It's been a lacklustre experience being a shareholder in Australia and New Zealand Banking Group (ASX: ANZ) with the share price falling from $27.57 at the beginning of 2008 to $25.73 today.
Inclusive of dividends though, the total annual return for shareholders has been in the vicinity of 7.5% per annum.
In contrast is Australia's best performing bank, Westpac Banking Corp (ASX: WBC) with average annual returns over the same time period of close to 11.5%.
That's quite an underperformance by ANZ, so what's going on?
Last Friday's Australian Financial Review published a critique of ANZ's previous CEO, Mr Mike Smith, who implemented his Asian strategy in an effort to assist Australian and New Zealand businesses with their own expansion strategies in the region and at the same time, perhaps, compete with the big boys of HSBC, Citi and Standard Chartered.
I'm fully supportive of any business wanting to expand, but it has to be done profitably. The argument against ANZ is that its expansion lacked focus and was needlessly costly to its shareholders.
ANZ shareholders have fared badly compared to its competitors, including Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB):
This is a very disappointing financial outcome for those who have backed Mike Smith's Asian-expansion strategy by owning shares in ANZ.
From late 2007 when Mike Smith was appointed, and as the bank's Asian expansion strategy became more apparent, I wondered then how this would all fare (all from a distance of course as I was never tempted to buy shares in the bank). Would this be a bank to successfully take on the world (or at least SE Asia), or would it return to Australia with its metaphorical tail between its legs?
Well, the answers are now clear and the current CEO, Mr Shayne Elliott, has taken the view that the bank's Asian expansion will be curtailed with more of a focus by the bank now on its digital strategy. The aim is to right the ship and return the bank to higher rates of profitability. I think this turnaround is a damning assessment of Mike Smth's tenure at ANZ.
(As an aside, Mike Smith was paid $88m in compensation for the period he was at ANZ).
Foolish takeaway
Poor financial incentives for CEOs can encourage an empire-building mentality with no thought given to the competitive landscape the company may find itself in as a result of its new strategy, and whether such strategies are ultimately profitable.
I'd avoid investing in ANZ and would rather watch from the sidelines how ANZ's new digital strategy unfolds in the years ahead. The appointment recently of Ms Maile Carnegie (previously Managing Director Australia and New Zealand at Google) is a good start, but the bank is going to have to get some runs on the board.
The bigger takeaway though is this:
Rather than invest in companies with 'professional' management, why not choose smaller companies where the senior management team and Board have a significant financial stake in the business? If Mike Smith owned 15% (or $11.3b) of ANZ, do you think he would have made the same strategic decisions?
Management at founder-led companies such as ARB Corporation Limited (ASX: ARB), National Storage REIT (ASX: NSR) and Freedom Foods Group Ltd (ASX: FNP) have meaningful financial stakes in their respective businesses leading to a shareholder-friendly culture which, I believe, is exactly the opposite of what has happened at ANZ in recent years.
Whilst the full effect of the failed Asian expansion strategy at ANZ could not have been known in advance, you can at least reduce some of your risk by buying into companies where management have aligned themselves with shareholders.
As always, do your own research and know what you're buying.
