Over the last several years, companies which can be broadly grouped under the umbrella of “fintech,” or financial technology, have been making notable additions to their boards of directors by acquiring talent from traditional financial institutions and regulatory agencies. These additions include Sheila Bair, former chair of the Federal Deposit Insurance Corporation joining the board of directors of Avant, which specializes in digital lending to subprime customers, and Anshu Jain, former co-CEO of Deutsche Bank, joining online lender SOFI. This effort is certainly not unprecedented.
Many industries undergoing transformation often reach out to individuals in the industry they are attempting to disrupt to create an air of legitimacy to their efforts and facilitate communication and transparency with the primary regulatory organizations. In the case of financial services, banks should take this opportunity to turn the model around and cast their nets in the opposite direction. By reaching out to technology-based companies and sophisticated technology professionals, banks can enhance their ability to meet the challenges associated with delivery of financial services and be better equipped to assess the risks associated with an increasingly technological environment.
Directors are broadly responsible for the management of business and affairs of a corporation and the proverbial “buck” ultimately stops with the board. Directors must fulfill their fiduciary duties with due care and always be properly informed about the critical matters facing their respective institutions. This means that directors need to be able to understand the challenges posed by technological innovation and how technology can successfully be incorporated into a bank’s existing platform. Most directors, however, do not come to a bank board with the technological expertise or sophistication to truly understand how technology works and the risks posed through the use of that technology.
By the same token, at their nascent stage, fintech companies typically do not have boards of directors comprised of individuals who are well-versed in the panoply of regulations which affect the financial services industry or anti-money laundering compliance. Realistically, most fintech companies, even at a more mature level, are often populated with smart technologists, founders and the venture capital representatives who have funded them. But as they grow and move closer to significant liquidity events, whether they be initial public offerings, mergers or acquisitions, fintech companies are leveraging the expertise of establishment bankers and regulators who understand the risks and rewards posed by various business models. Traditional banks should do the same.
How should traditional banks approach this challenge? Of course, by thinking outside of the box. The characteristics that make for a director who understands net interest margin and the ins and outs of loan origination and credit risk are not necessarily the same ones that make for a cutting-edge technology expert who grew up with a computer in hand and who appreciates the cybersecurity and data privacy risks posed when financial information travels from point A to point B. That means that boards must expand their search profile and look for individuals who may not have horizontal breadth of understanding in a wide array of bank operations, but rather, have deep technology experience and can learn the other areas of bank operations while educating their board colleagues on the risks inherent in a technological world.
In addition, banks should inform retained search firms and internal cross-reference sources that the characteristics of leadership they are looking for are probably not sitting on existing bank boards, but instead, may be overseeing the operations of code-laden start-ups located in Silicon Valley. To that end, banks must rethink the manner in which they envision leadership. They must recognize that leadership does not always involve a horizontal breadth of knowledge across a wide spectrum of subjects, but rather, leadership can be articulated through a more narrow, vertical expertise which fills a critical niche in enabling financial service businesses to meet the challenges of today….and tomorrow.