Strategies for Board Refreshment

Bank leaders who are thinking seriously about succession planning for the board might consider maintaining a list of potential directors — if they aren’t already doing so.

Bank Director’s 2023 Governance Best Practices Survey, conducted in April and May, and sponsored by the Financial Institutions Group at the law firm Barack Ferrazzano Kirschbaum & Nagelberg, found gaps in the way that banks approach the topic of recruiting new talent to the boardroom. Fifty-six percent of respondents say their board maintains an active pool of potential board candidates, while just over a third say it does not. Representatives from banks under $1 billion of assets and privately held banks were less likely to say their board maintained such a list.

“Succession on the board is under-emphasized,” says Robert Fleetwood, managing partner in Barack Ferrazzano’s Financial Institutions Group. “I think boards get caught flat-footed sometimes by having to fill seats and not knowing who a candidate is, or not having someone that they can readily tap. There seems to be an inability to find diverse candidates for some reason, which may be that they’re using their personal networks and not doing some of the outreach to professional groups or other outside areas.”

In anonymous comments, many bank leaders said they relied on personal and professional networks, but some reached into their communities to look for talent, engaged search firms or otherwise formalized the process through the board’s governance/nominating committee.

Banks with growth aspirations, especially those under $1 billion of assets, should “be much more engaged and deliberate about their board composition” and recruiting for the board, says Peter Smith, chairman of the board of directors at CNB Financial Corp., in Clearfield, Pennsylvania.

A bank board should ideally have at least four members with extensive knowledge and experience of the banking industry, he says. But, he adds that the $5.7 billion CNB board has achieved a diversity of experience in addition to that, including members with experience in employment law, information technology and bank supervision.
CNB has also successfully recruited diverse talent onto its board, Smith says, by turning to women and minority leaders within the bank to ask for introductions to community members with strong potential as bank directors. Of the 15 directors on the board, three are women and two are people of color.

“It is extremely helpful to have a member of the Black business community in Cleveland, for example, on our board, suggesting, ‘Who are the people we should be talking to? Where do you think we should locate a branch or an ATM?’” Smith says. “I couldn’t place a dollar value on the insight that they bring into the boardroom.”

Regional Banks Could Soon Face Stricter Debt Requirements

Federal banking regulators have proposed new rules for large regional banks to minimize losses to depositors and make it easier to unwind them if they fail, a move inspired by the bank failures this past spring.

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corp. issued a notice of proposed rulemaking in August that would require banks over $100 billion to raise additional debt in order to minimize losses to depositors in the event of a failure.

The failures of Silicon Valley Bank, Signature Bank and First Republic Bank, in the spring of 2023, demonstrated “some obvious lessons” that regulators should address, FDIC Chairman Martin Gruenberg said in an Aug. 14 speech.

Those lessons include the need to consider unrealized losses in calculating regulatory capital, the importance of resolution plans at large regional banks and the utility of long-term debt to absorb losses in the event of a failure.

The long-term debt requirement in particular is intended to absorb losses before depositors or the FDIC would, ostensibly mitigating risk in the event that uninsured depositors flee en masse in a crisis, like they did during the bank failures this spring. That long-term debt furthermore would reduce losses to the Deposit Insurance Fund and could also make it easier to recapitalize the failed bank under new ownership. That debt would need to be equivalent to the greater of either 6% of total risk-weighted assets, 3.5% of average total consolidated assets or 2.5% of total leverage exposure if subject to the supplementary leverage ratio.

“Since this debt is long-term, it will not be a source of liquidity pressure when problems become apparent,” Gruenberg said. “Unlike uninsured depositors, investors in this debt know that they will not be able to run when problems arise. This gives them a greater incentive to monitor risk in these banks and exert pressure on management to better manage risk.”

The American Bankers Association called the rules “another step in the wrong direction” and vowed to lobby against them, although the organization expressed cautious optimism about the FDIC’s proposal to expand its options for selling a failed bank.