Best Board

December 18th, 2018

Best-Board.pngI.pngn its guidelines regarding heightened standards for larger banks, the Office of the Comptroller of the Currency outlines its expectation that bank boards provide a credible challenge to management. To do so, directors should be independent, and the board should represent a diverse set of skills, backgrounds and experiences that allow it to ask tough questions.

Since a board’s composition plays a significant role in ensuring its effectiveness, Bank Director developed two metrics to understand the makeup of each bank’s board. A diversity score examines the percentage of directors who are female, ethnically diverse, or aged 53 or younger (representing Generation X and millennials). A skills score includes expertise important to overseeing a bank, including risk, audit and technology. This information was largely obtained through each bank’s latest proxy filing.

“There’s no doubt that having diverse views and perspectives on a board enhances decision making,” says David Larcker, senior faculty at Stanford University’s Rock Center for Corporate Governance.

To examine board performance, we looked at compensation relative to return on equity (ROE). (Compensation can differ due to the number of meetings attended by a director, as well as committee assignments, so we calculated the median value.) Shareholder approval—based on votes at the bank’s annual meeting—and governance and board ratings from Institutional Shareholder Services (ISS) were also included.

Each bank was scored relative to its regional peers. Regional winners were then compared to each other to determine the overall category winner. Due to this second scoring, the overall winner’s final score differs from its regional score.

Larcker.pngBank of Hawaii Corp. topped the overall category and the West due in large part to its diverse board—one-third are female, 42 percent are ethnically diverse and one-quarter represent Generation X.

Diversity—by ethnicity, gender, age and socio-economic background—is a key component of the board, says nominating and governance chair Mary Bitterman. “Unless people throughout the multi-island state of Hawaii and in the West Pacific region [where the bank has several branches] feel comfortable with members of our staff and board, and believe that we understand their challenges and aspirations and can be of help to them in realizing their financial goals, we will never be as effective as we would like to be,” she says.

Youth on the board is important, she adds. “The median age of Hawaii’s population is 38.5 years. We are a state of young people, on the one hand, and have the highest life expectancy in the United States for people over the age of 65, on the other,” says Bitterman. Representing diverse ages within the makeup of the board can help directors better plan for the needs of a diverse array of customers.

At a median compensation of $113,305 in 2017, Bank of Hawaii is one of the lower paid boards in the ranking, but had a high ROE as of March 2018, at 18.6 percent.

Bank of Hawaii’s board is also highly skilled: 42 percent are current CEOs of other companies, and one-third have accounting or audit expertise. One-quarter have an independent banking background—past experience at a bank unaffiliated with Bank of Hawaii—and one-quarter have technology or cybersecurity expertise.

The board’s first “tech expert” was elected in the 1990s, says Bitterman. “Having this expertise at the board level provides informed contributions to staff development, strategic planning and evaluation of bank operations from a technology viewpoint,” she says.

In the Northeast, Webster Financial Corp. took top honors for its board. It is also more diverse than its peers, comprised of 30 percent who are women and 20 percent who are ethnically diverse. Forty percent are current CEOs, and 20 percent have technology or cybersecurity expertise. Also, 40 percent have an independent banking background. The board exhibits a good balance of pay and performance, with an ROE of 13.7 percent and median board compensation of $124,283.

Huntington Bancshares topped the category in the Midwest due to its highly skilled board: 75 percent have risk or compliance expertise, half have technology or cybersecurity expertise, and 42 percent are current CEOs. One-third of its directors are female.

Finally, Bank OZK was recognized for its strong board in the South. Like Bank of Hawaii, one-quarter are younger. The board’s pay is low relative to performance: Median compensation was $154,973, with an ROE of 13 percent.

Boards can be required to make difficult decisions to ensure their institution’s long-term performance and should be constructed to reflect the challenges a bank faces today. This requires new skills—technology and cybersecurity, in particular—and diverse viewpoints and backgrounds that reflect changing demographics in the U.S.

How They Ranked: Best Board

      SCORE TOTAL DIRECTORS % FEMALE DIRECTORS
OVERALL WINNER: Bank of Hawaii Corp. 1.67    
           
Northeast
  1 Webster Financial Corp. 2.11 10 30%
  2 Sterling Bancorp 2.36 14 21.4%
  3 Community Bank System 2.75 11 9.1%
  4 M&T Bank Corp. 3.83 17 11.8%
  5 Signature Bank 3.92 9 22.2%
Midwest
  1 Huntington Bancshares 2.56 12 33.3%
  2 Commerce Bancshares 2.61 12 16.7%
  3 Great Western Bancorp 2.81 8 12.5%
  4 Fifth Third Bancorp 3.03 12 33.3%
  5 Chemical Financial Corp. 3.28 13 15.4%
South
  1 Bank OZK 2.31 16 25%
  2 BankUnited 2.33 10 30%
  3 Home Bancshares 2.97 14 7.1%
  4 South State Corp. 3.28 15 20%
  5 FCB Financial Holdings 3.86 11 -
West
  1 Bank of Hawaii Corp. 1.72 12 33.3%
  2 East West Bancorp 2.06 8 25%
  3 First Republic Bank 3.31 12 33.3%
  4 Cathay General Bancorp 3.81 12 8.3%
  5 Western Alliance Bancorp. 3.83 14 7.1%

SOURCES: Bank proxy statements and filings, Federal Deposit Insurance Corp. and Yahoo! Finance

Bank Director Research Group