Point of View

The Empowered Bank Board

One of the biggest changes that I’ve witnessed over the past three decades in banking is the gradual empowerment of boards of directors. There was a time when it was quite acceptable for the bank’s chief executive officer to pack the board with friends who were disinclined to provide real governance oversight. That dynamic might still exist at some smaller banks, but serving on a board today is a serious proposition.

The Big Bang event in this evolution was probably the 2008 financial crisis. The misdeeds of banks and thrifts weren’t the only factors. Nonbank mortgage originators, property appraisers and Wall Street banks with their rapacious securitization operations were all complicit in the crisis, and yet plenty of depository institutions engaged in dangerous business practices that went beyond the exosphere of sanity.

Congress reacted to the crisis by passing the Dodd-Frank Act of 2010, which imposed a number of restrictions on the banking industry, many of which are still in effect today. And the prudential banking regulators reacted by getting much tougher on the institutions under their supervision, including boards of directors. The financial crisis was a clear failure of corporate governance across much of the banking industry, and since then the regulators have imposed a heightened set of expectations on bank boards.

The board’s role is to oversee the affairs of the bank. An empowered board understands that it’s the boss. Management works for the board-the board does not work for management. Management is responsible for running the day-to-day operations of the bank and for carrying out the policies that have been established by the board. Although some of the board’s responsibilities are very specific in those areas where they have been prescribed by law, for the most part it does not have an operational role. Instead, the board is responsible for ensuring that the bank is fulfilling its obligations to its shareholders, and is in compliance with all applicable laws and regulations. In most instances, the board does this by working with and through the management team.

An empowered board does not usurp the responsibilities of management. A common expression you will hear is, “nose in, fingers out.” It’s important that directors drill down into the details. Banking is a numbers game. Numbers explain the bank’s performance and define its risk profile. Directors need to understand what’s going on inside their bank, and numbers tell much of the story. But the board always needs to remember that management is running the bank. Both parties need to stay on their side of the board-management red line.

Empowered bank boards share three important characteristics. The first one is a sense of mission. These boards understand their role and take it seriously. They accept the fiduciary duty they owe to shareholders and place a high priority on their interests. Sometimes the competing interests of shareholders, employees, communities and customers have to be balanced. But empowered boards know there is a clear chain of command. Management works for the board, and the board works for the owners.

An empowered bank board is also independent. There are technical definitions of independence that the stock exchanges and regulators use, although these are mostly concerned with avoiding conflicts of interest or determining who can serve on various board committees at public companies.

However, I’m thinking about something different when it comes to independence. Are the directors, individually and collectively, capable of exercising independent judgment-particularly if it brings them into conflict with the CEO? This can be a problem particularly at small, privately held banks where the CEO stills plays the leading role in board recruitment. It’s important that boards be able to pose a credible challenge to management-not to pick fights, but to discharge their fiduciary duties to the bank’s owners.

A third, more recent characteristic of empowered boards is an emphasis on diversity. It’s a simple fact that the majority of bank boards in the U.S. are made up predominately of older white males in their late 50s to mid-70s. That, by definition, is a very homogenous group of individuals. And homogenous groups tend to affirm-rather than challenge-the attitudes and biases common to their cohort. What you end up with is groupthink.

There is a growing consensus that diversity-as defined by age, race and ethnicity, gender and professional experience-can have a positive impact on a company’s performance. But the issue of diversity is larger than just factors like race, gender and ethnicity. These things are important, but there is more to the diversity story than what box you check on a census questionnaire. Every board should strive for a composition that provides diversity of thought, experience, perspective and unique insights. The result will be what is often referred to as cognitive diversity. And there is a lot of compelling research that cognitively diverse groups or teams make better decisions than more homogeneous groups of people with similar backgrounds who tend to think alike.

The growing empowerment of bank boards is encouraging-and necessary. The financial services industry is more complex, the regulatory environment more strict and the marketplace more competitive than when I first started writing about this industry in the early 1980s. Banking needs the leadership of empowered boards now more than ever.


Jack Milligan


Jack Milligan is editor-at-large of Bank Director magazine, a position to which he brings over 40 years of experience in financial journalism organizations. Mr. Milligan directs Bank Director’s editorial coverage and leads its director training efforts. He has a master’s degree in Journalism from The Ohio State University.

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