A Director’s Pledge for the Millennium

As the next 100 years of financial services introduces itself to bank boards across the country, I thought it might be wise to create a director’s pledge that could be carried around as a reference tool for prudent governance in the new century. This pledge won’t waste valuable space on one’s fiduciary duties or compliance responsibilities (there are mountains of paper already dedicated to those topics). Instead, the pledge that follows boils down the most critical lessons learned from the last century of bankingu00e2u20ac”the ones no director can afford to forget.

So, cut here, laminate, and go forth wisely toward the next century.

1. I will not bet the bank. Be sensitive to interest rate risk, third-world lending, derivatives, real estate volitility, loan concentrations, and unbridled expansion into noncore businesses. Banking is all about taking risks, but more important, it’s about managing risk.

2. I will remember who runs the bank. Management and the board run the bank, not the media, market analysts, or shareholder activists. Unreasonable external pressure to continually surpass last quarter’s earnings performance can lead to poor short-term decisions. Sometimes the stock price goes down no matter how you perform. Be aware of external dynamics, but don’t overreact to themu00e2u20ac”or to criticism about your bank. The market ultimately values steady singles hitters more than home-run kings who strike out most of the time.

3. I will become more sensitive to the banking industry’s political challenges. Although the banking industry has been effective in killing legislation that would be detrimental to its position as the lead financial services provider, over the years it has demonstrated a poor track record in passing legislation to level the playing field. Directors could play a greater role on Capitol Hill if those with influence would take the initiative. On the regulatory front, even more important is eliminating civil money penalties and rules that allow the freezing of assets, which work as a detriment to getting top-quality board members.

4. I will not stand by and watch as competitors steal market share. Want to know why funding is a problem for many of today’s banks? Credit unions, mutual funds, brokerage houses, and other nonbank financial companies are helping themselves to the banking industry’s lunch. This is not as big an issue for money-centers and superregionals, but for the majority of the banks in the country, it serves as a major reason why boards consider selling instead of buckling down and trying to compete. Banks are up against low-cost providersu00e2u20ac”competitors that are more geared to manage people’s money, (not just checking accounts but pensions, 401(k)s, and retirement funds) and who know how to use technology very effectively. It’s a jungle out there, so “eat or get eaten.”

5. I will not forget that in the financial services industry, reputation is everything! When the OCC announced its nine-point risk management evaluation system, I chuckled at the inclusion of “reputational risk.” I’m not laughing now. I think that, along with an organization’s employees, a bank’s reputation is its most valuable asset. This is multiplied when an institution can turn that reputation into a recognizable brand name. Strength, quality, and trust are all terms that exude confidence. Even in the aftermath of the banking crisis a decade ago, banking has maintained its reputation with baby boomers and their parents. Today there may be no bigger risk to the future of banking than the next generation’s opinion of banks. What have you done to solidify that reputation?

Thanks. Now could someone please help me off this soapbox?