What Directors Think About Diversity, Independence and Credible Challenge

Building a diverse board —as defined by gender, race and ethnicity — is a controversial issue in many corporate boardrooms today, banks included. An increasing number of large institutional investors and stock exchanges like the Nasdaq Stock Market are pushing for it, and a small but growing number of states either mandate it or are instituting disclosure requirements.

But not everyone is convinced that greater diversity inherently leads to better governance, as illustrated by results of Bank Director’s 2021 Governance Best Practices Survey. Fifty-nine percent of the respondents agreed that diversity as defined by race, gender and ethnicity improves the performance of a corporate board. However, 36% agreed with statement but said the impact was overrated, and 5% disagreed that greater diversity improves performance.

James J. McAlpin Jr., a partner at Bryan Cave Leighton Paisner LLP and leader of the firm’s banking practice group, is a strong proponent of board room diversity. “I have experienced the power of diversity on a bank board of which I am a member,” he says. “We have gone from a board of eight men and one woman three years ago to now a majority female board. There is a difference resulting from that positive transformation. Our board is probably more risk averse that it used to be. We seem to be better prepared as a group for meetings. And as a group we ask more probing questions.”

Sponsored by Bryan Cave, the survey polled 217 directors and chief executives at banks under $50 billion in assets in February and March of 2021. The majority of the respondents were independent board members. Almost half of the participants represented banks with $1 billion to $10 billion in assets.

Diversity is just one of many issues covered in this year’s survey. The list includes the practice of credible challenge, the desire for collegiality versus the freedom to disagree, board assessments, the board’s role in strategic planning and CEO performance evaluations. The survey results have been divided into five modules: board practices, the board/management relationship, strategic planning, board refreshment and diversity, and the role of the independent director.

The white paper also includes the insights of two experienced directors who helped us interpret the results: David. L. Porteous, the lead director at Huntington Bancshares, a $175 billion asset bank headquartered in Columbus, Ohio; and C. Dallas Kayser, the independent chair at City Holding Co., a $5.9 billion bank located in Charleston, West Virginia.

Ninety-nine percent of the survey respondents said that personal integrity was the most important attribute of an independent director, followed by the ability to exercise sound judgment at 96% and accountability at 94%.

“Regardless the size of the bank, the role of the independent director is pretty much the same,” says Porteous, who has served on the Huntington board since 2003, and as lead director since 2007. “There has to be a level of commitment, and that commitment has to be to your fellow directors. It has to be to the leadership of the organization, it has to be to the shareholders, to the community and to the regulators. If there comes a time when you just can’t dedicate that level of commitment, you should probably step down.”

To read more about these critical board issues, read the white paper.

To view the full results of the survey, click here.

The Secrets Behind Diverse Boards

Four women currently serve on the board at Eagle Bancorp Montana, the $1.3 billion asset holding company for Opportunity Bank of Montana. That’s by design, says Chairman Rick Hays.

“[We] decided that we needed to have a larger board,” Hays says, after a 2012 branch acquisition doubled its footprint in Montana and prompted a later increase from seven to nine members. The Helena, Montana-based commercial bank wanted to add directors representing its expanded geography, along with younger board members and women. Maureen Rude, who joined the board in 2010, was the sole female director at that time.

“We had all the board members, all the executive officers, the local market presidents in those communities, all looking for people with the characteristics we were looking for,” says Hays. Expanding its networks worked: Two women joined in 2015, and the fourth, public accountant Cynthia Utterback, in 2019. During that time, the bank also replaced a male director with another man with a technology background.

“We’re looking for the best possible candidates,” Hays says. “If you decide what you want and commit to getting it, you can get it done.” Adding new perspectives and backgrounds benefits the board and the bank, he adds. “I firmly believe that diversity is about the best possible business decision we can make; I’ve experienced it over and over in a variety of organizations.”

Almost 60% of the directors  and CEOs responding to Bank Director’s 2021 Governance Best Practices Survey believe that diversity in the boardroom improves corporate performance. However, fewer than half — 39% — have three or more board members who they’d consider to be diverse, based on gender, race or ethnicity.

The benefits of diversity in the boardroom are frequently touted by corporate governance experts, and many of the survey participants shared their experience. Here are a few of the comments we received:

“[D]iversity has helped shape everything from policies to product positioning.” — Lead director of a public bank between $1 billion and $10 billion in assets

“We have diversity in age, gender, geography, ethnicity and career experience. Creates more robust questioning when discussing products, trends, issues to ensure full vetting, understanding and ramifications of decisions.” — Independent director, public bank above $10 billion in assets

“[Due to diversity] [w]e have re-visited agendas, meeting logistics, and historical approaches to initiatives with a fresh lens.” — Independent chair at a private bank between $1 billion to $10 billion in assets

Sixty-five percent of respondents want to add more directors with diverse backgrounds, but almost as many (61%) believe it’s difficult to identify and recruit them to serve on the board. These candidates may be in high demand, but the survey finds that respondents representing more diverse boards report that it’s easier to recruit diverse candidates with the skills and expertise their organization needs.

 

As Rick Hays at Eagle Bancorp Montana illustrates, diverse boards broaden their networks to recruit diverse, qualified candidates. But an analysis of the habits of diverse boards yields further clues about their practices. They tend to have mechanisms in place to create space on the board, and to identify the skills and attributes they’re seeking.

Board evaluations can be valuable tools to evaluate governance practices and identify disengaged members. The survey finds that diverse boards more frequently use and also make deeper use of performance assessments, from assessing the effectiveness of the entire board, to identifying underperforming directors and conducting one-on-one conversations with directors.

Bank Director offers a board evaluation and peer assessment through its membership program. Mascoma Bank, a Lebanon, New Hampshire-based mutual, uses this evaluation annually. Clay Adams, the $2.4 billion bank’s CEO, says the tool provides a framework for the board to assess its practices, such as ensuring that the board is receiving an appropriate level of detail about the bank’s operations.

“We’re always thinking about how to do things better,” says Adams. “We use the board effectiveness survey to make sure that we’re on the right path.”

Peer evaluations are less commonly used by bank boards — 24% say their board uses one. Respondents representing boards with three or more diverse members (36%) are more likely to use this tool.

Mascoma’s board conducts a peer assessment every other year, under the purview of the governance committee. Adams has served on other boards that used similar assessments, which he believes provide tremendous value in driving conversations with underperforming directors. “Diverse board member or not,” he adds, “if a person is not fulfilling the duties — duty of trust, duty of care, duty of loyalty — then they shouldn’t be on the board.”

Bank Director included Mascoma Bank in its analysis of the Top 25 Bank Boards for Women earlier this year; the mutual has since added two more women to its board, so its composition is now evenly split between men and women. Adams emphasizes the importance of intention in building a diverse, skilled board. “We’re constantly talking about it [and encouraging] board members to think about people they come across in their lives or reaching out to communities where we may not — as a board, as individuals — interact,” he says.

Adams hopes to further diversify the boardroom. “We’d like to have a [person of color] on our board,” he says. “We live in a predominantly white region, northern New England. Therefore, we need to work a little harder to network with people who are members of that community.”

Mascoma also incorporates term limits for directors — 15 consecutive years — and a mandatory retirement age, at 72, as mechanisms to regularly open seats on the board. These policies were last examined by Bank Director in 2020; our survey found that boards with “several” diverse directors were slightly more likely to use a mandatory retirement age or term limits.

Getting the right mix of skill sets, backgrounds and experiences results from a gradual, deliberate process, says Hays. “When we’ve filled any of our board slots, we’ve probably had discussions for a year and a half to two years to get there,” he says, due to the value Hays and the board place on its composition. “It takes time to find the people we were so fortunate to find [and] bring onto the board. We could not have done it any sooner.”

Governance Best Practices: Taking the Lead

Due to ongoing changes in the banking industry — from demographic shifts to the drive to digital — it’s never been more important for bank boards to get proactive about strategy. James McAlpin Jr., a partner at Bryan Cave Leighton Paisner and global leader of the firm’s banking practice group, shares his point of view on three key themes explored in the 2021 Governance Best Practices Survey.

  • Taking the Lead on Strategic Discussions
  • Making Meetings More Productive
  • The Three C’s Every Director Should Possess

ESG Principles at Work in Diversifying Governance

Before environmental, social, and governance (ESG) matters became commercially and culturally significant, the lack of diversity and inclusion within governance structures was noted by stakeholders but not scrutinized.

The shifting tides now means that organizations lacking diversity in their corporate leadership could be potentially subjected to shareholder lawsuits, increased regulation and directives by state laws, investment bank requirements, and potential industry edicts.

Board and management diversity is undoubtedly a high-priority issue in the banking and financial services sectors. Numerous reports establish minority groups have historically been denied access to capital, which is mirrored by the lack of minority representation on the boards of financial institutions.

Some progress has been made. For example, for the first time in its 107-year history, white men held fewer than half of the board seats at the Federal Reserve’s 12 regional outposts. This was part of an intentional effort, as Fed leaders believe a more representative body of leaders will better understand economic conditions and make better policy decisions. However, further analysis reflects such diversity predominantly among the two-thirds of directors who are not bankers, while the experienced banking directors are mainly white males.

Board Diversity Lawsuits
The current pending shareholder suits have been primarily filed by the same group of firms and targeted many companies listed by a recent Newsweek article as not having a Black director. None of these suits involve financial institutions, but it is not hard to foresee such cases coming in the future. The lawsuits generally assert that the defendants breached their fiduciary duties and made false or misleading public statements regarding a company’s commitment to diversity. The Courts have summarily dismissed at least two suits, but a legal victory may not even be the goal in some cases.

Recently, Google’s parent settled its #MeToo derivative litigation and agreed to create a $310 million diversity, equity, and inclusion fund to support global diversity and inclusion initiatives within Google over the next ten years. The fund will also support various ESG programs outside Google focused on the digital and technology industries.

Regulatory, Industry, and Shareholder Efforts
Federal and state regulatory efforts preceded these recent lawsuits. The U.S. Securities and Exchange Commission has issued compliance interpretations advising companies on the disclosure of diversity characteristics upon which they rely when nominating board members and is expected to push more disclosure in the future. Additionally, the U.S. House of Representatives considered a bill in November 2019 requiring issuers of securities to disclose the racial, ethnic, and gender composition of their boards of directors and executive officers and any plans to promote such diversity.

These efforts will likely filter into boardrooms and may spur additional board regulation at the state level. In 2019, California became the first state to require headquartered public companies to have a minimum number of female directors or face sanctions, increasing 2021. In June 2020, New York began requiring companies to report how many of their directors are women. As other states follow California’s lead regarding board composition, we can expect more claims to be filed across the country.

At the industry level, the Nasdaq stock exchange filed a proposal with the SEC to adopt regulations that would require most listed companies to elect at least one woman director and one director from an underrepresented minority or who identify as LGBTQ+. If adopted, the tiered requirements would force non-compliant companies to disclose such failures in the company’s annual meeting proxy statement or on its website.

In the private sector, institutional investors, such as BlackRock and Vanguard Group, have encouraged companies to pursue ESG goals and disclose their boards’ racial diversity, using proxy votes to advance such efforts. Separately, Institutional Shareholder Services and some non-profit organizations have either encouraged companies to disclose their diversity efforts or signed challenges and pledges to increase the diversity on their boards. Goldman Sachs Group has made clear it will only assist companies to go public if they have at least one diverse board member.

Concrete Plans Can Decrease Director Risk
Successful institutions know their diversity commitment cannot be rhetorical and is measured by the number of their diverse board and management leaders. As pending lawsuits and legislation leverage diversity statements to form the basis of liability or regulatory culpability, financial institutions should ensure that their actions fully support their diversity proclamations. Among other things, boards should:

  • Take the lead from public and private efforts and review and, if necessary, reform board composition to open or create seats for diverse directors.
  • When recruiting new board members, identify and prioritize salient diversity characteristics; if necessary, utilize a diversity-focused search consultant to ensure a diverse pool of candidates.
  • Develop a quantifiable plan for diversity issues by reviewing and augmenting governance guidelines, board committee efforts, and executive compensation criteria.
  • Create and promote diversity and inclusion goals and incorporate training at the board and management levels.
  • Require quarterly board reporting on diversity and inclusion programs to reveal trends and progress towards stated goals.

As companies express their commitment to the board and C-level diversity and other ESG efforts, they should create and follow concrete plans with defined goals and meticulously measure their progress.

2021 Governance Best Practices Survey Results: Who’s Driving Bank Strategy?

The best banks balance short-term thinking with long-term strategy.

“Long-term performance is always our paramount objective,” Bank OZK Chair and CEO George Gleason told Bank Director at its recent Inspired by Acquire or Be Acquired virtual event. The $27 billion bank topped Bank Director’s 2021 RankingBanking study. “If short-term results suffer because of our focus on long-term objectives, then that’s just part of it.”

Strategic discipline starts with a bank’s leadership team — and the board should play an important role in developing the strategy and monitoring its execution. But that’s not always the case, according to the results of the 2021 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP.

The survey explores the board’s approach to strategic planning, as well as governance practices, board composition and the relationship between executives and the board. The results find that most boards don’t drive strategic planning at their institutions: Just 20% say the board drives this process and collaborates with management to develop the strategic plan. Most — 56% — say their board establishes the risk appetite but relies on management to develop the strategy.

The vast majority believe their strategic planning process is effective. But of the 11% who believe their process to be ineffective, some express regret over the lack of input from their board. One respondent believes their bank’s strategic plan to be “too in the weeds,” while another holds the opposite concern. “It flies at 30,000 feet for [the] most part,” says one independent chair. “[We] need to get a little closer to the ground with metrics and clear paths for management to build.”

Most — 84% — reviewed their strategic plan during the pandemic, but few shortened the time horizon of their strategy. This may seem surprising, given previous indicators that Covid-19 accelerated bank strategy in some areas, particularly around the implementation of digital technology. Perhaps this indicates that, for most bank leadership teams, balancing short-term results and long-term strategy remains top of mind.

Key Findings

Strategic Review
Three-quarters of respondents say their board reviews the strategic plan annually. Roughly two-thirds bring in an outside advisor or consultant to assist in developing the strategic plan — but not generally every year.

Board Responsibilities
When asked to identify the board’s most important functions, the majority of respondents point to holding management accountable for achieving goals in a safe and sound manner (61%) and meeting its fiduciary responsibilities to shareholders (60%). Just 34% say that setting strategy is a key board responsibility.

Competitive Pressures
Respondents say that pressure on net interest margins (52%), the ability to grow organically in their markets (44%) and meeting customer demands for digital options (37%) threaten the long-term viability of their bank.

Interacting With Management
The vast majority of independent directors, chairs and lead directors believe they’re getting the right level of information from bank executives. Almost all interact at least quarterly with the bank’s CEO (98%), CFO (94%) and chief risk officer (85%).

Credible Challenge
Three-quarters say their board has several directors willing to ask tough questions when warranted; 92% find their management team receptive to feedback.

Needle Moving on Board Diversity
Almost 60% believe that fostering diversity in the boardroom improves corporate performance. Thirty-nine percent have three or more board members who bring diverse characteristics to the board, based on gender, race or ethnicity.

Assessing Performance
Less than half conduct an annual evaluation of their board’s performance, which most use to assess the effectiveness of the board as a whole (84%), improve governance processes (60%), identify training needs for the board (59%) or assess committee performance (58%).

To view the full results of the survey, click here.

2021 Risk Survey Results: High Anxiety

An outsized crisis requires bold action. The banking industry responded in kind when the economy spiraled as a result of the Covid-19 pandemic.

Financial institutions across the country assisted small businesses by issuing Paycheck Protection Program loans. Banks also almost universally modified loans to help borrowers weather the storm, according to Bank Director’s 2021 Risk Survey, sponsored by Moss Adams LLP. At the peak of the downturn, 43% of the directors, CEOs, chief risk officers and other senior executives responding to the survey say their bank modified more than 10% of the loans in their portfolio.

Conducted on the heels of a tumultuous 2020 — with the pandemic, social strife and political change continuing into January — the survey reveals high levels of anxiety across the risk spectrum. In particular, respondents indicate greater unease regarding cybersecurity (92%) and credit (89%), as well as strategic (62%) and operational (52%) risks.

Almost half of respondents indicate that some or most of the loan modifications extended into the fourth quarter 2020, and two-thirds reveal concerns about concentrations in their loan portfolio, with most pointing to commercial real estate (43%) and/or the hospitality industry (31%).

Forty-three percent indicate that their bank tightened underwriting standards during the downturn. Looking ahead, many are unsure whether they’ll ease their standards to lend to business customers in 2021 and 2022. The challenges to bankers have been deep during the past year.

As the CEO of a small, southeastern community bank put it: “What doesn’t kill you makes you stronger.”

Despite this uncertainty, bankers express some optimism. More than three-quarters believe that supporting their communities during the pandemic has positively affected their bank’s reputation. Eighty-seven percent expect fewer than 10% of their bank’s business customers to fail. And 84% will improve their bank’s business continuity plan due to what they’ve experienced.

Key Findings

More Robust Stress Testing
More than 80% say their bank conducts an annual stress test. Of these, 60% have expanded the quantity and/or depth of economic scenarios examined in response to the Covid-19 pandemic.

Cybersecurity Gaps
Sixty-three percent say their institution increased its oversight of cybersecurity and data privacy in 2020. Most say the bank needs to improve its cybersecurity program by training staff (68%) and implementing technology to better detect or deter threats and intrusions (65%).

Pandemic Plans Adjusted
Respondents identify several areas where they’ll enhance their business continuity plan as a result of the pandemic. The majority point to formalizing remote work procedures and policies (77%), educating and training employees (56%) and/or providing the right tools to staff (55%). Roughly half say that fewer than a quarter of employees will work remotely when the pandemic abates; 25% say that no employees will work remotely.

Banking Marijuana
Forty-one percent of respondents represent a bank headquartered where marijuana use is at least partly legal. Overall, one-third are unsure if their bank would be willing to serve marijuana businesses. Just 7% serve these businesses; 34% have discussed banking this industry but don’t work with these companies yet.

Climate Change Still Not a Hot Topic
Just 14% say their board discusses the risks posed by climate change at least annually; this is up slightly from 11% in last year’s survey. Fewer than 10% say an executive reports to the board about the risks and opportunities that climate change presents to the institution.

To view the full results of the survey, click here.

Top 25 Bank Boards for Women

In early December, Nasdaq filed a proposal with the Securities and Exchange Commission that would require its listed companies to disclose diversity statistics about their board’s composition. Boards must include at least one female and, at minimum, one minority or LGBTQ board member. While the exchange recently made some changes to the proposal - to address the concerns of small boards with five or fewer members, for instance — there’s no denying that pressure has been mounting when it comes to improving diversity on corporate boards.

Just look at 2020 alone: Institutional Shareholder Services reiterated that it would vote against the nominating chair of Russell 3000 and S&P 1500 companies that lack female representation. Goldman Sachs Group announced that it will only take companies public if they have at least one diverse board member. And California and Washington both had gender diversity requirements in place for companies headquartered there.

“Diversity of thought forces [boards] to look at solutions in a different way, to look at problems in a different way,” says Kara Baldwin, a partner at Crowe LLP. “It’s simply good business to make sure you have those differing viewpoints.”

But corporate boards often do the bare minimum when it comes to adding women: An analysis of Russell 3000 boards by 50/50 Women on Boards finds that only 5% are gender-balanced, meaning women hold roughly half of board seats.

In a new analysis using its proprietary database of the nation’s 5,000 public, private and mutual bank boards, Bank Director identified the 25 bank boards with the highest representation of women. We focused on banks above $300 million in assets, given the lack of data on very small, private institutions. Only 11 of the banks we examined would meet the goal set by 50/50 Women on Boards.

Women, it should be noted, comprise 51% of the population and 58% of the workforce, according to the U.S. Census Bureau.

Both big and small banks, public and private, topped our list, showing that diversity is not exclusively a big bank issue. Webster Financial Corp. of Waterbury, Connecticut, with $32.6 billion in assets, and The Falls City National Bank, with $456 million in assets out of Falls City, Texas, top our list. Both boast boards with a membership that’s 56% female — well above the normal balance typically found on corporate boards. Rounding out the list are $1.9 billion First Bank of Highland Park, in Highland Park, Illinois, and Principal Financial Group, the holding company for $4.5 billion asset Principal Bank in Des Moines, Iowa. Both 12-person boards include five women, comprising 42% of membership. Last year, 50/50 Women on Boards found that women held 23% of board seats at Russell 3000 companies.

About six years ago, First United Corp., which has $1.7 billion in assets, started to intentionally focus on its composition, both in terms of skills and backgrounds. “We want to be more relevant to our customers and to our communities, for our shareholders, looking at that whole stakeholder group [including] employees,” says Carissa Rodeheaver, the Oakland, Maryland-based bank’s chair and chief executive. That includes representing diverse backgrounds, in terms of gender, race and ethnicity, and age.

This year, First United will begin using a skills matrix — a practice that helps boards map their directors’ expertise and backgrounds to identify gaps. A diversity and inclusion policy, put in place by the nominating and governance committee, will ensure the board considers a diverse slate of director candidates. “The pool has to be diverse, and that will continue to naturally lend itself to keeping that diversity of thought on the board,” says Rodeheaver. “It’s a great formula that leads to a well-rounded board.”

First United brought on three new directors in the past year — all women, it turns out, who are skilled in regulatory compliance, finance and project management, says Rodeheaver.

Lisa Oliver, the chair and CEO at The Cooperative Bank of Cape Cod, a $1.2 billion mutual bank headquartered in Hyannis, Massachusetts, places a high value on the “lived experiences” often uncovered when building diverse boards.

While the traditional executives and professionals often found on corporate boards — current and former CEOs, accountants, regulators and attorneys — still provide valuable insights, banks “have to think about the new needs of banking, and how that aligns with a whole different genre of people and the pipeline we need to cultivate,” says Oliver. For example, boards often seek technology and cybersecurity expertise; these skills aren’t often found at the top of an organization. Or a board might look for someone who can represent an industry that’s important to their bank, like healthcare.

C-suites are still predominantly male and predominantly white: Looking further down an organization chart might serve up an experienced candidate who also brings a diverse perspective to the table.

“You have to work harder; you have to expand that group of who you know,” says Baldwin. “You must be intentional — that’s really important.”

Oliver also wants to attract and retain younger directors to the board at “The Coop,” as the bank is called locally, but has struggled to retain young women as board members and corporators during the pandemic. (Corporators elect board members, but the position can also serve as a training ground of sorts for board candidates.)

“The pandemic has created great stress for young people to [serve] on the board,” says Oliver. One director, a business owner and single mother with a child at home, had to resign, she says. Oliver believes boards should consider how they can structure meetings to make the role more manageable for younger board members who are building their careers and businesses. “Not death by committee meeting, but what are the critical four committees we need to have?” she says. “There’s an art and a science to creating the agenda within that and providing the data to analyze risk, make it manageable.” A 400-page board packet can be difficult to fit into anyone’s schedule, much less that of a Gen X or millennial professional balancing family and career.

Oliver wonders if today’s more remote environment — with boards meeting virtually — could help them attract candidates from nearby Boston — a technology hub boasting a highly educated workforce.

Boards should consider looking outside their local community to find diverse, qualified board members, says Baldwin. Nearby cities, as Oliver posits, could be a valuable well of talent.

Both First United and The Coop are putting practices in place to help make room for new views: First United will declassify its board this year, and Oliver says her bank is putting term limits in place.

And both CEOs tell me that building the board their bank needs is a continuous process. “We need to constantly be looking and identifying individuals that make sense [for our board] and backfill that pipeline,” says Rodeheaver.

“We have to reflect the community around us, or else we’re not able to hit on some of the challenges that we face,” Oliver adds. “It takes effort, and it takes time, and it has to be a constant process.”

Top 25 Bank Boards For Women

Bank Name (Ticker) State Total # Directors % Women on the Board
Webster Financial Corp. (WBS) CT 9 56%
The Falls City National Bank TX 9 56%
Lead Financial Group MO 9 55%
First United Corp. (FUNC) MD 12 50%
The Cooperative Bank of Cape Cod MA 14 50%
First National Bank Alaska (FBAK) AK 8 50%
Boston Private Financial Holdings (BPFH) MA 8 50%
New Triplo Bancorp PA 6 50%
Andrew Johnson Bancshares TN 8 50%
Johnson Financial Group WI 10 50%
Minnwest Corp. MN 16 50%
GSB, MHC MA 15 47%
Cambridge Bancorp (CATC) MA 17 47%
First Capital (FCAP) IN 13 46%
Mascoma Bank VT 13 46%
Ledyard Financial Group (LFGP) VT 11 45%
First Seacoast Bancorp (FSEA) NH 9 44%
Orbisonia Community Bancorp PA 7 43%
Stearns Financial Services MN 7 43%
Lockhart Bankshares TX 7 43%
National Cooperative Bank OH 14 43%
MidFirst Bank OK 7 43%
Olympia Federal Savings and Loan Assn. WA 7 43%
Principal Financial Group (PFG) IA 12 42%
First Bank of Highland Park* IL 12 42%

Source: Bank Director internal data, plus bank websites and public filings, as of February 2020. Banks under $300 million in assets weren’t examined given the scarcity of data about these institutions.
*First Bank of Highland Park was left off this ranking when it first published. Bank Director regrets the omission.

How One Bank Chairman Created a Diverse Board

When Charles Crawford Jr. took over as chairman and CEO of Philadelphia-based Hyperion Bank in August 2017, the 11-year-old de novo’s board had shrunk from 15 directors at its inception to the statutory minimum of just five, and its future was anything but certain.

Hyperion had been formed in 2006, but never seemed to find its stride. “When you start a new bank you typically lose money for the first two years, and by year three you should have enough critical mass to be achieving profitability for your shareholders,” says Crawford. “Unfortunately for Hyperion, they lost money for seven straight years. A lot of those 15 board members said ‘You know what? This isn’t so fun.’” One by one, most of them left the board.

Crawford had also formed a new bank in 2006, but this venture turned out to be much more successful than Hyperion. Crawford’s bank — known as Private Bank of Buckhead and situated in an upscale community north of Atlanta – was sold in 2017. After the sale, an investor in both Private Bank and Hyperion asked him to take a close look at its operation and perhaps join the board. Crawford says he saw “a great entrepreneurial opportunity” and signed on.

Since then, Crawford has raised $18 million in capital, which has enabled the $250 million asset bank to finally begin to grow, and opened a branch in the Atlanta market. He has also rebuilt the Hyperion board almost from scratch. Today’s board has eight members, including an African American male, who joined the board in 2018, and three females who signed on in the fourth quarter of 2019. Crawford values the different experiences and points of view – often referred to as diversity of thought – that the group brings to the governance process.

“To me, it’s not just gender and ethnic diversity,” Crawford says. “It’s backgrounds and skillsets and knowledge, and that people think differently and ask different questions.” Hyperion’s board diversity didn’t occur by accident. “You do have to be very intentional to be able to build a diverse board or a diverse workforce,” he says.

One of Crawford’s challenges in rebuilding the board was his unfamiliarity with the Philadelphia business community. He graduated from the University of Pennsylvania but hadn’t lived in Philadelphia for over 30 years, so he didn’t know a lot of people there. One of his first recruits was Robert N.C. “Bobby” Nix III, an African American attorney with extensive experience serving on bank boards, including one occasion when he had to step in and take over as the interim CEO. Crawford was introduced to Nix by another Hyperion director who has since left the board.

Nix says he quickly developed a rapport with Crawford. “He is a very accomplished banker and a really bright and nice guy,” Nix says. “I got along with Charlie really well and had a great comfort level with him. And we talked about a lot of stuff about how I would like to see the bank go, and he actually listened.”

One of Nix’s suggestions was to recruit an economist because Hyperion is an active construction lender and that tends to be a cyclical business. Crawford later brought to the board Lara Rhame, the chief U.S. economist at FS Investments, an alternative asset manager in Philadelphia. Crawford started playing tennis after he moved to Philadelphia as a way of meeting people, and a fellow tennis player connected him to Rhame. Crawford said he was looking to add more talent to the Hyperion board.

“Lara and I had coffee and I explained what the bank was up to and [what] the mission [was] and got to know her background,” Crawford says. “I’ve never had an economist on my bank board, but it is very valuable. She helps not just me but the other directors and bank management see the big picture of what’s going on.”

Crawford first met another female director – Gretchen Santamour, a partner at the Philadelphia law firm Stradley Ronon, where she specializes in business restructurings and loan workouts – through a public relations consultant that did some work for the bank. Santamour invested in Hyperion when Crawford did a capital raise and later sent him a note. “She said, ‘I’m glad to see that you have a female on your bank board. Most community banks I’m aware of don’t. If you ever want to add to that let me know. I’d be glad to help you.’ I took that very literally and followed up with Gretchen later and said, ‘I got your note and frankly with your experience as an attorney and [with] workouts, and being so engrained in the Philadelphia business community, how about you? Would you be willing to serve? And she said she would.’ So she, too, has been a great addition.”

A third female director at Hyperion is Jill Jinks, CEO at Insurance House Holdings, an agency located in Marietta, Georgia. Jinks had been an investor in the Private Bank of Buckhead and had served on the board. Jinks also invested in Hyperion when Crawford did his capital raise, and when Hyperion expanded into the Atlanta market, he asked Jinks to become a director. “I had the experience of having her as a director for a decade on my previous bank [board] and I knew her,” Crawford says. “She chaired my audit committee – she’s chairing [Hyperion’s audit committee] now – and I knew she would be of great value to us, both in the Atlanta market and in general with governance.”

In addition to himself, other Hyperion directors include Louis DeCesare, Jr., the bank’s president and chief operating officer who joined the company in 2013; James McAlpin, Jr., a partner at the Atlanta-based law firm Bryan Cave Leighton Paisner and leader of the firm’s financial services client services group; and Michael Purcell, an investment adviser and former Deloitte & Touche audit partner with deep ties in the Philadelphia business community.

The story of how Crawford rebuilt the bank’s board reveals several important truths about board diversity. When bank boards need to recruit a new director they tend to rely on personal networks, and some of Hyperion’s directors were individuals that Crawford already knew. But the Hyperion board’s diversity is also intentional. Board diversity won’t happen unless the people driving the refreshment process make it happen through a deliberate process.

“As you can tell from my story, and I think this would be true with most community banks, we didn’t hire a big recruiting firm to help us ‘ID’ directors,” Crawford says. “My advice is, reach out to community organizations … by being involved. I remember back at my Atlanta bank, I served on the City of Atlanta Board of Ethics and it exposed me to a whole different group of people. And the chair of that board … was [an] African-American [who] had served on the Delta Credit Union board and he ended up joining my board. It’s just another example of, if you get out in the community, you’re going to get exposed to and meet people you otherwise wouldn’t if you’re sitting in your boardroom, or office, hoping they’ll come to you.” Nix, Rhame and Santamour are a case in point; all were unknown to Crawford before he recruited them to the board.

Crawford has another piece of advice for bank boards looking to be more inclusive. “Building a diverse board … is an ongoing, moving target,” he says. “I don’t think you’re ever done, as your community ebbs and flows, to make sure that either your board or our workforce looks like your community.”

Exploring Banking’s What Ifs

What if the ball didn’t sneak through Bill Buckner’s legs in 1986?

What if you answered the call to deliver two pizzas for 10,000 bitcoins in 2010?

What if Hillary Clinton lost the popular vote but won the electoral college in 2016?

Thought exercises like these can take you down the rabbit holes that many opt to avoid. But how about asking “what if” type questions as a way to embrace change or welcome a challenge?

Mentally strong leaders do this every day.

In past years, such forward-facing deliberations took place throughout Bank Director’s annual Acquire or Be Acquired conference. This year, hosting an incredibly influential audience in Phoenix simply wasn’t in the cards.

So, we posed our own “what ifs” in order to keep sharing timely and relevant ideas.

To start, we acknowledged our collective virtual conference fatigue. We debated how to communicate key concepts, to key decision makers, at a key moment in time. Ultimately, we borrowed from the best, following Steve Jobs’ design principle by working backward from our user’s experience.

This mindset resulted in the development of a new BankDirector.com platform, which we designed to best respect our community’s time and interests.

Now, as we prepare to roll out this novel, board-level business intelligence package called Inspired By Acquire or Be Acquired, here’s an early look at what to expect.

This new offering consists of short-form videos, original content and peer-inspired research — all to provide insight from exceptionally experienced investment bankers, attorneys, consultants, accountants, fintech executives and bank CEOs. Within this new intelligence package, we spotlight leadership issues that are strategic in nature, involve real risk and bring a potential expense that attracts the board’s attention. For instance, we asked:

WHAT IF… WE MODERNIZE OUR ENTERPRISE

The largest U.S. banks continue to pour billions of dollars into technology. In addition, newer, digital-only banks boast low fees, sleek and easy-to-use digital interfaces and attractive loan and deposit rates. So I talked with Greg Carmichael, the chairman and CEO of Cincinnati-based Fifth Third Bancorp, about staying relevant and competitive in a rapidly evolving business environment. With our industry undergoing significant technological transformation, I found his views on legacy system modernization particularly compelling.

 

WHAT IF… WE TRANSFORM OUR DELIVERY EXPECTATIONS

Bank M&A was understandably slow in 2020. Many, however, anticipate merger activity to return in a meaningful way this year. For those considering acquisitions to advance their digital strategies, listen to Rodger Levenson, the chairman and CEO of Wilmington, Delaware-based WSFS Financial Corp. We talked about prioritizing digital and technology investments, the role of fintech partnerships and how branches buoy their delivery strategy. What WSFS does is in the name of delivering products and services to customers in creative ways.

 

WHAT IF… WE DELIGHT IN OTHER’S SUCCESSES

The former chairman and CEO of U.S. Bancorp now leads the Make-A-Wish Foundation of America. From our home offices, I spent time with Richard Davis to explore leading with purpose. As we talked about culture and values, Richard provided valuable insight into sharing your intelligence to build others up. He also explained how to position your successor for immediate and sustained success.

These are just three examples — and digital excerpts — from a number of the conversations filmed over the past few weeks. The full length, fifteen to twenty minute, video conversations anchor the Inspired By Acquire or Be Acquired.

Starting February 4, insight like this lives exclusively on BankDirector.com through February 19.  Accordingly, I invite you to learn more about Inspired By Acquire or Be Acquired by clicking here or downloading the online content package.

A Guide to Getting CEO Transitions Right in 2020 and Beyond

Banks need to get CEO transitions right to provide continuity in leadership and successful execution of key priorities.

As the world evolves, so do the factors that banks must consider when turnover occurs in the CEO role. Here are some key items we’ve come across that bank boards should consider in the event of a CEO transition today.

Identifying a Successor

Banks should prepare for CEO transitions well in advance through ongoing succession planning. Capable successors can come from within or outside of the organization. Whether looking for a new CEO internally or externally, banks need to identify leaders that have the skills to lead the bank now and into the future.

Diversity in leadership:
Considering a diverse slate of candidates is crucial, so that the bank can benefit from different perspectives that come with diversity. This may be challenging in the banking industry, given the current composition of executive teams. The U.S. House Committee on Financial Services published a diversity and inclusion report in 2020 that found that executive teams at large U.S. banks are mostly white and male. CAP found that women only represent 30% of the executive team, on average, at 18 large U.S. banks.

Building a diverse talent pipeline takes time; however, it is critical to effective long-term succession planning. Citigroup recently announced that Jane Fraser, who currently serves as the head of Citi’s consumer bank, would serve as its next CEO, making her the first female CEO of a top 10 U.S. bank. As banks focus more on diversity and inclusion initiatives, we expect this to be a key tenet of succession plans.

Digital expertise:
The banking industry continues to evolve to focus more on digital channels and technology. The Covid-19 pandemic has placed greater emphasis on remote services, which furthered this evolution. As technology becomes more deeply integrated in the banking industry, banks will need to evaluate their strategies and determine how they fit into this new landscape. With increased focus on technology, banks must also keep up with leading cybersecurity practices to provide consumers with the best protection. Succession plans will need to prioritize the skills and foresight required to lead the organization through this digital transformation.

Environmental, Social and Governance (ESG) strategy:
Investors are increasingly focused on the ESG priorities and the potential impact on long-term value creation at banks. One area of focus is human capital management, and the ability to attract and retain the key talent that will help banks be leaders in their markets. CEO succession should consider candidates’ views on these evolving priorities.

Paying the Incoming and Outgoing CEOs

Incoming CEO:
The incoming CEO’s pay is driven by level of experience, whether the CEO was an internal or external hire, the former CEO’s compensation, market compensation and the bank’s compensation philosophy. In many cases, it is more expensive to hire a CEO externally. Companies often pay external hires at or above the market median, and may have to negotiate sign-on awards to recruit them. Companies generally pay internally promoted CEOs below market at first and move them to market median over two or three years based on their performance.

Outgoing CEO:
In some situations, the outgoing CEO may stay on as executive chair or senior advisor to help provide continuity during the transition. In this scenario, pay practices vary based on the expected length of time that the chair or senior advisor role will exist. It’s often lower than the amount the individual received as CEO, but likely includes salary and annual bonus opportunity and, in some cases, may include long-term incentives.

Retaining Key Executives

CEO transitions may have ripple effects throughout the bank’s executive team. Executives who were passed over for the top job may pose a retention risk. These executives may have deep institutional knowledge that will help the new CEO and are critical to the future success of the company. Boards may recognize these executives by expanding their roles or granting retention awards. These approaches can enhance engagement, mitigate retention risk and promote a smooth leadership transition.

As competition remains strong in the banking industry, it is more important than ever to have a seamless CEO transition. Unsuccessful CEO transitions are a distraction from a bank’s strategic objectives and harm performance. Boards will be better positioned if they have a strong succession plan to help them identify CEO candidates with the skills needed to grow and transform the bank, and if they effectively use compensation programs to attract and retain these candidates and the teams that support them.