You Could Get Sued

Welcome to a bank board. This is an exciting time to be serving. Oh, and do you have a director’s liability insurance policy, in case you’re sued?

Serving on a bank board can be a rewarding experience: think about the service you’re doing for your community, the connections you’re making and the businesses you’re learning about. It can also be quite frightening. Directors can and do get sued — especially public company directors.

The liability of serving on a bank board can be so intimidating that many banks offer directors’ and officers’ liability insurance to help attract qualified members to their boards. Board members can face civil and criminal liability for their service. (D&O insurance typically doesn’t cover criminal liability, but you probably don’t need to worry. Criminal liability usually involves activities such as falsifying bank statements, committing fraud or accepting fees or favors in return for special treatment, such as lower rates, which I’m sure you’re not planning to do.)

The pay isn’t great either. While the directors serving on the largest banks in the nation certainly get paid in the six figures, Bank Director’s 2022 Compensation Survey, sponsored by Newcleus Compensation Advisors, proves that’s not the norm. The median fee per board meeting in 2021 was $1,000, with a $30,000 annual cash retainer and $20,292 in equity compensation.

Plus, the responsibilities are numerous. If I were to run you through the 126-page “Director’s Book” published by the Office of the Comptroller of the Currency for national banks, it would be impossible to sum up the duties of the board in an elevator pitch of 30 seconds or less. Indeed, this list of duties and responsibilities seems to expand with every crisis or change in the economy. 

Next week’s in-person Bank Board Training Forum, which begins with the Bank Director Certification Workshop on Sunday, Sept. 11, will delve into many of aspects of the roles and responsibilities of bank boards. Jack Milligan, editor-at-large for Bank Director, will lead the workshop. His article 2017 that examines the task of serving on a bank board is relevant today.

Regulators and stakeholders demand an increasing amount of attention and supervision from bank directors. But the overall responsibilities are the same: 

  • Set clear, aligned and consistent direction regarding the firm’s strategy and risk tolerance.
  • Actively manage information flow and board discussions.
  • Hold senior management accountable.
  • Support the independence and stature of independent risk management and internal audit.
  • Maintain a capable board composition and governance structure.

In the end, the task seems like a lot for a part-time job. But the rewards of such service are many. You get to steward a ship that’s instrumental to the success of your communities, providing fuel for its economic engine. The rewards of such service are a job well done. Serving on a bank board isn’t the perfect fit for everyone, but everyone who does should be proud.

Laying Down a Foundation for Bank Boards Through Assessment, Alignment

There are few things in life that remain unchanged for their entirety, and that is certainly true of corporate boards of directors. A board’s ability to plan ahead for retirements, unexpected departures and shifts in business scale is imperative in maintaining a successful franchise.

As the cornerstone of leadership, the board’s composition plays a critical role in a corporation’s performance. In the banking sector, the board’s commitment encompasses the shareholders, to whom it has a fiduciary obligation, and to its management team, for which it has oversight responsibility. The board’s collective experience and knowledge of its members provides tremendous value, empowering the trajectory of the bank’s strategy.

But without the proper strategies in place, even the most robust board rooms are vulnerable to unexpected changes in the industry. An estimated 50% of all boards are operating without a strong succession plan. The absence of sufficient forethought poses incredible risk to a bank’s present and future stability. In contrast, establishing a foundation for preparedness through a board assessment process can help ensure the board is aligned to the strategic direction of the bank, and is prepared to address an ever-evolving business landscape.

The ideal board assessment approach allows for a standardized, yet customizable process. With careful attention to the uniqueness of every institution, the right steps will allow directors to examine their board’s strategic alignment to the functional and industry expertise needed to support the bank’s growth. A thorough assessment generates a “road map” of future director needs, along with updated governance framework. The assessment process can be led by the governance committee, the lead independent director, the chairman or a third-party firm. Here is the process we recommend:

Intake Session
Having conversations with board stakeholders that are focused on the bank’s long-term vision and short-term objectives will shape the strategy of the organization. This should also take into account the unique culture of the bank’s management team, coupled with any shareholder dynamics that can help guide the framework output and objectives.

Board Assessment
Develop a list of director questions and conduct one-on-one interviews with each director. Some categories of questions to ask include director professional background, contributions and engagement, director aspiration and a deep dive on director profile and skills. We also recommend developing a skills matrix as an effective tool to assess directors.

Future Board Framework
A healthy director composition analysis requires that the board compile a thorough report that includes the findings of the board interviews and member assessments. Directors should have candid discussions about the skills and expertise the board needs to fill identified gaps and needed changes. Directors should revisit all governance elements such as terms and limits, size of board, committee structures, election process and succession issues, among others. We recommend that bank directors develop a final three-year board framework plan to implement the identified changes.

Boards should follow this plan to refresh overall board governance, implementing new processes over time as to not dispute important social and cultural matters. Boards should also use a director refreshment plan to bring on new directors that fill experience and skills gaps identified as part of the board assessment process.

Often, a third-party firm is brought in to lead the overall assessment and refreshment process, working closely with the chairman or the board’s governance and nominating committee. Given the complexities of crafting and gauging a board’s optimal composition, a firm can be helpful with managing that assessment process from beginning to end. Additionally, a third party can help recruit a strategic director with the needed industry and functional expertise, with the added benefit of bringing forward a more diverse candidate pool to consider.

Strong bank boards continue to adapt to strategic objectives and maximize shareholder returns. Time and time again, companies that thrive consistently focus on going deeper with corporate board best practices. For emerging institutions, going through the assessment process for the first time is typically challenging; this process inherently implies impending change. Boards that regularly engage in director assessment and revisit their overall governance framework tend to produce better shareholder returns. Is your board focused on how to elevate the oversight function for the organization?