Don’t Shoot the Messenger

Scenario John Trantz has just received a phone call from a fellow director. The board wants to hold an executive session without the CEO or any bank officers present to discuss some specific planning issues. Trantz, the director with the longest term and a friend of the CEO, has been asked to notify the CEO that the meeting is taking place and to tell him that the board will be discussing the issue of appointing a lead director. John is well aware that both the executive session and the topic of appointing a lead director will be sensitive issues. He ponders whether taking these steps are worth the angst and repercussions they may create down the road.

We asked several people who might play roles in such a situation how they would react.

Good corporate governance guidelines today suggest that bank boards should establish an outside, independent director as either the chairman of the board or lead director. Investors expect and should receive the independent oversight that outside directors bring to the institution. Part of this independent oversight must necessarily come from periodic executive sessions of the full board and certain committees, particularly the audit and compensation committees. In this scenario, if Mr. Trantz is reluctant to take this message to the CEO, then another outside director must.

If the CEO in this case is uncomfortable with his or her board holding executive sessions, then one or more of the independent directors must address this privately with the CEO. The CEO should receive timely and direct feedback on topics discussed in executive session, particularly when his or her performance is at issue. If concerns about bank operations or strategic direction are discussed in executive session, these, too, should be promptly reported to the CEO.

Gary P. Bennett
Director, Washington Trust Bancorp
Westerly, Rhode Island

I can understand John Trantz’s concern about having an executive session without the CEO or any bank officers present to discuss planning issues. Also, the topic of appointing a lead director without the input of the bank officers and CEO would be difficult. Planning must include all the leaders of the bank, since they are the ones who will carry out the plans the board of directors makes.

It is vital to the CEO of any bank that he or she be able to work with the lead director in all of the business of the bank. Therefore, the CEO should certainly be consulted before a lead director is appointed. If I were John Trantz, I would vigorously oppose a confidential directors’ meeting without the CEO present to discuss this important appointment. It sounds suspiciously as though the fellow director is trying to appoint a person who would undermine the relationship between the CEO and bank officers and the board of directors.

Jeanne Gramstorff
Director, Perryton National Bank
Perryton, Texas

At Goleta National Bank and Community West Bancshares, we have a standing outside directors’ executive committee that handles issues such as the ones described in your example.

In the case you describe, one wonders why a CEO would be concerned about an “outside” discussion on planning issues and a “lead” director (whatever that might be) unless there is some perceived concern about his performing his expected duties. Any planning conclusions would certainly have to be discussed with, modified as required, and implemented by the CEO. The issue seems to be the board relationship with the CEO and his feeling of security with the board.

Since John Trantz is a friend of the CEO, in his shoes, I would discuss the situation with the CEO, allay his fears, and assure him that he will get proper feedback from the meeting. I would solicit his concerns and recommendations on the lead director issue to ensure his thoughts are aired. That said, planning is important and top-level direction should emanate from the board. The CEO has to realize that the board is the final authority and should be more than a “rubber stamp.”

Michael A. Alexander
Chairman, Goleta National Bank and Community West Bancshares
Goleta, California

John needs to step up to the plate. If the issues are that important for the board to meet without management or the CEO, as the senior board member with a close relationship to the CEO, he should know how to approach him. Being a bank director is not always easy.

Giles Dalby
Director, PNB Financial
Dallas, Texas

Replace the CEO! If the board of directors has a problem with having the bank’s chief executive officer at a meeting to include discussion of “planning issues,” it obviously has the wrong CEO or a relationship with the CEO that cannot, in the long term, be beneficial to the shareholders of the bank.

Howard M. Schoor
Chairman, Community Bank of New Jersey
Freehold, New Jersey

I believe the director needs to talk with the other directors and choose a lead director. We will probably be doing this, as well as having meetings without the CEO and other bank officials. If there is trust between the board and the CEO, there should be no angst. The board is working in the best interest of the bank, and the CEO should know that. I’ve seen “good old boys” ruin a good thing whether it be a city, an organization, even a family. If governance is to be done right, it must be done in honesty and trust. There are times when candor is easier if management isn’t there. The end result will be in the best interest of the bank.

Janet Westling
Director, HomeStreet Bank
Seattle, Washington