When Leonard Abess sold a majority stake in Miami-based City National Bank last fall, he did something very unusual. He took $60 million of that money and gave it out as bonuses to 399 current bank employees and 72 former employees. He did it without calling in a public relations firm or the media. He didn’t blog about it. And while he was mentioned in President Obama’s inauguration speech and was ABC News Person of the Week, these things were not done at his instigation. In fact, he wasn’t even on site when the money was given out. He decided to share the wealth, he said, as a way to reward the people who had helped make the bank successful. Knowledge at Wharton asked Leonard Abess, who remains chairman and CEO of the bank, to talk about the motivation behind his gift, leadership and the current economic crisis.

An edited transcript of the conversation follows.

Knowledge at Wharton: Thanks for joining us.

Leonard Abess: Thanks for having me.

Knowledge at Wharton: To begin with, can you explain in a little more depth exactly why you decided to distribute $60 million to your employees, when you could just as easily have given that money to a charity of your choice or some other nonprofit group?

Abess: It wasn’t so much that I just suddenly decided to do it. I knew I was going to do it for a very long time … for probably more than 20 years. I had confided it to my wife and to a [company] president who had been with us and to a chief operating officer. I just never thought that I was solely responsible for the success of the bank. I owned the bank. I enjoyed the profits, the dividends. And I always realized that while there were 400-plus people doing the work, making it successful, the profits were going in one direction. We certainly compensated very well. We were in the top 25 banks in the country in compensation per employee. But we were also in the top 15 in the country in revenue per employee.

I felt, particularly based on longevity, that these people were owners. They acted like owners. They worked like owners…. I wanted to acknowledge that. We had excellent compensation. Unlike many companies, we didn’t just pay it out in huge ways to the top people. But I had a formula based on how long people had been there. No one really knows that formula but me. The longer you were there, the more money you got. In many companies, the people who stay the longest are closer to the bottom of the compensation scale. People near the top tend to move around a lot more.

So it felt right. And I was concerned that [some employees] had not built up adequate pensions. Some of them had invested their 401(k)s in the stock market. I knew it had been difficult over the years to save. And I thought they were entitled to the same kind of security that I would get. People near the bottom of the company in compensation, but with longevity, got as much as nine years of compensation. And then people at the top didn’t get so many years.

Knowledge at Wharton: I was struck when I was reading about this gift by how incredibly long some of these people have worked at the company — 39 years, 43 years, 51 years. How do you explain that longevity at a time when many employees expect to stay no more than three to five years at a job before they move on?

Abess: I do think that [faster turnover] is truer today, [but] many people who entered the workplace 40, 50 years ago, did hope to stay at one place and retire there. Over the years, I never really liked separation, unless I instigated it. So I would always encourage people to stay. I would be very open to what they wanted. We never would force people into jobs they didn’t want. If they wanted something else, we would do our best to put them there, to train them. Often we would have to ask people to stay with what they did and try to treat them fairly for doing that.

But we provided, I think, an atmosphere of caring. We were always there. I know my employees. I know their names. I know their spouse’s names, their parents, their children. We have multiple generations there, multiple members of families, people who have met at work and married. And then their children have come to work there. So we always tried to have a family atmosphere. We attend each other’s events — birthdays, weddings and funerals. In hardship, we try to take care of each other. I think we had an atmosphere that, for people, was comfortable and they felt welcome in, so they stayed.

Knowledge at Wharton: While your gift is extraordinary under any circumstances, it’s especially noteworthy now, given the state of the economy and the fact that hundreds of thousands of people are being dumped from organizations where they have worked, in some cases, for decades. Did the economic crisis motivate your gift in any way? I know you said you had always planned to do this. But did the crisis sort of update your timeline?

Abess: No, it just made it more meaningful. And it made me think harder about the amount.

Knowledge at Wharton: I’m sure you’re not interested in criticizing any of your peers at the CEO level. But in broad terms, do you think that top executives frequently say their employees are their most valuable asset, but then act in ways that don’t back that up? For instance, the layoffs continue by the thousands. Yet many executives are giving up their salaries and perks and bonuses only when they are exposed to the public.

Abess: One of the nice things about being private and owning your own company is you get to write your own letters and your annual reports. That’s something I’ve always enjoyed taking a lot of time and doing. I also like to read other people’s annual reports, especially banks. I actually do read the letters, often thinking that some public relations firm wrote them. I write my own.

Several years ago, I wrote an annual report that started off saying: “I like reading annual reports. And they’re all the same. The CEO starts off with all the statistics and the performance, and then consistently — if you look this up, you’ll see that I’m right — in the last paragraph, they say, “And last but not least, we wish to thank our loyal employees, our directors and our share holders. Without them…” So I wrote about this. I said, “Why is it last? … I’m going to start my letter off thanking my employees.” And then the entire letter was about the employees.

Yes, I do believe that in many companies, especially larger ones, [thanking employees] is perfunctory. I think that senior management is removed from the day-to-day people and has lost touch with what goes on. I think they all have lunch together, dinner together, live in the same neighborhoods, come to work and flip out something nice to somebody as they pass by them. But I think that at the end of the day, it’s head count. And at the end of the day, often, the employees are the ones — especially those who have worked very hard — who suffer.

We have never had a layoff. We have paid a bonus to every employee, every year. We have never raised the cost of insurance. Today, the employee’s cost is the same as it was 20 years ago…. I tell young CEOs, that before you cut anybody’s compensation, before you fire anybody for economic reasons, you deal with yourself. Your perks go, your bonus goes, your salary goes. I am very surprised when I see huge amounts of money that go to the people at the top [even] as there are massive layoffs, especially when they accept government money.

Knowledge at Wharton: Do you think that’s going to change?

Abess: I think that there’s a change happening right now in America — in corporate America. I hope it’s sustainable. I [worry] that when the economy takes off again, we [will] return to the old ways. I’ve often said that we have to systemically change corporate America and the way it operates. It’s not enough to go in there and bail it out and save industries. Some of these industries — or the businesses in them — should not be saved. I’m not in favor of that. I’m in favor of putting people back to work. Somehow, this current situation has to be used for fundamental change in the way corporations behave.

Knowledge at Wharton: You have an undergraduate degree from Wharton. Do you think that ethical issues — including how you treat employees, how you compensate yourself — can be taught in school? Or are they learned at an earlier age and/or in the home? Where do we get our ethics?

Abess: I think we get them at home, at the dinner table, in the community, at church or temple, or wherever we go for spiritual guidance. And I think ethics can, must, be talked about in the schools. It’s a combination of all of the above. But I’ve never really felt the schools are responsible for teaching ethics or morality. I think they’re responsible for enforcing it. But I think it has to be learned at home and in the community.

Knowledge at Wharton: Just to recap: Your father started City National in 1946, then sold it to an investment group, which sold it to a Colombian businessman. You eventually bought the bank back in 1985. Under your leadership, the bank’s assets increased from about $400 million to $2.75 billion. You then sold a majority stake to the Spanish bank Caja Madrid for $927 million, retaining a minority share and also the titles of CEO and chairman of the board. But going back to the time your father owned the bank, I understand that you started out in the company’s printing department — kind of a grass roots education into how a bank runs. This experience of working in the trenches — did that affect your view of the rank and file employee, and how he or she can really add to the growth of a business? Not just your business, but any business?

Abess: The answer’s yes. And one short story. There were separate banks back then. We didn’t have branch banking. I worked in the print shop. I was 14, it was a summer job and sometimes I worked after school as well. My father had grown up in the Depression and was pretty strong about his kids working. I actually used to go to the bank when I was six and play with the coin counting machine. When I first took some coins, I found out I had to put them back. But there was a young lady, not much older than me when I was 14. She was the secretary to the president. She’s with us today. She’s been there 49 years. She has a high title, first vice president, and is a very important person in the company. But I would watch the president send her across the street to buy his cigarettes. And I also watched him have one of the maintenance men shine his shoes every day, and somebody else park his car. It bothered me. It really offended me. I just didn’t think it was right. And so — when I was 14 and worked there every summer — I spent my time with the people at the bottom. The lady who accompanied me to the President’s State of the Union speech was my boss in the print shop. She’s been at the bank 51 years. Today she’s a safe deposit custodian. We’re friends. I just feel everybody should be treated with equal dignity, no matter what their job is.

Knowledge at Wharton: So, rather than aspire to a position where you could have people get your cigarettes and your dry cleaning, you, in fact, found it to be quite a turnoff.

Abess: Terrible. I find when I ask somebody for a cup of coffee, I apologize. It’s just automatic. I say, — “I’m sorry to ask you, but I know you’re going that way.”

Knowledge at Wharton: I’ve read that you’re a strong environmentalist. And in fact, that you and your family have endowed the Leonard and Jane Abess Center for Ecosystem Science and Policy at the University of Miami and founded the Abess Floading Research Station in the Brazilian Amazon, among other contributions. But I’m wondering, what does it mean these days to be an environmentalist, when it’s such a loaded term and there are so many different opinions as to what this earth needs to sustain itself?

Abess: I think we’re rapidly approaching [the point] where every thinking person is an environmentalist. But we’ve been interested in this forever. We even grow our own food….  But I think at the end of the day, it just means that you’re on the side of being part of the solution and not part of the problem. It’s being aware. Everybody can contribute, just in the way they live. And then others have other resources to contribute….

Knowledge at Wharton: Here’s an easy question. From your perspective, what caused today’s financial crisis? And when will it be over?

Abess: I’ll try to make this one short. I got a D in money and banking when I was here at Wharton…. In the old days, you would gather deposits in the community and then reinvest them through loans to help businesses. You would grow based on your capital and your ability to get deposits. Citibank came out and said, “Look, you need to leverage your capital. There are other forms of capital.” Which I call debt. I learned they were debt. Today they’re capital. But they said, “You need to manage your liabilities because assets are easy to get. You can make loans. You can buy securities. Assets are simple. It’s funding them that’s hard. So rather than go out in the community to get people’s savings, you can manage your liabilities by borrowing money from the Federal Reserve, the home loan bank.”

That was the beginning of really leveraging up in the financial industry. There wasn’t much leverage before that. I got a D because Wharton was teaching that at the time. It was the theory of the day. I’d grown up with a father who was livid about it, who just said, “No, you manage your assets.” So I wrote a paper saying, “This is all wrong.” I didn’t have a teacher who appreciated dissent. He didn’t want to see me again so he didn’t fail me.

I think some of the roots go back that far, where we started coming up with the concept of leverage. You then take that forward. You have your liability management. You can fund almost any asset. You get a new class of people coming out, frankly, of places like Wharton — who are very driven, and very driven about compensation. And you come up with new asset products because the ability to leverage your capital, the ability to fund the acquisition of assets, becomes almost unlimited. So now, what are we going to do? There are so many hardware stores to lend money to. There are so many people to give mortgages. We need new things. So we had people invent — literally, I think, “invent” is the right word — complex assets of long-term unpredictable nature, not well-understood, except by computers…. And then we compensated them for their production in the sale of these instruments. To me, that whole process of unlimited funding, extreme leverage and then a shortage of financial product — along with paying huge sums of money to bright people to invent more and more product that could be sold and allegedly spread risk — brought the house of cards down. I think we have to look at this.

As I always say, I’ll give someone a bonus for making a loan after [he or she] collects it. We don’t give bonuses. I have a friend who’s an anesthesiologist. I had surgery, and as I was going in, I said, “Howard, you’re gonna put me to sleep.” And he said, “Anybody can put you to sleep. I’m gonna wake you up. You’re paying me to wake you up.” Well, we need to pay these people to collect. I think the compensation system has been terribly skewed. When people rant and rave that it’s the bonuses that caused this — they might not even know what they’re talking about because they’re just enraged. But in a sense, they’re right. And so to me, it’s excess leverage, unlimited funding, and compensation for coming up with new product.

Knowledge at Wharton: And when do you think we’ll see the light at the end of the tunnel?

Abess: I think we’re in trouble for quite a while. You know, there are many measures. Perhaps the stock market is coming back — I’m not sure. But I think that the financial system is totally broken. And I think that propping it up with huge sums of money is not going to solve the problem. We are doomed to repeat this again. I think that it’s going to take a long time to get this healthy again. Now, when I say that, it doesn’t mean we’re not going to have a boom economy again — down the road. Maybe sooner. I don’t think we will, but we might. But it’s just going to bust again — and maybe even worse than this. We have to fundamentally re-engineer our worldwide financial system. That’s going to take a lot of time.

Knowledge at Wharton: In your opinion, what are the three most important attributes of leadership?

Abess: Oh, boy. I can think of many important attributes. But I think that leaders have to lead by example. That’s extremely important. I think leaders, as part of that example, have to have a clear moral compass, clear ethics. Leaders don’t lie, leaders don’t cheat, leaders don’t misdirect. I think true leaders leave their egos somewhere where no one can see them. I think you have to have a certain amount of ego to get there, but I think you’ve got to keep it in check. I think that leaders respect people. They respect communities. To me, leadership really is leading by example — motivating people, being human, just being real and talking to people. Listening — leaders listen. Leaders listen well, and they respond well.

Knowledge at Wharton: You said on ABC News, in referring to your decision to give $60 million to your employees, that “I prefer to live in a world where this is ordinary.” How likely is this to happen?

Abess: It’s a question of human nature, you know? Maybe it will spread. Certainly if you look at the mail I’ve gotten, and the blogs, you would think that it will. That’s a hard one to answer. I think there’s a possibility for it. But no, I’m not terribly hopeful.

Knowledge at Wharton: Well, maybe we’ll talk again in 10 years, and there will have been some change for the good. In the meantime, thanks for sharing your thoughts with us.