While Bank of America (NYSE:BAC) CEO Brian Moynihan deserves credit for navigating the nation's second-biggest bank through its onerous legal debacle of the last five years, an even more formidable challenge lies ahead. For Bank of America to generate satisfactory shareholder returns going forward, Moynihan must distill a multitude of disparate, and in some cases mutually exclusive, operating cultures into a unified philosophy based on the principles of conservative banking.
The power and importance of corporate culture
While culture is one of the least-appreciated and difficult-to-quantify aspects of a corporation, there's a growing sense among academics and businesspeople alike that it plays a pivotal role when it comes to generating outsized shareholder returns.
"Most organizational scholars and observers now recognize that organizational culture has a powerful effect on the performance and long-term effectiveness of organizations," explained Kim Cameron and Robert Quinn in Diagnosing and Changing Organizational Culture, a leading text on the subject.
They based this observation on "an impressive array" of empirical evidence demonstrating the importance of culture in enhancing organizational performance. For instance, a 1992 study cited by Cameron and Quinn found that culture was one of the "major differentiating factors between high-performing companies at that time ... and a matched set of lower-performing companies."
To tease out the precise role culture plays, scholars break it down into two "dimensions." The "content" dimension assesses the specific attributes of a company's culture. Is it thrifty like Wal-Mart? Does it put a premium on hard work like Amazon.com? Is it innovative like Apple? The "pattern" dimension then incorporates these observations into an assessment of the type, strength, and congruence of culture.
The standard bearer of banking culture
When it comes to banks, few harness the power of culture better than Wells Fargo (NYSE:WFC), the nation's fourth-largest bank by assets. One could even argue, as I have in the past, that it has produced some of the industry's best shareholder returns over the past few decades principally due to its culture of prudence and thrift.
Consider these anecdotes from a 1989 profile of Carl Reichardt, the legendary chairman of Wells Fargo from the late 1970s until 1994:
Over the decades, the bank has always set up a big Christmas tree on the 12th floor where the executives hold forth. Last year Reichardt cut the item from the budget. It was a waste of money, he said, because so few customers ever made their way to the 12th floor. Several vice chairmen chipped in to buy a tree.
An officer of the bank wanted draperies for his windows. Reichardt called him in for a talk, and spent the whole time wiggling in his chair, pulling stuffing from a hole in the upholstery. The officer got the message.
Now compare those to a 2013 profile of Wells Fargo's current chairman and CEO, John Stumpf:
John Stumpf, a banker who earned almost $23 million last year, is cheerfully picking the stuffing out of a cracked leather armchair in his office. The chair, inherited from an even more frugal predecessor, is the most decayed of a worn set around Stumpf's conference table, a perfect set piece for his brand of subtle showmanship. He revels in his humble surroundings, proudly pointing out the "shabby" decor and rust-red carpet ("very '70s") of his yellow-lit executive suite.
Asked if Wells Fargo would ever upgrade its San Francisco headquarters or consolidate its scattered offices around the city into a gleaming flagship, something to rival Manhattan's spaceship-like Bank of America tower or its elegant new Goldman Sachs building, Stumpf scoffs: "That's not us."
Thus, not only does Wells Fargo's culture transcend organizational hierarchy, illustrated most vividly by the executive suite, it also transcends time, stretching back over multiple decades.
Bank of America's uphill battle/cultural dilemma
With this as a backdrop, one can get a sense of the scale and significance of the challenge confronting Moynihan. This follows from the fact that Bank of America, unlike Wells Fargo, either does not have a coherent culture, or the culture that it does have is grossly inconsistent with the principles of sound banking.
Keep in mind that the Bank of America we know today is still relatively young. Until two decades ago, banks were largely prohibited from operating in multiple states and engaging in activities that strayed too far from those of a traditional lender -- namely, taking deposits and making loans.
But all of this changed with the passage of two seminal legislative acts. In 1994, Congress repealed a long-standing prohibition on interstate banking. And in 1999, lawmakers abrogated a Depression-era injunction, better known as the Glass-Steagall Act, against the comingling of investment and commercial banks.
While these moves triggered a broad-based "arms race" of acquisitions and consolidation within the industry, no bank pursued growth more aggressively than Bank of America. After completing a "merger of equals" with North Carolina-based NationsBank in 1998, the combined entity went on a veritable shopping spree, more than quadrupling in size over the following decade.
The result of both the size and rapid succession of these acquisitions, followed in short order by the disruption caused by the financial crisis, is a banking behemoth that appears to be governed more by regional fiefdoms than by a unified command center operating out of the bank's headquarters in Charlotte, N.C.
The executive suite itself serves as a case in point. Prior to the crisis, Bank of America was ruled by the so-called "Charlotte mafia," a core group of former NationsBank executives led by then-CEO Ken Lewis. But beginning with Lewis' forced resignation in 2009, the locus of power shifted to a growing cohort of Boston-based executives -- most notably, Moynihan -- who survived Bank of America's 2003 acquisition of FleetBoston.
Moynihan punctuated his coup earlier this year with three key changes to the bank's management committee. In the first case, David Darnell, a holdover from NationsBank who had risen to co-chief operating officer at Bank of America, accepted a demotion that ostensibly allowed him to move to Tampa Bay, Fla., to spend more time with his family. Simultaneously, Moynihan added two new members to the committee tasked with running the bank: Dean Athanasia, president of preferred and small business banking, and Thong Nguyen, head of retail banking operations. Notably, both worked with Moynihan at FleetBoston.
All told, former FleetBoston executives now occupy five of the 13 seats on the executive committee, leading at least one prominent industry analyst to speculate that Bank of America might even consider relocating its corporate headquarters to Boston.
Filling Bank of America's cultural vacuum
The positioning and politicking, while certainly not unique to Bank of America, has produced a cultural vacuum in which the bank's least savory elements have flourished. They cheated retail and institutional customers. They defrauded the federal and state governments. They submitted forged documents in judicial foreclosure proceedings. And, most recently, they were caught manipulating bond and currency markets.
"This bank is like the world's worst-behaved teenager, taking your car and running over kittens and fire hydrants on the way to Vegas for the weekend, maxing out your credit cards in the three days you spend at your aunt's funeral," wrote Matt Taibbi only somewhat hyperbolically in 2012. "[A]nd on top of it all, they completely suck at banking."
It's here that Moynihan must now turn his attention if he has any desire to see Bank of America compete on a level playing field against the likes of Wells Fargo and other responsibly run lenders. Can he do so successfully? That remains to be seen. But either way, it's safe to assume that orienting the bank's 230,000 employees will be every bit as challenging as solving the legal debacle of the last five years.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, Bank of America, Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of Amazon.com, Apple, Bank of America, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.