In the past year I have had the opportunity to meet hundreds of CEOs and chairmen of banks and inevitably the conversation has turned to board performance. I have yet to meet a banker that does not sing the praises of some of his or her directors. These highly functioning board members are invaluable to the bank—hard-working and well prepared, with special skills the board needs. They help build the bank, devote themselves to their committees and are an important sounding board for the CEO. But soon enough the conversation turns to other directors on the board, usually a minority of one or two individuals who can no longer effectively contribute to board discussions. They have overcommitted themselves or are simply ill prepared and can’t keep up, and the board needs to replace them with people more capable of contributing to the bank. But this is when a lot of boards go soft when dealing with an underperforming director. Some of these directors have served the bank very well in the past, have become good friends with other directors after years of service and play an important role in the community. That leads us to the toughest question of all: How do you move those directors off the board?
Age and term limits. Personally, I think age and term limits are the easy but ineffective way out. If you create a standard on the basis of age or years served, then when talented directors reach that set limit the bank will be forced to either amend the limit or have to lose a high performance director. I understand why banks do it—it saves the embarrassment of having to tell a person who has served for years that the bank needs new talent on the board—but it rarely works on a long–term basis.
Emeritus or advisory boards. Some banks create an advisory board, essentially moving the less than stellar director to a board that may meet as infrequently as once each year. It keeps the director involved with the bank while allowing the bank to seek high performance directors for the working board. The bank faces the challenge of giving this board a real job that is meaningful. If you find a great project for the advisory board, you can get an enthusiastic group of community leaders. If not, it becomes a make-work board that gradually fades away.
Clear standards, board education, performance evaluations and a board succession policy. It comes as no surprise that this is the option I usually suggest to CEOs and chairmen. It is the hardest path as it requires a set of agreed upon standards, objective measurement of performance and sensitive but firm communication to the underperforming director. To make it work, there should be options for training available so all directors can regularly work to improve their performance. The advantage of this approach is that it often encourages a healthy change in board culture—directors and officers understand that board succession is a part of board service. The good news is that once the bank has these processes in place and established regular evaluations, most banks see overall improvement in board productivity.
While the first two options are known and fairly well understood, the third path is not as clear. There are many ways to set standards, dozens of options in training and a wide variety of evaluation tools and processes. Part of these processes may even include making it clear that a mismatch exists between the needs of the bank and a specific board member’s skills. In the end, however, the CEO or chairman has to tell a director plainly, “Given the bank’s goals and our recent board evaluation, I think it may be time to bring in a director with new skills and for you to step down.”
I have heard many interesting ways to soften that blow but none that make it easy.