On the Record: Dick Kovacevich

As chairman and chief executive officer of San Francisco's Wells Fargo & Co., Dick Kovacevich runs one of the nation's largest and most profitable financial services companies providing banking, insurance, investment, mortgage and consumer finance services. The company has $370 billion in assets,

135,000 employees and 5,800 stores nationwide. It reported net income of $5.7 billion in 2002, ranking first in The Chronicle's annual survey of the Bay Area's most profitable companies. Kovacevich, 59, recently sat down with a group of Chronicle reporters and editors to discuss the challenges facing his company. The following Q&A has been edited for space and clarity. .

Q: As the CEO of a multistate, multibillion-dollar bank company, what do you worry about most? What keeps you up at night?

A: That depends on the situation, on the economy at any given time. I guess the most consistent thing is we believe the key to our business over the long term is our ability to generate revenue and increase market share.

There may be other things that concern me -- credit losses, a tough economy,

interest rate changes or whatever -- but the thing we must do each day is get more of our customers' business and gain market share. If we do that, everything else will take care of itself.

Q: How much do you worry about the economy at this time?

A: You don't worry about things you can't control. I can't control the economy.

The past two years have not been good for the general economy, yet we have achieved double-digit growth in both revenue and profit. So it proves that our business model can work in tough times.

Q: How much of Wells Fargo's recent performance has been due to your mortgage business, which has been thriving? What is your outlook for mortgages and refinancings now that interest rates are starting to kick back up?

A: The mortgage business is strong because interest rates have been so low. Interest rates are low because of the difficult economy. That's one of the reasons we decided -- 15, 20 years ago -- to be in the mortgage business. It's counter-cyclical to a lot of our other businesses.

But less than 20 percent of our earnings come from mortgage-related businesses. So 80 percent of the company also has to be doing well.

Barring a significant increase in long-term rates -- you know, 3 to 4 percent, which I don't think there's any chance of in the near term -- it would just be the refi side of our business that would be negatively impacted by a 1 or 2 percent increase.

Q: You carried out one of the biggest mergers of the late '90s, and you joined two companies (Norwest of Minneapolis, where Kovacevich was CEO, and Wells Fargo of San Francisco) that were very different in their history and culture. It's now been five years. How would you characterize the culture and the business of the combined company? Is it the kinder, gentler culture of Norwest? Or the tougher, more bare-knuckle culture of Wells Fargo?

A: We are very large, and we're in 70 different businesses. The only way you can manage a company of that size is through culture, through shared visions and values. In establishing the culture for the combined company, we attempted to take the best from both.

Remember, Wells Fargo was basically a California bank and was narrowly focused -- it was not in all the products and services we have today. So when people observe the new company, they often conclude that the culture is more Norwest because the geography is so expansive, the product line so wide. But they're mixing up a business model with culture.

Q: One of the striking things about your transaction was that although Norwest was the dominant partner, you chose to keep the Wells Fargo name and headquarters here. Was that the right decision, to base the company in San Francisco? What's your commitment to San Francisco today?

A: When (former Wells Fargo CEO) Paul Hazen and I first discussed the possibility of merging, we agreed that the only way we should merge is if the decisions that we made were based on what's best for the company over the long term.

Let's take the Wells Fargo name. Wells Fargo versus Norwest for a national company -- Norwest sounds like a mispronounced airline that gives bad service. So that was not a hard decision.

In terms of the headquarters, it was not a hard decision for two reasons. One is that California is by far the largest business within Wells Fargo. Two, I knew a lot about the Midwest and Minnesota, so it would be better for me to be closer to an area that I did not know as well.

We are committed to California and the San Francisco area. But I worry about California because it has a reputation as an antibusiness state. And I think we're losing huge amounts of job growth. There are companies moving out of California simply because the environment for doing business in California is so negative compared with our neighboring states.

It's a shame for this state, which has so much going for it and is a gateway to Asia, has a diverse group of people who are hard workers, a wonderful quality of life, wonderful weather and so on. If it wanted to, it could be the most attractive place to do business. But because of its reputation and regulatory environment, it's driving businesses away. It's sad, and it doesn't have to be that way.

Q: What's your sense of doing business in San Francisco?

A: The same thing is happening. We're losing jobs. The political environment in San Francisco is antibusiness. The politics are divisive and extreme. The Board of Supervisors seems to be dysfunctional. The mayor and the board don't talk to each other. It's a sad commentary.

Q: If that's true, why was it that just three years ago San Francisco seemed like such a wonderful place to do business? You couldn't rent space down here (downtown), you couldn't park down here. San Francisco showed up on all the lists of hot cities to do business in. Why was it so hot then? We have a lot of the same people running it now.

A: What we had three years ago was an artificial bubble.

It's still a highly desirable place for highly paid professionals if they can afford the cost of living. But if you're talking about integrated manufacturing operations, the city is not attracting businesses.

Q: Is San Francisco ever going to be viewed as a manufacturing center? Is that realistic or even desirable?

A: We're not talking just about San Francisco. We're talking about California.

Maybe the professional staff lives in San Francisco and the manufacturing is done in Fresno or Bakersfield or Northern California or elsewhere. But there's no reason California can't be a manufacturing hub.

Very few of the major U.S. cities are manufacturing hubs. But there are factories in their suburban markets, and there's no reason we can't be competitive in that regard. It's important because not everybody is an MBA from Cal or Stanford. You need jobs for lower-paid and lower-educated people, and that's what we're not doing.

Q: I know that Wells Fargo does telemarketing because I've gotten calls at home and work from Wells Fargo. How will the overwhelming success of the National Do Not Call Registry affect your operations?

A: Most of our interactions with customers are done physically within the stores or over the Internet. So I don't expect Do Not Call to have any negative effect, especially when it affects our competition equally.

Q: On a related topic, on the issue of letting consumers opt in rather than opt out, Wells Fargo and many banks oppose it. In what ways do you share information among your affiliates? How big a part of your marketing effort is that?

(Editor's note: State Sen. Jackie Speier, D-Hillsborough, has authored several unsuccessful bills that would give consumers more control over how financial institutions share information about them with other companies. A key provision would requires that bank customers give their written permission (opting in) before their personal information can be shared. Presently, customers who don't want their personal information shared must take the initiative of opting out by signing a form provided by the bank.

A: It's a very important part of our business because our affiliates include different banks in different states. So that if you, as a customer of Wells Fargo in California, would like to do some banking business when you are in Colorado, the only way that can be done is if you can share information with our affiliate banks there.

Q: Dick, I have to stop you right there. I don't know of any privacy legislation that would restrict banks with multistate operations from sharing information with their own banks.

A: Look at Jackie's first bill. Basically it would have restricted that.

Q: That's a bit of a red herring in the sense that I'm sure no one intended . . .

A: This is what the legislation said. It was no red herring. You could not share information with your own affiliates (without having the customer opt in). It's what the legislation said.

Now when the vast majority of our customers see a Wells Fargo name, they don't know and they don't care whether that is a subsidiary of Wells Fargo, a division of Wells Fargo, an affiliate -- they think it's all Wells Fargo. They don't understand what they're opting into.

Q: Ever since I got my Wells Fargo mortgage, every week I get five or six offers in the mail offering to refinance my house and do other things with my mortgage from other companies that don't say they are affiliated with Wells Fargo. But they seem to know how much my mortgage is to the very penny. How did they get that information?

A: Your state or county gives them that information.

Q: You mean they went down to the country courthouse?

A: It happens all the time. They may even get it through the Internet, but they don't get it from us.

Financial services are probably the most personal business I can think of. This is your personal money; it's your personal information.

We do not give information to outsiders. There is some confusion out there that somehow we are selling information. We do not sell information.

Q: I'd like to ask something about another hot-button consumer issue, and that's junk fees.

In the past 20 years, Bank of America and Wells Fargo have achieved very large market share in California consumer banking. At the same time, in the banking industry's search for revenue, you've imposed fees for things like calling customer service too many times, going in and speaking with tellers, fees for bounced checks at very high levels and so forth. Our readers write to us often, outraged at the fees they have to pay. To what extent did you take advantage of the opening of banking laws and build an oligopoly, which then allows you to impose such fees?

A: An oligopoly? Give me a break! There is a bank on every corner in California. I wish that we were so powerful with 14 percent market share to be an oligopoly.

Fees are imposed only on customers that aren't full-service customers of Wells Fargo. If you are a full-service customer, you don't pay any fees, basically. You don't pay safe deposit fees, you get special deals on loan rates, you get special deals on deposits, the more business you do with us.

But if you're only a checking account customer, and you're calling us every day for your balance, and you don't use the automated system, you are charged a fee. It doesn't make any sense for us to keep having people tell you what your balance is when there's a (free) alternative.

Q: How does Wells Fargo serve lower-income communities?

A: Let me make myself very clear. Every income level is giving enough financial services revenue to somebody to be profitable to Wells Fargo. It's a myth out there that somehow low-income people can't be profitable to financial servicing. So we are very focused on that market.

We're the largest provider of first mortgages to low-income people, people of color, in the United States. We started the matricula consular card for Hispanics, the first bank in the country doing that. There were 80,000 people who were basically unbanked because they didn't have the identification cards to be allowed to bank, and we started that program.

You ran a story (in May) saying we're the most profitable company in the Bay Area. We're proud of that. But we're most proud of the fact that, for the second year in a row, the San Francisco Business Times ranked us as the most charitable company in the Bay Area, based on our annual giving to nonprofits.

These are linked. Corporate America ought to wake up. You can do good things in your community and still be profitable.

Q: Back in the old days of Wells Fargo, the management team had a reputation of having a hard edge, of being very smart, very focused, all work. You have been known to get on stage in front of employees dressed as Mick Jagger.

A: You're not supposed to know that.

Q: It was actually in The Chronicle once.

A: Oh God.

Q: What is that about? Is that a strategy to try to make employees feel more relaxed? Or is that the real Dick Kovacevich?

A: One of our most important corporate values is having fun. I believe you'll perform better if the environment you're working in is a fun one, particularly if your major focus is customer service.

Q: You're headquartered in one of the most diverse cities in the country. In light of that and also the recent Supreme Court decision on affirmative action, what specific steps does Wells Fargo take in hiring, promoting and training to ensure a diverse workforce?

A: One of the most important competitive advantages you can have is the diversity of your workforce. Our customers are increasingly diverse. In order to perform at the highest level, you need diverse opinions and people of different backgrounds.

We're not as diverse as we would like to be. We have done a good job over the years with gender diversity, both at the old Wells Fargo and the old Norwest. We haven't done as well with people of color. We've got the problem today that the pipeline isn't as full as it should be. We've got to look at midcareer hires and some other things to get there.

Q: Is the banking industry poised for another round of large mergers like the late '90s? Will Wells participate?

A: The industry is going to continue to consolidate, and that will include very large mergers. But there aren't a lot of big deals left in the West. Since our focus is the western part of the United States, it's unlikely we will do a merger in the East, and certainly not a big one.

There are about five states in the Midwest we've been trying to get into for about 15 years, including Missouri, Oklahoma and Kansas. We'd like to be there.

Q: During much of your career, you've been ambivalent about the investment banking business. You're in it now in a relatively small way. Is it something you want to expand, or will it always be a small part of the overall business?

A: I have believed, and I still believe, that the general culture of investment banking is incompatible with Wells Fargo. It's not a relationship- built business. It's a transactional business where individuals are rewarded above the team.

The question is can you be successful in investment banking using our model? We inherited an investment bank (Van Kasper of San Francisco) when we bought First Security (Corp. of Utah in 2000). And we said, "Let's see if we can attract people who think they can operate successfully as an investment banker within the relationship culture we have." That's what we're experimenting with now and having some success.

Now, retail brokerage is different from investment banking. We like retail brokerage; we bought Ragen MacKenzie (of Seattle in 1999). That's going well.

Q: How good is Wells at measuring how much money you're earning from each customer relationship? What portion of your customers is profitable?.

A: About 63 percent are profitable, and the others we call potential.

The average consumer has 15 financial relationships. If you can get only four of those, you are profitable. If you get 8 or 9 or 10, you are really profitable. And you can give them lower prices like Wal-Mart because you can spread your costs.

In that sense, we have more in common with the Wal-Marts and Home Depots of the world than we do with other banks.

Participating in this interview were Business Editor Ken Howe, Deputy Business Editor Steve Zuckerman, columnist Kathleen Pender and staff writers Carolyn Said and Sam Zuckerman. Editoral assistant Colleen Benson transcribed the tape.

BRIEFCASE

Name: Dick Kovacevich

Age: 59

Job: Chairman and chief executive officer of Wells Fargo & Co., a diversified financial services company with $370 billion in assets, 135,000 employees and 5,800 stores nationwide. The San Francisco company provides banking, insurance, investment, mortgage and consumer finance services.

Education: Bachelor's and master's degrees in industrial engineering, master of business administration, Stanford University.

Board affiliations: Cargill Inc., Target Corp., San Francisco Committee on JOBS, San Francisco Symphony, San Francisco Museum of Modern Art.

Family: Wife, Mary Jo; three children; three grandchildren.

"I worry about California because it has a reputation as an antibusiness state."

On serving lower-income communities

"You can do good things in your community and still be profitable."

On diversity in the workplace

"We've done a good job with gender diversity, not as well with people of color."

BEYOND THE BOARDROOM

Favorite time of the day: Early morning. I usually get to the office around 5:30 a.m.

Best way to recharge batteries: Athletics. Golf, tennis, skiing, basketball and walking.

Best business decision: The merger of Wells Fargo and Norwest.

Worst mistake? I've made a lot of mistakes. My worst, I think, were getting too involved in businesses that were supposed to be run by the people who ran them.

A little too hands on? Yes. I've become better about it over time.

Favorite vacation? There were two of them. We took our kids on a safari about 10 or 15 years ago. The second was rafting down the Colorado River in the Grand Canyon.

Hobbies? I like sports of all kinds.

If I could be part of any moment in history? I think the current moment. These are challenging times.

If I weren't doing this: I'd love to be playing professional baseball. I was a pitcher at Stanford and hoped to have the opportunity to play professional ball. But I hurt my shoulder with a rotator cuff injury.