Bringing in the Business

Scenario: John Walter, the president and CEO of The Security Bank, has just informed the board that he is considering instituting a director business development program to supplement the officers’ current sales efforts. Security Bank’s market area has two new large banks opening full-service branches with commercial lending staffs within several miles of three Security offices, and in CEO Walter’s mind, the gauntlet has been dropped. Walter has asked directors for their input into the program design, but for two recently appointed board members, the very idea of marketing rings a sour note.

Following the board meeting, the two dissenting directors complain that their responsibility is to oversee the performance of the banku00e2u20ac”not sell products. “No one ever told us prior to joining the bank that directors are required to sell,” complained one. “After all, serving as a bank director is not our full-time job.”

Walter has heard great things about other banks’ development programs. But is he asking too much of his board? As he prepares to discuss the idea with the outside bank chairman, he ponders what to do next…

“Bank directors are hired to supervise and monitor the bank. They are not hired as marketing officers or sales personnel. These two directors are absolutely rightu00e2u20ac”there should not be a business development program for directors. That does not mean that these directors (along with other directors) cannot bring business into the bank, including their own. They can keep their eyes and ears open for opportunities to bring business to the bank through their contacts at charitable organizations, education groups, churches, etc.

When directors are forced into business development, or when a president complains that development is not being done by directorsu00e2u20ac”there is usually a failed marketing and sales program at the officer and employee level.

Directors can do a great deal by making sure that the president and staff have the resources necessary to undertake a significant marketing campaign of business development among the officers and staff. If the bank insists that the board of directors become business development officers, then triple their annual salaries and put them on the payroll.”

Dr. Douglas V. Austin

President and CEO

Austin Financial Services, Inc.

Toledo, Ohio

“A level of involvement in marketing by outside directors is an integral part of a director’s responsibility to the future success and value of the bank, as are other corporate governance and fiduciary responsibilities.

Marketing responsibilities for outside directors are at a different level than employee directors or bank employees. Outside directors must focus on the bank’s community image as a resource, the value added for local customer service, and local professional assistance. Specific referrals are appropriate, and they must be general and couched in the approach that our staff can appropriately address specific needs. There must be independence between the referring director and the credit or deposit relationship to avoid conflicts of interest.

Enhancement of shareholder value is a basic board of director tenant; therefore, a director business development program is essential.”

Clyde E. Conklin

Chief Executive Officer

First Bank Northwest

Lewiston, Idaho

“The new directors may have a good point. Unless business development was discussed as part of the directors’ responsibilities on the front end, it may be unfair or unreasonable to expect much from them now.

Perhaps the directors’ business development involvement could be structured in two ways. For those directors who are willing and able to do so, some direct business development responsibilities could be assumed. The other directors could be asked to work in a support role by giving leads to the officers and periodically accompanying officers on calls when their influence could be helpful.

Directors are frequently not equipped with the product knowledge or marketing skills to develop business. To the extent they can assist the marketing efforts of the bank’s officers, it may be reasonable to do so. But the officers should handle all the details, other than initial contacts for which the director may be particularly suited.

A number of banks now have stock option plans for directors. Increasing their ownership positions is probably the most effective way to interest directors in being involved in business development.”

J. Franklin McCreary

Gerrish & McCreary, P.C.

Memphis, Tenn.

“Walter needs to rethink and revise his approach to the board on a director business development plan. Historically, directors have been an important source of business for the banks they serve. A recent AABD survey of banks of all sizes shows that 81% expect directors to generate new business. The level of this activity varies from bank to bank, with smaller institutions typically making greater use of their directors. However, this is not a subject for introduction by unilateral management action.

Management should develop a proposal that sets forth the required changes in roles and responsibilities in the context of the bank’s needs, competitive situation, and sales/marketing strategies as well as director compensation and time commitment. The board should then make the final decision on whether to implement the plan.

Walter should start over with this process. Outside directors should know exactly what they are getting into before accepting a seat on the board and assess the time commitment accordingly. It appears that Security Bank’s two new directors were not advised that changes were being considered. Walter needs to explore whether the voiced objections are based on procedural problems or a fundamental aversion to taking on a sales role. This may suggest a need to rethink the optimal mix of skills for Security’s board. Walter and the board should be prepared to accept turnover as a cost of changing roles and responsibilities.”

Greg Golembe

Executive Director

American Association of Bank Directors

Bethesda, Md.

“The general guidelines in the FDIC’s Pocket Guide for Directors states: ‘A financial institution’s board of directors oversees the conduct of the institution’s business.’ The comprehensive business of the bank includes not only the bank’s performance but also the ingredients that make up that performance. Business development is a key ingredient in the total performance of the bank.

At our bank, all employees and directors take part in an incentive program. Our main director’s goal is business development, measured by the number of contracts and referrals made. This business development is not a ‘full-time job,’ but it can easily be conducted during the director’s normal course of business and recreation.”

Joe Haskins, M.D.

Chairman

Capital Bank

Ft. Oglethorpe, Ga.

“The advice I might offer Walter is, first of all, to step back and understand that while he and the two directors differ in approach, they likely agree on the goal. The goal is to position Security Bank for continued success in the face of the new competition.

The responsibility of the board is to oversee bank performance. However, while directors’ responsibilities do not include ‘selling’ bank products, they may, and in my opinion should, include assisting bank staff in developing new business.

With the new banks entering the market, questions and interest will abound. Walter should encourage the directors to, in their day-to-day interfaces with individuals and businesses in the community, ‘promote’ the bank and its products and services. This requires limited time and effort by the directors, and while it is not ‘selling,’ it effectively supplements the officers’ sales efforts. Walter and his officers can facilitate the directors’ efforts by providing them with talking points on the evolving banking market and the advantages of banking with Security Bank. Walter will have achieved his goal, the new directors will be more ‘engaged’ in the bank’s success, and Security Bank will be better positioned to face the competition.”

Brenda L. Johnson

Director

Charter Bank Eau Claire

Eau Claire, Wisc.

“Directors are assumed to be the watchdog for the shareholders to ensure that management is meeting all goals and expectations as defined by the board. But, this has to be recognized as only the starting point of the defined responsibilities of the next generation of board members.

We as board members must realize that the future of our institutions depends on all employees, officers, and directors to promote our organization. It is our fiduciary responsibility to ‘talk up’ our institution and, of course, to provide referrals to the appropriate members of the bank. Our referrals are some of the best and easiest prospects for our officers and staff to work.

We, as directors, must realize that we are in constant contact with most of the professionals and successful individuals in our business community. With a little coaching and proper motivation, we can give a very good referral to our staff. This is not very hard to do. The easiest and best prospect can become a customer just by a bank director talking, listening, and asking for their business. Director referrals give our staff another potential prospect to work withu00e2u20ac”a prospect that has the possibility of being converted to a lifetime bank customer.”

Robert B. Rogers

Vice Chairman

Stillwater National Bank

Stillwater, Okla.

“My first reaction is that CEO Walter is taking the right approach by asking the board for its input in structuring a successful program, versus mandating that each director has a sales quota. At the same time, there is always merit in reviewing these types of board announcements with the outside chairman to gain his or her support and response prior to communicating to the entire board.

There is no business development program that fits every bank and specifically every board. Some directors will be better at selling of referring business than others, and a good program must have the flexibility to fit different types of directors. One great way to involve the directors without adding much pressure is to award stock options (if not offered already) on an annual basis for business referral.

Finally, I’m surprised that any director would accept a bank board position without realizing that our industry is facing massive competitive pressure and must rely on all of its contingencies to generate new business. These include directors, vendors, referral sources, and all of its employees. CEO Walter is doing the right thing by originating some type of business referral program and letting the directors participate in its structure.

Bruce G. Kilroy

President

National Penn Bank, Lehigh Valley Division

Allentown, Pa.

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