The Board's Duties in Strategic Planning
Jay Brew, chairman, president & CEO, BNK Advisory Group

Jay, in addition to your other duties, you’re also the director of a bank that you started a few years ago. What are a director’s duties when it comes to strategic planning?

The first and foremost duty of a bank director is to create long-term shareholder value, and I believe that it has to be on a 10-year time horizon. It can’t be the short-term timeframe of most strategic plans–three years, one year, or shorter. It really takes a 10-year horizon for the directors to encapsulate their dynamic vision of what the bank is going to look like in the future. For example, if you open a typical branch today, it would take five years for that branch to season. If you’re looking at a three-year time horizon, that branch is not going to come into play in terms of creating value and meeting expectations. So if you look at that long-term value and ask,“What kind of share value would I like in 10 years? What would make me happy? What would make all the other shareholders happy?” then you set the tone of the plan.You can move from there and essentially back down the curve on all of the different aspects of what your strategic plan should be.That creates a dynamic atmosphere to get management and the directors involved.

You’ve written a book for directors called The Art of Risk in Community Banks.Why is the management of risk so important to the strategic planning process and to community banking in general?

It goes back to that one question we were talking about:“Where are we now?”A big part of that is “what risks are we taking?” So when you remember that one of the duties of a bank director,which is to assess risk, set risk parameters,monitor risk, and also provide management with dynamic tools and models to simulate risk, risk really boils down to the whole aspect of how a bank makes money. If a child were to walk up to you and ask, “How does a bank make money?” the typical answer a director would give is that “we take in deposits,we make loans, and we make [money on] the difference.” The real answer is based upon how much risk the bank assumes.When I attend director conferences and meetings and I ask them about risk and whether they understand it, directors overall feel that they do not understand risk.There’s credit risk, interest rate risk, capital risk, and liquidity risk, and when you look at all those risks, are they balanced in order to create the kind of returns that make a strategic plan happen? When I work with banks on strategic planning, a major piece of that is looking at what risks they are taking,whether they are comfortable with those risks, and whether they need to rebalance those risks.

When it comes to strategic planning, what are the duties of the board with respect to the CEO?

The one thing I say to directors is that you’re not there to micromanage.You lay out the strategic plan that the CEO is there to carry out, and in doing so, you should have given the CEO the goals and the risk parameters. So a vital piece of the strategic planning process is to evaluate the CEO at all points along that 10-year curve. From that standpoint, the CEO is the one who’s going to make the strategic plan happen. So the board needs the tools to be able to monitor the CEO to make sure that the plan will succeed.

The other side to the equation is that the board also has to develop a compensation plan over that 10-year period. I feel that if the CEO is able to deliver the strategic plan at all the points along the 10-year cycle, that CEO should be compensated in a very high manner.

Please summarize the role of the board in strategic planning.

The board’s role in strategic planning–and I say this because of what I’ve learned from being a bank director myself–is to protect the shareholders of the institution. The board is also there to create value going forward. So it goes back to that whole 10-year vision. In our bank,we’ve had our 10-year vision. In fact,we’re at year five, and we’ve exceeded the goals of that vision.That creates a dynamic situation, not only for the management team, but also for the directors, in which we feel we’re creating this great value going forward.

From that standpoint, the directors really have to be in a position to be educated. If they don’t understand all the moving parts of a bank, they’re not doing their job to protect the shareholders.The area of risk is a good example, if they do not understand risk as well as they should. There are many educational forums where they can get a director level of education. If you look at an average bank in the country, right now, by our calculations, it’s actually carrying a high credit risk. It’s somewhat odd that the average is at a high. From that standpoint, if the directors don’t understand that and aren’t educated to look at these different areas of the bank in terms of risk, they’re not going to be able to protect the bank’s value as well as create long-term shareholder value.

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