Dennis McCuistion, a former bank CEO and an authority on corporate governance, sees a major weakness in many bank boardrooms today: They get stale. He believes in a simple solution: Individual director evaluations.
“I would bet half the directors in community banks today can’t truly understand their own bank’s financial statements, much less understand the technology and risk that’s in the marketplace today,” says McCuistion, who is now the executive director of the Institute for Excellence in Corporate Governance at the University of Texas-Dallas. “After some period of time, most every board member’s effectiveness goes down,” he says. “They’ve shared every good idea and referred all the business they can. An evaluation is one of the best ways to refresh the board.”
However, there is little commitment to performing regular peer-to-peer evaluations of each director in corporate America today. In 2015, Spencer Stuart’s U.S. Board Index reported 61 percent of S&P 500 companies evaluate their board and board committees as a group. But only 14 percent evaluate their full board individually. While data specific to the banking industry isn’t available, consultants and academics agree financial institutions follow the same trend. General board evaluation is common, but reviewing the performance of each individual director is not widely practiced.
Why? It can be uncomfortable. Some banks are concerned about legal records of director performance. And it’s just one more expense for an industry always looking to trim, with peer evaluations conducted by third parties costing as much as $40,000 for larger banks, McCuistion says.
Still, a new emphasis on good governance may be changing the tides. Banks in recent years have added more financial acumen and industry expertise to their boards to please regulators. Consolidation has weeded out some weak institutions. And corporate governance professionals say implementing regular evaluations are catching on as leaders seek to keep their boardrooms effective and involved.
“What has surprised me is that directors are beginning to get excited about this,” says Byron Loflin, founder of the Center for Board Excellence in Greensboro, North Carolina. “Men and women who are committed to their business and business vision are taking governance and director evaluation seriously.”
[Editor’s note: Bank Director also administers board evaluations for banks, including full board and individual performance assessments.]
Loflin says the banking industry has emerged this year as one of his fastest-growing client groups as more bank boards show interest in hiring his firm to guide their evaluation process. He uses online surveys to conduct evaluations and presents boards with the aggregated results. “It’s not just a snapshot in time, but a picture we take this year, next year and the year after that, so you can see the landscape change over time,” he says.
Tony LeVecchio, chairman of LegacyTexas, a community bank with $8 billion in assets, says individual evaluations have been instrumental for the Plano, Texas-based lender. He says performing regular director evaluations has kept the growing lender’s boardroom healthy, accountable and effective. “It’s been very valuable,” he says.
The biggest obstacle to individual evaluations is a fear that results would be discoverable information in a lawsuit. As a result, some bank board members prefer to skip the evaluations altogether. However, most experts agree evaluations can be structured in order to be protected under attorney-client privilege or performed so there is no lasting record.
McCuistion says he evaluates the old-fashioned way. Each director fills out a paper survey with a pencil. The results are discussed privately with each member and then the forms are destroyed. “We’re sensitive to the concerns,” Loflin says. “If they’ve been doing the job properly, it seems highly improbable that an evaluation by a peer would be a problem. A person truly at risk is a person not doing the job.”
HOW-TO: HEALTHY EVALUATIONS
If your boardroom is ready to consider peer evaluations, here’s an overview of some ways to ensure success:
The best peer evaluations generally begin with a boardroom setting its own criteria for the review, says Richard Furr, a 30-year veteran of evaluating bank boards. He co-founded Furr Resources with his wife, Lana Furr, to help boards with performance issues.
When boards establish their own evaluation criteria, it creates accountability and ownership, the Furrs say. “If the directors have felt like they owned the process, they’re much less likely to brush off the results,” Lana Furr says.
The process should usually begin with basic job descriptions months or even a full year before any individual evaluation. McCuistion says many directors have never been issued a written job description. He advises each client start with that step. Then, a nominating or governance committee, or even an independent chairman, can propose items each director will be evaluated on. Common items are attendance, knowledge, preparation and contribution to each meeting. Personality, character and support of corporate culture and the bank’s mission and policies can also be included. Boards should then agree on the criteria and frequency of the reviews.
“If I know every year I have to sit down and face my results, based on criteria I agreed to, then I will be more engaged and accountable,” Richard Furr says. “The weak links start to see the expectations and it forces them to respond.”
After setting criteria and collecting anonymous responses (via paper or electronically), board members should expect to sit down one-on-one with the evaluation administrator. While a governance committee chairman or independent chairman can effectively conduct evaluations, a third party handling the meetings gives directors some anonymity and freedom to express concerns.
“Directors need the opportunity to review their results then have the chance to anonymously raise their hand and ask for more emphasis on certain issues,” Loflin says. “It also gives them a place to share the results of their own self-reflection.”
McCuistion says he has seen boards transformed by one-on-one meetings after evaluations. He once was able to ask a bank director why every single one of his peers expressed displeasure in his penchant for calling for the CEO’s resignation. The conversation helped the director see he needed to modify his behavior or step down. Another conversation helped a bank director respond to criticism that she was silent in meetings. “Behavioral traits are every bit as important as the director’s skillset,” he says. “One-on-ones [are] where you can address those issues.”
Evaluations may be conducted by an outside party, but the reaction must be managed by the board’s leadership. Evaluation results have the potential to reveal weaknesses in a boardroom or even make it clear that one or more board members need to exit. Who will navigate that fallout? That person may be an independent chairman or lead director, or a nominating or governance committee chairman, for example.
For some banks, especially small, family-owned institutions, evaluations can lead to uncomfortable encounters. That’s when strong leadership is paramount. “Sometimes family owners are the best board members. But sometimes they are the worst,” McCuistion says. “If an evaluation process shows owner-board members have major problems, what are you going to do? You’ve got to have people with fortitude to tackle a situation like that.”
Some banks eschew individual evaluations for such reasons. However, those banks that have strong leaders guiding the board through peer evaluations can reap significant rewards. It can also help identify future leaders on the board.
“Evaluations create opportunities for honest dialogue between the chairman and the individual directors,” Richard Furr says. “We see that as really positive. It helps create a healthy culture and you begin to understand how the cultural dynamics of the board affect its performance.”