What makes a good director good?
Some attributes of an effective director are constant regardless of what’s going on in the world: dedication, integrity, intellectual curiosity, moral courage, and a temperament that enables someone to be a team player. It takes a special person who has been endowed special characteristics to be a good director, which is why not just anyone can do it well.
But directors must also be adaptive to the business environment they find themselves in, and I suspect it has ever been thus. In the 1970s, bank directors were faced with the deregulation of interest rates and the loosening of a regulatory philosophy that had held sway since the Great Depression. In the 1980s, the development of regional merger compacts ushered in the consolidation of what historically had been a highly fragmented industry. The commercial real estate meltdown in the 1990s forced directors to contend with the largest number of bank failures since the depression. And the current decade has brought the Sarbanes-Oxley Act, stricter enforcement of anti-money laundering regulation after the 9/11 terrorist attacks, deregulation under the Graham-Leach-Bliley Act, and for the very largest banks, a new regulatory capital framework under the Basel II Accords.
Unfortunately, the 2000’s have also brought the most challenging business environment in 15 years thanks to a flat yield curve that has made it increasingly difficult for most commercial banks to register consistent revenue growth. This is challenging many bank directors to really dig into their company’s business strategies and understand whether or not they are working in the current environment.
People outside the industry tend to view banking as a tightly regulated business where there is very little room for strategic creativity, but that simply isn’t so. True, Bank of America Corp. would be prohibited under federal law from buying a cellular phone company or going into the wind farm business, but the choice of strategyu00e2u20ac”including geographic markets, customer segments, products, distribution channels, and technologyu00e2u20ac”is still a highly material decision for every bank regardless of its size. For example, Iu00e2u20acu2122ve had several consultants and bankers who have been involved in de novos tell me that one reason some community bank start-ups struggle in their early years is that they arenu00e2u20acu2122t able to differentiate themselves from their competition. In other words, senior management and the board havenu00e2u20acu2122t paid enough attention to the companyu00e2u20acu2122s strategy, but have fallen into the old trap that a bank is a bank is a bank.
And make no mistake, ensuring that a bank has a good strategy in place is a crucial board-level responsibility. While it is managementu00e2u20acu2122s job to develop the strategy, directors should be actively engaged in the processu00e2u20ac”asking good questions and requiring management to defend its recommendations, while also offering suggestions based on their own business experiences. This is how it should happen, but the annual strategic planning effort at many banks tends to be a pro forma process where the CEO and his or her team submit their plan to the board expectingu00e2u20ac”and too often receivingu00e2u20ac”a rubber stamp of approval.
Of course, to know whether oneu00e2u20acu2122s bank is pursuing the right strategy in a challenging environment requires a sophisticated understanding of the business itself. And this I believe is the Achillesu00e2u20acu2122 heel of a great many bank directors, who often understand the rules of corporate governance much better than they understand the business of banking because most of them arenu00e2u20acu2122t bankers. Having a group of intelligent and experienced nonbankers serve as board members can bring a refreshing new perspective to strategic deliberationsu00e2u20ac”but their ability to contribute will be marginalized if they donu00e2u20acu2122t understand the business.
My advice to all bank directorsu00e2u20ac”but especially those individuals who are joining a board for the first time and do not have a banking backgroundu00e2u20ac”is educate yourself thoroughly about the business. Learn all you can about what makes other successful banks successful. (And when you do, youu00e2u20acu2122ll see that thereu00e2u20acu2122s plenty of room for differentiation.) It has been the mission of Bank Director magazine since its inception to educate directors about board governance and the business of bankingu00e2u20ac”and that effort now extends to three successful conferences and an expanding webinar operation as well. But honestly, Bank Director is not the only educational source out thereu00e2u20ac”the industry trade associations, our media competitors, and the regulators provide useful content as well.
Of course, we hope you rely on us as your primary educational resource to understand the trends that are shaping the banking industry. But the important thing is to learn all you can about the business regardless of its sourceu00e2u20ac”it should be every directoru00e2u20acu2122s strategy!