As calendars look ahead and with the latest strategic planning retreats in the rearview mirror, now seems a good time to ponder what bank boards need to focus on from a governance perspective.
There is no doubt that the operating environment will remain challenging for the foreseeable future. There are many compounding factors: the interest rate environment, softening loan demand, an uncertain regulatory climate, profitability pressure, economic volatility and competition from many directions, to name a few obvious ones. Yet bank boards also need to focus on the many critical human capital challenges impacting effective corporate governance. Here are five areas that boards would do well to prioritize in the year ahead:
- Board Tenure and Refreshment. Many bank boards are aging and slowing the pace of board refreshment by raising or even eliminating mandatory retirement ages. Yet there is a pressing need for boards to add more strategic thinking, current business sophistication, technology savviness and financial acumen. Not to mention, there’s a long-term desire to add younger directors and elevate the level and scope of the board’s knowledge base. There are still too many bank boards comprised mostly of local small business owners when the bank is now trading on Nasdaq and making multimillion-dollar loans. Boards need to take a hard look at director longevity. If a long-tenured board member is not adequately contributing, a tough decision may need to be made — and it’s not raising the retirement age.
- Director Assessment. Many directors resist any form of individual evaluation, concerned that perhaps they will come up short. Yet, in this age of proactive governance and investor activism, performance-based assessment of directors for continued board service has become the norm for all but the smallest companies. Such assessments are not necessarily designed to play “gotcha,” but rather to highlight areas where a director — or the board as a whole — may benefit from additional training, or to identify and facilitate conversations with directors whose personal situation may have nudged them towards a lesser level of engagement. Such wake-up calls can often be useful for everyone.
- CEO Succession. A board’s most important responsibility is determining the leadership of the institution. Yet many boards do not emphasize this enough; they may allow a long-tenured and well-liked CEO to ignore the question of their retirement plans. For banks with viable internal CEO successors, the lack of a planned succession timeline can cause extreme frustration for internal contenders — perhaps even leading some to depart for a better opportunity. It’s understood that banks without a succession plan and timeline, coupled with perceived limited successors in-house, are often viewed as simply waiting for the right time to sell.
- Talent Strategy and Retention. Given today’s workforce dynamics, historically low unemployment and demographic challenges, it’s no surprise that the issue of employee attraction and retention is on the minds of directors in every industry. Boards should be questioning the bank’s CEO and chief human resources officer about their plans to tackle these challenges. Employee development plans are an important retention tool, but too few banks take this seriously. If your recruitment team or chief human resource officer is not bringing strategic thinking to the human capital arena, the bank may need to upgrade this area. Boards must hold CEOs accountable here as well.
- Diversity, Equity and Inclusion. DEI frameworks and initiatives are fully entrenched on the radar screen of banks. Yet many boards are more focused on management’s efforts in this area than in examining their own composition. Boards often benefit from a more diverse set of viewpoints, which usually comes from directors bringing their broader gender and racial perspectives to the table. While women finally comprise roughly 30% of public company boards — a long-sought goal — continuing to push harder to identify highly qualified directors with broader backgrounds can only benefit the bank over time. Boards should take a close look in the mirror.
The role of a bank director today is anything but easy. While becoming a true “strategic asset” for management is a worthy goal, boards that take a candid view of their own operation and practices may find that they can do more to help themselves become even more effective.