Part I: Best Practices of Bank Boards

By: Jim McAlpin


good-board.jpgToday’s banking industry is constantly being buffeted by waves of financial, regulatory and operational challenges. The increased regulatory burden and related costs impact every financial institution in both the approach to doing business and the expense of doing business. The industry is in transition, with no clear path forward. As a result, there has never been a greater need for well functioning, informed and courageous boards of directors of banks and bank holding companies. There has also never been a more important time for board members to keep in mind that their responsibilities can be boiled down into one simple goal: the creation of sustainable long-term value for shareholders.

Achieving long-term value for shareholders may seem an elusive goal in the current environment. On more than one occasion, bank board members have commented to me that they feel they are now working for the benefit of the regulators. However, as with any time of turmoil and change, the challenges we now face will pass. As bank boards look for ways to strengthen their institutions, they should not overlook the opportunity to strengthen themselves as a group. One way of doing that is to adopt the practices of the most effective boards of directors.

Over the past several decades my partners and I have attended hundreds of bank board meetings, for institutions ranging in size from under $100 million in assets to well over $10 billion. Regardless of the size of the entity, we have noticed a number of common characteristics and practices of the most effective boards of directors. This is the first in a series of articles which will describe the 10 best practices we have observed among highly effective boards of directors. In this article I focus on two fundamental best practices – selecting good board members and adopting a meaningful agenda for the board meetings.

Best Practice No. 1 – Select Good Board Members

Some of the most challenging and distracting issues a board can face are those related to its own members. These issues typically arise in connection with conflicts of interest between board members and the banks they serve, or when board members experience financial stress. They can also arise when there are personality clashes in the boardroom or when one or more board members seek to dominate the conversation. The best time to avoid such issues is during the selection process for new directors. Compromise and wishful thinking in the selection of directors will almost always dilute the effectiveness of the board as a whole. Key characteristics of good directors include:

  • Independence – being free of conflicts.
  • Time to devote to the job – including time to gain knowledge of the industry, to prepare for board meetings and to participate in committees.
  • Attention – being fully engaged and proactive as a board member.
  • Courage – having a willingness to deal with tough issues.
  • Curiosity -possessing an intellectual curiosity about the bank, the financial services industry and the trends impacting both.

A group of good, solid and dependable board members is, in my experience, preferable to a big-hitter, all-star line-up of directors. A board is most effective when it acts as a group, with a culture in which all members can voice their opinions, and in which probing, and sometimes difficult questions can be asked. Dominant personalities and board cultures in which constructive debate never occurs have contributed to the demise of many banks in the current downturn. Careful selection of new board members, keeping in mind the strengths and weaknesses of the other members of the board, is well worth the time and effort involved.

Best Practice No. 2 – Adopt a Meaningful Agenda

Take the time to review, revise and update your board agenda. I’m aware of several banks that are using the same approach to board meetings and the same agenda as 30 years ago. The absence of any objection from board members may only mean that they are drifting off to sleep during the half-hour-long financial presentation. Board members greatly appreciate a shift to a more efficient and effective agenda, with a focus on committee reports and presentation of only meaningful information about the condition and operations of the bank .This can free up substantial time for the board to focus on the overall direction and progress of the bank. 

Most directors only visit the bank once or twice a month, which makes a full understanding of the bank’s plans and status very difficult. There needs to be an educational element in board meetings. Most directors have an ongoing need, and desire, for growth and development in their understanding of the banking industry. With such education, directors can become more effective in their recognition and understanding of the risks to be monitored, as well as the factors that most influence a bank’s strength and performance.

Board packages should be delivered well in advance of each meeting in order to provide the directors with adequate time to prepare. Committee chairs should be prepared to give concise but informative reports at the meeting. Financial and operational presentations by management should focus on telling the board members what time it is, not how the watch was built. This approach can result in more interesting and informative board meetings and will likely result in greater interaction and contribution by the board members.

Links to the other 3 parts in this series

Originally published on October 25, 2011.