Is Your Backup Ready? CEO and the Backup Quarterback

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The 2023 NFL postseason gave us a clear example of what it looks like when a team doesn’t have a backup. Dallas Cowboys continued to use kicker Brett Maher in games, even though he missed not one or two extra points, but a total of four extra points in the Cowboys’ wild card game against the Tampa Bay Buccaneers.

If your financial institution doesn’t have a strong CEO succession plan, it could wind up feeling like the Dallas Cowboys with no options to move forward. There are many parallels between a backup quarterback who is ready and a strong CEO successor.

Recruit Next-Generation Talent
Championship teams recruit talented players for each position. In addition, they recruit the next generation of players. The quarterback knows that there is someone ready to take over his position when he graduates or becomes unexpectedly injured. The backup trains his skills with the expectation that he will one day surpass the current quarterback.

Create Opportunities to Practice Leadership
Backup players are trained, mentored and given the opportunity to practice their skills and leadership. When a team with a talented depth chart fails to designate the backup quarterback, the team is not ready to follow when one of the backups steps in. Talent is not enough. Practice is not enough. The team needs to be ready to follow the next leader. Teams can absolutely have more than one candidate for the backup position, but at some point before the season, they need to make a decision on the depth chart.

Work Together for the Greatness of the Team
The relationship between the quarterback and the backup is strong. They work together for the success of the team. Backup preparation, coupled with clear communication, prepares the entire team for the next generation of leadership — whether that time comes in three years or in an instant.

Three Steps to Cultivate Backup Readiness
1. Timeline.
The backup needs to be ready now, while having the confidence to wait for graduation or retirement. When a team extends a transition timeline in college football, we see players jumping in the transfer portal and playing for a competitor. The same is often true in CEO succession planning. Holding to your timeline helps retain your backup.

2. Position Profile.
Look at your organization chart for your institution today and understand what is needed for each position in the next five years. Create a position profile that combines a job description with what the business will look like at the point of succession. Make sure your bank’s backup options have, or are building, the skills and experiences they will need to align with where the business will be at the point of succession.

3. Assess Your Talent
Much like a wide receiver can move to play safety, your institution needs to find strong talent to fill key position to lead into the future. Use a comprehensive assessment that profiles leadership potential and identifies development opportunities that allows for your “best athletes” to move into a range of roles.

When your bank needs a succession plan or depth chart, follow the example of championship football teams. Understand the timeline, then match the skills of your players with the demands of your organizational chart. A third party can be useful in helping to assess and plan for the future team.

Boardroom Battle

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The following feature appeared in the second quarter 2023 edition of Bank Director magazine. It and other stories are available to magazine subscribers and members of Bank Director’s Bank Services Membership Program. Learn more about subscribing here.

Few banks can tout a success story as enviable as Cherry Hill, New Jersey-based Commerce Bancorp.

Anyone who invested in Commerce back in 1973, when Vernon Hill II founded the bank, saw their investment grow 470 times by 2007, when the bank sold to TD Bank Financial Group, he says. “The 34-year annual return to our shareholders was 23% a year. … If you look at the growth numbers of Commerce, there was nobody even close to it.” The bank went from a single location with just nine employees to almost $50 billion in assets, more than 12,000 employees and 470 branches — or stores, as Hill calls them.

It accomplished this by focusing on growth, at a rate of $18 million in deposits annually, according to Hill. A “Philadelphia” magazine article from 2006, titled “Vernon the Barbarian,” described Hill rallying his troops — the thousands of bank employees attending the company’s “Wow” awards, which gave out honors such as “Best Teller.” With employees cheering him on, he told the crowd, “Most of you know that each year, we go and save another part of America that’s not served by Commerce.” A Lehman Brothers analyst covering the bank at the time likened its expansion to “the Mongolian horde coming across the plains, threatening the Roman Empire.”

Commerce won so many customer accounts because it focused on taking a retail approach to banking, offering a high level of service. Billed as “America’s Most Convenient Bank,” Commerce branches were open seven days a week. They welcomed dogs in branches and gave out dog biscuits. And Hill isn’t a cost-cutter — he likes his branches to be well designed, in the best locations and stocked with free pens that advertise the bank. Hill boasts that Commerce gave away 28 million pens a month to anyone who came in the branch.

But the years since have been fraught with trouble. Described as the “greatest retail banker of our lifetime,” Hill has been embroiled in lawsuits, a boardroom battle, regulatory actions and activist campaigns. Hill hasn’t been able to create the same magic since, and shareholders have suffered.

In 2007, Hill lost his job at Commerce under pressure from the Office of the Comptroller of the Currency, according to a Securities and Exchange Commission filing. Hill had used a real estate firm he owned with family members to scout locations for Commerce branches; his wife’s design firm, InterArch, was contracted for the company’s design and branding. The OCC placed restrictions on related-party transactions that would have prolonged the branch application process.

Months later, TD announced that it would acquire Commerce in an $8.5 billion transaction. The deal was an important step in the Canadian bank’s own growth in the U.S., doubling its U.S. footprint. TD kept the “America’s Most Convenient Bank” slogan, which it uses to this day.

As an investor with more than 6 million Commerce shares, Hill had done well for himself. But after more than three decades running a bank, he suddenly had nothing to do. “I couldn’t work for somebody else,” he tells me. So in 2008, Hill invested in sleepy little Republic First Bancorp, a small competitor to Commerce that at the time had less than $1 billion in assets and a handful of branches primarily centered around its headquarters in Philadelphia. He began acting as an advisor to the bank’s leaders, including then-CEO and founder Harry Madonna. Then two years later, in 2010, he crossed the pond to found Metro Bank in the U.K., leveraging the same model that made Commerce a success.

At Metro Bank, the stock saw steady growth from its 2016 IPO before going into a free fall in the latter half of 2018; it hasn’t recovered. Republic’s stock has also been beleaguered. Back in the Commerce days, Hill’s customer-friendly, growth-focused approach was revolutionary. His friend, longtime bank investor Tom Brown, is the one who describes him as the “greatest retail banker of our lifetime.” But even he admits Hill can have a difficult personality.

David Slackman, a former Commerce executive, believes Hill is often misunderstood. “Vernon is extremely confident in the model and extremely confident in his ability to be successful with it, and can therefore sometimes come across as seeming inflexible,” he says. He describes Hill as an exact but supportive and loyal boss who ended conversations with his top officers by saying, “Don’t do anything stupid.” That was a warning not to stray away from the Commerce model, Slackman recalls.

“My personality is strong,” Hill says. Commerce was frequently compared to Apple back in the day, which was run by another passionate business leader, Steve Jobs. It’s clear — from talking to Hill, reading his books and digging into his banks — that he’s committed to his approach to banking.

But relationships devolved at Republic over the years. Madonna says Hill — who eventually became CEO before resigning 18 months later — held his bank hostage due to a perfect split in the boardroom: three directors backing Hill, and four backing Madonna. Madonna says Hill operated without effective board oversight due to the division in the boardroom.

But in a lawsuit filed against Republic and Madonna’s faction of directors, Hill and former director Barry Spevak contend that it was Madonna’s group that had the board deadlocked, with Hill’s directors “intentionally and systematically prevented” from participating in board deliberations.

Back before that became an issue, in 2008, Republic needed capital, and it needed a new direction. Like many banks in the financial crisis, Republic had experienced losses in its loan portfolio, says Frank Schiraldi, a managing director and senior research analyst at Piper Sandler & Co. “Vernon came along as really a savior,” he explains. Hill says he invested $6 million. “With [Hill] now being a large owner, he had the opportunity to push his old Commerce strategy as sort of a reboot. And initially, it was very well received.” Madonna describes Republic in those days as a “garden-variety community bank.” He says Hill persuaded him to turn Republic into a “deposit-driven organization” with an expanded branch footprint. Hill’s ownership gained him the right to designate a board member, Theodore Flocco Jr. — a former senior audit partner at Ernst & Young who had advised Commerce, and someone Hill considered a friend.

“When I invested in Republic, they were a broken bank, troubled. They needed capital, they needed [our] model, they needed people,” says Hill. “I came in and invested on the terms that I would install — with their approval — what we call ‘The Power of Red.’” Hill’s branding campaign eventually included a big red ‘R’ for Republic; Commerce had a similar big red ‘C.’

“It was an opportunity for me to invest and use the Commerce model to expand Republic and serve the same markets we had served at Commerce,” he says. But, “it’s harder to convert something than it is to build it from scratch.”

Meanwhile, Madonna was still running Republic while Hill was in London recreating the old Commerce model from the ground up at Metro Bank. And he was doing that with Shirley Hill, his wife and “branding queen” who owned the firm InterArch, responsible for branding, marketing and design at Hill’s banks — Commerce, Republic and Metro.

Hill describes his wife’s involvement as a whole package adding value, similar to the way Apple designs its products and experience. “She does architecture, construction, marketing and branding. And the value of that is not one branch. It’s all united together,” explains Hill. Metro paid InterArch over £20 million over the five-year period preceding the Hills’ departure in 2019, according to the bank’s annual reports.

“Everybody knows we have to get third-party reviews on the pricing,” Hill says of the InterArch relationship, something that occurred at both banks.

Hill stresses that InterArch was worth every penny and just as important to his banking model as his dog, Sir Duffield II, or Duffy — a Yorkshire terrier who has featured heavily in promotions for Republic and Metro. “My dog’s more well known than me,” Hill jokes. At Metro, Duffy joined the Hills in welcoming customers — and their dogs — at the bank’s grand openings. A Duffy float made its way through London parades. The Yorkie even had a column in the bank’s newsletter, and a Twitter account featuring him visiting bank branches and dining with Ann Coulter. “Everybody knows Duffy; he goes everywhere,” says Hill. The dog-friendly branches also appealed to customers, he says. “The customers take that to mean, ‘If you love my dog, you must love me.’”

It was the original Sir Duffield, visiting a competing bank’s branch with Shirley Hill in 2001, who inspired Vernon Hill’s dog-friendly approach. She was stopped at the front door and told that her pup wasn’t allowed. Hill decided being open to dogs was another way to disrupt banking and set his banks apart.

Despite the known issues around related-party transactions, Republic offered Hill the chair role in 2016, ramping up his involvement with the bank. “We were very aware of his relationship,” says Madonna. “Consultants were brought in to look at the contracts, to make sure they were fair market value, and that things were done in accordance with laws and regulations, and that they were in the best interest of the bank.” InterArch billed Republic $2.2 million for marketing, design and similar services from 2019 through 2021, according to an SEC filing.

Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware, sees a huge conflict for any public company doing business with a spouse or family member of a CEO or director — even if all parties appear satisfied with the arrangement. “You’re going to face all kinds of accusations of unfair dealing,” he says. “I can’t imagine a board being counseled that it was OK to do that. That’s strange.”

But while Hill was chairman, he was still spending most of his time in Europe building Metro Bank, according to Madonna. That changed in 2019, with Hill’s resignation from the U.K. bank after Metro disclosed that it had misclassified commercial loans, leading to a £900 million increase in risk-weighted assets. Put simply, Metro classified those loans as less risky than regulators thought they were; riskier loans require more capital.

Metro Bank shares dropped precipitously when the bank disclosed the issues in January and continued to fall through the year. The stock peaked at more than £40 in March 2018; it was valued at less than £1.50 as of Feb. 28, 2023, on the heels of Brexit and the Covid-19 pandemic. Shareholders began calling for Hill’s resignation; he stepped down as Metro’s chairman in October 2019, and resigned from the board by the end of the year — along with Metro CEO Craig Donaldson, who’d run the bank by Hill’s side since its founding in 2010. “It was a misinterpretation of the rules,” Donaldson told Bloomberg at the time, calling it an “isolated incident” that the bank was seeking to rectify.

Issues with the bank’s regulators took years to resolve, and included a £5.4 million penalty to the Prudential Regulation Authority and a £10 million fine to the Financial Conduct Authority.

“What happened in London really didn’t involve me,” Hill says. “Their capital system [in the U.K.] is way different than ours; there was nothing about our model.”

Following his departure from Metro, Hill became increasingly involved in day-to-day operations and decision-making at Republic. “He really was trying even harder to prove that what he was doing [at] Metro Bank was right and not wrong, and he doubled down on pushing for more and more deposits that we couldn’t put to use,” Madonna says. “That’s when it turned hostile.”

The Paycheck Protection Program — in many ways a boon to community banks in 2020 — revealed divides in the Republic boardroom. Madonna says he and some of the other directors wanted to use the influx in deposits from PPP loan customers to return expensive government funding, reducing the bank’s costs and improving its loan-to-deposit ratio. “Instead, [Hill] went out and purchased a lot of long-term, mortgage-backed securities” at low interest rates, Madonna says. Loans were already a low percentage of the bank’s assets compared to peer institutions, due to Hill’s preference to leverage securities.

Much like institutions with long-term, low rate bonds and securities on the books, Republic First was negatively affected when the Federal Reserve began its series of inflation-fighting interest rate increases in early 2022. Republic’s accumulated other comprehensive income, influenced by bond prices, amounted to a negative $148 million as of Dec. 31, 2022, according to S&P Global Market Intelligence; securities accounted for 43% of the bank’s assets.

“When you have a lot of low-cost deposits, you look at ways to invest it. Sometimes you make loans; sometimes you buy bonds,” says Hill. The bank couldn’t safely grow loans as fast as it could grow deposits; he favored government mortgage-backed securities as an alternative to loan generation. “When you have excess funding, what do you do with it? In the current environment, buying government mortgage-backed securities is the best way,” Hill says.

The AOCI effects plaguing many banks are more pronounced at Republic due to its model, says Schiraldi.
Beyond the bank’s securities portfolio, Hill wanted to build expensive, $7 million branches, according to Madonna — significantly more expensive than the average branch cost of $1.8 million, per a 2019 survey by the consulting firm Bancography.

But Hill has a different view. “The retailers that win in life are the ones that have the highest sales per store,” Hill says, adding that deposits per branch at Republic were “extremely high.” Deposits were growing, he adds, by around $30 million a year per branch. In its 2021 annual report, Republic reported deposit growth over the prior three years at an average 30% annually.

But profitability metrics had been abysmally low for years and didn’t appear to be improving. In Bank Director’s annual performance rankings dating back to 2015 — the year before Hill became chairman — Republic has appeared toward the bottom of its peer group year after year.

Up until 2020, Madonna says the board was collegial. But some directors, including Madonna, were beginning to believe that Hill’s strategy wasn’t working. “It was our fiduciary obligation to periodically look at what the strategic alternatives were for the bank,” Madonna says. Hill alleges that the group wanted to sell the bank, something he vehemently opposed. Madonna says while this option wasn’t off the table, they weren’t seeking a buyer. But Madonna’s group of board members was growing skeptical of what he calls “extremely optimistic” forecasts put forth by Hill. “It was just growth, growth, growth,” says Madonna. “He had three directors that no matter what he said, they put their hands up and said, ‘Yes.’”

“The board meetings became poisonous,” he adds. Madonna describes deliberations as “personal and hostile.”

Directors felt they couldn’t ask questions, he says, claiming that Hill would leave the meeting or refuse to answer. “[H]e wasn’t a person who knew how to discuss things in a reasonable manner. He had his model, and everything had to fit his model.” Directors received the agenda the day before meetings, Madonna alleges.

Hill sees things differently, telling me that directors were prepared and involved. “We were active in moving our business plan along; we had multi-year plans,” he says. Directors may have debated and even disagreed on matters, but Hill characterizes meetings as “generally OK.”

But Madonna says that by February 2021, he had had enough — so, he stepped down as CEO and handed the reins to Hill.

Why make Hill CEO? Madonna says he was fed up with management receiving two sets of instructions, one from Hill and the other from Madonna. “You can’t run a bank that way,” says Madonna. “I said, ‘Hey, you want to run it, you run it.’” Madonna remained president and chairman emeritus of the holding company board.

Investors had noted Republic’s woes. Driver Management Co. — no stranger to running activist campaigns at community banks — had started purchasing the stock in October 2021. “We focus on banks where there is value that needs to be unlocked,” says Abbott Cooper, Driver’s founder and managing member.

Through 2022, the bank’s total shareholder return from 2016 — when Hill was elected chair — was down 50.3%, according to Schiraldi. Driver was soon joined by another investor group intent on pushing Hill out, led by George Norcross III, Gregory Braca and Philip Norcross. Both George Norcross and Braca worked under Hill back in the Commerce days. George led the bank’s insurance brokerage and served on the company’s board. Braca stayed with TD following the acquisition, eventually becoming CEO of TD’s U.S. operations.

Braca and the Norcross brothers — both influential in New Jersey politics — saw a struggling bank in a familiar footprint: Pennsylvania, New Jersey and New York. “With the right leadership, the right oversight and governance, the right strategy, this could be a winning organization,” says Braca. Like Driver, the Norcross brothers and Braca wanted Hill out — but they wanted Braca in as CEO.

As the Norcrosses and Braca escalated their campaign, the division in the boardroom became public. Madonna — with fellow board members Andrew Cohen, Lisa Jacobs and Harris Wildstein — issued a press release in March 2022, stating their concerns about “potential harmful actions” by the other half of the board. They asked that several proposals be tabled until after the 2022 annual shareholder meeting, including agreements around services provided by Shirley Hill’s firm, InterArch; the opening and renovation of new branches; and augmented severance payments connected to Hill’s service on the board and as CEO.

In the defamation lawsuit filed against Republic and Madonna’s faction, Hill and Spevak called the accusations levied by that group “knowingly false and defamatory,” noting that the board had approved the contract for InterArch year after year and that the opening of two new branches had been authorized years earlier.

As Elson points out, it’s hard for a board to get anything done when it’s split evenly between two factions.

Republic’s annual meeting, last held in April 2021, had been postponed. But the stalemate broke on May 11, 2022, with the death of Flocco, the board member and Hill’s longtime friend. Just two days later, the Madonna majority appointed him as interim chairman; Hill remained CEO and a member of the board. The battle wasn’t over — litigation followed, with the directors suing each other — but Flocco’s death spelled the beginning of the end for Vernon Hill’s tenure at Republic. Legal issues that stalled Madonna’s re-appointment as chairman were resolved in late June, favoring the Madonna faction. Hill stepped down as CEO, and the directors who had voted with Hill left the board.

Tom Geisel, the former CEO of Sun Bancorp and executive at Webster Financial Corp., was named CEO by the end of the year. Madonna says the company now aims to slow the growth, restructure the balance sheet and rein in costs.

But things remain unsettled at Republic. Driver resolved its activist campaign with the appointment of former Texas Capital Bancshares executive Peter Bartholow to the now seven-member Republic board. Late in 2022, Hill sued Republic over the continued use of the branding elements developed by InterArch for the bank, some of which featured Hill and Duffy. Madonna tells me Republic has moved away from Hill’s marketing style — though the big red ‘R’ remains.

And the Norcrosses and Braca still want a seat at the table. As of Feb. 27, 2023, the group proposed purchasing $100 million in stock, with board seats commensurate with its stake in the bank. But they’re willing to wait and see how Geisel performs as CEO. “You can’t just blame Vernon … at least he had a growth strategy,” says Braca. “Before [Hill], this was a sleepy little bank that had basically no growth.” He blames the legacy board, and questions whether Geisel will be empowered to effectively raise capital and turn the bank around, citing the lingering issues with Republic’s bond portfolio. “It’s a troubled situation, and it’s exactly why another bank can’t buy this place, because of the mark-to-market issues on that bond portfolio,” he says. “This was a board that oversaw a strategy that said, ‘We’re going to increase our costs and expenses, [and] raise deposits at a premium to what everyone else was paying at the time, which was nearly nothing.’ This was a board that oversaw all this.”

The bank still hasn’t held an annual meeting when this issue went to press, and it’s playing catch-up on its quarterly filings. Nasdaq has threatened to delist the stock as a result. On March 10, Republic announced a $125 million investment from a group that includes Castle Creek Capital; the asset manager will have the right to appoint a director.

And the board division has taken its toll on investors. Those include Hill, who owned almost 10% of the stock in March, and Madonna, but they also include smaller owners who truly believed in Hill’s vision. In the bank’s first quarter 2021 earnings call, a shareholder recalled a personal connection with Commerce. “Vernon, from the beginning, my mother used to work for you … I’ve been in the bank a long time. I’ve lost a lot of money.”

Keys to Serving ‘Risky’ Businesses

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Most banks focus on taking deposits, making loans and providing many other services for their retail and commercial customer channels. Recently, some institutions have opened their doors to riskier businesses — in particular, cannabis businesses. Banks that navigate those spaces successfully can offer lessons to other banks.

Failing to Prepare Is Preparing to Fail
The first and most important theme is extreme preparation. Before actually providing services to risky businesses of any kind, banks need to consider and prepare for the enhanced expectations of regulators and shareholders. Banks also need to appreciate where they may stand with the regulators, addressing any outstanding issues before going further.

Ahead of any conversation with regulators, bank executives should develop plans that cover the institution’s staffing, existing and future expertise, development of policies and procedures, compliance considerations, use of third parties, regulatory notices or approvals, market dynamics, growth expectations and ongoing risk management.

Regulators will want to understand how serving risky businesses fits into the bank’s strategic plans and will expect the board to have robust discussions that are especially focused on risk management. Regulators are particularly skeptical of new business lines that increase risk to the bank, its customers and ultimately, the deposit insurance fund. Bank executives should anticipate receiving heightened scrutiny of their plans for serving risky businesses.

Talk to Your Regulators
Talking to regulators about servicing risky businesses is really a bank’s second step. First, the bank needs to prepare to talk to them.

Executives and the board will need to do their homework to support their reasoning and analysis; they will need to demonstrate to regulators what the institution has already done and plans to do from a compliance, risk management and operational perspective.

Regulators will want to see details fleshed out in as much specificity as possible. Due to the increased risk and expectations in these areas, they may take the position that expanding into these business lines represents a change in the general character of the bank’s business, which may require specific filings or approvals from regulators. In any event, it is critical that executives have discussions with regulators before going to market.

Robust, Ongoing Risk Management
The third theme is robust and ongoing risk management. Risk management is a key element of bank examinations, often hammered home by examiners who want to provide a clear signal of their expectations. This is especially true with any bank seeking to provide services in riskier business areas.

It’s not enough to dust off old policies and add in the applicable key words for the new business. Banks need to tailor their policies and procedures to the specific businesses they’re looking to serve, including the flexibility for growth.

What many banks already understand is that regulators want to see a risk management framework that is tailored not only for the existing business, but more importantly, a framework developed to address the growth plans of the business lines. The framework needs to be robust in its current state and from a forward-looking standpoint: Is your bank’s risk management framework appropriate for today and tomorrow?

Patience
The final theme should come as no surprise: Patience is paramount for banks as they plan to engage with risky businesses. There is an extended timeline to work through; it will probably take longer than expected to work through details with regulators and seek necessary approvals. And it will certainly take time to develop and exercise the appropriate risk management framework that is flexible enough to address not only the current business, but also what the line of business might look like in the future.

These four themes are critical for any bank board and management team to consider and appreciate if they’re interested in working with risky businesses. Given the heightened risk, these conversations need to start in the boardroom, but there are many opportunities for those banks willing to put in the time and effort. These business lines are clearly not for every institution, but these themes apply to almost any new line of business — whether or not it might be considered risky.

This piece was originally published in the second quarter 2023 issue of Bank Director magazine.

Assessing the Value of Your Loan Review Department

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Bank directors know that while there are many risks that all banks face — including some serious emerging issues — the major, ever-present risk that causes the most bank failures is credit risk.

The question then becomes: how well do they know the key components of an effective credit risk management system that can protect the bank’s safety and soundness and minimize the liability of the directors? The loan review department is a key aspect of an effective risk management system — yet it may not be functioning effectively. While bank directors are justifiably concerned about future economic conditions and the potential impact on their loan portfolios, are their institutions’ loan review departments really effective “early warning systems” for credit risk?

Part of the loan review challenge today is the difficulty in finding and retaining credit risk professionals. Loan review analysts are not on a typical bank “career path;” finding people with the right skills who are interested in a loan review position is a growing challenge. Is a hybrid staffing model blended with outsourced loan review services a necessity to address staffing issues today?

Other relevant challenges for banks include a growing acceptance and desire for a remote work arrangement, which can minimize collaboration, peer exchange and interpersonal communications. Only now are affordable technology tools emerging to support the loan review function to assist remote workers. Are banks investing in automation of this area? How can directors determine if loan review is bringing in the value it should to you and your bank?

Bank-Specific Considerations
When assessing the value of a loan review department, including efficiency and effectiveness of their functions, a lot depends on the characteristics of the bank itself. Smaller banks may have no choice than to use an outsourced model or hybrid blend of resources due to a lack of available internal skilled resources. Much larger banks typically staff their department with internal resources, which can present different management and career path issues. A bank with a rapidly growing book of loans may face difficult decisions on their model.

The specific responsibilities of a loan review department differ depending on the institution’s history and credit culture. Some banks virtually re-underwrite their sampled loans during exams — including financial re-spreading and deep dive document compliance. Other banks focus on a current validation of the risk rating and potential risk of credit deterioration. In many banks, loan operations does quality control checking for loans booked and internal audit performs documentation reviews, while other banks consider such duties to be part of loan review. Obviously, each bank needs to assess and clarify its department’s structure and responsibilities scope, along with its staffing model.

Other areas that differentiate different loan review departments include sample penetration thresholds and goals. Some departments have goals to review 60% or more of all borrowers over a certain threshold of loan size, while other’s objectives have less volume and more “risk targeted” exams. A more forward-looking model in vogue today is using “continuous monitoring” to watch emerging risk patterns and trends.

When assessing the value of a loan review department, management and the board should thoroughly understand the current state and how these bank-specific characteristics factor into the model of their team. It’s appropriate to challenge the current model and question its business value. As part of their responsibilities to the bank, directors must perform their duty of care and “trust but verify” the effectiveness of their loan review department.

Banks today are looking at any and every opportunity to build efficiency and cut costs, even in important areas of risk control like loan review. Many institutions have not been considered the loan review department’s cost-effectiveness in years. While banking has seen rapid change in many operational areas, thanks to automation and process changes put in place during the pandemic, loan review has languished. Many departments today are doing running the same way they have been in the past. Rapid and meaningful assessment of the effectiveness and efficiency of the loan review department can bear significant fruit in two of the most important areas of banks today: risk management and operational efficiency. Now is a good time for the board to exercise its duty of care and assess the loan review department’s ability to deliver these benefits.

Five Actions That Bank Directors Can Take Now

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Recent stress in the banking sector continues to affect the operations and financial positions of banks in the U.S. While executive management teams analyze events and take actions to address the needs of their institutions and customers, there are important oversight actions that corporate directors of banks, especially mid-sized banks with total assets of between $50 billion and $250 billion can take to fulfill their role of looking out for the interests of the bank’s shareholders.

1. Understand and challenge management’s viewpoint on changing risks and dislocations, including how potential continued rate increases and a potential “higher for longer” interest rate environment could affect the bank’s strategy and objectives.
Directors should ask management to support and explain their critical assumptions, especially in situations where they differ from the perspectives of regulators, investors, rating agencies, financial analysts and industry observers. Boards should also carefully consider how management proposes to recalibrate risk appetite as the environment changes; in doing so, they should challenge the methodologies and metrics they use to set critical limits.

Some key questions to ask include:

  1. Has the bank established risk tolerances that are sufficient enough to capture current and emerging risks that have come to light?
  2. Are those risk tolerances complemented by key risk indicators and reporting? Given current events, should they be adjusted?
  3. Are risk acceptance decisions sufficiently governed and supported, and are the implications well understood?
  4. Does the board receive high-quality reports that convey clear, impactful insights supported by facts and analysis?

2. Review the details of executive management’s crisis action plans and the range of market and economic scenarios that management is considering.
Evaluate the availability and adequacy of management’s crisis resiliency, specifically capital and contingency funding. Some key questions to ask include:

  1. Has management appropriately tested the bank’s contingency plans?
  2. Is management documenting the lessons learned from those tests and adjusting plans based on the results?
  3. Has management performed multiple tabletop simulation exercises?
  4. Does the bank have communication plans in place that consider all relevant media outlets, including social media?

3. Obtain independent perspectives by meeting in executive session with the chief risk officer (CRO) and the chief audit executive.
Boards should seek the CRO’s and CAE’s independent perspectives on the bank’s current risk profile in relation to the board-approved risk appetite and strategy, as well as the adequacy of executive management’s risk management and crisis response plans. In addition, the CRO and CAE can provide an independent evaluation of the strengths and weaknesses of the bank’s risk management capabilities given the current environment. In particular, boards should seek their evaluation of the quality of risk data, the speed with which analyses and reports can be produced and the capabilities of crisis response talent.

4. Assess whether the board and the bank’s management teams have the right skills and sufficient resources.
The scope and nature behind the current market stress — and the scope and nature of the required response — strains existing key personnel on the board and in management. Boards should determine whether they have skill gaps in areas relevant to the current stress and where they may need subject matter expertise and training. Immediate areas of focus could include capital planning, liquidity management, regulatory strategy, crisis management, financial reporting, regulatory compliance, recovery and resolution planning, and business integrations.

In performing this assessment, boards should consider whether they run the risk of being overly dependent on a single board member in one or more of these areas, which can lead to overreliance or dependency on a key person. Further, boards should also focus on making sure that senior management, treasury and independent risk management functions have sufficient resources and capabilities to execute their responsibilities.

5. Plan ahead for the post-stress environment.
We believe that heightened regulatory requirements for mid-sized banks are inevitable, and that standards that are currently applicable to banks with assets exceeding $250 billion will progressively be applied to smaller institutions, such as those with assets between $50 billion and $250 billion. To prepare, boards for institutions with assets of $50 billion and above should consider:

      • Launching a comprehensive evaluation of board practices in light of the principles outlined in the Federal Reserve’s supervisory guidance for boards at banks with more than $100 billion in assets, SR21-3. They should carefully consider the degree to which an evaluation should be executed by independent parties.
      • Gaining an understanding of how a potential tightening of regulatory standards for mid-sized banks would affect the institution. For instance, would the bank need to make upgrades to its capital and liquidity risk management frameworks and systems? How would the bank’s talent needs change? What changes would the bank need to make to senior management and board governance? How will operations and controls need to change? What are management’s plans to address these changes?

Succession Planning With Confidence

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CEO succession planning is a critical board responsibility — and a big challenge. According to Dr. Julie Bell, director, leadership advisory at Chartwell Partners, boards can follow a five-step process to ensure an orderly, informed succession planning process. That process includes nailing down a timeline, evaluating the candidates and coming up with a coaching plan to close any skills gaps in a would-be successor.

  • Identifying Candidates
  • Conducting Assessments
  • Coaching Successors

How One Bank Transformed Its Board & Shareholder Base in 6 Years

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The McConnell family has had a controlling interest in Pinnacle Financial Corp., based in Elberton, Georgia, since the 1940s. But over the past few years, Jackson McConnell Jr., the bank’s CEO and chairman, has worked to dilute his ownership from roughly 60% to around a third. “It’s still effective control, but it’s not an absolute control,” he says.

McConnell, a third-generation banker, has seen a lot of family-owned banks struggle with generational change in ownership as well as management and board succession issues, and he’s seen some of it firsthand when Pinnacle acquires another bank. It’s a frequent problem in community bank M&A. In Bank Director’s 2023 Bank M&A Survey, 38% of potential sellers think succession is a contributing factor, and 28% think shareholder liquidity is. 

“One of the things that I’ve experienced in our effort to grow the bank [via M&A is] the banks that we’re buying … maybe the ownership is at a place where they would like to liquidate and get out, or the board [has] run its course, or the management team is aging out,” he says. “And they end up saying the best course of action would be to team up with Pinnacle Bank.” 

There’s not another generation of McConnells coming through the ranks at $2 billion Pinnacle, and he doesn’t want the same result for his bank. “I want to make sure that I’m doing everything that I can to put us in a position to continue to perpetuate the company and let it go on beyond my leadership,” he says. Putting the long-term interests of the bank and its stakeholders first, Pinnacle is reinventing itself. It’s transitioned over the past few years from a Subchapter S, largely family-owned enterprise with fewer than 100 owners to a private bank with an expanded ownership base of around 500 shareholders that’s grown through M&A and community capital raises. As this has transpired, Pinnacle’s also shaking up the composition of the board to better reflect its size and geographic reach, and to serve the interests of its growing shareholder base.

Pinnacle is a “very traditional community bank,” says McConnell. It’s located in Northeast Georgia, with 27 offices in a mix of rural and what he calls “micro metro” markets, primarily college towns. It has expanded through a mix of de novo branch construction and acquisitions; in 2021, it built three new branches and acquired Liberty First Bank in Monroe, Georgia — its third acquisition since 2016. 

The bank’s acquisitions, combined with three separate capital raises to customers, personal connections and community members in its growing geographic footprint, have greatly expanded the bank’s ownership. 

But McConnell says he’s sensitive to the liquidity challenges that affect the holders of a private stock, who can’t access the public markets to buy and sell their shares. “We’ve done several things to try to provide liquidity to our shareholders, to cultivate buyers that are willing to step up,” McConnell says. “You can’t call your broker and sell [the shares] in 10 minutes, but I can usually get you some cash in 10 days. If you’re willing to accept that approach, then I can generally overcome the liquidity issue.” Sometimes the bank’s holding company or employee stock ownership plan (ESOP) can be a buyer; McConnell has also cultivated shareholders with a standing interest in buying the stock. The bank uses a listing service to facilitate these connections.

“We have a good story to tell,” McConnell says. “We’ve been very profitable and grown and have, I think, built a good reputation.”

The board contributes to that good reputation, he says. During one of the bank’s capital raises, McConnell met with a potential buyer. He had shared the bank’s private placement memorandum with the investor ahead of time and started his pitch. But the buyer stopped him. “He said, ‘Jackson, it’s OK. I’ve seen who’s on your board. I’m in,’” McConnell recalls. “That really struck me, to have people [who] are visible, [who] are known to be honorable and the type of people you want to do business with … it does make an impact.”  

The current makeup of Pinnacle’s board is the result of a multi-year journey inspired by the bank’s growth. Several years ago, the board recognized that it needed to represent the bank’s new markets, not just its legacy ones. And as the bank continued to push toward $1 billion in assets — a threshold it passed in 2020 — the board became concerned that the expertise represented in its membership wasn’t appropriate for that size. 

“If we wanted to be a billion dollar bank, we needed a billion dollar board,” says McConnell. The board started this process by discussing what expertise it might need, geographic areas that would need representation, and other skills and backgrounds that could help the bank as it grew. 

The board also chose to change its standing mandatory retirement policy to retain a valuable member. While the policy still has an age component, exceptions are in place to allow the bank to retain members still active in their business or the community, and who actively contribute to board and committee meetings. 

But there was a catch, says McConnell. “We said, ‘OK, we’re going to do this new policy to accommodate this particular board member — but for us to do this here and make this exception, let’s all commit that we’re going to do a renewal process that involves bringing in some new board members, and some of you voluntarily retiring.’” The board was all-in, he says. “I had a couple of board members approach me to say, ‘I don’t want to retire, but I’m willing to, because I think this is the right way to go about it,’” he recalls.

Conversations with directors who still view themselves as contributing members can be a challenge for any bank, but McConnell believes the board’s transparency on this has helped over the years, along with the example set by those retiring legacy board members. Over roughly six years, Pinnacle has brought on nine new board members. That’s a sizable portion of the bank’s outside directors, which currently total 10.

McConnell leveraged his own connections to fill that first cohort of new directors in 2016. The second and third cohorts leveraged the networks of Pinnacle’s board members and bankers. McConnell has had getting-to-know-you conversations with candidates he’s never previously met, explaining the bank’s vision and objectives. But he’s also transparent that it may not be a fit in the end for the individual or the board. “We talked openly about what we were trying to do, and also openly about how I might end up recruiting you, only to say, ‘No,’ later,” he says.

Director refreshment is an ongoing process; Bill McDermott, one of the independent directors that McConnell first recruited in 2016, confirms that the board spends time during meetings nominating prospective candidates for board seats.  

Both McConnell and McDermott say the diversity of expertise and backgrounds gained during the refreshment process has been good for the bank. Expansion into new markets led to bringing on an accountant and an attorney, as well as two women: a business owner and the chief financial officer of a construction company, who now make up two of the three women on the board.  

New, diverse membership “adds a lot of energy to the room. It’s been very successful,” says McConnell.

To onboard new directors, there’s a transition period in which the new directors and outgoing board members remain on the board for the same period of time — anywhere from six to 12 months — so sometimes the size of the board will fluctuate to accommodate this. 

It can take new directors with no background in banking time to get used to the ins and outs of a highly regulated industry. That’s led to some interesting discussions, McConnell says. “There is some uneasiness and awkwardness to some of the questions that get asked, but it’s all in the right spirit.” 

External education, in person and online, helps fill those gaps as well. McDermott says the board seeks to attract “lifelong learners” to its membership.

One of the factors that attracted McDermott to Pinnacle was the bank’s culture, which in the boardroom comes through as one built on transparency and mutual respect. “I was just attracted by an environment where everybody checked their egos at the door. The relationships were genuine,” he says. “[T]hat kind of environment, it’s so unique.” And he says that McConnell sets that tone as CEO.

“There is lively discussion,” says McDermott. “Jackson encourages people to ask thoughtful questions, and sometimes those thoughtful questions do lead to debate. But in the end, we’ve been able to synthesize the best part of the discussions around the table and come up with something that we think is in the best interest of the bank.”

Additional Resources
Bank Director’s Online Training Series library includes several videos about board refreshment, including “Creating a Strategically Aligned Board” and “Filling Gaps on Your Board.” For more context on term limits, read “The Promise and the Peril of Director Term Limits.” To learn more about onboarding new directors, watch “A New Director’s First Year” and “An Onboarding Blueprint for New Directors.” For more information about the board’s interaction with shareholders, read “When Directors Should Talk to Investors.” 

Bank Director’s 2023 Bank M&A Survey, sponsored by Crowe LLP, surveyed 250 independent directors, CEOs, chief financial officers and other senior executives of U.S. banks below $100 billion in assets to examine current growth strategies, particularly mergers and acquisitions. Bank Services members have exclusive access to the complete results of the survey, which was conducted in September 2022. 

Building the Board’s Ethical Backbone

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An ethical foundation is vital to a healthy, successful financial institution, and it starts with the board of directors.

“Ethics is something that you carry with you every day,” says Samuel Combs III, CEO of the management consulting firm COMSTAR Advisors and the governance committee chair at $2.7 billion First Fidelity Bancorp, based in Oklahoma City. “It begins with the leadership team, of course, [and] boards.”

As a guiding principle for the organization, a code of ethics provides a pathway to govern. And the rise of environmental, social and governance (ESG) initiatives, with their emphasis on customers, employees and communities, puts additional pressure on corporate behaviors. While a bank’s regulators require a certain level of ethical standards, some organizations have taken the lead in driving an ethical approach to banking to garner consumer trust. The board should be at the forefront of these discussions, yet, incorporating an ethical approach to banking does not come with a paint-by-numbers guide. Instead, it’s driven by management, and shaped by the questions and insights boards can bring to the conversation.

Organizations often go wrong with their ethical duty not on the personal level, but due to a systemic breach, says Steve Williams, the president and co-founder of Cornerstone Advisors. “When people get caught up in something, it’s seen as normal when it shouldn’t be,” he adds. “Systemic pressure, that can happen in any place; you have to believe it can happen here, in order to protect against it.”

Board members have a limited opportunity to peer into the day-to-day of the organization and understand how it’s operating from an ethical standpoint. Combs advises directors to look for “signals,” and ask questions about the gray areas of finance and the business’s success.

“To mutually arrive at a standard, the board must set the expectations,” says Combs. “It’s up to the management to live up to those standards.”

When financial reports are produced, if results prove far better than expected or end up very true to estimates quarter after quarter, it’s important to inquire as to how the bank achieved the numbers. It doesn’t mean something has gone awry, but you should ask to ensure liberal accounting tools or untoward sales practices are not being used. Another sign? Maybe there’s a sense that employees’ engagement has dropped significantly. Boards must seek to answer why. It requires asking further questions about sales processes, deposit efforts and the management of the institution. “It’s a signal that you should look further,” adds Combs.

This doesn’t mean that the board needs a separate ethics committee to manage this process. “I believe it should be engrained in all committees,” says Williams. Ethics should be the backbone for all deliberations in the audit, governance, compensation, risk and other committees of the board, informing how members analyze, question and provide guidance.

This thread should also trickle down to how the board makes decisions and evaluates performance. Reevaluating the code of ethics, whistleblower policies and other internal documents should be conducted once a year, and should be done with some “degree of visibility,” says Williams.

What Should a Code of Ethics Address?

Sources: Office of the Comptroller of the Currency, Federal Deposit Insurance Corp.

  • Prohibitions and monitoring relative to conflicts of interest, insider activities and self-dealing
  • Confidentiality of bank, customer and employee information
  • Maintaining accurate and reliable records
  • Compliance with applicable laws and regulations
  • Fair dealing, including the use of privileged information and misrepresentation of facts
  • Protection and use of bank assets
  • Expectations that employees, executives and directors deal honestly with the bank’s auditors, regulators and legal counsel
  • Screening the backgrounds of potential employees
  • Whistleblower policy, which allows employees to safely report concerns about bank practices
  • Periodic ethics training
  • Updating ethics policies to reflect new business activities
  • Consequences that could occur if executives, employees or directors breach the code of ethics or otherwise participate illegal behaviors Process.”

When looking at these documents, hold them up to the board’s actions and performance. How did the board make decisions, based on the code of ethics? When tough issues arose, did the board make the easy decision or take a tougher route that was more in line with the code of ethics? Did the board, in its decision making, represent the bank’s core values? Consider incorporating these questions into the board’s performance evaluation. You may not have a perfect score, but regularly revisiting the board’s deliberating process will ensure that living to the bank’s values becomes second nature, says Williams.

Failing to have this ethical background can lead to a significant backlash against the company, both from a legal perspective as well as harm to its reputation. The board at Wells Fargo & Co., for instance, received significant criticism for not questioning gray areas in its results and sales processes, which led to more than $3.7 billion in fines levied by the Consumer Financial Protection Bureau. Damage to its culture and reputation promises to be longer lasting.

An emphasis on ethics should also be found in how the board evaluates management, and how management evaluates the rank-and-file. Williams says it should even bleed into how a director may compliment an executive on a social site like LinkedIn. Has the director complimented the manager based on reaching some sales target? Or does the compliment reflect that the person lived up to the ethical core of the organization? It’s often telling when ethics isn’t emphasized in what directors publicly acknowledge.

That said, it’s important for potential directors to consider avoiding certain opportunities, even if the challenge of reshaping a poorly run organization may be an initial draw. Combs says he once considered joining the board of a non-bank entity that had some questionable ethics, which had become public. At the time, he felt he could have the opportunity to change what the organization would look like moving forward.

However, he eventually passed on the role because he wouldn’t have the levers to make change from the board position. “If you like a challenge, it’s fun to do the work,” says Combs. “You have to know [the organization] is willing to do the hard work.”

The same diligence and decision making must occur when the board is presented with possibilities, some that could improve the bank’s bottom line but would be counter to the institution’s ethical framework. It’s in those moments where the decisions made by the board could determine whether the bank experiences an ethical failure down the line.

Sometimes the right decision will be the hard one, even if the easy one is technically legal.

“Regulatory compliance does not cover all our needs for ethics,” says Williams. “Be much broader and active in that reflection.”

3 Principles to Promote a Bank Culture of Innovation

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Many bank leaders I talk to are very aware of the importance of innovation in the face of a fast-paced, changing environment. Yet, they have trouble promoting change and adopting more modern and efficient processes and technology — contributing to the struggle of making their bank more innovative. While every institution is slightly different, I wanted to share a few practical approaches to achieve internally led innovation that were very effective during my 12 years at Alphabet’s Google and another six working with the most innovative community and regional banks.

A recent survey from McKinsey & Co. found that 84% of CEOs understand innovation is imperative to achieve growth, yet a mere 6% are satisfied with the level of innovation within their organizations. These numbers reinforce that executives have the desire to promote innovation, but continue to struggle with execution and strategy.

One of the main problems I see institutions having in their typical approaches to innovation is the reliance on external paid consultants instead of activating an existing resource within their bank: their own employees. Employees already have a deep understanding of issues that both they and customers experience with the existing services and technology stack and are in a unique position to generate ideas for improvements. Not to mention they are also highly motivated to drive these innovations to a successful completion.

Embracing this approach of where the innovation most likely comes will enable bank leadership to focus on creating an environment that is conducive for innovation. Here are three practical suggestions executives and boards should consider:

1. Make it “Safe” to Fail
The foundation of a successful bank business model includes managing risk, such as balancing the downside of defaulting loans with the benefit of interest income on performing loans. And just like it is impossible to benefit from interest income without risking the principle, it is not possible to innovate without trying some things that, in retrospect, do not work out as originally planned.

The key here is to make sure everyone in the organization knows it’s OK to try things and sometimes fail. Without trial and error, there is no reward. Organizations that minimize the negativity around failure and view it as an opportunity to become better are often the ones that are able to move forward and innovate.

2. Encourage “Bottom-Up” Ideation
Most are familiar with “top-down” change that stems from leadership teams and management. However, this approach makes it harder to innovate; in many cases, it ignores the unique context that front line employees have gleaned. These employees use the bank software and speak with customers, giving them a unique and very valuable perspective. They know what is causing pain and what modifications and improvements would make customers happier. The key to promoting innovation is to extend the opportunity for ideation to all employees in a “bottom-up” approach, allowing their voices to be heard while embracing and appreciating their creativity and insight.

Giving employees a safe space to voice their ideas and an opportunity to provide feedback is at the core of innovation. Executives can achieve this by shifting the organizational process from a one-pass, top-down approach to a two or more-pass approach. This is front line employees can propose ideas that management reviews and vice versa: management proposals are reviewed by the same front line employees for feedback. Management proposals’ are then refined to reflect the employee feedback. This allows management to incorporate all relevant context and makes everyone feels part of the process.

3. Enable an Agile Approach
While planning everything down to the smallest detail may seem like the safer option, it is important that boards and management teams accept that the unexpected is inevitable. Rather than trying to foresee every aspect, it is important to incorporate an agile mindset. An agile approach starts small and observes, adjusts course based on those observations and continues to course correct through repeated observation/adjustment steps. This allows the organization to absorb the unforeseen while still continually making progress. Over time, the pressure to be correct all the time will dissipate; the bank will feel more in control and enabled to make appropriate adjustments to increase the chances of the best possible outcome.

The rate of change around us and within financial services is steadily increasing; it is impossible to predict and plan for what will happen in the next few years. Instead, it is crucial that bank boards and management teams embrace adaptability as a critical element of corporate survival.

When Directors Should Talk to Investors

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Company boards have long spoken to investors in indirect ways, through their votes and organizational performance. But as powers shift to large investors and governance norms have changed, investor groups have demanded more one-on-one conversations with bank directors.

Allowing directors to speak to investors comes with risk, and not just due to the potential for legal missteps. The director becomes a public representative of the bank and anything he or she says will be scrutinized, resulting in possible backfire.

“You can’t really say you’re not speaking for the company,” says Peter Weinstock, a partner at the global law firm Hunton Andrews Kurth. “You’re speaking for the company.”

But in an age where activist shareholders have an increased presence and institutional investors such as Blackrock and State Street Corp. have greater power, organizations find that some investors expect this one-to-one interface with directors. When done right, it can ease tension among the investor base, allowing management to maneuver more freely. When done wrong, however, it can result in proxy fights and changes to the board and management.

The topics that investors care about impact the moves that directors and boards make. Board discussions on compensation, for example, are becoming more important. Last year saw the lowest level of shareholder support for executive pay — only 87.4% of S&P 500 companies received shareholder approval in advisory voting during proxy season, according to PwC. That indicates a higher bar for boards to get shareholder buy-in for executive compensation.

Companies also must deal with an increasing amount of activist shareholder proposals. PwC reports there was a 17% increase in shareholder proposals last year. Out of 288 proposals related to environmental, social and governance (ESG) matters, a popular topic last year, 41 proposals passed.

One way to provide context for the company’s efforts on those matters: director conversations.
Institutional investors and shareholder analysis groups have turned their focus to three big concerns – audit, governance and compensation – all of which reside at the board level. With questions surrounding those specific concerns coming from many different groups, banks have turned to so-called “roadshows.” In those organized conversations, directors speak to shareholders or investor services groups about specific governance or audit topics. During those roadshows, board members stick to a prewritten script.

“The advent of the one-way listening session allayed director fear,” says Lex Suvanto, global CEO at the public relations firm Edelman Smithfield. “There isn’t much risk in what they shouldn’t say.”

Certain concerns may require more direct conversations with a specific investment group. When entering those conversations, it’s important to remember what information the shareholders want to glean. “Understand who you are speaking to and what they are all about,” says Tom Germinario, senior managing director at the financial communication firm D.F. King & Co. “Is it a governance department or a portfolio manager, because there’s a difference?”

Each investor will come to the conversation with different goals, investment criteria and questions they want addressed. It’s on the company to prepare the director for what types of questions each investor may need answered.

During those different calls, banks should ask to receive the questions ahead of time. Many investors will provide this, since they understand that the director cannot run afoul of fair disclosure rules, a set of parameters that prevent insider trading. But not all investors will provide those insights upfront.

To head off such concerns, the bank’s communications or investor relations team should run a rehearsal or prepare the director with possible questions, based on the reason for the meeting.

The investors will look for anything that might give them insight. Directors that veer off script could run afoul of what they can legally disclose. Plus, the tenor of the answers must match what the CEO has said publicly about the company. Without practice, the conversation can unwittingly turn awry.

“If a director is on the phone with an investor and something is asked that the company hasn’t disclosed, the director can table that part of the discussion,” says Weinstock. “The company can then make a Regulation Fair Disclosure filing before following up with the investor on a subsequent call. That’s an option if the company wants to release the information.”

It’s important to remember the practice will also protect you, since you will have a significant amount riding on the conversation as well. “Directors may reveal that they’re not in touch with important investor priorities,” says Suvanto. “Directors need to understand and be fully prepared to represent the values and behaviors [of the company].”

Suvanto adds that many directors would have been better not to speak at all than to go into a room with a large institutional investor, unprepared. In a public bank, such a misstep can lead to a proxy battle, which may result in the director (or many directors) being replaced by members the investors view as more favorable or knowledgeable.

The conversation also works differently, depending on the size of the bank and whether it’s a private or public institution. Institutional investors likely will focus on larger banks. Small banks may not account for an oversized spot in the institutional investor’s portfolios. Instead, for smaller companies, it’s often about getting the CEO and chief financial officer in front of investors to encourage investment. Often, this does not need a director’s voice.

For private banks, however, there are certain moments where directors may be asked to step in. If, say, an organization has questions about its auditing practices. Or what if a competitor bank has major governance violations? To address questions from investors concerning those issues, it may be advisable to have the committee head for the specific concern speak to investors about the bank’s practices.

But even a private bank cannot ignore concerns about releasing information that’s meant to stay within the board room. “It’s important to realize that information does not belong to a director,” says Weinstock. “It’s also important to realize that private companies could have insider trading violations.”

What else could go wrong? A director could overpromise when the company isn’t ready to address the issue. This can happen in the environmental, social and governance (ESG) space with regards to addressing social concerns, for example. If a director commits to social commitments that the company cannot yet adopt, it can pit the director against the board or management. Either the company will decide to adopt the promised measures, or the director will have misled the investor.

“A director should never get on the phone alone,” says Germinario. “You never want an investor to misconstrue a promise.”