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Risk and Other Hot Topics for Bank Directors

During the last 12 months, boards of directors have been on the front line dealing with the near-collapse of the financial markets and the recessionary fallout. As a result, worries over capital and credit quality have superseded all others as the banking industry slowly begins to right itself after this tumultuous year. To analyze emerging issues within U.S. corporate governance, Corporate Board Member and PricewaterhouseCoopers LLP have released the 2009 What Directors Think study, which measures directors’ opinions on a wide scope of board topics and concerns. Approximately 15% of the study data is derived from financial institution respondents; this information provides an interesting backdrop for the concerns and challenges foremost in bank directors’ minds as they look toward 2010.

According to the 2009 What Directors Think study findings, financial institution directors recognize the following:

• Their risk as a director has increased, and organizationally, there is a need for better risk management processes;
• boards need to devote more time to strategic planning;
• for public companies, shareholders are becoming increasingly active;
• compensation planning may be clouded by government intervention;
• more regulation and litigation are expected;
• succession planning continues to be a challenging area.

Chief among the issues about which directors feel most passionately is the increased onus to manage risk, though identification of risk is an ongoing challenge: 71% of financial institution directors say “unknown risks” is the issue that keeps them up at night. Fully 92% of directors agree there will be a considerable amount of new regulation as a result of the economic crisis. Accordingly, 73% expect risk of regulatory investigation to rise over the next two yearsu00e2u20ac”no surprise given the multitude of proposals circulated in recent months from the SEC, listing exchanges, and bank examining agencies that portend increased scrutiny. Likewise, 60% of bank directors agree shareholders will have increasing influence, and 63% expect risk from plaintiff’s bar litigation to increase. The bottom line is that the perceived risk of being a director has skyrocketed: 81% of financial institution board members believe their risk has increased during the last 12 months.

On a positive note, bank directors are seemingly managing the risks at hand: 89% are confident they adequately meet their responsibility to monitor the company’s multitude of risks. In the area of audit, specifically, bank directors rated their audit committee’s ability to monitor accurate financial reporting as the dimension for which their board was most effective.

To help them accomplish these objectives, directors indicate their financial institutions are providing them with the tools they need to perform effectively. Fully 81% say they are receiving a sufficient amount of information on risk; the remaining one-fifth say management is addressing that deficiency going forward.

One looming aspect of risk management in this environment is executive compensation. As evidenced by the vignettes shared by bankers in our cover story this quarter (“Navigating Compensation Risk“), there are fewer areas of responsibility more complex and challenging right now for financial institution directors.

Sixty percent of bank directors believe U.S. companies are having difficulty controlling CEO pay levels; furthermore, when asked to rate by difficulty a list of director responsibilities, 46% indicated that serving on the compensation committee and determining CEO compensation are among the hardest jobs. Even so, 77% of financial institution directors believe that no matter how hard the job, the responsibility for setting policy and approving executive compensation should be left to the board of directors, rather than mandated by government or shareholders; half agreed they would like more time to address the matter in their board meetings.

Bank directors are among those hardest hit by governmental backlash over extreme cases of compensation abuses, which were widely publicized in 2009. Whether or not an institution took TARP funds, the majority of directors say they will feel the effect of the government’s increased scrutiny on compensation (Figure 2).

Along with risk management, directors also demonstrate a desire to devote more time to strategic planningu00e2u20ac”a finding that has consistently increased each year of the survey since 2004. Despite the distractions of the past year, when many bank directors were beleaguered by capital, credit, and other regulatory concerns, 79% still say they would like their board to devote more time to strategic planning (Figure 3). The percentage of respondents who indicated a desire for more strategic planning is even slightly higher than the number who chose risk management and is significantly higher than those who marked succession planning, though all three key governance areas are clearly on bank directors’ radars.

The results of this study help define the changing dynamics in today’s boardrooms and will assist directors in understanding their peers’ most difficult challenges and concerns for the year ahead. The comprehensive report, along with significant trend analysis and commentary, is available at www.boardmember.com.

What’s Ahead for Banking?

The banking industry has become segmented into the “haves and the have-nots,” says John Duffy, chairman and CEO of leading New York-based investment banking firm Keefe Bruyette & Woods. Duffy recently sat down with Bank Director president and CEO TK Kerstetter to discuss what lies ahead for the banking industry, and how financial institutions can capitalize on their strengths in the current environment.

Key to whether a bank falls into the have or have-not category, Duffy says, is having adequate capital, having an handle on your loan loss problems, having adequate reserves, and, importantly, having a good relationship with regulators.

“We are clearly in an era of more regulation,” Duffy says. “The industry is going through difficult times and I think we are going to see new, and hopefully more effective, regulation.” Thus, knowing the players and developing good regulator relationships will become an even more important key to survival.

Even in light of these many challenges, Duffy says, banks that are well positioned should be able to take advantage of many opportunities in 2009 and beyond. To hear more about Duffy’s advice for bankers and his predictions on where the industry is headed, access the full interview by visiting Bank Director‘s Resource Center at www.bankdirector.com and click on Interviews/Webcasts.