was at the Stanford Business School. So, what I would now like to do is, give you some examples of how culture influences our behavior and decision-making process. I believe these examples apply to all businesses, but again, in particular, those that have a direct service relationship with their customers. Take acquisition strategy, for example. At Wells Fargo, we will only do those acquisitions where the company that we are considering acquiring has a culture that is similar to Wells Fargo’s. Our culture is described in this “Vision and Values” booklet that is updated about every two years and was first published about twenty years ago. It describes in great detail our vision, values, culture, and operating philosophy. If any one of you is interested in a copy of this, I have a few of them here. So, early on in the discussion stage of a possible acquisition, we will give the principals this booklet and ask them to compare their culture to ours. We ask them to estimate how well such a vision and values will be accepted. If the cultures are considered to be incompatible, we would terminate further discussions. A prime example of the role of culture in our acquisition decision-making process was when other large banks were buying investment banks in the late 1990’s; we did not. We felt that the investment banking culture was incompatible with ours. We are a relationship-focused company; investment banks are often transactionally-focused. We are a team-focused company with team incentives. Investment banks are often made up of independent-minded, highly-paid stars, who are individually-incented. Some investment banks often cross the line, in our belief, in terms of ethical behavior, and often take excessive risk relative to rewards. We predicted that six out of ten of these investment bank acquisitions by commercial banks would not work. We were wrong. Nine out of ten didn’t work.>>[laughter] In fact, that’s how we missed the mess other large banks and investment banks are in right now. ?Management by culture? told us that some of the actions taken by others were morally and ethically wrong. Other actions taken just did not make any risk / reward sense to us. Management by culture saved us. But, things change. Because of these culture and ethical lapses, the investment banking industry has dramatically changed. With the recent demise of Merrill Lynch, Lehman Brothers, Bear Stearns and many smaller firms that actually left us in the 1990’s, there are only two broad, product line, investment banks left, namely Goldman Sachs and Morgan Stanley, and they are actually bank holding companies today. We believe that this radical industry realignment has permanently changed the competitive environment and business practices, such that Wells Fargo can now be in the investment banking business without compromising our culture and values. In combination with Wachovia, in just the past year, and because of the investment banking expertise that Wachovia had, we have gone from being a very small player to likely ranking in the top ten of US investment banks this year, and we think we?ll be in the top five within the next few years. Our company’s culture and belief in ?people as a competitive advantage? also causes us to handle layoffs and staff reductions different from others. Now, we know it is often necessary, because of acquisitions or other downsizing, that positions must be eliminated, but eliminating positions does not necessarily mean that good, loyal, experienced, and talented people need to be fired. When our competitors do acquisitions, they can hardly wait to tell The Street how many people will be fired and what the cost savings will be. We, in contrast, don’t typically do acquisitions for cost savings but rather for revenue growth. Cost savings are usually a one-time profit gain. Revenue growth is the gift that keeps on giving. We do eliminate positions, but we attempt to find other jobs for the people being displaced. To find other jobs for the people being displaced, given the turnover that exists in our company, there are nearly thousands of positions available each year that can be filled by people displaced by acquisitions and downsizing. We call it “Retain and Retrain.” Since we believe in people as a competitive advantage, we want to keep all the good, experienced people that we can on our team. Another area we differ from other banks was our early commitment to, and continued belief that, we are a financial services company much more than a bank. For over two decades now, less than 50 percent of our revenue comes from traditional banking. Traditional banking is about a $500 billion industry. The total financial services industry, which, in addition to banking, includes insurance, investment banking, asset management, mortgage, consumer finance, leasing, and other products, is a $2.7 trillion in size, over five times larger than banking. The leading bank in a given state may have 20 percent to 30 percent banking share in that state. It is hard to grow when you have such a large share. However, this banking share leader would usually have less than a five percent financial services market share in that state. That means there’s plenty of room for growth if you are a financial services company. While others follow the advice of Wall Street, consulting firms, and conventional business school teaching, being strategically focused ie. a narrow product line, and some were basically monolines, Wells Fargo has maintained a very broad product line, delivering about every financial product and service purchased by mass market and high-net-worth consumers, as well as large, medium, and small businesses. A lot of people, including some of my Stanford Business School professors, think you shouldn’t try to be all things to all people. Admittedly, it is hard to do, but if you can figure out how to effectively deliver, through cross-selling, all the financial products needed by all the potential customers in your marketplace, there are enormous competitive advantages, diversity of income streams, economics of scale and skill, and compelling profitability. Through my positions on Board of Directors and the number of customer relationships that we have, I have helped to nudge other companies to consider expanding their strategy and selling more products to their existing customers and more services, and it has also worked for them. It has always fascinated me that a multi-product, financial company like Wells Fargo was considered by some as almost a conglomerate: too broad, not focused. So I?d ask these people, “Is Wal-Mart a conglomerate?” ?No,? they would say. ?Are they focused?? ?Absolutely. They are focused.? ?Well, what does Wal-Mart not sell?? I try to get people to understand that Wells Fargo is, first and foremost, a distributor. It’s a distributor of commodity financial products. Most all financial products are similar. Thus, we have much more in common with other distributors of commodity products, like Wal-Mart and Lowe’s, than we did with Goldman Sachs or Countrywide. Just like Wal-Mart and Lowe’s, our uniqueness is the way we distribute those products, not the products themselves. Consistent, organic, revenue growth through cross-selling is probably Wells Fargo’s most distinctive skill. Our average retail household has 5.9 products and over one in four has over eight products. These are, by far, the highest cross-sell ratios in the industry and about twice the industry average. Our average wholesale customer has 6.4 products with us. Our middle-market, commercial banking, division averages close to ten products per customer. Again, about double the industry average. Organic, double-digit, revenue growth is essential for consistent, double-digit, profit growth. We have grown our revenue at a double-digit, compound rate for 20 years, and therefore, we have had the profitability and market share growth that I?ve already mentioned to you. Since many of monolines have crashed and burned, or been acquired, more companies now seem to be interested in cross- selling and broadening their product line. We have a 20 year head start on these Johnny-come-latelies, and I’m glad we do. Let me now mention the need for disciplined acquisitions. This is required in any company in any industry. I never understood the comment, “I know we paid a lot for this deal, but it is a strategic acquisition.? If you paid so much that you don’t get a decent return, what could be strategic about it? A strategic deal should mean that it fits so well, you should make a pile of money. Let me ask you this about acquisition strategy. If you believe, as I do, that practically all financial segments ? and it?s true of many other industries ? are cyclical, when during the cycle should you acquire? ? at the top, or at the bottom? When do most people buy? I’m not going to ask you how many get that question right; I’ll leave that to your classroom. Most people only want to buy great companies, and so do we; but, of course, they pay high premiums. Wells Fargo often buys fixer-uppers, companies who?ve had a temporary set back, but still have good people and good customers and a solid franchise. We pay a lower price, because there is more work to do, which will require more time and perhaps additional investment. But with our broad product line, our superior business model, our strong, experienced management team, and our cross-selling prowess, we can usually, within three years, get the troubled company growing revenue at double digit rates, just like the rest of our company. A good example of this strategy, that Garth mentioned, was the acquisition of Wachovia Bank last fall for $12.7 billion, a company whose market cap was over $90 billion a couple years before that, and has the number one banking market share in eight, fast-growing, southeastern states as well as other great markets. Yes, we have some problems to fix, but I believe this will turn out to be the best and most profitable acquisition in banking history and among the best in all of corporate history. We also often buy smaller companies rather than larger companies, because their culture is more similar to ours, the implementation risks are less, and so is the risk of being wrong. Most of our large bank competitors buy only large companies. When we do a deal, the financial projections must clear two hurdles: a minimum 15 percent internal rate of return and accreted to existing stockholders by no later than year three. Both are important. If you have a PE ratio higher than your acquisition target, it is relatively easy to be accreted, but there is usually a reason for the PE difference: the target has probably been growing at a slower rate. If you give the sellers most of your PE difference, you will soon grow more slowly as well. Your PE will fall. Requiring both an IRR and an accretive ____ rate, ensures you only do deals that will add value no matter how you elect to pay for them: stock, cash, or the combination of both. Most companies don’t do that. Some companies set their IRR hurdle rate too low, in my opinion, at their so-called ?cost of capital,? something they probably learned in business school as I did. Who wants to earn only their cost of capital? That’s just sure step toward mediocrity. Others think any acquisition that is accretive is good, without considering the inherent PE differences. Let me ask you this question. Should you take actions based upon the advice of so-called industry visionaries, pundits, the media, and Wall Street experts? When I first started running major bank businesses in the late 1970s, I was told by my boss that branches were dead and paper checks were history; we should start reducing both immediately. Well, there are more branches today than there have ever been, and they increase every year. Only in the past couple years, 35 years later, are we seeing paper checks decline. In the 1980s, I was told that the mortgage business is a lousy business and we should get out of it. In the early 1990’s I was told that banking margins were falling so rapidly, and non-banking competitors were growing market share so fast, that banking was all about cutting cost. The cost cutters would ultimately win. In the late 1990’s, I was told that the Internet would make branches obsolete. Bill Gates said banks were dinosaurs. By the early 2000s, everything was reversed. It was now all about revenue growth, not cost cutting. I was also told branches were now so valuable, we should open them by the thousands. As we know, those visionaries were consistently wrong. Ladies and gentlemen, it is important to listen to the futurists, the pundits, the media, and Wall Street, because there is usually some rationale to their positions, but in my opinion, don’t do anything until you see signs that customers are actually voting with their feet. Look for the earliest possible signs of radical change. If you don’t see any, stay away from the bleeding edge. Customers, I said, use their feet. Don’t look at eyeballs as a reason for market evaluations. Contrary to the industry, we’ve been opening new stores and acquiring stores through acquisitions at the same pace practically for two decades, and we are continuing to do so. We never stopped or restarted, and we?ve always focused on revenue over cost cutting We also developed what is now considered the best, integrated Internet banking channel in the industry, and it serves all of our customer?s personal, business, and investment needs through one single sign-on, whether that person enters for their own personal accounts, their business accounts, or their wealth management accounts. Customers can navigate from one to the other easily and efficiently. Global Finance Magazine just rated our Internet offering as the best in the world. During the Internet glory days, unlike the pundits and consulting companies and many of our competitors, we never saw the Internet as a competing channel. We saw it as complementing our other distribution channels. And the vast majority of all of our customers are actually multiple-channel users. They use our stores, the Internet, the ATMs, and the telephone. We never saw, nor expected customers to suddenly stop using their primary channel and immediately go exclusively to a new channel. We believed that if they did begin to shift, they would shift gradually, and in such a moderate pace, that we could reconfigure our distribution network accordingly. Many of our competitors, during the Internet craze, closed their branches in anticipation of a major change in customer behavior, and then reversed all of that a few years later. Let me now mention Scale vs. Skill. How many times do you hear a CEO say, ?I need to get bigger to be better?? I don’t buy that. You get bigger by being better; you don’t get better by being bigger. Scale is certainly important in some business, but is often overrated. For example, in banking, I would say over a hundred billion dollars in assets or so, skill is much more important than scale. Skill is finding the best way to do something in one place, say a store or with a customer, and then replicating that over your entire network. That’s the only advantage, to me, of being big. You get to take a good idea and multiply it thousands of times vs. maybe less than a hundred times for a smaller company. Otherwise, size can be a deterrent to organic growth. Why? Because you often lose touch with your customers and team members. Bureaucracy sets in, hierarchy rules, you lose speed to market and fast decision-making. How about risk management? Well, you can’t be considered the best financial services company in the industry unless you’re the best at managing risk, risk of all forms: credit risk, interest rate risk, and operational risk. All segments of the financial services industry are cyclical, and it’s quite common that towards the end of the positive side of the cycle, asset values get elevated and risk spreads decline, to a level beyond ? and in some cases far beyond ? their fundamental levels. Only if you are disciplined, diversified, and have skilled and experienced managers and leaders that have reduced your exposure to such overvaluations, can you avoid the writedowns, as these assets are eventually valued significantly lower. You only have to look at what happened in late 2007, when the collapse of the subprime mortgage markets set off a re- evaluation of all asset classes, and led to a rather extended, credit crunch. We bankers just don’t get it. Every decade or so, we have to relearn that covenants are important, that risks do go up and down, but never disappear, that the Greater Fool Theory, now known as securitizations, collateral debt obligations, and the like, do not last long, and that sooner, but most often later, they will all come back to roost. Wells Fargo, by the way, did not participate in this charade. Our responsible-lending values, that are included in our vision and values booklet, saved us. We did not offer any no-doc option, negative-amortization loans, to subprime borrowers. These exotic, subprime mortgage loans were not only economically unsound, they were not appropriate for many borrowers. We lost 4% market share in our mortgage business for three years between 2005 and 7, $160 billion in originations in 2006 alone. In hindsight, we were glad we did. For similar reasons, we also did not participate, to any significant degree, in the latest Wall Street fads, such as collateral debt obligations, structured investment vehicles to hold assets off balance sheets, hedge funds financing, off-balance-sheet conduits, low-covenant or no-covenant, large, highly-leveraged loans. We do not hold in our money market mutual funds, any collateralized debt obligations, and commercial paper obligations directly backed by subprime debt, and so on, and so on. Another area we seem to do things differently from others is management succession in general, and CEO succession in particular. Years ago at Norwest, we put in the policy that all members of the management committee, the top fifty or so people in our company, had to retire not later than the end of the year that they became 65. Now, this was not done because we think people over 65 cannot continue to contribute to corporations. It was done for succession-planning purposes. It takes many years to prepare someone to take over senior positions at a company the size and complexity of Wells Fargo. For senior positions, it may take three to five years; for CEO position, even longer. The ?65 and you?re out? policy was put in place to ensure that everyone, including the board, knew there was a time certain that someone would retire, and so plans could be made to select the best candidates and give them the necessary experience to handle the new job. So, we ask all committee members to give us a minimum of two years? notice. And so, the ?65 and you?re out? policy is really something more akin to a term limit. It ensures there will be a well-timed process to select the best placement, and the replacement candidate would also know approximately when the position would be available. It could be sooner, but it would not be later than that date. And that’s how we handled CEO succession at Wells Fargo. I don’t think the old CEO should stay beyond 65 to play the role of coach, as the new CEO is selected about 18 months to two years before becoming CEO, and the old CEO becomes chairman and helps coach the succession process. I think the old CEO should give up his CEO role in that two year period and remain a full-time chairman until his age of 65 expires. Now, Wells Fargo followed this process with our CEO succession, and in fact, that CEO succession started about seven years before John Stump was selected in July of 2007. By the way, I would have retired at the end of last year, but because we acquired Wachovia, and because of the financial crisis, I was asked to stay on for an extra year to help integrate the acquisition and help with the crisis. Let me conclude by asking you this question. What is the most important metric in business? If you had to pick only one metric to evaluate how well a company is performing, and how likely it would perform in the future, what would that be? If I have learned anything over the past 40 years, it is this: the key to the bottom line is actually the top line. The only way to consistently grow profits is to consistently grow organic risk-adjusted revenue. If customers are giving you more of their business, as evidenced by organic, revenue growth, you know you must be doing a lot of things right. You must have competitive products, you must have good service, you must have good people who understand customer’s needs, you must be priced about right, your technology must be competitive. The opposite is also true. If you?re not generating organic revenue, you have major problems. Cutting costs only lasts for so long, and will probably even reduce future revenue. Financial engineering is more often a long-term negative than a positive. If you believe that revenue is the key metric then, as CEO, you must believe by example. You must be customer-focused, call on customers, make sales? calls with team members, and walk the talk. I have probably made an average of two customer calls or customer visits every day in my business career. I don’t ever remember that being considered important when I was at the Stanford Business School. Acquisitions that grow revenue after being acquired can never be good investments for very long. In my opinion, revenue growth is so important that you shouldn’t even make an acquisition unless the revenue growth of the combined enterprise is higher than the sum of the revenue growth of the two companies if they had remained separate entities. So, in my opinion, it’s all about organic risk-adjusted revenue growth year after year after year. By the way, Wells Fargo has been growing revenue at double- digit rates for 20 years, 12 percent annual compound rate, for example. So, it’s indeed been quite a story and quite a journey. It is really a story of the opportunity presented by capitalism and the free enterprise system. It’s amazing what opportunities are out there. Speaking of capitalism, I thought you’d like to know my definition of capitalism and how it differs from other political and economic systems. It is particularly relevant, given what’s going on in Washington today. First, Socialism. That’s when you have two cows, and the government gives one to your neighbor. Communism. That’s when you have two cows, you had to give both to the government, and the government distributes half the milk to the people and the other half spoils on the way to being delivered Fascism. That’s when you have two cows. You have to give all the milk to the government officials. The officials sell the milk and deposit the proceeds in their Swiss bank account. And then there’s capitalism. You have two cows. You sell one of them, and you buy a bull.>>[laughter] That’s capitalism. If I have learned anything in my 42 years of business, it is this: Success, without fun, never lasts. Fun without success isn’t much fun. My wish for all of you is to have both fun and success in your business career. Thank you for inviting me back to my roots. I wish all of you the best in your career, and you have as much fun as I?ve had in mine. I’d now be happy to answer any questions you may have. Thank you very much.>>[applause] Q: Thank you for your talk. I read a quote from Alan Greenspan nine months or so ago, where he said if you were 50 years younger, he?d start a bank. I?m wondering if you agree with that sentiment, and if you do, how that might apply to someone in our shoes that?s going out into the working world. A Well, I don’t know about starting a bank, because it’s a difficult thing to do and takes time and a lot of capital too, but I think it’s financial services business ? might as well change the word from bank branch ? is one of the great industries in the world. You know, money never declines. It grows forever, and you’re basically in the money business if you?re in financial services. And so, you have an industry that’s always going up and there’s not many of that. You know, you can have too much food, you can have too much wine, but I don’t know of anyone who has too much money.>>[laughter] So, I think it’s a great business. Q You mentioned your business units were all very decentralized. How did you leverage, I guess, the integrated side of things? How did you manage your business units so they?re integrated while being also decentralized? A Yeah. It’s really our secret sauce. We operate these decentralized businesses, but from a customer standpoint, we hope to be viewed as one Wells Fargo. So, we partner between the businesses so that we can deliver all the various products and services, that these decentralized companies are manufacturing, as one, to the customer. It’s a very difficult process. It’s kind of all explained in our vision and values but it really ? you have to completely organize your company from your technology to your incentive systems to your structure to your reward and recognition system that encourages this behavior. And it’s literally hundreds of small things that make that happen. And the way I explain this is, the bad news is, This is hard to do. The good news is, This is hard to do. And it’s a little bit like Wal-Mart. Does anyone not know what Wal-Mart’s strategy is? Everyone knows it. Low cost etc. But it’s how they do that strategy that nobody can duplicate. And it’s a bit like ours. Everyone sees the benefit of cross-selling now, but it’s very hard to do, so your competitive advantage is it’s a superior business model. A superior business model that’s easy doesn’t stay superior for long. A bad business model that’s hard is, of course, the worst thing you can do.>>[laughter] But a superior business model that’s hard to do actually is the upper right hand corner. You can have a competitive advantage for a long time if it’s a superior business model and hard. Q Just had a quick question. You know, you said you had already bid for Wachovia. There was a lot of coverage in the press, but what was the process?>>What process?>>Like bidding for Wachovia when Citi had already done so. And when the stock hit $7.80, or around that figure, did you ever think that it was a bad move back in March?>>Well, no, I guess, is the short answer. You know it gets back to what I was trying to say before. You know, the convention wisdom ? in my experience, if you only had two choices to make, follow the conventional wisdom or do the opposite. If you did the opposite you would be better off. I’m not saying you should do that, but I’m saying the conventional wisdom is wrong, in my opinion, so much of the time. But again, you got to pay attention to it, because there’s usually some truth to it. But you just have to have your own conviction. Come to your own conclusion. Do that quantitative analysis. Listen to your people. Forget ego. Do the right thing, and usually, it will be opposite or different from the conventional wisdom, and that’s how you do things. Again, when do you buy? You buy when things are great or when things are in trouble? And when do people buy? And this is not hard. If you have a cyclical business, if you just buy it here and perform on average, you’re going to perform a lot better than if you buy it up here. It’s cyclical. Almost all businesses are cyclical. So it’s things like that. So our market share and our acquisitions strategy has always been greater by huge degree in the so-called bad times. Q So you talk a lot about acquisitions and culture. How would you characterize the difference between Wachovia’s culture and Wells Fargo’s and what have you done to really sort of done blend the two cultures together to have a cohesive unit? A The problem that happened with Wachovia is, they started out as a regional bank and made a lot of acquisitions where the theory was ? and the former CEO, ______, basically said, ?I?ve got to get bigger to be better.? And that’s, as I said earlier in my speech, that’s very dangerous. And he bought things at very high prices, and got into problems. So then, they had to cut costs. Then, he decided to go into brand new businesses because they were fairly narrowly focused, saw the benefits or diversity a little late, and thought they had to catch up. And so, they went into investment banking. They went into the mortgage business at the peak of the cycle. And so, what happened is, they had a lot of problems that were caused by the failed implementation of a strategy, but the fundamental businesses were actually quite strong. They?re being masked by the mistakes they made, by going into the investment banking and trading, by going into the pick-a-pay in the savings business. They way-overpaid for certain acquisitions, and had to make that up by cost cutting and so on. And we know what happened, and all we’ve done is sliced off all the bad things ? we don’t do the things that got them into trouble. We are paying part of the purchase price of the difference between 90 billion and 12.7 is writing off all of the problems in their pick-a-pay portfolio, but the underlying people are very culturally similar, the businesses are very similar, and this will turn out to be the best deal ever done in banking. Q Thank you so much for joining us today. My question is, you mentioned earlier that you have a very keen focus on revenue growth and you also mentioned that you guys are expanding your other business lines, such as investment banking, but actually those two things in combination, many people said over the last five years, are precisely what led us into the crisis today, because retail banks were focusing on growing the revenue, diversifying all their risk on Wall Street, and that’s kind of how we ended up in the situation we had last year. So, how do you feel as a bank, you guys can move forward with those two things in mind and not face whatever the next crisis may be? A Well, as I said, I think the cultures that existed back then we wouldn?t have gone into investment banking. That has changed. Now, when I talk about investment banking, I’m talking about the meat and potatoes of investment banking, the underwriting, debt and equity, and so on. We did not do, and will not do the trading activities, the CDOs, the structured products. They didn’t make any sense anyway. So, but we couldn’t even be in the basic part of the investment banking, because of the cultures that exist, but it’s all gone now. So, today, we think as I said, we were probably in the top ten; now, we’ll be in the top five. Now, if that culture changes back to the old way, we will just wind that business down if we can’t compete. I don’t see that happening. I think this is a fundamental change that’s going to be around, if not forever, for at least ten years. And, if anything, I think the industry will move even closer to a culture like Wells Fargo than it even is today, and one reason that will occur is I think you’re going to have close watch by regulators in this industry for a long time. Even if they wanted to, they’re not going to be allowed to do it, other than going into an unregulated hedge fund or whatever, but it’s not going to be done through investment banking, in my opinion. We’ll see. Q I worked at Perella Weinberg, and was an adviser in the Wachovia-Wells Fargo transaction, and you guys really have something unique. And you spoke about choosing people was your key role I was just wondering if you could offer some advice as far as, when you?re choosing people, what were the key components or any advice related to that? A Well, as I say, most of our senior people are home-grown. We like to bring people in early in life, experience the culture, see the most successful ones, and promote them, etc. Mostly, outside people we bring in are through acquisitions. So again, we don’t bring a lot of people in that get into senior positions that haven’t been with us for at least ten years. So it’s kind of home grown is how we do that. And we want people who have great values, who are smart but do believe in teamwork, and really caring about customers and their communities and so forth. And we think that’s more important, as I said, than brains at the 99 percent level.>>[clapping]

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