A Boardroom Conversation

What Are the Red Flags That Something Is Wrong at Your Bank?

With several of the largest banks experiencing ethical scandals in recent years, Bank Director digital magazine spoke with J. Terry Strange, the audit and compliance committee chair at BBVA Compass Bancshares, the $86.7 billion institution based in Houston. As a former vice chair and managing partner of the U.S. audit practice at KPMG, LLP, he is uniquely qualified to talk about how bank board members can assess the culture of their organizations and look for red flags.

Q: I am going to start with a quote from Warren Buffett. When he’s looking for talent, he said he looks for integrity, energy and intelligence. And if you don’t have the first one, the other two will kill you.
TS: I would agree with Mr. Buffett, particularly if you’re hiring an experienced hire, someone senior in the organization. You would assume they achieved something and they have got the intellect to function. Integrity becomes the first thing, energy second.

Q: Before joining a board, what would you do to assess whether that organization met your ethical standards?
TS: I would start with the CEO, [and look at] what their business ethics are like, [whether] they have the same values that I have in terms of doing business. If I could get comfortable with the CEO, and I thought I could be a positive influence, then the next thing I would look at was who else is on the board. Do they share a set of common values in terms of how they conduct business? The next thing is whether the CEO is able to attract like-minded people in terms of direct reports.

Q: What are some red flags that that’s not happening?
TS: Regulators can clue you into things they’re finding in their exams, internal audit with their findings, whether they are finding noncompliance with your policies and procedures and breakdowns in your internal controls. You have to assume you have the proper policies and procedures, so deviation in those is a real red flag. Hotline reporting is important, whether it comes from your customer base or your employees. There is a mistake that’s made in many organizations that everything that comes in over the hotline, if it doesn’t actually talk about a fraud or suspicion about improper accounting, then it must be a [human resources] issue. That’s not always the case. What looks like an HR issue might be a trigger or indicator of a bigger problem. If I remember the reporting around Wells Fargo [which experienced a fraudulent account opening scandal last year], there were one or two of their hotline calls that were handled as if they were HR issues, when in reality there was more fire there.

Q: Wells Fargo is a good example of a board you wouldn’t want to be on. There’s a crisis going on and there are lots of questions about whether the board knew what was going on, and if not, why?
TS: That’s a hard question to answer not having been on that board. I wouldn’t want to condemn that whole board. There were a lot of highly successful people who sat on their board. One of the things I would have asked is, how is our cross-sell metric so much better than our peers?