Interview with John Allison
John Allison is the retired CEO and Chairman of the Branch Banking & Trust Corporation, 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 more impressively, while many top banks failed outright or received large bailouts during the recent financial crisis, BB&T remained healthy and profitable. Mr. Allison is currently Distinguished Professor of Practice in the Business School at Wake Forest University.
Kaizen: Where did you grow up?
Allison: I grew up in Charlotte, North Carolina but I moved between the 10th and 11th grades to Chapel Hill, and graduated from high school in Chapel Hill, North Carolina.
Kaizen: When you were young, did you think you would become a banker?
Allison: Not at all. I was interested in economics in high school but not in banking, per se.
Kaizen: What were your early career dreams when you were a kid?
Allison: I thought I would work for a railroad and maybe be a railroad engineer.
Kaizen: You went to college at UNC-Chapel Hill—how did you choose that school?
Allison: That’s an interesting story. My dad told me that since we were living in Chapel Hill, I could go to college here much cheaper. He said he would be glad to pay for me to go to Carolina. And he would be glad for me to go anywhere else I wanted to go to, if I wanted to pay for it. So I said, “I think I’ll go to Carolina.” We weren’t poor but he didn’t have a lot of extra money.
Kaizen: What did you major in?
Allison: That’s another funny story. All through high school I was very good at math and I was told by my teachers that I ought to go into engineering, because I was good in math. So when I went to sign up at the University of North Carolina, they asked me, “What you would like to major in?” I said, “Engineering.” And they said, “Well, we don’t have it.” I said, “What do you have?” They started down the list and when they got to Business Administration, I said, “I’ll take Business Administration,” having no idea what that meant.
Kaizen: Did you grow into it and enjoy it?
Allison: I did. I think I was very fortunate because I was really interested in the courses. They were much more interesting to me—even though I liked things like history and math—just in terms of what motivated me. I found the business courses very motivating.
Kaizen: At this point, what were you thinking your likely career path would be?
Allison: I got very interested in finance. I felt like I would enjoy something that was in the financial industry or finance-related, or something like that.
Kaizen: After graduation, you went to work at BB&T. Why did you choose that company?
Allison: Partly, I guess, by chance. I knew I wanted to get into the banking business. I interviewed with several banks. At the same time, what I really thought I was going to do was go work in the banking business for couple of years and go back to law school. I saw a connection between law and banking in the back of my mind. BB&T was to some degree more convenient as the headquarters weren’t that far away. It was a small organization where I thought I might make more difference in the short term, with going back to law school some day in the back of my mind.
Kaizen: Was BB&T in Winston-Salem at this point?
Allison: No, it was in Wilson, North Carolina, a small town in the eastern part of the state.
Kaizen: How big was BB&T when you started?
Allison: When I went there it was $300 million in assets.
Kaizen: While working, you also went to graduate school at Duke for your MBA?
Allison: I really liked banking and I did enough with lawyers to know I wouldn’t enjoy being an attorney. I decided to go back to graduate business school. I went to Duke, frankly, mostly because Duke gave me a stipend to go that helped me pay for it. Otherwise I couldn’t have afforded to go to Duke. I did the MBA in kind of a quirky way. I went to the full-time daytime program and still worked part-time and commuted from Wilson to Durham. It was about an hour-and-a-half commute. And then after the first year I needed more money. I needed to work more time. So I went back to work full-time for the bank and finished up in the evening program at Duke. It was tough.
Kaizen: Over the next sixteen years, you performed a variety of jobs at BB&T—manager of the financial analysis department, loan officer development program, regional loan administrator, then various others. Were you following a standard career path at this point, moving around and up in the company?
Allison: When I joined the bank it was so small there was no career path. Even though I went into a “management development” program there was no management development program, really. They just kind of shuffled you around in jobs. I was a teller and I worked as a bookkeeper, those kinds of things. It was a small organization, so I would call it both opportunistic and driven by a commitment that I made early in my early career.
People ask me: When I went to the bank did I want to be CEO? Did I want to make a lot of money? The answer is I love being CEO and I love making a lot of money. But these outcomes were never objectives of mine. My objective was to do whatever I did better than anybody had ever done it, and to enjoy it while I was doing it, and to see the connection between what I was doing and the rest of the organization. It was a learning experience. What happens, if you do something really, really well, is people will ordinarily give you opportunities to do other stuff. I never really thought about a career path. I never really compared with my peers. I was just really focused on excellence in my work. The attitude was, “Put me in, coach. If you have something that needs to be done, I’ll make it interesting.” That’s how I approached my whole career.
Kaizen: You came primarily from a finance background. Were you systematically exploring other branches of banking?
Allison: My core career was around the lending business. Then, as I moved up in the organization, I had more and more people reporting to me. Even in the lending business, the leadership or management of your lenders if you’re an “administrator” is very important in making good loans. I was evolving from a more technical perspective to a much more human-systems perspective in my whole worldview.
Kaizen: Then you were appointed president of the bank in 1987. You were relatively young at that time—39. Is that unusual?
Allison: Yes, very young. It is interesting as a background that, 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 then they were finally hiring some young people. In 1980, we had an unintended revolution, for lack of a better word, in that one of the guys who had been there a while decided to leave. He was the informal leader of our age group.
When he left several other young mangers decided to leave, because the organization was in conflict. 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.
Kaizen: Come 1987, what do you think the BB&T board saw in you that led them to select you as president?
Allison: 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 went from a stale industry to a rapidly-changing industry. We were deregulated in certain aspects; we were more regulated in other aspects. But interstate banking comes, branch banking comes in a lot of states, product diversification starts coming, and I think I was able to communicate to the board clearly what we needed to do to be more successful. I think they appreciated that.
Kaizen: What was the financial health and status of the bank at this time?
Allison: The bank was solid and way behind. It was financially sound but we were almost certainly destined to be acquired in the consolidating industry unless we changed our strategy. We weren’t making the investments that we needed to make to be competitive in the long term.
Kaizen: Two years later they also appointed you CEO and Chairman. What had you accomplished in those two years that led to those appointments?
Allison: It was an unfortunate event that caused that to happen. 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.
Kaizen: At age 41 you are CEO and Chairman of BB&T as a whole.
Kaizen: How big was BB&T at this point?
Allison: It was $4.5 billion in assets.
Kaizen: BB&T experienced explosive growth under your leadership. What were the major growth areas?
Allison: 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. Lots of thrifts failed. 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. They were getting killed by the negative publicity going on about the industry.
At that time, banks could not acquire thrifts. But it was inevitable that the law would change because somebody had to buy the thrifts or else even the healthy ones were going to be in trouble, because there was so much commotion in the marketplace and so much fear about the thrift industry. We actually announced the first thrift acquisition by a commercial bank literally before the law changed; it was executed after the law changed. And we rolled up lots of thrifts and we rolled up lots of community banks.
The other thing we decided to do was grow rapidly in the insurance agency business. Today we’re the sixth largest insurance distributor 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.
We also drove fast internal growth rates: we opened a number of branches and we developed a very successful sales process to drive the growth. And then we were expanding product lines through acquisitions of non-bank entities. We went into a series of businesses that have been very successful for us. We have a specialized automobile finance business where we have a very strong niche. We expanded our wealth-management capabilities by doing some acquisitions in that arena.
We did some venture capital investments, some of which worked out, some of which didn’t. We looked at small companies that were in specialty finance businesses—and bought the companies. We bought into about ten different companies and maybe half of them worked out. We were making a conscious strategy to grow our business in non-traditional banking areas. We had some home runs and we had some failures. We developed a number of very strong high-return specialized niches. For example; we are the largest provider of financing for snowmobiles and large lawnmowers in the U.S. We did acquisitions and grew those kinds of businesses.
We were growing our internal business through a sales system, doing mergers and acquisitions in the thrift business, doing mergers and acquisitions of community banks, and acquiring specialty finance businesses.
Kaizen: How did the typical merger come about? BB&T actively researching opportunities? Other banks being put up for sale actively?
Allison: 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 decided we needed to grow our business through mergers and acquisitions. In a consolidating industry, we knew we were going to get acquired if we didn’t grow. You can argue if it that’s good or bad but we wanted to be an independent company and our board wanted that, too. So, 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? Can we bring economic value? Can we pay a premium above their stock prices and it still be good for our shareholders?
And secondly we started a careful study of cultures: would this organization fit with our culture? There were companies that, on the surface, were well-off economically but we thought the cultural transition would be too much. Now, we would never have total cultural overlap, but there were people we knew that we wouldn’t fit with culturally. We took those companies off of our list as potential acquisitions.
There was a fellow working for me named Burney Warren, who really knew the banking business and had run a savings and loan himself. We would call on these companies in a very systematic fashion. We didn’t do any unfriendly acquisitions: “If you don’t want to sell to us, we will not threaten you. But here is why this might be good for you and your employees and your shareholders.”
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. You can’t make an acquisition work for everybody in the acquired company, but you want to make it work for as many people as possible. That’s why it is going to work for you. So we focus a lot on the human systems.
The main reason people fail in acquisitions is because they aren’t trained to do their new job. We operate our own university and we developed a very systematic process, literally from day one, about how you train up the employees and how you improve the probability of success post-acquisition. The day we announced a merger, I would go and talk to at least all the officers, and all the employees, if it was a smaller company, about the BB&T culture and about our strategies, but mostly about the culture what it looked like to be successful at BB&T. So, we were doing cultural indoctrination and training from day one, selecting people who generally had a cultural fit with us anyway.
Where we sometimes weren’t aligned was in regards to rewarding performance, and it’s the number one reason I think some of these companies weren’t successful. At BB&T we consciously believe in justice—those who contribute the most get the most. Measuring performance is complex, but the goal’s very clear. A number of the smaller companies we acquired were very paternalistic. What that meant is they weren’t really rewarding their highest performers and they were tolerating non-performers. We consciously said that if you’re a high performer, you’re going to do really well. If you’re a non-performer, this is probably not going to work out for you unless you change your performance. We’re going to give you the opportunity to change. We’ll train you and give you the opportunity to become a performer. But if you chose not to become a performer, we will not tolerate non-performance. So, we achieved a great selection process; the better people stayed and the people that weren’t so good left.
Kaizen: Before the M&A, you would look at the financials and at the cultural fit. How do you tell the cultural fit from the outside, before the acquisition? What markers are you looking for?
Allison: Well, you can do it in a variety of ways. One, if you’re competing against them you can observe their behaviors. Secondly, you can read their financials. They put out annual reports and they say what’s valuable to them. It’s surprising, if you get rid of the numbers and starting reading through the other items in the annual report, you learn a lot about culture. Thirdly, you meet with them and talk to them and ask them what’s important. And, finally we would always get them to come to BB&T and we would tell them what our culture was about. They would visit and I would spend 75 percent of my time talking about what the culture at BB&T was, with the context of saying that if this doesn’t fit with you please don’t sell to us. If you like this and you think this is something that would make your employees happy and your shareholders happy, then you should think about selling to us. But I don’t want to convince you to sell to me if this culture isn’t what you want to do, because it won’t work for us.
Kaizen: In 1995 BB&T merged with the roughly equal Southern National Corporation, which means you doubled in size. What was that merger experience like?
Allison: That was a very interesting merger. It was a merger of equals of two companies that were about $10 billion each and had about the same number of employees. It was by far the hardest merger to execute but economically it was the best merger in our history. The way it worked economically is we had a lot of overlapping operations so there were huge cost savings. The dilemma was that the cost savings looked like lost jobs, which is a challenge to deal with.
We made several important decisions. Part of the deal was I was going to be Chairman and CEO of the organization, and therefore the culture had to be BB&T’s culture. I couldn’t change who I was. And the whole culture was consistent with my beliefs because it has to be; you can’t have a culture different than the CEO’s beliefs. It won’t work. So, that was part of the deal. The good news about that: the employees of the company we were merging with, when they really understood our culture, thought it was better than the one they had. There was a natural drift toward our culture.
The second principle was to be as equitable as possible. The way that worked is we were going to get the best person for the job. But, in truth, in a large organization there are a lot of ties, i.e., equally qualified job candidates. Where there were ties, we were going to try to create balance. And we would do that partly structurally, by where we geographically located operations. Because, practically speaking, many people aren’t going to move. So, we ended up with three operational locations that helped deal with the ties and for people that wouldn’t move.
Southern National had moved to Winston-Salem. So they were technically headquartered here, but they’d only moved here a couple of years before and most of their backroom was still in Lumberton, a small eastern North Carolina town. So we decided as part of the deal headquarters would be in Winston-Salem. We also were going to do our best to make long-term economic investments that would be as minimally disruptive as practical to our heritage cities of Wilson and Lumberton. So, we put our technology center in Wilson and we put lot of our backroom processing—collections functions—in Lumberton. Of course, at the time we did the merger, everybody thought we’d kill these communities. However, I am convinced we have more jobs in Wilson and more jobs in Lumberton than we would have had if we tried to stay independent, because both companies would have gotten bought and these operations would have been gutted. But it also helped deal with the human systems because we created opportunity.
Ten years after the merger, we went back and measured how many employees from Southern National were still working for BB&T, and how many employees from the original BB&T were still working for BB&T. It was almost exactly the same number. So, we had kept our agreement and employees know that. They know it’s going to be tough, but there’s a sense of equity. We still got the best people to do the job but there are many ties. And also how you design systems impacts those outcomes because people make location decisions, which is fine. So, we designed an outcome and I think that’s what made the merger equals work: (A) we were clear about what the culture was going to be and (B) we did our best to create equity.
Kaizen: As BB&T grew, did managing large numbers of people come naturally to you, or was it something you had to work at?
Allison: It’s something I worked really hard at. I am naturally mathematical, analytical. I’m good at numbers. 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 a short period of time, three or four months, and I had a secretary I was working with. She was also helping other managers. She was a young lady; she’d just come 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.
And then I worked hard on two fronts. One, I studied philosophy as a hobby. Now that sounds crazy, but I was searching for my own core values. I had a mix of values from growing up, but I really didn’t have them integrated, I didn’t have them consistent. I specifically studied Ayn Rand’s works, but I also studied Aristotle and a number of other philosophers in that process. In a search, not really to run an organization, but for personal peace. I felt like if I was at harmony with my own values, instead of having a lot of the conflicts that I inherited through my youth, that I would be more successful.
And then the other plane, which I think very few business people spend enough time on, was personal self-awareness. It happened almost by chance. I went to a seminar by a company on self-awareness. It was very powerful for me and we ended up buying the company; we still own it to this day. And all of our senior managers go through a self-awareness process. In the self- awareness process, what you do is look at your subconscious emotional beliefs, which are premises that can interfere with your rational decision making. You think you’re rational, but you’re actually coming from some subconscious irrational premises.
I’ll give you an example. In my case, what was really clear to me after going through this self-awareness process is I believed I was not good enough. It came from my relationship with my mother where I’d get all A’s and one B and all I would hear her talk about (in fairness to her) was the B. So, I’m not good enough. Being not good enough is not all bad. That actually motivates you to get better. But it’s certainly not all good, because sometimes you literally can’t hear: you get very defensive when you do get a B. You can’t be objective about it. I pursued self-awareness for years—I’m still pursuing it to some degree—helping me look at my subconscious emotional premises, largely developed as a child, and to align those premises with rationality. The goal was to make my emotions reinforce what my mind would decide, instead of my emotions making me make the wrong kind of decisions. I think I made a lot of progress.
We also did a lot of teamwork around this concept. One thing I learned was that, when I said something, people were hearing something different, and I was hearing different things than what they meant because I was looking through my filters and they were looking through their filters. The goal was to get the filters down to help people be more rational. This was not anything magical, but it was powerful.
I use the analogy—it’s not a perfect analogy—that we’re really like computer programmers. We’ve been writing programs in our own minds since we were very small. And a lot of those programs were all screwed up because we are writing them as children. You’ve got to go back and rewrite the programs. Human beings don’t want to do that. It’s hard to do because it’s painful. But if the programs have some flaw in them, some conclusion you would never arrive at as an adult, the old programs create blind spots in your thinking.
I spent a ton of work, first, getting my personal values clear so I that I had an integrated philosophy. I had integrity in a systems sense, and my beliefs were consistent. And then, secondly, trying to help myself think better, not in a raise-your-IQ sense, but eliminating the blind spots in my thinking process and helping the people who work for me do the same and learn from each other in that process. Those things had very high paybacks.
I think most of the really bad management decisions are acts of evasion. Evasion occurs when somebody is presented with some piece of information that on some level or other they know needs to be examined. However, they don’t want to examine it because it threatens something they believe about the world, or something they believe about themselves, and they literally don’t hear it. The really bad decisions are often acts of evasion.
Kaizen: 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?
Allison: 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. The integrating event occurred when we did our merger of equals. I wrote the BB&T philosophy booklet, which we use to this day. It’s an integrated world view. I wrote it but it was edited by Leonard Peikoff, who is Ayn Rand’s intellectual heir. Leonard’s book, Objectivism: The Philosophy of Ayn Rand had enabled me to fully integrate my world view for which I owe Leonard a great debt. Our executive management team bought into the philosophy because it was a clear foundation for future success.
The BB&T Philosophy has two critical characteristics. First, it works in the real world. If you look at a lot of business value statements, they are full of clichés—often altruistic, which they cannot live in a free market. That creates cognitive dysfunction among their employees. They’ve got this value statement but the employees know it’s not real so they’re trying to figure out what the values really are. The second thing is that the BB&T Philosophy is integrated. There are no inconsistencies in our philosophy statement. Unfortunately, many people have contradictory beliefs. The BB&T Philosophy works in the real world and is integrated.
We put it in writing which all our employees read. As CEO, I made speeches often to our employees, where I talk about our philosophy and try to take it from a general statement to concretes: Here’s how our philosophy is applicable in this real world situation. The core of our philosophy is that the most important human resource, the only true natural resource, is the human mind.
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? Given BB&T’s philosophy, how do you do this? It’s not just, “Here is how you push the buttons.” What is the implication? Obviously, the level of intensity varies with the complexity of the job but it’s built into all our training processes.
This is interesting, we have this philosophy that encourages people to think independently, but your people still need processes. You can’t expect everybody to reinvent the wheel. So we develop processes that help you reach optimal performance if you chose to do so, and then the individual employee can operate in a broad range consistent with our philosophy.
For example, we are very sales-oriented. The sales system requires, in certain jobs, that you make at least ten outbound calls every day. We train you how to make those calls. But within the context of having this behavior that’s required in this job, we give you a huge amount of flexibility once you understand the concepts. Another example: our branch managers have actual lending authority. At most other banks the loan officers just fill out a form for a centralized decision. At our competitors, the branch lender does not have the authority to make loan decisions.
To allow employees to operate autonomously, you have to train people a lot better. And all that’s part of the culture. If you have a culture that says people should think independently, then you have to define the rules. What does that really mean? You can’t violate the law, and you also have to be consistent with the culture, but we encourage you to be innovative within that context.
So all of that is part of the cultural indoctrination. It’s not a haphazard process and it’s not just about talk. You have to outline the principles and then convert the principles into realty for people and then, number one, you have to live the values. You must act consistent with your principles.
It is hard and easy. Easy, in the sense that we are a principle-driven organization. Everybody understands that. When you’re a principle-driven organization there will be times that you will sub-optimize short-term performance, but it will always be good for the long term if you develop your principles properly. 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 fired them that day. 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? We actually haven’t had that many people leave for violations. But I think because we always acted consistently with our values, our employees lived our culture.
Kaizen: During your tenure, there were many revolutionary technological changes in banking and finance—computerization, ATMs, the proliferation of credit and debit cards, online banking, and so on. Did that factor in BB&T’s growth?
Allison: 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 than he did it 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.
We are a quality oriented culture—we have a sales culture but we also have a very high quality service commitment. We think that sales and service are integrated. Every time service quality is measured by outside firms, we’re much better than our competitors. If I’m providing you really good service, the fact that some other competitor has some new technology that you know we will introduce when it’s the appropriate time, you’re not going to change banks.
We built this culture around a very high value proposition for the client. We weren’t the cheapest price, but we had the best service and we had the best value ratio of quality-to-price. It was measurable and we were a lot better. Our clients were a lot happier. And because of that, we didn’t lead with technology but we always adopted it as soon as it got working. Our online banking now is better—I think there’s a lot of evidence of that—than Bank of America’s. But we were a little late—on purpose. A close follower strategy.
Kaizen: The technologies I mentioned above are ones obvious to me and others as consumers—were there other major technological shifts that impacted banking behind the scenes?
Allison: There were massive changes in the backroom operations of the bank that the client would not see, in the clearing process and all that. But again we just tried to be a close follower. We didn’t try to lead with technology. And it’s interesting—the banks in our size category that tried to be technological leaders, all of them were unsuccessful. The clients are not technologically driven; the clients in general are not early adopters of technology, in our business. You have to lead them to online banking and then they like it; they just aren’t early adopters.
Kaizen: In 2004 you put BB&T’s growth on hold. Why was that?
Allison: 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. That enabled us to do mergers with companies and send in just a couple really good people to make that company better. We wanted to keep the talent from the company we were acquiring, but we had to have a couple of BB&T trained leaders who could operationalize our culture and could also operationalize the contact with the parent organization.
But we were doing so many mergers and acquisitions that, even though we had invested heavily in leadership development, we out-ran our own internal investment in people. Also, we were to some degree outrunning our technology. When we did a merger, we would fully integrate that merger with our existing systems, and we were outrunning ourselves. We called it “indigestion.”
Even though we were really good at the merger business, one thing that many companies make a mistake on is not realizing that mergers, in the short-term, always make you worse. If your own systems aren’t running well, believing you can buy somebody else and make you better is a mistake. If our own systems aren’t at perfection, or as good as they’re going to get, then don’t do a merger, because you will screw up the whole organization trying to integrate the marginal merged assets. We kept checking ourselves and we wanted to be sure our internal operations were running very well. We decided our own systems were not optimizing so we decided to stop doing acquisitions.
Kaizen: After a few years of digesting, so to speak, by 2007 how big was BB&T in terms of assets?
Allison: BB&T was probably about at $135 billion.
Here is where an interesting thing happened. During this period when we were out of the merger business, we really started to focus on driving internal growth. We started building more new branch offices and we looked at the past acquisitions we had done and decided to optimize these acquisitions and focus our organizational energy on internal growth.
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. These community banks were selling for higher prices and had lower quality. We would review our models and we chose not to do acquisitions.
We had many banks who wanted to sell come to us, as BB&T was a preferred acquirer because of how we handled the human systems. We were able to refer potential merger partners to the companies we had acquired in the past. “Did we do what we said we were going to do?” And we did because we always kept our agreements; we were just meticulous about keeping agreements. 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 for these banks, and the company’s quality had deteriorated. Some of the Midwest buyers that got in trouble were aggressive buyers in Florida for companies that just weren’t that good. It was hard on us, though, because at the time financial analysts wanted us to do mergers because we had been successful in the past. However, we could not figure out how to make the mergers work.
Kaizen: You are looking at the financials, and you’re looking at the cultural fit. Was part of the decision about where to merge driven by geographical concerns?
Allison: Sure. The financials will be driven to some degree by growth markets. Strategically we think it’s more important to have strong market shares than to have a large territory. So in every market we entered, our goal was to have strong market shares until we reached a practical market share limit under the anti-trust laws, and then we would push out. But we always pushed out contiguously and logically.
I am a model railroader and a casual railroad historian. The only transcontinental railroad in the United States built in the late 1800’s that made any sense was the Great Northern, built by James Hill. And what did he do? He built a really logical franchise; he built where it made economic sense, instead of just building the railroad based on government incentives. All of the intercontinental railroads that were government subsidized were economic disasters. We built our franchise very logically. We wanted to remain independent but we wanted to be valuable at the same time. So, we were a logical buyer and we were ready to go to Florida but we looked at it and said, “Wow, these prices make no sense and, boy, is this a frothy real estate market.”
In retrospect, that seems easy. At the time it was hard because we were perceived as a successful acquirer and 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 predicted were right. The way financial models work, you can tweak the assumptions and have any outcome you want. It’s true about almost all mathematical models. We refused to fudge our assumptions because we knew we would just be misleading ourselves.
Kaizen: So from 1989, when you became CEO, to 2008, BB&T went from $4.5 billion in assets to $152 billion in assets—an increase of over $147 billion. From the outside that is extraordinary. Did it seem outstanding to you as you lived it?
Allison: Yes and no. This is hard for some people to understand. We never had growth as an end in itself. I think companies get into trouble with too much focus on growth. We decided we were going to do everything we can that makes BB&T better. So we’re only going to do acquisitions that we believe will make BB&T a better organization. In a rapidly consolidating industry, however, there were lots of opportunities out there because that’s exactly what the economics of the industry are driving you towards. We were experiencing extraordinary growth on multiple fronts: on the banking front and on the insurance agency front, exponentially, and some of our smaller businesses were growing very rapidly. So, in some ways it felt extraordinary.
But we had invested very heavily over a long period of time in quality leaders. They understood our culture, they understood our value system, and we evaluated their performance and promoted them very carefully. We were able to allow those people, within the context of our culture, to have a huge amount of relative autonomy.
For example, the man who took over our insurance agency system, Wade Reece came out of our banking system. He drove the insurance operation. He made it work. We were, at a macro level, responsible for it and hopefully we were helpful to him doing it, but we gave him the authority to do it and allocated capital for him to do it. And the way we were running our community banks, we had really strong community bank presidents. They had a much higher level of authority than our competitors. There were some control systems but the community bank presidents were driving these community banks. We were able to implement a rational, rapid-growth strategy with a lot of high-quality, culturally integrated individuals driving the outcome. The stress of growth—I don’t want to say it wasn’t there—but it wasn’t killing me as a CEO. If we hadn’t had really good people that we spent a long time developing, we couldn’t have done it.
I did shift a lot over that career period to cultural indoctrination. I always thought culture was important. But later in my career I spent a huge proportion of my time communicating about values and getting feedback.
For example, one of my roles was protecting our community banks. As organizations get bigger, there’s a natural drive towards centralization. One thing, you get smarter people in your centralized functions. And, two, if you are running centralized functions, you hate deviations. It’s analogous to government control. Centralized systems are a natural process because elitists consolidate power—they don’t think of themselves as elite—these are well-intended people who like to run their system and they hate deviations. I had to become the defender of our community banks. I had to constantly go back to the home office to people who were really good people and say: “Yes, I understand that this makes your job harder but here are the benefits of having this localized decision-making: We get better information, we get faster decisions, we understand the market better.”
One reason we had a lot less credit problems in the financial crisis (not that we didn’t have problems) than other banks is we had much of our authority in our community banks. We had better information, and that’s non-trivial. The community bank presidents also were held very responsible; they owned the process. As the company got bigger, I gained the ability to focus on culture and strategies that flow from that culture and reinforce the process, instead of actually managing the day-to-day operations. I became more and more consciously detached from the operational side of the bank, on purpose.
Kaizen: Successful people typically are very good at learning from mistakes. Looking back, did you make any significant mistakes along the way?
Allison: Many, many mistakes. The ones that mattered and hurt the worst were misjudgments of people, where I thought somebody either had better character or was more competent. I had something happen early in my career: a man I really had a high regard for and considered a good friend embezzled from the bank. Those kind of mistakes—misjudgments of people.
I tell this story as a concrete example; it’s an interesting story. Early in my career I was primarily a farm lender and BB&T was mostly a farm bank. We were big in the agricultural business and we were big in livestock operations. I had made a number of big livestock loans. One of those loans was to a large hog operation. The hog business is an interesting business: you either make a lot of money or you lose a lot of money. The hog producers grow one too many hogs and prices fall. Once they start making a lot of money, they are tempted to raise too many hogs. It’s a very cyclical business.
We had this client who had been successful in the business but, even during his success period, he did some things that I really should have paid attention to—character-related actions. Times got tough in the hog business. One afternoon, he walks into my office and he slams down this big wad of keys and he says, “Son, they eat at five,” and he leaves. This is at 4:00 in the afternoon.
I got in my car and drove down to this hog operation, as if I knew what the heck I was doing, with nearly 10,000 pigs. And I’m driving around and looking at the pigs, thinking, “What am I going to do?” And then it dawned on me that the owner didn’t actually feed the hogs; somebody who worked for him fed the hogs. So I ask around and somebody at the filling station said whatever-his-name-was down the road feeds the hogs.
So, I drive down to “Tom Brown’s” house and knock on the door and say, “Tom, are you the one who feeds the hogs?” And he said, “Yeah.” And I said, “We need to get the hogs fed. Would you do that?” He said, “Hell, no!” And I said, “Why not?” He said, “They didn’t pay me.” I said, “How much do they owe you?” I can’t remember what it was $100, $200. So, fine, I wrote him a personal check. “Go feed the hogs.”
And the learning experience was that character is huge and if character deviations are happening in good times, they’re going to be really bad in bad times. So if you get any character warnings, don’t ignore them. This particular individual with the keys was smart but I had enough character warnings. I learned the importance of character experientially. You can run all the mathematical calculations, but character is more important. This man could have gotten through the cycle on the surface, but it was going to be hard. He didn’t want to do the hard stuff.
You lend money to people. Yes, the mathematics matters, but character is more important. The man who embezzled from the bank was the same kind of story in that there were some signs that I ignored because he was a friend of mine. You can’t do that.
Now, we also did some crummy acquisitions. We bought some companies we should not have. Here is an example of a double learning experience that ironically worked out to be a great deal for us. We acquired a subprime automobile finance business. That sounds bad but it’s actually a very legitimate business because you’ve got to have a car to go to work. We bought this business at a time when it was doing very well on the surface, and then it became a disaster because they had been underwriting credit risk poorly. We took whopping losses.
Now here was the lesson: We were trying to experiment; that was legitimate. But if you go into an industry and you don’t know anything about it, the seller knows a lot more than you. You need to be doubly skeptical and try to understand his motivation for selling. And also, be sure you put in some kind of earn-out over time, so you don’t give all the money on the front end, so he’s concerned what happens after the acquisition.
But the other lesson was interesting because, at the same time, a number of our competitors bought into similar businesses. They’d run the business into the ground and exit it. We chose to stay in this business, get really talented people in the business, and gut it out because it was a legitimate market if it was done right. And now it’s a very profitable business for us because the other competitors exited the business. And it serves a legitimate need. Subprime’s got such a bad name, but there are low-income consumers who need finance, right? And it can be done right: good for them, good for the bank. And so, instead of abandoning the business, even though I made a dumb decision on the price we paid for it, etc., we decided to fix it. And that was another interesting lesson.
I think you have to learn from your mistakes but you have to try to learn the right lessons. Ask yourself why you made that mistake, what was it that drove you to make that mistake, and then, given that it’s a mistake, what is the optimal action from here? Just because it was a mistake doesn’t mean that the optimal action is always to quit. Sometimes it is and sometimes there are other options.
Kaizen: How do you tune yourself or train yourself to be aware of character flaws and not block them out, particularly when it’s a personal or at least a semi-personal relationship?
Allison: I think number one is to become more self-aware, because a lot of times somebody may be feeding you what you want. They figured you out. They figured out what motivates you, so they give it to you. When, in fact, there’s actual behavior going on over here that you observe, different than what they’re saying, not necessarily in relation to you but in relation to other people, and you’re choosing not to see it.
Classic thing that you see managers miss: some people manage up very effectively—they do a good job of feeding the boss what the boss wants to hear—and do a terrible job of managing down. It is better to get rid of those type people quickly when you identify that’s going on. The way you do that is, either systematically or periodically, you go talk to the people working for them in a way that will disclose that characteristic. Their behavior is a form of lack of integrity, if you think about it—if they’re managing you differently than the person working for them. The truth is that the people that matter are the people working for them, not you. Making the boss happy is not going to produce revenue. Making the people who work for you happy, that’s how you produce revenue.
Kaizen: Your career is focused on money and, as you know, our culture has wildly different moral 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?
Allison: 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. In a broad context, I view money as positive.
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 not an end, it’s a means to an end. The end is happiness in the Aristotelian sense of a life well-lived. Pursuing money as an end can be very detrimental because it can allow you to do pragmatic things that are destructive and inconsistent with things that you really believe are more important. So, yes, there’s nothing evil or bad about money in a free market. Money is a just reward for productive work, but it’s in the context of the pursuit of happiness.
In business some people are so obsessed with money and getting it any way they can get it, including manipulating the government to get it, that they judge themselves and others by how much money they have, even though they haven’t really earned it. It’s the earning of money that’s valuable versus the getting it and having it. And I think that’s where the criticism of capitalism sometimes comes from—the critics don’t realize it’s not capitalism that’s creating the problem, it’s the government interference in the market that is unjust.
Corrupt businessmen will be punished in a free market. Unfortunately, the government fairly often saves poorly-run businesses in the name of the public good. Citigroup has failed three times in my career. Each time the government has saved them and they have become bigger and worse.
I’m proud of the money I earned. I make no apology for that. I think it’s an indication of my productivity. But on a moral level, it doesn’t make me necessarily a better human being than other people that have made less money. You can argue about capabilities, you can argue about chance; there are lots of things that enable people to make money. And I know some people who haven’t made a lot of money that I consider to be morally superior people to some people who have made a lot of money. So, yes, money is a great indicator in a free market. Yes, it’s a good thing, but you can’t judge people morally just by how much money they make. In fact, I know some people who made a lot of money through legal means that I wouldn’t justify morally. So money is not a moral answer in the final sense of the word.
Kaizen: 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?
Allison: In a certain sense this was both 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 of them would move their business from BB&T because of our decision. On the other hand, given our whole value system and given the purpose we have in our organization, 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.
First, I didn’t realize how badly eminent domain was abused even before Kelo: horrible stories that people sent me. And second, 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.
One other story about this is both sad and interesting. I had two CEO’s of large organizations whom I had known a long time who called me shortly after our announcement and they both said almost the same thing. They both said, “Look, John, what you’re doing is really good. Congratulations on doing this. Very nice.” And then I said, “If you feel that way, I assume your organization will do it too.” And they said, “Oh, no, we never take positions on public policy.” I found that very interesting. In other words, we don’t act on principle. At least that’s what I interpreted it to be. Interestingly enough, both CEO’s ended up being fired later on. I don’t know if there was any correlation, but maybe.
Kaizen: Turning to the 2008 crisis that devastated many major financial businesses. BB&T weathered the crisis well. Was that because you and other BB&T leaders saw trouble coming and were prepared for it, or was it because BB&T was fundamentally sound and able to adapt quickly or otherwise ride out the storm?
Allison: I guess some of all. We knew the market was frothy. We also had always run a sound bank. But primarily it was because of our culture, our value system. Our value system enabled us to avoid a lot of the problems that other banks got into, because they weren’t consistent with our long-term beliefs. And because of that we weren’t doing a lot of things that some other people were doing. So, that’s really what protected us.
I was fortunate that I was a long-term CEO. I have more empathy for the CEOs who made mistakes than a lot of people do because, when times were booming, the people doing the dumbest stuff were getting rewarded. Their stock prices were better, the market didn’t see through it, and the feedback—Why aren’t you doing what Wachovia’s doing?—was very strong. When you have to say, “Look this is how we run our business, this is a long-term perspective. We believe that some of these things that are going on are going to be detrimental. I can’t prove that to you. It might be ten years before it happens, but we run our business based on principles.”
We were very fortunate to be largely owned by high net-worth individual shareholders. High net-worth individual shareholders are willing to listen to the principle argument because they’re mostly smart people who made all of their own money and they appreciate that principles matter.
One of the challenges in our economy today is that many institutional shareholders are very short-term. A long-term perspective would be 90 days for some institutional shareholders—very short-term oriented. Principled action is difficult. My only answer to them was that this is how we run our business and if you don’t like it, sell our stock. We’re not going to change because you want us to maximize short-term results.
Kaizen: One of the factors was BB&T’s decision not to underwrite sub-prime or other marginal mortgages. Such mortgages could have been profitable to BB&T in the short-term, right?
Allison: One of the most important products we avoided was called the negative amortization mortgage or the “pick-a-payment” mortgage. The pick-a-payment mortgage was not a true sub-prime mortgage. It was actually targeted towards young people who had high income potential in the long term. It enabled them to leverage themselves up in the real estate market.
A simple example: if the interest expense on a mortgage was $1000 a month, in a pick-a-payment mortgage you only had to pay $500 dollars a month. So every month you owed more on the mortgage. But the big factor is you could qualify at the minimum payment, at $500 instead of $1000. So, you could buy a much bigger house. These mortgages were very popular in fast-growth markets—southern California, southern Florida—where the theory was to buy as a big a house as you can, and in five years refinance it. You’ll owe more but the house is going to appreciate. We didn’t foresee the demise of the real estate market near the magnitude that did happen, but we knew home prices after appreciating for many years were not going to appreciate at 15 percent for perpetuity. And we knew that we would be setting up a lot of young people to get in trouble if we made negative amortization mortgages.
One of the fundamental commitments in our mission is to help our clients achieve economic success and financial security. We believe in the trader principle: value for value. We have a moral obligation to help you be successful and I expect to make a profit doing it. I’ll tell you that. I’m not going to do it for free, but I’m never going to make a decision that I consciously think is bad for my clients. I might be wrong, but I’m never going to make a decision that I believe is bad for my clients, even if I can make a profit in the short-term, because it will always come back to haunt me. So, at the time we could originate and sell these mortgages, and they had great spreads, they were very profitable on the surface in the short term, and we were criticized for not doing it.
But here’s an interesting thing. I didn’t personally make that decision. I would have made that decision, but the man who runs our mortgage department, Tim Dale, made that decision because he understood the culture at BB&T. He believed that these pick-a-payment mortgages were not consistent with our values at BB&T.
We had mortgage originators who left us and went to work for Countrywide, because if you’re a mortgage originator a pick-a-payment loan is the easiest product in the world to sell. You get paid a bigger bonus. We were glad they left in the sense we do not want people working for BB&T who are not committed to treating our clients fairly.
By the way, one interesting thing, and this is relevant to this crisis. I am very critical of Countrywide and Golden West who offered this product. But you can’t absolve the clients of moral responsibility, either. We had plenty of clients who came in and we told them this is a bad product for you. What you ought to do is buy a smaller house put 20 percent down, and get a 30 year fixed rate mortgage. And they said they wanted to buy a bigger house—I’m going over to Countrywide! Now they’re broke and they deserve it. I do think Countrywide outsmarted some people, but on the other hand there were a lot of consumers who consciously made this decision and should have the negative consequences. We shouldn’t be bailing them out in any sense of the word. It’s a mutual error, a mutual self-destruction.
Kaizen: 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?
Allison: I was personally adamantly opposed to TARP. Particularly—this is a little complex—as it was originally presented. Remember, it was going to be a big buyback of bonds. It ended up being an investment in banks but, just structurally, I knew that the buyback of bonds wasn’t going to work. In addition, 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 conscious public policy. Ben Bernanke, the head of the Federal Reserve, is a student of the Depression. And he thought this was 1930. Now certainly there are lessons to learn from the Depression, but this was not 1930. It was a very different kind of financial problem. It was a back-room problem; it wasn’t a consumer-led run on banks, like in 1930. In the 1930s, when they tried to save individual failing financial institutions, it didn’t work.
So Bernanke is faced with three large financial institutions that are on the verge of failure. But he doesn’t want to specifically bail them out because he thinks the market will jump on them. But he believes if he can get all the $100-billion-dollar banks to participate and call it giving money to banks to make loans, the market will just say that the Federal Reserve is acting to protect the market and not individual institutions. It was very important to get the large ($100 billion and over) healthy banks to participate or else it wouldn’t work. Hence the strong arm to put the healthy banks in TARP. And the same thing happened to several of the other healthy banks: they were pushed into TARP.
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.
Kaizen: As banking and finance continue to evolve and innovate, where do you think the next significant opportunities will be?
Allison: I think the industry really has a big problem with the Dodd-Frank financial bill. It imposes massive regulatory controls on the industry that are even more unpredictable than the current rule. One of the biggest challenges is “consumer compliance,” which is not actually consumer compliance —it really gives the Federal Government the authority to allocate credit, to control products and services.
It’s unpredictable to me how they’ll use this power in the short term, but predictable in a longer-term context. Right now, because of this recent crisis, if anything they’re going to make it harder to get credit to lower income-people. That’s what they’ve done with tightening up the credit card standards. But five years from now the politicians are going to be unhappy, and the politics will be to get credit to lower-income people. And they’re going to force us to do what they already did in subprime home lending, which will be to force banks to make subprime consumer loans. This bill is a very big threat to the industry and the economy.
Under the bill, there are five financial institutions that are too big to fail. They’ve got an implicit government guarantee. In fact, the rating agencies will tell you that. For example, Citigroup’s credit rating would be much lower than it is if there wasn’t an implicit guarantee. There is going to be a scramble to get into the “Too Big to Fail” category because it gives you an implicit government guarantee; so it’s going to spur a lot of consolidation in the industry. It’s going to be really tough for community banks. Some community banks will make it but it’s going to be a really tough environment for community banks. And there’s probably going to be almost nobody in the “middle size” category because you’re either going to get too big to fail and have this implicit government guarantee, or you’re going to be in limbo.
Kaizen: So the direction then is further consolidation among the biggest of the big banks and those will, whether they’re doing sound things financially or not, have an implicit government guarantee, so the whole system is going to be much more centralized and unstable?
Allison: You would think regulators should want a diversified system because then, theoretically, that reduces the volatility. In practice, they will consolidate the system because it’s a whole lot easier to regulate a handful of large competitors than it is to deal with all these messy little banks. I can’t say it’s a conscious strategy, but it seems like a conscious strategy to encourage consolidation in the industry. And the anti-trust laws are often used—in a practical sense, to encourage consolidation.
We had a concrete example a few years ago when we bought a small bank in the mountains of North Carolina. We had to divest a $25 million branch, a small branch, but the regulators allowed Wachovia and Wells Fargo to go together to create a $1.5 trillion company with no divestiture. We’re big but we’re not as big as those guys. One way we can compete against them is that we have dominant market shares in second-tier markets where we can drive more efficiency and better quality in those markets. So if you force us to divest in those markets by an arbitrary mathematical formula, it’s harder for us to compete with the Wells Fargos.
Kaizen: After seeing BB&T through the crisis, you retired at the relatively young age of 60. What led to that decision?
Allison: I’ve had a lot of people ask me that question and 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. In fact, it’s very common in businesses to see a long-tenure CEO leave and his successor does a poor job. I think the reason for that is it’s hard for a successful CEO to keep the talent that is needed for the future because he really likes running the business. I think a CEO ought to be judged five years after they leave. One of their obligations—they can’t totally control it and they can’t control 20 years out—is that they ought 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.
In addition, there were five of us who built BB&T together. We’re all in the same age group, we worked together, and we’d all been in the job a long time. It’s hard being on an executive management team in a rapidly-growing, big organization. It’s fun, but it’s also tiring; it wears on you. It was clear that all but one of us wanted to retire relatively young and we were going to have a compressed group retirement time period. So we had to have a plan to deal with that. 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 maybe they’d been with us 20 to 25 years and 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; it was a five year 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. I think you have to have a purpose until you die. I didn’t want to go play golf. In fact, my wife says I flunked retirement, and that’s fine. I wanted to do something different but I didn’t really want to quit.
Kaizen: Looking back, what was the best thing to you personally about being CEO of a top ten bank?
Allison: Well, the process of building a business is great fun. To be honest, we always exceeded my own expectations and they were very high. It was enjoyable having a vision and seeing the creation of that vision. I am fundamentally a builder. 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. It was fun for me to see people grow. It’s probably the same kind of experience you get from teaching, when you see a light go on, that’s a very satisfying thing. And I saw a lot of lights go on in my career.
Kaizen: What was the most challenging thing for you about being CEO of a top ten bank?
Allison: 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.
If we’d been in a free market and not had to put up with regulators, I think I’d have wanted to be CEO longer. It just wore you down having to bow to destructive regulations. We fought things like eminent domain, but there’s a lot of stuff you can’t fight—you literally will be put out of business. Having to make concessions to things that you knew were bad was for me, given my ethical beliefs, really tough. I have become a strong spokesman for free markets and individual rights. I tried to do that in my job but I can be even more clear about it now that I am not in that same position.
Kaizen: Leaders have to have initiative, guts, resourcefulness, perseverance, the ability to recover from setbacks, and so on. If you had to choose, what character trait would you say is the most important?
Allison: I think number one is a sense of purpose and, related to that, is being rational. And I use rationality in a really broad context, in the sense of making logical decisions based on the facts, having informed yourself so you don’t evade, and that you’re focused on what’s going on. In other words, I don’t mean rationality in just adding the numbers together. I don’t think that’s rational. It’s being able to hold a context, see the big picture, integrate it, take personal responsibility for who you are in that regard. So purpose and rationality. And when I say “rationality,” one of the big things is reality-grounding. A lot of big mistakes come out of evasions, which are related to ignoring reality.
Kaizen: With younger in people in mind, how do you operationalize those large abstractions—purposefulness, being reality grounded?
Allison: I think you can teach them. First saying they are important and then living them. Atlas Shrugged was very helpful to me in this regard. A lot of people read Atlas Shrugged and see the politics, and certainly I agree with the politics in Atlas Shrugged, but that was not what I was looking for.
What Atlas Shrugged helped me do is concretize the characteristics that lead to success and happiness. That’s what I saw in Hank Rearden and Dagny Taggart. I saw the things that kept them from being happy, but I also saw the things that made them happy, and so the personal lessons in the heroes of Atlas Shrugged, are very, very powerful. Yes, I was interested in the politics of Atlas Shrugged but I view that as secondary. I was interested in the characteristics that made these heroes work. I think there’s great lessons for kids, for students, young people. Take it seriously.
Kaizen: You have received a large number of honors, including honorary doctorates from colleges and universities and prestigious awards from professional organizations. In what way do those add to or heighten your sense of what you have accomplished?
Allison: You certainly appreciate those kinds of recognitions. You can’t help it. You try to be cautious in the sense that, if you think you have accomplished things and you feel like the acknowledgements are just, it’s nice to see the world giving a proper kind of reward. Unfortunately, awards can be given unjustly. You see people getting Nobel Prizes who do not deserve such recognition. At a personal level if you believe an award is appropriate recognition, it heightens your sense of justice.
You have to be cautious, though, in the sense that you don’t want it to let you become arrogant. You try to hold the awards in context and say, “Did I really earn this award? And if I didn’t earn it, then I don’t want it.” I don’t believe that people should be humble; I’ve never met a successful humble person. I’ve met people who had a humble act but they weren’t really humble.
But on the other hand you don’t want to be arrogant or over confident. What you really want to be is objective. To be psychologically healthy you want to be objective. Now to the degree that you objectively think these things are reinforcing objective strengths you have, that’s good. But you need to be sure that’s exactly what’s happening and not to let the awards, as an end in themselves, encourage you to become arrogant about something that you really haven’t earned.
Kaizen: What is next for John Allison? What projects are you working on?
Allison: My passion is defending individual rights and free markets. I’m trying to do that in a number of ways. I’m trying to do it educationally by teaching students here at Wake Forest University. I speak a lot on other college campuses about Principled Leadership, which is really the values that individuals need, which are also the same values that will lead to organizational and societal success.
I’m writing a book on the financial crisis that tries to both show how it happened and also focuses a lot on philosophy. The economic mistakes were driven by destructive philosophical beliefs.
I’m trying to support the BB&T University programs on the moral foundations of capitalism. We’ve got to be sure that individual rights and free markets are represented in the academic community. The primary reason our country went from “life, liberty, and the pursuit of happiness” to a redistributive state, or wherever we are today, was because the Left took over the universities. The Left’s views should be heard in the universities, but the problem is the defenders of individual rights and free markets aren’t often heard in universities. We need those views to be heard.
Kaizen: Going back to your college years, in retrospect what did you learn there that was most helpful to you as leader of a major bank?
Allison: Understanding the technology of business and specifically the technology of finance was absolutely necessary. I don’t think it was anywhere near sufficient. If I look back at my college education I think there were some big missing holes in business school: leadership and human systems in particular. These skills were taught in a very mechanical, superficial way. But I did learn a lot about business technology and the language of business, which was necessary for my career.
Now here’s a funny lesson I got, which I think might be an atypical lesson. I only took one philosophy course in college and it was terrible; the professor was awful. Fortunately, in the course I made an interesting observation. It was a survey course on the history of philosophy. We got to Aristotle I thought, “Man, those are brilliant insights!” The professor, however, attacked Aristotle for the ideas I liked. I decided the professor was very wrong. During the whole course, I couldn’t get in line with the professor’s beliefs. At the end of the course—he was a skeptic—he basically said we didn’t know anything; that was the cumulative lesson. This is was back in the 60’s. I got a C. I got all A’s, and a few B’s, and one C in college, and the C was in a philosophy course. But instead of rejecting philosophy, which you might think would be the natural consequence of this experience, I rejected the professor. After I graduated, I worked from Aristotle to Rand, trying to integrate philosophic ideas with my real life experience.
Kaizen: Is there anything your college education could have better prepared you for?
Allison: 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.
Kaizen: In closing, what advice would you give to young people just starting out in their careers?
Allison: 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. Unfortunately, for a huge percentage of college students their goal is to get through college. They don’t really see anything beyond that, and I think that produces a different level of outcome.
This is a little bit of a long story, but it’s relevant. We have a model that says that focusing on results is largely a useless exercise. We learned this from doing mergers and acquisitions, because people are getting results you would expect based on what they’re doing. If you want to change results, you have to change behaviors. Behaviors drive results. If you’re unhappy with your weight, you’ve got to eat less, eat differently, exercise more, etc. If you’re unhappy with your grades, you’ve got to study more, study differently, get a mentor, etc. Behaviors produce results. The interesting thing about behaviors is you can sustain behavior change in the short-term because of external pressure. But in the long-term we act consistently with our beliefs. Our beliefs drive our behaviors. People lose weight, they gain it back because they don’t believe it’s important not to. So, leadership is not about results, it’s about beliefs and behaviors. Many leaders try to get better results by “beating” on the person instead of defining the behaviors that the person needs to exhibit. They haven’t thought about what actions are necessary to produce the desired outcome. Professors don’t think about that. What behaviors would these students have to have to produce superior results? They don’t even ask that question. And what beliefs would they have to have to sustain those behaviors? So leadership is about reinforcing beliefs that lead to behaviors that produce desired results. And you have to think about what the behaviors ought to be: that’s your job. If the student could figure it out, he doesn’t need to be there.
The meta-belief is purpose. If you want to do something meaningful, it’s the sense of purpose that drives the hard work to accomplish the steps to achieve the end goal. And what most college students, particularly business majors, lack is that they don’t have a purpose. They don’t know what they want to do which causes sub-optimal behaviors and lesser results.
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. And that’s what most college students, I think, lack and therefore, they get a less meaningful education experience.
This interview was conducted for Kaizen by Stephen Hicks.
© 2013 Stephen R. C. Hicks. All rights reserved.