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Committees : Governance

Part 4: Best Practices for Bank Boards

March 29th, 2012 |

relay-baton.jpgI frequently speak to groups of bank CEOs and directors at state and national conferences.  One of my favorite topics is “best practices for bank boards.”  The audience reaction always confirms my belief that bank boards of directors all face the same fundamental challenges, regardless of the size or geographic location of the bank and the shareholder base which they serve.  Boards of directors are groups of people, and every group of people develops its own set of shared expectations and priorities.  It can be helpful for a bank board to occasionally take the time to reflect on its approach to self governance and decision making, especially when this is done by examining the experience and success of other boards of directors in the industry.

This is the fourth and final article in a series on best practices for bank boards. This series of articles describes ten of those best practices.  In this article, I will discuss the last two best practices—developing real board leadership and making use of special purpose board meetings.

Best Practice No. 9 – Develop Real Board Leadership

 Every board should periodically evaluate whether it has effective leadership.  Just as no director has a “right” to sit on a board, which gives rise to the need for director assessments and evaluations, leadership positions also are not tenured.  To be effective, a leader must be engaged, prepared for meetings, willing to take on difficult issues, and, in my view, willing to lead by example.  Burnout and growing complacency can be expected in all leadership roles.  It is in the best interest of the board, the bank and its shareholders for the board to have the ability and willingness to recognize and address these issues when they arise, and not delay action.

If the CEO is also chairman of the board, is that arrangement working for the board?  A test for whether such an arrangement is working is for the non-management independent directors to consider whether the board is truly making its own decisions.  If not, then reconsider the existing leadership structure and, at a minimum, appoint a lead director to bring more balance to the board’s decision making process and better ensure a flow of important information to the board.

Also, consider rotating committee leadership on a regular basis, particularly among the most important committees such as the audit, asset-liability and loan committees.  Fresh leadership perspective can be an effective risk management tool.

Best Practice No. 10 – Make Use of Special Purpose Board Meetings

Have at least two meetings a year dedicated to focusing on the bank’s strategy and why it works (or should work) and its strengths and challenges.  Include in one such meeting a discussion of “Buy, Sell or Hold,” since management needs to know the direction of the board on this fundamental issue in order to effectively run the bank and position it for the future.

Consider scheduling a special meeting to address any questions or concerns that directors may have but won’t express in a regular board meeting.  For example, in this time of increased regulatory burden and more aggressive regulatory enforcement, many directors are interested in knowing what their personal liability exposure is and what protections exist, whether they ask or not.  Directors also are very interested these days in hearing a more complete description of the impact of the Dodd-Frank Act and the scope of authority and impact of the Consumer Financial Protection Bureau.

Finally, consider setting aside most or all of a board meeting to have the directors hear directly from the key senior staff of the bank.  This can be helpful for the board to gain confidence in the bank’s overall management team, and it can also be a source of insight into the strength of the institution.  Good banking is fundamentally about good people, and in-person communication is the best way for the board to take the measure of the bank’s people.

I wish you and your board great success. The other articles in this series are below:

jmcalpin

James McAlpin is a partner in the Financial Institutions Group of Bryan Cave LLP. He advises bank boards on a wide range of legal, structural and business issues, and he also provides strategic planning advice.

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