When the chairman of MainSource Financial Group, a $2.8-billion asset banking company in Greensburg, Indiana, retired last year after 28 years, figuring out how to replace him became a critical decision. Did the bank have the expertise it needed on board committees, including banking expertise and a background to handle all the new government regulations for banking? The answer was no.
So MainSource went through a radical change: going from nine to 12 members, merging the holding company and bank board and adding two new members: one with deep banking experience, the other with compliance expertise, and both with a background in large public companies.
“It was a pretty dramatic restructuring of the board, enhancing its skill set and adapting to a new leadership structure,’’ says Brian Crall, the lead independent director at MainSource. “My assessment is it has gone very well for us.”
Other banks are engaging in similar soul searching. With an industry wondering how to grow profits and deal with an increasingly heavy regulatory burden, many boards are assessing the kinds of skill and experience that bank boards will need going forward. They are looking for directors with skills that are tough to find: enterprise risk management, for starters. They are looking for digital expertise in an age when banks are grappling with new technology and security attacks. They’re looking for racial and gender diversity to bring different perspectives to the oversight process. They’re looking at the potential retirement of many of their directors in the years ahead. The average age of an S&P 500 financial firm independent director is 64, according to recruiting firm Spencer Stuart. So what does the board know about the changing demographics of the country or how 20-somethings are using social media today? Will the board ask the right questions about the bank’s future? It won’t be easy, and some banks will have an easier time recruiting than others.
“The bar has gone up across the board,’’ says Alan Kaplan, the president and CEO of Philadelphia-based executive search firm Kaplan & Associates Inc. He says there is more pressure from shareholders and regulators in a difficult economic environment, and both are asking about the qualities and expertise of the board. Risk has become more broadly defined than it was a few years ago and now includes technology risk and investment portfolio risk, he says.
Historically, community banks have brought on board members who were pillars of the community and iconic names in business. That still has a lot of value, Kaplan says, but now boards and CEOs also are asking about the particular mix of skill sets on the board.
“In many cases we have not brought on people who have the depth of financial acumen or business savvy to serve on a bank board,’’ he says. “There was sort of an overemphasis on the community aspect, and not enough financial and governance oversight, which really are the primary functions of the board; to bring in the right management and monitor that performance and to compensate management appropriately based on that performance.”
United Community Banks Inc. in Blairsville, Georgia, decided to beef up its financial and banking expertise when it came time for the board retirements recently of former Georgia governor Zell Miller and Hoyt Holloway, who has owned several businesses, including a poultry operation.
The board chose Steven Goldstein, formerly a chief financial officer for both the Federal Home Loan Bank of Atlanta and of Royal Bank of Canada’s U.S. and international divisions. Also joining the board was Thomas Richlovsky, a former executive vice president at PNC Financial Services Group and chief financial officer for National City Corp., which was bought by PNC in 2008.
“The industry is more complex today because of so many changes in the regulatory environment, but also the normal complexity from a financial standpoint, understanding what interest rate swaps are and asset liability management and completely understanding call reports and the 10Qs and 10Ks that go along with being a public company,’’ says Jimmy Tallent, president and chief executive officer of the $7.2-billion asset bank holding company.
Risk is another area where boards are looking to improve their skills. The Dodd-Frank Act requires a risk committee for bank holding company boards above $10 billion in assets, but even banks under that threshold are feeling pressure to add risk committees and risk expertise.
This has challenged boards to find people with the right background.
“The specificity of the requests at the board level has really increased,’’ says Peter Crist, a partner in Crist Kolder Associates, an executive and board search firm in Hinsdale, Illinois, and chairman of Wintrust Financial Corp., a $15.9-billion asset banking company in Lake Forest, Illinois. “No one said 10 to 15 years ago, we need someone with risk experience to go on our board.
Richard Perkey, a managing director at executive and board search firm Russell Reynolds Associates, says the economic environment for banks is so difficult, there’s a heightened demand for people with a lot of experience in banking and risk management in particular.
“The emphasis is more dealing with today’s issues and today’s issues relate more to risk,’’ he says. “Most institutions are not at a stage where they are thinking about innovation or growth. Most institutions are trying to deal with a whole new regulatory environment and today’s problems caused by yesterday’s decisions. It’s still hand-to-hand combat out there.”
Michael Shanahan, senior partner at The Boston Consulting Group, says financial firms should push themselves to create a board that will help them navigate a more difficult economic landscape. Banks have suffered a lot of bad publicity and they’ll need to win their customers’ trust, he says. One way to do that is add an expert in retail. “A non-industry voice is needed more than ever,’’ he says. “It’s going to be more difficult to make money than it has been in the past. It’s going to be a changed game. Significantly changing that customer relationship could be essential.”
Similarly, the Group of 30, a private, nonprofit international body of senior representatives of the public and private financial sectors, studied 36 of the world’s largest financial institutions and recommended in an April report on governance that boards not load up with too many financial industry professionals.
“While [financial industry] perspectives from the board can be helpful as a counterpoint to executive views, the board’s function is not to outdebate the executive on technical issues,’’ the report says. “Too many [financial industry] veterans can lead to groupthink.”
To varying degrees, it may be difficult to find the right mix of skills and backgrounds.
A 2011 Annual Corporate Directors Survey last year by PricewaterhouseCoopers LLP found that 62 percent of bank directors thought it was difficult or somewhat difficult to find someone with risk expertise to add to the board and 59 percent said it was difficult or somewhat difficult to find someone with a technology background.
However, the demand for technology expertise has risen. Banks boards generally know that there’s an avalanche of cyber attacks and attempts to breach their security systems. Perhaps as a consequence, there was an eightfold increase in new directors with a high tech or telecommunications background added to the boards of S&P 500 financial services companies in 2011 compared to the year before, rising to 16 percent of new directors, according to recruiting firm Spencer Stuart.
Boards also have a high demand for women and minorities to serve as members. Spencer Stuart says 24 percent of new directors in 2011 on S&P 500 financial services boards were women, compared to 18 percent the year before. Only about 15 percent of current S&P financial services firm directors are women, according to Spencer Stuart.
Archie Brown, Jr., the president and CEO of MainSource Financial, which added a woman with a compliance background to its board last year, explained it this way: Women tend to make the household’s decisions about where to bank and they make up most of the bank’s employees. In contrast, MainSource’s board is mostly over the age of 50, white and male.
“I think there needs to be a different way of thinking than is typical for the rest of our industry,’’ Brown says, hopeful that a more diverse board will bring different perspectives needed for a changing landscape.
Whether they are diversity candidates or not, current CEOs are always a hot commodity to serve on boards, but those are hard-to-come by in an age when many companies place restrictions on their executives’ service on outside boards.
Director candidates who are in high demand will be picky about what boards to join and this can make it difficult to recruit for small bank boards. The personal liability can be just as high, and the pay is low.
“If I call and say I’ve got a board seat for American Express, everyone is falling all over themselves,’’ says Crist. “If I call about a community bank, people will tell me: ‘Call me when you’ve got something better.’”
Although most directors don’t serve on boards for the pay, Crist says, there’s a significant difference in compensation for big versus small bank boards. A big bank may pay upward of $150,000 per year to serve, while a smaller community bank may pay $20,000 or less, says Crist.
While pay for a small bank can be quite low, the liability is still there. In the wake of the financial crisis, the Federal Deposit Insurance Corp. has given notice to sue about 500 bank directors at failed banks, most of them directors at small banks. That makes it tough to recruit for banks struggling with financial problems.
William Reeves of Spencer Stuart’s Atlanta office has so far recruited 19 bank board directors for the U.S. Treasury, which has the authority to appoint two members to bank boards that have missed six or more dividend payments to the Treasury as part of the Troubled Asset Relief Program.
Reeves says he gets turned down at least twice as often when he’s working for the Treasury as he normally does when recruiting board candidates. Although the Treasury appoints them, once they are appointed, the directors work for the bank and receive no immunity just because they were appointed by the Treasury.
In order to find good candidates who were available and best able to serve troubled financial institutions, he and the Treasury decided to focus on recruiting retired bank executives with credit experience.
He recruited two directors last fall for Citizens Republic Bancorp Inc., a $9.6-billion asset bank holding company in Flint, Michigan, that had missed nine consecutive dividend payments worth about $34 million, according to investment firm Keefe, Bruyette & Woods, which has been tracking the TARP program.
Cathy Nash, the president and CEO of Citizens, says she had some trepidation when the U.S. Treasury told her it was going to be appointing people to her board last year.
“I asked: How can we be a part of this process?” she says.
She felt better when she got a call from Spencer Stuart asking her what sort of people she thought the board needed. Nash knew she had some people retiring soon and wanted banking expertise and people who could serve on the audit committee. That’s what she got.
To find the right directors, Crist suggests the board conduct director evaluations that list the current skill set of the board members and the skills they will need in the future.
“I think the most important thing a community bank has to think about is: What are we today and what are we going to be in two to four years?’’ Crist says. “That dictates what sort of resources you need around the table.”
If the board plans to acquire other banks, does it have members with acquisitions experience? If it plans to get bigger, does it have members who have ever worked at a larger company?
The board evaluation process also includes a self-evaluation for each board member that can help weaker board members reflect on whether it’s time for them to go.
Perkey says it helps to have an independent third party come in for the evaluation and take out the element of personal relationships and history on the board and focus on what the bank needs now and in the future.
Getting rid of reluctant-to-leave board members is never easy, but it’s a responsibility of the board and the chairman of the governance or nominating committee, says Walt Moeling, an attorney with Bryan Cave LLP in Atlanta.
“If there is a board member who is weak, the board should deal with that,’’ he says. “Management has enough to deal with.”
The CEO needs to be involved in picking new directors, but not in charge, Kaplan says. That’s the job of the nominating committee and the board.
“If the CEOs are picking their own board members, they’re going to pick people they know well enough who aren’t going to push back,’’ Kaplan says. “You don’t want to bring in board members who are adversarial, but you want informed people with integrity and courage. You want them to put tough stuff on the table when it needs to be there. They need to have the objectivity to do that in a constructive way; that’s their job.”
It’s also the expectation of regulators, says Chip MacDonald, an attorney with Jones Day in Atlanta.
“The regulators are expecting banks to improve the quality of their boards,’’ he says. “All banks to a certain extent are under siege due to economic and regulatory change. It’s a hard job to do well. In that environment, it takes ever more talent on the board to succeed.”