Shaking Up Board Deliberations

After years of growth, the board at $3.6 billion Civista Bancshares needed to change. Membership no longer reflected the bank’s size, says board chairman Dennis Murray Jr., and its role was changing as it approved fewer and fewer loans. Three acquisitions over the past decade meant a more expansive footprint; simply including professionals who represented its various geographies no longer proved sufficient. “We had too many communities in which we were doing business,” he says.

Fresh perspectives and new expertise were needed, particularly around risk, technology and human resources. “With size and regulatory supervision, and shareholder expectations, the [director’s] role has shifted,” says Murray.

The board’s two most senior members were asked to retire. A mandatory retirement age was set, at 75. As a result, four new directors have joined the 10-member board since 2019, according to the Sandusky, Ohio-based bank’s 2023 recent proxy statement.

When executed well, turnover in the board’s membership can be healthy, providing new points of view while also retaining seasoned directors with institutional knowledge of the bank’s operations. “It’s not only good for strategy,” says Sydney Menefee, a partner at Crowe LLP, “it’s also [good] for risk identification, because that person’s experiences will inform how they look at a particular situation.”

In Bank Director’s 2023 Governance Best Practices Survey, sponsored by Barack Ferrazzano’s financial institutions group, 80% of responding directors and CEOs report their board has added at least one new director since January 2020. Less than a third have added three or more.

However, board refreshment is often “easier said than done,” says Robert Fleetwood, a partner at Barack Ferrazzano, particularly for smaller, tightly-held banks where directors are family members or individuals who have close relationships with the bank’s owners. But all boards benefit from new points of view, no matter the size or ownership of the bank. “You want fresh ideas to make the bank as strong as it can be,” he says.

But often, legacy directors prove reticent to resign, especially in challenging times, says Fleetwood. They worry their departure could signal trouble at the bank. And sometimes, directors just don’t want to leave.

Like Civista, many boards set a mandatory retirement policy as a refreshment mechanism, but the tool has drawbacks. Engagement doesn’t have an age limit, and many older directors remain contributing, active professionals who add value to discussions.

Fleetwood adds that a retirement age sets the expectation that a director will serve until they hit the limit – even if they’re no longer the member that the board needs. Instead, he recommends that boards set clear expectations that every board member contributes. The survey finds the vast majority set expectations for individual directors around attendance (96%), respectful interaction with other board members (80%), participating in training and education (80%), contributing to committee-level discussions (77%) and preparation for meetings (71%).

Civista’s directors serve one-year terms, and the board conducts an annual peer assessment, says Murray, which can be used to inform conversations with individual directors about their performance. Murray, with the board’s nominating/governance committee chair, meets annually with all individual board members. Generally, it’s a discussion about what’s working at the bank, and what isn’t. But the discussion also opens up an opportunity to talk about a director’s contribution in the boardroom – and whether it’s time to step down.

Eighteen percent of survey participants report that their board conducts an annual peer-to-peer evaluation; another 10% use the exercise less frequently.

Fleetwood recommends that those conversations occur before the nomination process. “Everyone nominated gets elected,” he says. “Removing a director for performance is virtually impossible, and that’s public.”

Convincing board members to leave can be difficult, but it can be just as tough to find new suitable candidates for board service. It’s a process that can take years, says Fleetwood. In the survey, more than half of responding directors and CEOs say their board cultivates an active pool of candidates for board membership.

Murray says the Civista board develops a list of prospective director candidates based on input from bank leaders – particularly lenders in the community – and directors. It’s an ongoing process, with names coming on and off the list.

Civista also developed a handbook that sets expectations for new and prospective board members. “We’ve shared it with people thinking about joining the board,” Murray says. When new directors join, a year-long onboarding process helps directors ease into their position.

“You should always [have] feelers out to see who the next person can be and what’s needed, and get their interest,” says Fleetwood.

Menefee will participate in a panel discussion focused on governance at Bank Director’s upcoming Bank Board Training Forum, September 11-12, 2023, in Nashville, Tennessee.