Bank of America: More friends now that Hugh has gone

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Hugh McColl is a hard act to follow. He was, after all, the man who turned a small south-east regional bank into one of the world's largest financial institutions. And he had a reputation for toughness. A former marine, he kept a grenade on his desk and would give it to any employee that had disappointed him.

He had few fans among shareholders: his last few deals in the 1990s destroyed rather than created value. "The firm's expansion came at a high cost," says Mike Mayo, banking analyst at Prudential Securities. "From 1998 to 2000 Bank of America destroyed more economic value, as measured by an economic value added analysis, than any large bank."

Tom Brown, a former sell-side banks analyst who now runs his own hedge fund, Second Curve Capital, refers to that period as "the reign of terror". He says that McColl has learnt nothing from it. Having left Bank of America McColl set up an M&A firm to advise banks looking to make acquisitions, saying: "What led me into this business is that I know how buyers think and I know what makes a buyer happy, because I was a buyer and I was usually happy."

That, says Brown, is "pure Hugh. Note that the words 'me' or 'I' appear five times. Alternatively, the word 'shareholders' doesn't appear at all. There you have it. Throughout his career, McColl seemed to have no clue what made his shareholders happy - or that he even had shareholders to make happy. And in fact, they rarely were happy. Kudos to the champ!"

Thus far, though, Ken Lewis appears to be doing a good job as McColl's successor. He has a simple strategy. "For years our focus was on getting bigger," he says. "Now it's on getting better." He has ruled out making the kind of big acquisitions that made McColl infamous, has regular meetings with the bank's shareholders and has exited unprofitable businesses such as subprime real-estate lending and auto leasing.

And he has made it a priority to get his managers focused on creating value, not just building businesses. In the past year he has made Six Sigma the guiding philosophy behind his managerial style - the same principles Jack Welch put into action so effectively at General Electric. And though return on equity and earnings growth are still important, SVA, or shareholder value added, is the main financial criterion by which his managers are judged - and paid. Simply put, it is a measure of how much a business returns to shareholders after taking into account the cost of capital, which for Bank of America executives has been set at 12%.

Lewis wants each business to register double-digit SVA growth each year, wants revenue growth of between 6% and 9%, and a return on equity that is consistently above 20%. "This is the reputation we'd like to have," he says. "We don't have it yet but we have spent the last 12 months laying the foundations."

Investors seem cautiously optimistic. Results have been promising, and since Lewis's accession to the CEO role was first announced in January last year the share price has increased by about 50% and is the only financial services firm to beat the S&P500 index.

It is early days. But a clear sign that things are not as bad as they once were comes from Brown at Second Curve. He's still wary, feels predictions for growth in asset management and investment banking especially are too optimistic, but he does at least own Bank of America stock now. What's more, he's no longer proclaiming what he once did about CFO James

Hance, McColl and Lewis: "Throw these bums out!"