Strategic Planning for Bank Boards

Jay Brew, chairman, president, and CEO of BNK Advisory Group, spoke to Bank Director about the importance of developing and implementing a long-term strategic plan, understanding the asset-liability risk process, and getting the most out of board retreats. His comments are based on information from his recently published book, The Art of Strategic Planning in Community Banks. It is the first in a series for bank directors.

What role do directors play in the strategic planning process?
From my perspective, bank directors have four critical duties, the first of which is to increase shareholder value. Secondly, they need to develop a strong strategic plan. This is important not only to the future of the bank, but also to the regulators monitoring its activities. Regulators want the plan to come from the board, with the help of management. They want to know that it’s not one of the canned versions of strategic plans that are out there. And most importantly, they want to know that the directors worked prudently through all of the logic, gave considerable thought to where the bank should be strategically, and defined it clearly through the plan.

You recommend that community bank directors implement a 10-year strategic plan as opposed to the typical three- or five-year plan. Why is that?
Bank directors need to focus on long-term strategic goals versus the three- to five-year timeframes. Three years is a good range for the tactical part of a board’s plan and a reasonable timeframe to assess approaches and benchmarks. However, implementing a 10-year plan will allow bank directors to reap the full benefits of increasing value.

What is the importance of using milestones to track and oversee a 10-year strategic plan, and how should directors use these milestones?
Milestones are strategic goals. When I work with a client, I recommend plotting milestones through a 10-year period. This allows directors to use these very clear milestones—asset size, share price and the building of new branches, as examples—to oversee the strategic plan. To give you an example, in my own role as a bank director, I’ve observed that my fellow directors are particularly pleased when they see one of the milestones we identified upon the bank’s founding finally come to fruition. Most recently, we exceeded our next asset-sized goal ahead of schedule. That’s very exciting for a board because exceeding, not just meeting those types of strategic milestones, means the long-term value goal is attainable.

Why do you emphasize increasing shareholder value in your strategic plan?
Sometimes people use the word stakeholder, which includes employees, management, the community, and customers, as well as shareholders, when talking in terms of the value of a strategic plan. But for stock banks, it really comes down to increasing shareholder value. And as I mentioned before, if you look at increasing that value as part of a bank director’s duties, it must then be a focal point in the strategic plan. I’ve found that if you start throwing out higher and higher share prices that could be attained, it adds a great sense of excitement and motivation when developing strategic plans with boards. And at the end of the day, the real question is, “Are the shareholders happy?” If the directors, as shareholders of the bank, are happy, then you can assume everyone else is, too.

You’re an advocate of directors understanding asset/liability management. Why is that, and what are some of the fundamentals directors should know about this area?
This is probably the most misunderstood area for bank directors. For example, if a child approached a director and asked, “How does a bank make money?” the typical answer the director would give is that the bank takes deposits and makes loans. The real answer, however, is in the assumption of risk. We break down a bank’s risk into four categories: credit risk, interest rate risk, liquidity risk, and financial risk (which would be a bank’s capital). Many directors understand credit risk, but interest rate, liquidity, and financial risk are much more difficult to grasp.

There’s a regulatory need that encompasses the third duty of a bank director—the ability to assess risk, set risk parameters, and then monitor risk. So if directors don’t understand the asset/liability risk process, how can they take on that duty? And more importantly, your level of earnings is based upon the risk you assume. So it’s crucial that directors have a firm understanding of the asset/liability process.

Unfortunately, the industry hasn’t adequately educated directors in this area and when it is explained, it’s often overcomplicated. Many CEOs and CFOs even have problems with it, so if they’re the ones trying to inform the directors, the information may not get through due to a lack of understanding on both sides. At BNK, we’ve simplified the whole process by creating “risk dials” that clearly illustrate the risk in a graphic, at-a-glance format that any bank director can understand.

Should education be part of this process?
I consider education to be the fourth duty of a bank director because the industry is continually changing. There are always new developments, making it an exciting business. But it’s also a challenge to keep on top of things. Directors must use available resources to be fully educated on emerging topics so that when management introduces an issue, directors are not fully dependent on management to make critical decisions on the direction of the bank. At least half of our strategic planning is dedicated to educating directors and management on key aspects of banking. The majority of the directors I’ve met do not have the education level needed for the type of decisions they are responsible for making. Directors should take advantage of publications such as Bank Director as well as state and national organizations that can serve as useful educational resources. It’s also advantageous to provide a separate continuing education budget for each director so board members can pursue whatever type of individual education they most need.

Are board retreats helpful, and should they feature a session that does not include management?
Board retreats are part of my passion. I love doing them because every bank board is somewhat different, and every bank has its own unique issues. So bringing the board together in a facilitated retreat environment, away from the bank, gives directors the opportunity to share ideas and work through the strategic thought process. One negative point, however, about these retreats is that the directors often want to delve too deeply into tactical issues. In the retreat setting, it’s important to stay focused on strategic issues and resolving how the bank will move forward on those issues. It’s also important in this day and age to have a nonmanagement session during the retreat that allows directors to talk in an open manner. A good facilitator is key to overseeing the session and working through some of the issues, because I’ve found in those settings that some really interesting issues can come up. Some of the issues can be easily and openly discussed with the aid of a facilitator and resolved right on the spot, while other topics are best taken up at another time. But even if Sarbanes-Oxley wasn’t in place, banks should have these types of sessions because board members often do not speak their minds in the boardroom, and this creates poor communication with management.

Members of management sometime misconstrue these sessions as opportunities for people to go freewheeling on them, but even so, they must view that as a positive situation that, eventually, can foster better communication between them and the board.

On the other hand, some directors can present wildly diverse points of view. As a facilitator, there are times when it is appropriate to step in and challenge their thinking. Facilitators can also encourage those who are typically quiet to voice their opinion.

The bottom line is, the primary job of the facilitator is to bring about a group dynamic that is very different from the normal board-meeting group dynamic. In my mind, that starts opening up doors for getting into some really strategic issues.

What can directors do to ensure their strategic plan doesn’t simply gather dust once it is finalized and approved?
Whenever I facilitate a strategic planning session, I send the directors a questionnaire asking, among other things, “Was your last strategic plan successful?” Often, the bankers and directors reply, “no.” They go through all the words and the facilitation of the retreat, finalize the approval, disband, and then fall into what I call the daily malaise. That daily malaise eventually clouds their strategic focus, and that’s when their plans begin to gather dust. Banks just forget about the strategic plan. Then they go and start the process all over again.

To that end, I recommend directors put together a monthly or quarterly report as part of their board packet that reviews the various milestones and tactics they have in place. That’s very different from looking at month-to-month and year-to-year budgets. Armed with all that information, directors can monitor the progress of their strategic plan. They should meet at least once a year, and in some cases, more often, to review the entire strategic plan to make sure everything is on track. Directors can appoint a facilitator to come in or they can do it themselves. But they need to make sure that the plan isn’t gathering dust, that they’re on target to reach designated milestones, and ultimately, that they’re poised to achieve the shareholder value they want.

Do you think it’s helpful if the board appoints someone as point person to organize that process and make sure it stays on track?
That falls under the CEO’s purview as part of his or her management duties—to provide that information so that the board can fulfill its oversight responsibilities. In the same way that management should be more than exhilarated to say, “We’re exceeding our goals and that means the plan is moving forward,” these individuals should also want to ensure that the final goals, milestones, and increased shareholder value will be attained.

On my own bank board, the consensus is, “Wow this is great, this is fantastic, we’re excited to be moving forward.” If a director does not have this feeling right now about his or her bank’s strategic outlook, then that board really needs to reassess its strategic plan.

© Board Member Inc. All Rights Reserved