Examining the Horizon: Using the Strategic Plan for Growth

Sometime this fall, the directors and senior management group at Bancorp Rhode Island will put their other work aside and spend one day at an offsite location talking about the bank’s future for the next three years. The digs won’t be anything fancy. “We’re very tight-fisted,” says Chairman Malcolm G. Chace. “We have our strategic retreat down the street.” The bank will provide sandwiches, but “that’s the height of our care and feeding,” he laughs.

Over the course of the day, they’ll discuss a slew of strategies for growing the bank, selecting some while eschewing or postponing others, and finish up by providing management with a number of realistic financial targets. The bank operates on a three-year planning cycle, and this strategic plan will be its road map through 2007. Chace and Bancorp Rhode Island’s president and chief executive officer, Merrill W. Sherman, are true believers in the value of strategic planning. Thus it is likely no mere coincidence that since the Providence, Rhode Island-based bank opened its doors in March 1996, it has grown to more than $1.2 billion in assetsu00e2u20ac”or that its stock price has quadrupled in the past five years.

There are few board duties more important than strategic planning, yet it seems to be a skill for which many banks are woefully deficient. And difficulty with strategic planning can be reflective of a deeper, more serious dysfunction within the organization’s governance process. Effective strategic planning requires that a bank’s independent directors and CEO work closely together in an atmosphere of give and take. In situations where those individuals are at odds, it may be next to impossible to reach a common vision. But even healthy banks with an effective governance process may need help in developing a blueprint for the futureu00e2u20ac”the very definition of a strategic plan.

“Among all the responsibilities entrusted to the board of directors, determining the strategic direction of the bank is the most important decision it can make short of a decision like selling the bank,” says Paul Simoff, a principal at Toledo, Ohio-based Austin Associates. “There probably isn’t a more important role.”

With 20 years’ experience helping community banks through the strategic planning process, Simoff has seen a significant change in their attitudes over that time. “You definitely see that boards accept this role much more seriously than ever before,” he says. Simoff believes a more competitive business environment and the advent of such major pieces of legislation as the Gramm-Leach-Bliley Act, which gave broader powers to the banking industry, and the Sarbanes-Oxley Act, which imposed tough new accounting standards on all publicly owned companies, have forced bank directors to become more deeply involved in strategic planning. “These changes have compelled banks to become more proactive in this area,” he says. “It’s different now. There is a palpable difference.”

Ten years ago, Portland, Maine-based Banknorth Group was a down-on-its-luck thrift, and CEO William Ryan was working hard to turn it around in one of the most pernicious business climates banks had seen in years. There was little margin for error, Ryan recalls. “We had the sense that we had to do more strategic planning than bigger banks because if we made a mistake, it could really cost us.” Since then, the $29 billion bank has used a successful acquisition program to expand throughout a six-state northeast region. Forbes magazine cited Banknorth as one of the “Best Managed Companies in America” in January 2004, and last August, Toronto-based TD Financial Group acquired a 51% interest in the company for $3.8 billion.

Banknorth’s directorsu00e2u20ac”Ryan is the only insider on the boardu00e2u20ac”work up a new strategic plan every year. Ryan believes it has helped the company to grow intelligently while avoiding a few of the problems that have beset some of its competitors. In 1990, when New England was in the grip of a severe economic recession brought about by the virtual collapse of the region’s commercial real state market, Banknorth decided to expand its network of loan offices just as many other banks were scaling back. Ryan says this expanded physical presence greatly aided the bank in its effort to recover collateral from many of its borrowers. Banknorth also decided in 1993 to expand its branch network just when many other banks were beginning to question the value of a brick-and-mortar distribution system. In recent years, the deposit-gathering function of branch systems has helped drive retail banking profitability. And in 1994 and 1995, Ryan managed to expand into Connecticut and Massachusetts ahead of some of his biggest competitors.

Ryan believes strategic planning has enabled Banknorth’s board to see trends and anticipate the future better than many of its competitors. “We’ve tended to be a little bit ahead of the curve,” he says.

To be successful, an institution’s directors and management team must work together to achieve a consensus about its future direction. The process of strategic planning might best be described as a partnership, with the board and management assuming distinctly different roles. Many consultants and bankers agree that senior managementu00e2u20ac”led by the CEO u00e2u20ac” should take the initiative in putting forth its ideas, after which it’s up to the board to subject those idea to thorough due diligence. This point of view conforms to the conventional wisdom in corporate governance that it’s management’s job to run the enterprise and the board’s job to provide oversight. Or as consultant Gary Young, CEO of Kent, Ohio-based Young & Associates puts it, “Directors direct, and managers manage.”

But not everyone thinks that the board should play a passive role in strategic planning, at least in terms of formulating ideas. Randy D. Dennis, president at DD&F Consulting Group in Little Rock, Arkansas, argues boardsu00e2u20ac”including the CEOu00e2u20ac”should take the lead in charting the company’s future. “The board is much more engaged [when] they start the process,” he says. There is a subtle but important difference between Dennis’s approach and the conventional view of the board’s role. In the latter, the CEO and his or her management team work up a business plan for the board’s review. In Dennis’s approach, the boardu00e2u20ac”including the CEO but excluding senior managers who aren’t directorsu00e2u20ac”develop the plan.

An important part of Dennis’s consulting practice is to help community banks through the planning process as a facilitator. He says when senior business-line and operations managers are present for strategy discussions, most independent directors clam up because they think they don’t know enough about banking to participate in the discussions. “You can’t do that because it’s a killer,” says Dennis.

Still, when it comes to strategic planning, most banks operate on a more traditional model where the institution’s CEO and senior executives drive the process. “It’s management’s responsibility to identify all the options and present them in their entirety to the board,” says Simoff. “The board then has to ask a series of questions: Is management capable of executing the plan? What resources are needed, and what will the impact be of trying to obtain those resources? Finally, what is [the bank’s] current valuation, and what valuation does the organization achieve if it attains these [strategic] goals?” In other words, will management’s proposed plan create shareholder value? “[The board] is there to serve the shareholder base,” Simoff says.

For his part, Banknorth’s Ryan does not look to his independent directorsu00e2u20ac”most of whom are experienced business people, but not bankers themselvesu00e2u20ac”to provide a competing vision for the future. Although Ryan is self-confident enough to work in a governance structure where he is the only insider on the board, he still believes that strategic vision should come from him. And he thinks it’s unfair to expect directors to have independent ideas of their own, given their lack of industry experience. “I don’t think that’s the best use of the board,” he says. “I think the best use of the board is to do a market test. You need people at the board level with diverse backgrounds and a willingness to listen.”

Ryan adds that in past years, he and his management team have proposed entering the credit card and national mortgage arenas. Both times the board argued that it would be difficult for a regional bank to be successful in heavily consolidated businesses dominated by a relatively small number of large players with significant economies of scale. Although Ryan and his management team were confident about their prospect at the time, he credits the board with exercising good judgment.

Bancorp Rhode Island’s Sherman also questions whether a board can properly discharge its oversight responsibilities to thoroughly vet the strategic plan if it also helped put the plan together. “I think you need a separation of powers if you’re going to have a governance process,” she says.

Young, who facilitates an average of 30 strategic planning sessions a year for community banks, has experienced both sides of the divide: banks where management pushed the plan and others where the board drove it. And he says regardless of its exact role, the board needs to be fully engaged in the process. “My belief is that boards need to be very actively involved in the development of the strategic plan,” he says. “The board lays out the strategy of the bank with management, and then management implements it.” Young also says a board should be alarmed if the CEO can’t articulate his or her own strategic vision. “If the CEO doesn’t have a strong view of where that bank ought to go, the first thing that board ought to do in its strategic plan is get a new CEO.”

When the board and management team at Bancorp Rhode Island meet later this year for their triannual planning session, they will discuss a variety of ideas for growing the bank’s business lines or expanding into new ones. They will also agree on certain objectives that are not tied directly to the bank’s annual revenue and expense budget, instead giving Sherman and her senior executives some targets to shoot at. Management’s performance against the strategic plan will then be evaluated every quarter for the next three years, though Sherman won’t hesitate to “veer off plan” if something isn’t working. “We’re very proactive as managers,” she says.

Although his objective is the same, Ryan takes a somewhat different tactical approach to strategic planning at Banknorth. Every year in June, when the bank is about halfway through its current plan, he gathers the board for a three-day retreat at the Mt. Washington Hotel in the mountains of New Hampshire. The timing is important because by midyear, the board already has a good sense of what is, or isn’t, working with the current plan. And Ryan believes taking the board away for three days is worth the time and money. “If you want independent thinking, you have to create an independent environment,” he says. “If you do it in a bank boardroom, you’ll get boardroom thinking.”

The evening before the first planning session, Ryan will invite an investment banker to give the board an independent assessment of the bank’s strengths and weaknesses, and Ryan will follow that with his own presentation the next day. This will lead to a free-flowing discussion about the bank’s various strategic options, which might include such things as opening additional branches, getting more checking account deposits, or jumping into new business lines. Banknorth has expanded throughout much of the Northeast under Ryan, so mergers and acquisitions are always an important aspect of its strategic plan. And every time the board considers doing something significantly differentu00e2u20ac”like getting into a new line of businessu00e2u20ac”it asks whether the bank has the necessary skills. As with Bancorp Rhode Island, the strategic plan is reviewed by the board every quarter. “Are we doing better or worse?” asks Ryan.

Some smaller community banks turn to facilitators like Simoff, Young, and Dennis to help them develop a strategic plan. The process generally begins with as assessment of the bank’s competitive positioning. Simoff, for example, uses a questionnaire in which he asks the directors to describe the bank’s challenges as they perceive them. He then works closely with the management team to define its strategic priorities, such as business line expansion or acquisitions. Ultimately, the board and CEO choose their institution’s future direction, but Simoff provides a framework in which they can decide what that future should be. “We don’t do the plan for them,” he says. “We assist them in one way or another.”

Young says that a decision by a board to bring in an outside facilitator is not a sign of organizational dysfunction. “I make my living out of doing strategic plans,” he says. “The last time our organization did a strategic plan, I had someone from the outside lead it.” A third-party facilitator often brings a fresh perspective to the process. “He doesn’t have any [political] baggage,” Young explains. “You can ask questions that someone on the inside couldn’t. My job is to be a counselor to the board.”

Young usually starts out by analyzing the bank from a ratio standpoint to understand how it’s performing and identify its strengths and weaknesses. He then shows the board and CEO how various optionsu00e2u20ac”opening a few branches or doing a stock buybacku00e2u20ac”would affect shareholder value. And Young tries to challenge many of their assumptions about the future. “I try to ask them questions that force some thought,” he says. The first day generally focuses on developing a five-year plan, while the second day identifies specific objectives that must be attained in the following 12 to 18 months if the longer-range vision is to come to fruition. “This way everyone can look back and see where they were successful and where they weren’t,” he says.

Indeed, it is absolutely crucial that any strategic plan be accompanied by a monitoring structure so the board can measure management’s progress. “There’s no [inherent] value in a strategic plan,” says Young. “There’s only value when it’s implemented.” Adds Simoff, “It’s important to hold management accountable for what it said it would achieve. If there isn’t a monitoring process in place, the strategic plan isn’t complete.” And the failure to measure management’s progress against the plan, Simoff adds, would be an “abrogation of a major responsibility of the board.”