How Old is Too Old?

Old.pngAlmost every conversation about the refreshment of a bank board based on the age of its directors begins with a pause, or a deep breath, or some other physical cue of discomfort. The question of how old is too old to serve can rattle the sensibilities of any director. Age, whether strictly in terms of years or a looser definition of tenure or duration of board service, remains one of the tougher issues directors grapple with, as well as how to assess and ultimately how to handle board performance.

As boards draw greater scrutiny from investors, shareholders and regulators about their performance, attention to detail and makeup, it has become an unavoidable topic for directors. It is especially important for those who serve on governance and nominating committees within those boards, as larger conversations about overall diversity of the board become more prevalent and influential in the direction of banks across the United States.

It’s never a secret who the weak links are on the bank’s board. The difficulty is dealing with it,” says Jim McAlpin, partner at Bryan Cave Leighton Paisner and leader of the law firm’s financial services practice.

To McAlpin’s point, there is no clearly defined way to handle underperforming directors, nor is there a universal way to evaluate board member performance. Banks have a variety of philosophies, which many would argue is beneficial for the industry, offering a buffet of potential best practices to adopt and adapt for each institution. And while most tend to agree about the connection between board diversity, the board’s performance and the performance of the bank itself, there’s little formative research to back that assumption up.

Bank Director’s 2018 Compensation Survey shows that no boards of banks above $5 billion in assets had directors younger than 40, and more than three-quarters of respondents overall said they had zero. However, an overwhelming majority (87.3 percent) said diversity, which includes age, ethnicity and gender, positively impacts board performance.

Academics have yet to definitively pinpoint true paradigms that can form a foundation to build strategies for consistent board refreshment in U.S. banks, but there is a common understanding among bankers and preference from examiners that board diversity is an essential ingredient in positive performance, and board members should not all be of the same age or be too similar in other areas.

“Age does affect people,” says McAlpin, who notes that he’s changed his view from earlier in his career when he believed directors should retire at a specific age. McAlpin turned 60 this year.

No longer in favor of a “bright line” that brings about predictable board refreshment, the idea of having a diverse board makeup is preferable among most institutions, McAlpin says.

“There needs to be not just younger people but different skill sets on bank boards,” he says.

“You need to be really good at something,” McAlpin adds, whether that’s in auditing, technology or another critical area.

And that conflict is consistent regardless of asset size, performance or geography. Boards know it’s unacceptable to have directors falling asleep in meetings. They also know directors shouldn’t resist strategic directional changes, like making significant technological integrations or swapping out a decades-old core provider for the sake of the institution’s long-term growth or competitive advantage, simply because it is a cultural and operational change, and uncomfortable for a director who has served on the board for decades.

But equal to that in this discussion is the need for experience, knowledge of the community the bank serves, the business, and what has worked and what hasn’t in an industry that is defined by its cyclical nature.

Essentially, it boils down to a single word: balance.

“Somebody said to me with a chuckle, but I got their point, (that) I don’t want anybody on my board that’s not at least 75-life experiences, [which] many times come with age,” says Dave Porteous, lead director and chairman of the nominating and governance committee at Huntington Bancshares, a $105 billion asset regional bank based in Columbus, Ohio.

“It may be that somebody who is 70 has amazing life experiences, but those experiences are not going to be the same in their 30s, 40s or 50s-you need all of those.”

Porteous jokes, but the point is clear: Age can be both an asset and liability. A younger director could be savvy in technology (almost a cliché, but an increasingly critical skill in today’s competitive landscape), while an older director has the historical perspective to know how to weather the next economic downturn and maintain consistent performance. There is also evidence that age and length of service do have some effect on the perspective directors have.

PwC’s 2017 Annual Corporate Directors Survey, which includes more companies than just banks, showed that directors with terms less than five years believed racial diversity to be more important (84 percent), compared to directors with tenures longer than 10 years (65 percent). Newer directors were also less likely to report their board was sufficiently diverse than their longer-termed counterparts by 10 percentage points, 52 percent to 62 percent.

This evidence lends credence to the general conclusions that age and length of service to the board changes perspectives about how a director not only views the business, but the role and performance of the board.

A new voice in the boardroom can change the conversation, bring new ideas and skills to the table, or call out practices that are not optimal for board effectiveness. Directors who have served together for a long time may not see the need for change as clearly,” the PwC study says.

Ethnicity and gender diversity have become flash-point discussion topics in terms of board diversity and overall governance issues, reflecting the desire of institutional investors and firms that provide proxy advisory services for more diversity in corporate boards. While age and tenure are often rolled into those discussions and data sets, they are much more of a moving target and challenging to pin down.

“Investors generally look at those things [age and tenure] very differently,” says Courteney Keatinge, director of environmental, social and governance research at Glass Lewis & Co., a global proxy advisory service. She says Glass Lewis, like many others, doesn’t have a strict position on when a board member becomes “too old,” but does expect to see boards evaluating themselves, a process that can be tricky and sensitive, but offers a more accurate reflection of potential skill deficiencies.

“If there’s somebody who’s in their 80s but has a long history with the company, is on top of their stuff, is able to keep up with the issues that are coming in front of the bank … If they’re able to serve effectively, I don’t see a reason why they shouldn’t be [on the board],” Keatinge says.

What Glass Lewis likes to see, Keatinge says, is a “comprehensive approach to board governance,” and describes age and tenures as tools in a toolbox that “ought not be the only criteria.”

For most banks, age is not the only factor. Some of the best performing banks in terms of shareholder returns include age in their board evaluations, but don’t make that the ultimate determining factor of a director’s qualifications.

Peter Crist served as the chairman of the board for nine years at Chicago-based Wintrust Financial Corp., with $29 billion in assets, before voluntarily rotating out of that role in 2017. He remains a board member. Crist does not believe in hard-and-fast term limits or age-out policies, nor does Wintrust, but he does fully embrace the evaluation process as a means to maintain an effective board and appropriate refreshment. Wintrust elects its directors to one-year terms and does not have term limits, but its charter does have a retirement age of 76, though exceptions can be made.

“There are plenty of well-functioning boards out there that have a nice cadence. Conversely, there’s a lot of [bad] boards out there that are clique-ish. I never have to worry about somebody calling a spade a spade when it gets to performance or attendance or conduct,” Crist says.

That collegial, fraternal atmosphere can be an unspoken asset for the board in terms of cohesion and teamwork, but also a potential liability because, like Crist suggests, calling a spade a spade might be more difficult. Discussion around the perspective of management and resistance to market forces and need for transition often bows to the individual defense of self. In other words, it’s sometimes hard to recognize the need for refreshment when the time comes because of personal bias.

You can look no further than the late 1980s, when many argue relaxed regulations led to risky behavior, and dereliction of duty from boards contributed to the savings and loan crisis, leading to the failure of nearly a third of the industry. Twenty-some years later, when regulations relaxed again, similar risky behavior was a contributor to the 2008 financial crisis.

At the time of the S&L crisis, there were roughly threefold as many banks and thrifts in the country and arguably threefold as many board seats. By contrast, today there are more regulations, fewer board seats by way of fewer banks, and thus a greater emphasis and attention on the performance of the board and the bank itself. The 2008 financial crisis brought about greater attention and intense scrutiny to corporate governance in general, even more so for banks that were blamed in part for the most recent recession.

Evidence of that can be found in Institutional Shareholder Services’ top findings from its 2016 investor survey, in which a majority of investors surveyed deemed it “problematic” if there had not been a new director added to the board in five years or more, and if the average tenure was more than 10 years.

Community Bank System, based in Dewitt, New York, has been a serial acquirer for the better part of two decades, buying 10 banks and growing from $2 billion in assets in 2000 to nearly $11 billion in the second quarter of this year. Sally Steele, the board’s chairperson, joined in 2003 with one of Community Bank’s acquisitions. Being a serial acquirer has provided its own pipeline of fresh directors, Steele says.

Community Bank System has a mandatory retirement age of 70, a policy that is not uncommon, although not a standard across the banking industry. Some, like Huntington, set their mandatory retirement age at 72, while other banks set it as 75. Many institutions also include a provision to make exceptions in individual cases. Steele says the policy is helpful, but also acknowledges it wouldn’t fit the culture of every institution.

“It’s not about us as individuals. It’s about the collective strength of the board and its ability to create shareholder value,” Steele says. “If you bring new folks in, you’re probably going to benefit [from] that.”

What’s also consistent among high performers like Community Bank System, Wintrust and Huntington is the value these boards place on evaluating their own performance. Outsiders like Glass Lewis, ISS and McAlpin agree this is a beneficial practice.

But again, to each their own. There are several other ideas to consider in evaluating board members. A governance and nominating committee of only independent directors is one place to start, McAlpin says, but all agree that whatever the proper course for the bank and board becomes, it needs to be consistent.

More and more boards are developing skills matrices to evaluate their directors, which can be structured to fit the strategic objectives and culture of the bank and the board, including the age and tenure of its members, although those might be less common or weighted to a lesser importance. But they need to be followed.

“We don’t hear that often-about directors being too old to serve on boards-from our clients, so it’s not usually a concern,” Keatinge says. “What does become a concern is when a company institutes an age limit for their directors … and then they don’t follow that. That’s where a problem comes in.”

Chief executives are in a precarious position even if they are also the chairman of the board, McAlpin says, because of the inherent difficulty in giving objective feedback, making it ever important for boards to be proactive.

“For many CEOs it’s very difficult to take on nonperforming directors. It’s one of the most difficult things to do,” McAlpin says, who emphasizes the importance of independent directors evaluating and refreshing themselves.

The Wintrust board has refreshed three board members in the last 10 years, asking three long-tenured board members to step down. That could be considered a lot by some standards, and required careful planning.

Crist says while age played a role, the primary focus for the refreshment was to bring on directors who could improve the board’s cybersecurity and audit capabilities. And while the conversations were quick and purposeful, they were no easy lift.

“In all three instances we needed the chair for a different skill set. There was a definite need and everybody knew the need, so the message, sadly, to the people who received it was, ‘why me,’” he says.

Crist, who voluntarily left his role as chairman to emphasize the point on refreshment, says the discussion effectively resembles an employee termination and should be scripted in a way that makes it as easy as possible. Be quick, to the point and clear about why the decision to refresh the seat has been made.

“Be short, sweet and to the point. It is a surgical strike,” he says.

Another strategy is to “start at the very beginning” and build a matrix of skills the ideal board should have, or consider an independent advisor to objectively assess your board based on that matrix, Porteous says. It can highlight shortcomings or where the board might be overweighted in a particular set of qualifications, or skewed in age. It also removes the perception of bias or subjectivity when that might be an issue.

“You may have too many bankers or too many lawyers. All of those individuals may be really good board members, but you have a candid discussion,” Porteous says.

Others might choose a softer approach that is less threatening and avoids potentially brutal performance reviews.

“My theory is, 90 percent of board members know if they’re really contributing. The 10 [percent] that won’t admit it usually kind of stand out in the crowd,” Crist says. “I do think it should be an internal, self-driven correction device.”

What’s clear is that boards face increasing pressure to govern and correct themselves. The poster child the need for stronger self-governance is Wells Fargo & Co., which was required by its regulators to bring in several new directors, force others into retirement and appoint an independent chairman after a series of well publicized scandals inside the bank.

“I firmly believe that everything starts at the top,” Crist says. “You own the responsibility to make things better. That’s your job. If that means changing … the chairs on the deck, then you have to do that.

“If it all starts at the top, then the chairman or lead director has to own the responsibility for improving that. From there, every chair, every committee chair has to own that responsibility,” Crist adds. “If you don’t have that right, if you don’t have the right chairs or you don’t have the right lead director, you’re in trouble, you’re going to struggle for sure.”

Jake Lowary

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