A Board for Tough Times

You probably thought that being a bank director was already pretty challenging, but hang onto your hats because a looming recessionu00e2u20ac”which feels as if it has already arrivedu00e2u20ac”is going to make the job even tougher.

To a large degree, banks are creatures of the economy, and when the economy weakens so does bank performance. I’m not referring to Wall Street and the declining value of mortgage-backed securities that global titans such as Citigroup and Goldman Sachs hold in portfolio. Instead, I have in mind what can happen to community banks when a recession settles deeply into Main Street’s bones like osteoporosis. The last time the U.S. banking industry experienced a systemic credit downturn was a six-year period from 1987 through 1992 when more than 1,000 banks and thrifts were taken over by the Federal Deposit Insurance Corporationu00e2u20ac”chaired at the time by Bank Director‘s publisher, Bill Seidman. As a general rule, the current generation of CEOs, CFOs, and outside directors has only run a bank or served on a board during good times.

They are, as the old saying goes, shallow-water sailors.

For all corporate boards, tough times are a test of their basic governing philosophy, practices, and culture. A dysfunctional board might be able to muddle through when a rising economic tide is lifting everyone’s boat, but how will it respond during a recession, when senior management and independent directors must work together as a team to ensure the survival of the enterprise? For bank and thrift boards, there will be many important decisions that will have to be made about loan chargeoffs, capital levels, dividends, and funding. Boards that are driven by politics, personality clashes, or animosity between the CEO and independent directors probably won’t be able to come together and do what’s best for the institution and its owners. It may be impossible for them to trust each other’s motives or put aside old slights or disagreements.

I think the best board for tough times is the same kind of board that you should want at all times. It begins with having the solid foundation of a supportive environmentu00e2u20ac”or what Marty Lipton, a partner at Wachtell, Lipton, Rosen & Katz in New York has called a “culture of a common enterprise,” where management and directors realize that they have a common goal of building a company that provides its owners with an attractive return on their invested capital.

It’s probably fair to say that most strong boards also pay close attention to an array of best practices, including ongoing director education, board-level evaluations, the trend toward fully independent boards, and the appointment of a lead director when the company’s CEO is also chairman of the board.

But strong boards require more than the design of a perfect structure with all the right policies. They also rely on committed individual directors who exercise sound and independent judgmentu00e2u20ac”people who ask tough and sometimes unpopular questions, and push hard for answers when necessary.

While this is by no means an all-inclusive list, I will throw out three qualities that I think every director should have. And these qualities become even more important when staring down the gun barrel of a recession.

The first quality is moral courage, which I would define as the willingness to go against the grain and to oppose your fellow board members if you think they are doing something that is unwise. Moral courage is the willingness to be unpopular for the sake of an important principle.

Directors also need to have the right temperament. You can’t be a prima donna, or so rigid in your thinking that you can’t understand anyone else’s perspectiveu00e2u20ac”but you can’t be a mouse, either. Really good directors seem to understand intuitively when to talk and when to listen, and often times they are natural consensus-builders.

Directors also need to understand banking, which might seem like an obvious statement except that most independent directors come from outside the industry and often are recruited because they bring important skill sets or know-how that most bankers don’t have. Outside directors need to have their own knowledge base about the financial services businessu00e2u20ac”not necessarily to challenge management in an adversarial manner, but to understand what management is telling them and be a good sounding board. Directors have a fiduciary obligation to ask penetrating questions and not take everything at face value.

The willingness to make tough decisions, the ability to build consensus, and having a solid grasp of the challenges facing your institutionu00e2u20ac”these aren’t the only attributes of successful boards, but it’s hard to imagine that any bank board will navigate its way through the coming storm without them.

Or put another way, these are the attributes of blue-water sailors.