Want to make your board more effective? Look for a lead independent director with the fortitude and skillset to constructively navigate the relationship with bank management.
While the role is still evolving, bankers have identified some attributes of successful, effective and productive lead directors. These include undisputable independence, forthrightness and an ability to facilitate productive conversations, both in and outside the board room.
As the board’s representative with management, undisputable independence is crucial to a lead director’s ability to be an effective counterweight. It can empower the lead director to act as a conduit of constructive conversations for management and have direct, and sometimes uncomfortable, conversations on behalf of fellow board members.
When speaking with management, lead directors should include an accurate and timely summary of what is discussed in any executive sessions. These sessions allow directors to express concerns and articulate expectations for management in a transparent manner — something they may not be comfortable discussing directly with the CEO. An effective lead independent director can transform these discussions into palatable and productive feedback for executives.
During board meetings, directors — not management — should guide the conversation and focus on key issues. Lead directors can help facilitate consensus and alignment between the board and management, enabling both groups to have candid conversations and ultimately share the same strategic focus.
Building consensus also includes working to making board meetings more effective. A concise, timely meeting agenda representing key board matters can lead to strategic discussions and allow directors to thoughtfully prepare for a productive meeting. Start by surveying fellow directors about matters of importance and sharing discussion points and summaries with management. This can give the board time and space to focus on critical matters during a meeting and help avoid rushing through important topics.
A board of directors is filled with a variety of personalities, so a lead independent director’s demeanor and communication style can impact its success. Effective lead independent directors must be comfortable addressing awkward or sensitive topics and have the ability to lead discussions without becoming a dominant presence in the board room. Facilitating and eliciting perspectives from other directors can coalesce key information, so all the directors feel they have been heard and management understands what is expected of them.
The specificities of the role — and the tasks the lead independent director governs — caution against frequent rotation of this role, which could be viewed as lack of strength on the board, ineffective leadership, or even a lack of commitment to governance. Rotating this role too frequently could also lead to a reduction in the board’s overall productivity.
Assess current and potential board members for candidates who could effectively serve as lead independent director, and weigh the possibility of bringing in a new board member to provide the necessary skills.
For more information on the role of lead independent director, contact Susan Sabo at susan.sabo@CLAconnect.com or 704-816-8452 or Todd Sprang at todd.sprang@CLAconnect.com or 630-954-8175.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.
CLA exists to create opportunities for our clients, our people, and our communities through our industry-focused wealth advisory, outsourcing, audit, tax, and consulting services. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.
Should your board form a standing risk committee — and how will you know that the time is right?
Federal law requires all depository institutions to establish a standing board-level risk committee once they reach $50 billion in assets. The requirement dates back to the passage of the Dodd-Frank Act in 2010; the original asset threshold was set at $10 billion but raised to $50 billion when some of Dodd-Frank’s provisions were relaxed in 2018.
Not every bank waits until it reaches $50 billion to form a risk committee. Many boards make that decision when their bank is much smaller, generally in reaction to its growing size and complexity. In my experience, smaller banks tend to handle risk oversight through their audit committee. But as a bank grows by expanding geographically, adding new business lines or diversifying its loan portfolio — and sometimes doing all of these things at once — its risk profile changes. There is simply more to keep track of — more that can go wrong — and it becomes appropriate to assign the job of risk oversight to a dedicated committee.
In my opinion, once a bank becomes large and complex enough that risk oversight shouldn’t be juggled with audit committee issues like overseeing the external audit or ensuring the integrity of the bank’s financial statements (if it’s a public company), having a dedicated risk committee becomes a best practice.
“When the materials, when the content, when the conversations get more complex and more involved — that’s when I tend to see audit committees split apart into a pure audit committee and a board risk committee,” says Ryan Luttenton, a partner at the consulting firm Crowe LLP. “It’s when the complexities of the institution become a little more challenging to manage in the context of just one meeting. When you start to push things into consent agendas, and you’re approving things and the list starts to grow and grow, it becomes a question of, are we doing a disservice to the institution by not having more constructive discussions around risk and strategy in a risk committee?”
BankNewport, a $2.3 billion mutual bank subsidiary of OceanPoint Financial Partners, opted to form a risk committee in 2016 when it was just $1.4 billion. According to risk committee chair James Wright, the Newport, Rhode Island-based bank was beginning to expand beyond Aquidneck Island, an island in Narragansett Bay that contains Newport and surrounding towns, to the rest of Rhode Island. The bank was also beginning to expand its lending focus to include commercial real estate, an inherently riskier asset class.
Previously, the BankNewport board had not assigned risk oversight to its audit committee, but instead handled it in a compliance and trust committee. The board ended up reconstituting that committee as a standing risk committee. “I think it was a variety of things that led us to doing that,” says Wright. “Our credit portfolio was shifting from more of a residential focus to more commercial. It wasn’t dramatic, but the balance was starting to shift. We were taking on more of a geographic footprint. It really was time to create a more enterprise-wide, strategically focused risk committee that would look at all risk as connected entities.”
There are seven members on the bank’s risk committee, including the board chair and CEO, and it meets quarterly. Around the same time that it created the committee, BankNewport also hired its first chief risk officer to build out a more comprehensive, enterprise-wide risk management process at the bank level. Wright believes the board’s decision to form a risk committee, combined with stronger risk management practices at the bank level, has greatly improved the quality of its risk oversight. “Now, there’s a more centralized place for everyone to go and say, ‘What are we doing about this? What are our protections? What are our proactive measure we’re taking on these things?’”
Another bank that made a decision to bring a sharper focus to risk governance is Glacier Bancorp, a $21.3 billion asset regional bank in Kalispell, Montana. According to committee chair Annie Goodwin, the bank had approximately $5 billion in assets when it formed a risk oversight committee in 2012. Obviously, this was well under the $10 billion threshold that had been established by Dodd-Frank, but the bank wanted to be ready when it got there.
“Even though we’re not at the $50 billion asset threshold presently … our board has made the decision to maintain the risk oversight committee,” Goodwin says. Nine of Glacier’s 11 directors sit on the committee, and its risk oversight officer reports directly to the committee and provides it with monthly reports.
“The risk oversight committee provides a disciplined structure to ensure that we are conducting enterprise risk management in a comprehensive manner,” says Goodwin. “So many areas of the bank’s functions and operations are encompassed in the oversight of our committee that I don’t think our board could ever go back and not have a risk oversight process again.”
Although bank regulators rarely mandate that banks below the $50 billion threshold form a risk committee, they often begin to have conversations with banks under their supervision about adopting more robust enterprise risk management practices at the bank level when they approach the $5 billion mark, according to Luttenton. “And then, as you get to $8 billion, what I hear from my clients and feedback from some of the regulators is that they kind of come in and do a light touch,” he says. “They start to set some expectations around enterprise risk and things like model risk management and vendor management.” Regulation generally becomes tougher when a bank passes the $10 billion mark, and the regulators want a strong risk management program in place by then.
And if the bank is beefing up its risk management policies and practices at the bank level, it may make sense for the board to focus its risk governance efforts in a dedicated committee.
Goodman is a former regulator who served as Montana’s Commissioner of Banking and Financial Institutions from 2001 to 2010. She believes that even small community banks can benefit from bringing a more focused approach to risk governance by setting up a dedicated committee.
“For all banks that are sitting on the sidelines with whether or not they should implement an enterprise risk management committee, my advice is to get started soon,” she says. “And even if it’s a very simple process, it’s always easier to implement a program when the bank is small, rather than waiting until it gets much larger in asset size and much more complex in its operations. I think even with a smaller community bank, enterprise risk management can get into the board’s DNA, their way of thinking that prepares them for the future and to help the bank with its long-term success.”
Brian Nappi, a senior manager at Crowe, says directors are often bogged down under the weight of too much information. “If I’m sitting on a risk committee and I have to look at more than nine pages to understand where we are, then we’re not good communicators,” he says. The first page should have four things, Nappi says: the risk appetite statement compared to the bank’s risk profile at the end of every quarter; the top three to five risks facing the bank; management’s response to those risks; and the top two or three emerging risks. The remaining eight pages should contain a variety of risk data if the committee members want to drill down deeper, he adds.
Generally speaking, risk committees should be forward-looking in their focus, while audit committees naturally look backward. This is why handling risk in the audit committee is something of a philosophical disconnect. When a bank forms a risk committee after its audit committee has been handling risk oversight, the audit committee still plays an important role in verifying that the bank’s various risk management policies are being followed.
“The focus for audit committees is on internal controls — which controls are working, and which ones are broken,” says Nappi. “Risk committees, their focus should be on what’s the highest residual risk [facing] the institution, and what [is] management’s response to those risks.”
You can view a sample risk committee charter here, part of our Board Structure Guidelines, which describe committee functions, structure and compensation, as well as board roles. These resources are available exclusively to Bank Services members.
Bank Director’s 2020 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner, focused on how bank boards manage their business, including their composition, independence and oversight. The analysis also digs into some key best practices, which Bryan Cave Partner James McAlpin Jr. explores further in this video.
Benjamin Franklin is quoted as saying “If you fail to plan, you are planning to fail.” And that old quote couldn’t be more applicable to bank board succession planning, especially nowadays when the industry is undergoing so many significant changes.
Boards today need to be planning for even more technology reliance, new fee-based income generators, tougher regulations, and fewer professionals interested in banking as a career. The days when a bank could rely solely on investors and well-connected business people to guide its direction are almost gone. Instead, tomorrow’s banks will need leadership with expertise in the crucial areas that aren’t directly adding to the bottom line, such as technology, risk, compliance and audits.
There are a lot of moving parts in a bank board succession plan. That’s why we’ve highlighted seven areas to consider that have surfaced from our experiences working with banks and their board succession plans.
Optimize Your Composition: Boards need to find the right people to reflect the strategic priorities of the shareholders. Banks today have moved to finding niche lending areas in addition to traditional banking services to meet growth objectives. It is imperative to build a board that aligns with and is complementary to the bank’s strategic plan. For example, if a bank is transitioning from a branch-focused model to a branchless model, it’s important to incorporate expertise on the board who can guide that transition. Perhaps reducing the number of directors will increase the productivity of the board.
Anticipate What’s Coming: It’s important to understand the changing bank market, including technology and regulatory shifts that are expected in the next three to five years. Understanding this gives banks an opportunity to move out of reactionary situations and become proactive. Having board members with the right experience and forward-thinking approach can help define new potential business lines while adhering to shifting compliance and regulatory demands.
Identify Necessary Skills: Once you have identified coming shifts in the business, it’s important to determine the skills needed to meet those challenges. Beyond driving business, boards should include members who bring a skill set that advances the bank toward its strategic priorities, whether technology, cyber-security, audit, risk and/or compliance. As a bank grows, it should consider bringing on directors who understand more complex banking models. If a bank wants to move into a niche, bringing a board member in with specific experience can help guide the bank in that area.
Consider Investor Expectations: It’s important to keep in mind the fiduciary role the board plays. Investors want to see a committed board qualified to serve, while remaining devoted to the short and long-term success of the bank. Investors today are actively monitoring the governance of banks.
Get a Technology Expert on the Board: It’s time to consider adjusting the board’s composition to complement the capabilities of the next generation of leadership. One big switch between today’s leaders and tomorrow’s will likely be reliance on technology. Technology has been a missing piece on a lot of boards, and as the next generation of leadership takes the helm to steer banks toward more technology-driven services, it will be essential to have a technology expert on the board. This person should not only understand technology, but also understand how to leverage it to connect with customers.
Self-Assess: Directors are increasingly using self-assessments to look for gaps in expertise and skills, some of which could be addressed with training or further development. Assessments can help drive consistent refreshment of the business over time by adding needed skills as the complexity of banking continues.
When it comes to who will lead succession planning for the board, it is typically the governance committee’s responsibility but in privately held banks, the chairman often runs the show on succession planning. As regulators are increasingly asking about director succession, the ownership of the plan will increasingly shift to the independent directors of the governance committee. Knowing when and how often to develop and refresh a succession plan depends on where a bank is in its development. A newer bank will likely review the succession plan for the board more frequently than a more established bank.
A well thought out decision making process is key to the success of the board and the financial institution as a whole. Regulators and auditors are looking to see that the board is thorough and educated with their actions. In this video, Lynn McKenzie of KPMG LLP lays out the importance of the credible challenge to management and how to best approach the process in the boardroom.
Why is it important for the board to provide a credible challenge?
Could credible challenge sour the relationship between the CEO and the board?
How should the board provide evidence of oversight?