Laying Down a Foundation for Bank Boards Through Assessment, Alignment

There are few things in life that remain unchanged for their entirety, and that is certainly true of corporate boards of directors. A board’s ability to plan ahead for retirements, unexpected departures and shifts in business scale is imperative in maintaining a successful franchise.

As the cornerstone of leadership, the board’s composition plays a critical role in a corporation’s performance. In the banking sector, the board’s commitment encompasses the shareholders, to whom it has a fiduciary obligation, and to its management team, for which it has oversight responsibility. The board’s collective experience and knowledge of its members provides tremendous value, empowering the trajectory of the bank’s strategy.

But without the proper strategies in place, even the most robust board rooms are vulnerable to unexpected changes in the industry. An estimated 50% of all boards are operating without a strong succession plan. The absence of sufficient forethought poses incredible risk to a bank’s present and future stability. In contrast, establishing a foundation for preparedness through a board assessment process can help ensure the board is aligned to the strategic direction of the bank, and is prepared to address an ever-evolving business landscape.

The ideal board assessment approach allows for a standardized, yet customizable process. With careful attention to the uniqueness of every institution, the right steps will allow directors to examine their board’s strategic alignment to the functional and industry expertise needed to support the bank’s growth. A thorough assessment generates a “road map” of future director needs, along with updated governance framework. The assessment process can be led by the governance committee, the lead independent director, the chairman or a third-party firm. Here is the process we recommend:

Intake Session
Having conversations with board stakeholders that are focused on the bank’s long-term vision and short-term objectives will shape the strategy of the organization. This should also take into account the unique culture of the bank’s management team, coupled with any shareholder dynamics that can help guide the framework output and objectives.

Board Assessment
Develop a list of director questions and conduct one-on-one interviews with each director. Some categories of questions to ask include director professional background, contributions and engagement, director aspiration and a deep dive on director profile and skills. We also recommend developing a skills matrix as an effective tool to assess directors.

Future Board Framework
A healthy director composition analysis requires that the board compile a thorough report that includes the findings of the board interviews and member assessments. Directors should have candid discussions about the skills and expertise the board needs to fill identified gaps and needed changes. Directors should revisit all governance elements such as terms and limits, size of board, committee structures, election process and succession issues, among others. We recommend that bank directors develop a final three-year board framework plan to implement the identified changes.

Refreshment
Boards should follow this plan to refresh overall board governance, implementing new processes over time as to not dispute important social and cultural matters. Boards should also use a director refreshment plan to bring on new directors that fill experience and skills gaps identified as part of the board assessment process.

Often, a third-party firm is brought in to lead the overall assessment and refreshment process, working closely with the chairman or the board’s governance and nominating committee. Given the complexities of crafting and gauging a board’s optimal composition, a firm can be helpful with managing that assessment process from beginning to end. Additionally, a third party can help recruit a strategic director with the needed industry and functional expertise, with the added benefit of bringing forward a more diverse candidate pool to consider.

Strong bank boards continue to adapt to strategic objectives and maximize shareholder returns. Time and time again, companies that thrive consistently focus on going deeper with corporate board best practices. For emerging institutions, going through the assessment process for the first time is typically challenging; this process inherently implies impending change. Boards that regularly engage in director assessment and revisit their overall governance framework tend to produce better shareholder returns. Is your board focused on how to elevate the oversight function for the organization?