Two Veteran Directors Explain How Boards Can Bolster the Bank’s Cultural Immune System

Kevin Ahern thinks of culture as an immune system that’s critical to a bank’s health.

“It keeps the people you want to keep in the organization [and] the customers you want,” he told Emily McCormick, Bank Director’s vice president of editorial and research, in a recent webinar. “It also keeps the people you don’t want out.” Ahern serves on several bank boards, including $6.6 billion Horizon Bancorp in Michigan City, Indiana.

A bank’s culture can be a critical part of its success or failure, and the board plays an important oversight role. But that can be easier said than done.

“The board doesn’t create the day-to-day culture. Management does,” said Sandy Moll, board member at $1.6 billion Landmark Bancorp in Manhattan, Kansas. “But the board does define expected values and conduct. We also ensure that there are incentives that support the desired behavior, [and] we hold the CEO accountable for the culture.”

In the webinar, Ahern and Moll discussed how to assess the organization’s culture as well as weathering change, including the rise of artificial intelligence. The transcript below has been edited for brevity, clarity and flow.

BD: What information is critical to the board so they can understand what’s going on in the organization?
Ahern: If you’re struggling with hitting your annual or three-year financial objectives, that would be an area to question why. Turnover ratios for non-officers in a bank — if you have turnover ratios above 20%, I think it’s important for the board to ask what factors might be involved with that. Is it geographical? Is it our business model? Is it the current economic climate? Or is it something else? For officers and executives, if you have turnover ratios greater than 6% or 7%, depending on the size of the organization, again, ask questions and explore why are we having a hard time retaining those people?

Moll: What I want to hear from the CEO and the C-suite are the successes, the challenges, emerging risks, turnover hot spots, leadership issues, any cultural concerns they have. And I think healthy CEOs bring problems to the board before the board hears about them elsewhere.

BD: Let’s talk about the role of the audit function in cultural oversight.
Moll: I personally think internal audit can see cultural issues before anybody else can, because audit can determine whether employees are speaking openly, whether management suppresses concerns or whether controls are being bypassed. Sometimes bypassing of controls is systemic as a cultural issue, and the audit committee should view culture as part of their risk oversight. I think a strong audit executive has direct access to the board, of course, and they escalate concerns.

BD: What do you want to see as part of the CEO evaluation that can help the board tap into culture?
Ahern: I’m certainly getting feedback from all of the directors with respect to those key issues around [their] observation of the CEO’s leadership on this effort. Are you seeing the kind of candor that we want to see in the boardroom and the communications with the other executives? But I think also the question of making sure our culture development, the way we’re building our culture focuses in on the performance objectives for the company. How are you linking those two things so that they work together?

Moll: I think all CEO evaluations should include very specific things like talent development, retention, succession planning, employee engagement, your risk culture, your regulatory relationships in addition to your financial planning or financial performance. And some leading indicators include turnover — declining engagement, increased sick leave, hotline reports, internal transfers, audit findings, lawsuits, fraud, those types of things.

BD: Is AI a useful tool in a cultural sense, or are banks having to navigate this as part of a cultural change?
Ahern: People realize the value it’s going to create for all of us as workers as well as for businesses. But I think there’s also a fair amount of fear around, “What does that mean for me?” And one of the important aspects of culture is giving people the feeling of security with respect to their individual position within the company. I think it’s important to communicate that this is going to help us work better, help us work smarter, help us do more, and it’s going to help you as part of that.

Moll: From a board’s perspective, you do have to have some policies, and they need to understand they shouldn’t be uploading board reports into AI because that may not [be] confidential. There [need to be] some parameters there, but I think you’ve got to embrace the benefits of AI and not make decisions out of fear.