Ins and Outs

Scenario: The $400 million First National Community Bank’s chief executive has just informed the board that he will be retiring in 10 months. Presently the chief executive holds the titles of chairman and president. The bank has doubled in size over the past five years, and with the major competitor in town having been recently acquired, the board and management anticipate similar growth over the next five years. There have been informal discussions about filling the positions and whether the new CEO should continue to hold multiple titles.

Some of the new, more vocal directors are standing up for recently publicized corporate governance trends that clearly support an outsider in the seat. The top inside candidate is already lobbying certain directors to have a CEO chairman and COO president to handle future growth. The chairman issue is becoming an emotional roadblock. Where do you stand on the issue of an inside versus an outside chairman?

“Proper corporate governance involves clearly defining the duties and responsibilities that an institution owes to its shareholders, executives, employees, customers, and the community which it serves. The fulfillment of those duties requires, in my view, the implementation of a time-tested principle: Effective corporate policy is only set by directors; it then becomes the responsibility of the CEO and his executives to provide the planning and necessary leadership to fulfill same.

It is crystal clear that both executives and directors need leadership. Having a CEO who functions also as chairman of the board tends to stifle full and fair discussion on important issues, which can render policy making more difficult. Keeping the two functions separate, in my view, will allow the truly top-notch CEO to accomplish more goals. My belief is that such an individual really would prefer not to be the chairman, but would rather act as a partner with a strong and highly respected outside independent chairman of the board of directors. The separation of these functions and the concomitant exercise of appropriate authority allows for a truly wholesome and stable business environment to prosper.”

Thomas J. Maloney

Director

Ambassador Bank of the Commonwealth

Bethlehem, Pa.

“It would not bother me as president and CEO to have an outside chairman. I look at the position of outside board chairman as an honorary title only because [that person is] not actually in the day-to-day operations of the bank. The outside chairman would only be able to chair the board meeting based on the agenda that the CEO prepares for the meetings.

Based on this scenario, I feel that in the First National Community Bank’s case, it would be important to the bank, with the projected future growth, to continue as it has in the past with an inside CEO and chairman. I think, even in this situation, if you have a good board, you would have at least one or two directors that basically would take the lead on the board and would function almost as chairman anyway.”

David W. Holland

President, CEO, and director

The Citizens Bank

Hickman, Ky.

“Good past performance by a CEO/chairman is no guarantee that his or her successor will produce the same results. The bank appears to have a great window of opportunity for growth and must capitalize on it. An outside chairman may be in a better position to put pressure on directors for developing new business. Very rarely will an inside chairman enjoy the leverage needed to demand good performance of outside directors who are charged with the responsibility of hiring the best possible management and rating the performance of the CEO.

Also, if there is significant ownership by the public, who will best serve the shareholders, a company dominated by one or two individuals, or a board with broader leadership? Lobbying for inside control at this early stage may be a bad omen of things to come.”

Charles L. Tice

Chairman of the Board

National Bank of Sussex County

Branchville, N.J.

“This bank has seen a nice growth in its assets these past five years. It is probably due to the president/chairman’s skills, but in the past few years, many banks have seen nice assets growth. In fact, it has been hard not to make money or see growth in net worth. It seems to me that management and directors are committed to the continued growth of the bank and not to be acquired. But, for the bank to move into the next millennium and to continue to grow, it may not be as easy a task as it has been…. More diverse and creative thinking skills will be needed for future growth; [it is important,] therefore, to have lively discussions and different points of view. I think this is best facilitated by having an outside chairman.

In our bank, our chairman is from the outside. Some of our directors have skills which directly relate to the banking industry and other directors do not. If the president and the chairman are one in the same and he or she has a strong personality, then the discussion may be limited, which could hamper future growth.”

Dr. Roger M. Higley

Director

Westwood Homestead Savings Bank

Cincinnati, Ohio

“As an academic, my first impulse is to prefer an outside chairman, since research shows that firms led by outside chairs create more shareholder wealth than those chaired by insiders. These academic studies do not focus directly on banks, however.

As a former community bank director, my leanings would be towards an inside chair on the grounds that an insider is more likely to appreciate the unique aspects of the banking industry, such as the scope and character of regulation, the critical importance of credit quality, and the rock bed relevance of confidence in the game of banking. Does an outside candidate so schooled exist on the board of a $400 million bank? (Electing an outside chair who is not a current board member is a bad idea, unless the bank has truly severe problems.)

In the end, I would choose based primarily on the skills, experience, and leadership capacities of the candidates. The board should select the best-qualified individual, taking account of all the relevant factors and tradeoffs. It should not follow some mechanical rule in selecting a chairman.”

Dr. Donald J. Mullineaux

Dupont Chair in Banking and Financial Services

Gatton College of Business and Economics

University of Kentucky

Lexington, Ky.

“With the bank’s continued growth, an outside chairman would seem to be a managerial necessity. Policy and process begin to diverge as a bank grows. A new president, whether CEO or COO, will need to devote his or her full energy to the mechanics of daily bank operation. An outside chairman would add an objective element to the overall management process, directing board-approved strategy and ensuring policy implementation. Finding the right individuals for these two positions, who are compatible in both temperament and ability, will be critical to the bank’s success.

The real issue is, who do we trust to enhance shareholder value and also to remain loyal to the bank’s directors, officers, and employees? That question is as old as banking and is never fully answered.”

Cottrell L. Webster

Regional Director, Division of Supervision

Federal Deposit Insurance Corp.

Memphis, Tenn.

“In my opinion, an outside chairman would provide a better balance for the overall management of the company. Holding both titles presumes too much authority vested in one person.

Having been the largest shareholder, as well as CEO of a NYSE company for 25 years, I found it to be very convenient in many circumstances (i.e. salary, promotions of colleagues) to consult on those types of decisions with the chairman.”

Seymour Holtzman

Shareholder Activist

President

Financial Value Fund

Allentown, Pa.

“In my experience, a strong outside board is a crucial spark for the financial performance of a corporation. Whether the president and CEO is also the chairman is just a factor in whether there is a strong outside board. In the context of a new CEO, I always counsel the board to proceed prudently and to review carefully the performance of the new CEO. Having a new president assume the roles of chairman, president, and CEO allows the board less flexibility in its review function.

On the other hand, I also place a premium on avoiding boardroom dissension. Consequently, I would be inclined to support an outsider as the chairman for a limited term. Thereafter, the president should either be elevated to the chairman position, or the board should change its direction entirely. A solution such as automatic elevation of the president to chairman in two years, unless there is an absolute majority vote against the elevation, may well be an appropriate solution.”

Ronald H. Janis

Partner

Pitney, Hardin, Kipp & Szuch

Morristown, N.J.

“I feel that the present size of the bank and the projected growth warrants the distribution of duties to a two-person inside chairman and president format.

We have found in our organization that to accomplish our stated mission to grow, to broaden our range of financial products/services, and to maintain the image as a technology leader within the community bank industry, it requires the involvement of top management, particularly the involvement of a full-time chairman and president. Therefore, we have found the two-person concept allows us to remain focused and totally involved with our specific areas of responsibility.

Additionally, our approach adds a high volume of depth to the top management level and fulfills the philosophy of our succession plan to develop from within for long-term continuity.”

Barbara Harding

Chairman and CEO

Phillipsburg National Bank

Phillipsburg, N.J.

“Performing in the chairman/president role in my own organization, I value the synergy and efficiencies of the combined role. However, as with any structural approach, the talents and abilities of the individuals involved should determine part of the answer. Other considerations include assessment of time requirements to properly fulfill both roles. More importantly, the clearly defined operational and strategic objectives of the bank must match executive abilities with needs.

Therefore, the decision should involve common sense, planning, short- and long-term objectives, and personality and ability assessments of the people involved rather than having a doctrine that dictates the configuration, but may not provide the best executive management for the bank. At our $600 million bank, we have a very competent individual in both roles and the results have been excellent.”

Scott R. Loring

Director

The Pacific Bank

San Francisco, Calif.

[Editor’s note] We welcome your involvement. Readers interested in suggesting topics or offering comments can contact Bank Director at P.O. Box 3486, Brentwood, TN, 37024 or by faxing them to (615) 371-0899.