Much is being written these days about the performance and expectations of bank boards of directors. From recent pronouncements that some regulators intend to spend even more time taking boards to school, to activist investors shining light on underperforming institutions, being a bank director poses more challenges than ever in today’s climate.
The heightened demands of the current competitive and regulatory landscape appear to be taxing the capabilities of many bank boards. On every level, the bar for directors is getting higher. Many of the complex dynamics of boardroom effectiveness are—surprisingly—intangible and cultural, rather than procedural. Here are five key elements of successful boards of directors, based on our firm’s experience and echoed by a variety of expert industry sources:
Quality Dialog, Debate and Discussion This is cited by boards as the single most important differentiator for “great boards.” It is the willingness to tackle the tough challenges—dealing with the “elephants in the room”—which significantly impacts a board’s effectiveness and the institution’s performance. Important issues such as CEO succession, corporate performance, talent development, and underperforming directors are often difficult to deal with due to personal relationships and board politics. Yet research also shows that an environment which does not evoke boardroom candor and a willingness to deal with these vital issues greatly undermines a board’s effectiveness and a bank’s success.
- Start with the basics of a formal evaluation process for CEO performance and tenure. Regularly scheduled board executive sessions create a safer environment for tough conversations and to tackle lingering issues.
Diversity of Perspectives Around the Board Table A diverse range of thoughts, experiences and perspectives on important issues is another key success factor for highly effective boards. This is not gender, ethnic or racial diversity for the sake of optics; it is a true approach to broadening of the viewpoints which collectively sit around the board table. More often than not, however, to achieve the widest array of viewpoints does require proactively reaching out to prospective directors who represent a different profile than our legacy board members.
- While only 19 percent of U.S. public board members today are women, companies with three or more women directors on the board are statistically proven to perform better.
Board Self and Peer Evaluations Ninety-eight percent of large company boards of directors now perform some kind of annual evaluation, and this approach is rapidly filtering down to mid-size and smaller institutions. There are multiple layers to board assessments, including evaluation of how the group is functioning as a whole, individual self appraisals, and ultimately how we view the performance of our peer directors. Candid feedback, facilitated by a trusted third party, provides another data set for dealing with less effective boards and underperforming directors.
- Begin with a general group evaluation of board operations, including committee structures, agendas, advance materials, etc. This eases into the concept of evaluations, and helps set the stage for deeper future assessments.
Skill-based Process and Formal Approach to Director Recruitment Bringing new directors to the board should be a process and not just an invitation. There are too many skills gaps within boardrooms today, particularly smaller community banks. I often hear that skills are needed in areas such as information technology and cyber risk, marketing and social media, finance and risk, and strategic planning.
- A good first step is to survey the existing directors to develop a comprehensive view of the board’s collective skills.Then focus board recruitment on individuals with particular skills and experiences, rather than who you know.
CEO and Director Succession Research from RHR International found that 81 percent of boards viewed grappling with these challenges as the most important element of being a great board. Yet only 32 percent of boards today formally discuss CEO succession at least twice a year; 64 percent place this subject on the agenda only once annually. A best practice would be for boards to discuss CEO and director succession on a more frequent basis, and foster transparency throughout these discussions.
- CEO selection and succession is a board’s most vital responsibility, and independent directors need to drive this process. Likewise, director succession should be a regular topic for the independent directors on the governance and nominating committee.
Nearly three-quarters of directors agree that a great board is a substantial component of institutional success. What makes a boards of directors most effective is a willingness to deal with those very issues which are most challenging: boardroom candor, diversity of perspective, and the performance and succession of both the CEO and directors. A board’s ability to address these dynamics will be a critical ingredient of the bank’s future success.