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.

What We’ve Learned From the Pandemic (So Far)

Year in and year out, Bank Director’s surveys tap into the views of bank leaders across the country about critical issues: risk, technology, compensation and talent, corporate governance, and M&A and growth.

But 2020 has been a year for the record books. It’s been an interesting time for me as head of research for Bank Director, with the results of our recent surveys revealing changes that, in my view, will continue to have far-ranging effects for the industry.

As boards plan for 2021 and beyond, here are a few things I believe you should be considering.

The Great Tech Ramp-Up
The Covid-19 pandemic dramatically accelerated technology adoption by the industry, an issue we explored in Bank Director’s 2020 Technology Survey.

Sixty-five percent of the executives and board members responding to that survey told us that their bank implemented or upgraded technology to respond to Covid-19, primarily to issue Paycheck Protection Program loans. As a result, most banks reported increased spending on technology, above and beyond their budgets for 2020.

The primary drivers that fuel bank technology strategies remain the same — improving customer experience and generating efficiencies — and pressure has only grown on financial institutions to adapt. More than half of the survey respondents told us that their bank’s technology plans had been adjusted due to the pandemic, with most focused on enhancing their digital banking capabilities.

“The next generation will rarely use a branch,” one survey respondent commented, “so a totally quick efficient comprehensive digital experience will be necessary to survive.”

The 2020 Compensation Survey confirmed that most banks dialed back on branch service early in the pandemic; by the time we fielded the Technology Survey in June and July, bank leaders finally recognized the digital channel’s preeminence in terms of growing the bank and serving customers. (The previous year’s survey found respondents placing equal emphasis on digital and branch channels.)

Our FinXTech Special Report on mobile banking provides tips on evaluating your bank’s mobile app.

The Technology Survey revealed gaps in small business and commercial lending as well — deficiencies that have been laid bare as a result of the pandemic. More than half of respondents that have adjusted or accelerated their technology strategy indicated they’d expand digital lending capabilities.

Some bankers I spoke with about the survey results indicated concerns that banks could dial back on technology spending due to the profitability pressures facing the industry. However, given the changes we’ve seen, I don’t believe it’s sustainable to dial back on this investment.

That leaves bank leaders facing a few key challenges, starting with determining where to invest their technology dollars. It’s difficult to gauge where the wind will blow, but the survey provides solid clues: 42% believe process automation will be one of the most important technologies affecting their bank, followed by data analytics (39%). Almost 40% believe the security structure to be vitally important; cybersecurity is a perennial concern for bank leaders and as banking grows more digital, this will require additional investment.

Additionally, 64% told us that modernizing their bank’s digital applications forms a core element of their bank’s strategy.

Implementing new technology requires expertise, and the 2020 Compensation Survey found most respondents (79%) telling us that it’s difficult to attract technology and digital talent.

But this may not mean bringing data scientists or other highly-specialized roles on staff. Olney, Maryland-based Sandy Spring Bancorp hired a senior data strategist who is responsible for the use, governance and management of information across the organization; that individual also reviews vendor capabilities and identifies areas that help the bank achieve its goals. “The senior data strategist should be on the lookout for ways to find opportunities for and through data analytics, whether that’s predicting customer trends or finding new revenue-generating opportunities,” said John Sadowski, chief information officer at the $13 billion bank.

Finally, 69% told us their bank didn’t streamline vendor due diligence processes in response to Covid-19. As technology adoption accelerates, consider whether your bank’s third-party management process is sufficiently comprehensive, while still allowing it to quickly and efficiently put new solutions into place. 

Work-From-Home Will Alter the Workplace
The 2020 Compensation Survey found that banks almost universally implemented or expanded remote work options as a result of the pandemic; the 2020 Technology Survey later told us that for many banks (at least 42%) that change will be permanent for at least some of their staff.

In late October, $96 billion Synchrony Financial — a direct, virtual bank — announced that remote work will become permanent for its employees, allowing them to choose from three options. Some can simply work from home. Others can schedule office space, while some will have an assigned desk. This third group includes executives, who will be asked to work remotely at least a couple days a week to reinforce the cultural shift.

It’s a move that the bank believes will make employees happy, but it also promises to yield significant cost savings by cutting real estate expenses.

It could also yield competitive benefits for banks seeking top talent. Glacier Bancorp, for example, doesn’t limit hires to its Kalispell, Montana-based headquarters — instead, it hires anywhere within its multi-state footprint. That helps the $18 billion bank recruit the technology talent it needs, human resources director David Langston told me in May.

Remote work is a cultural shift that many bank executives will be reticent to make. But even if a long-term remote work option doesn’t align with your bank’s culture, offering flexibility will help support employees, who have their own struggles at home with virtual schooling or caring for high-risk family members.

Too often, working parents are forced to choose between their children and their career, meaning companies are losing valuable employees or, in the least, productivity.

A recent McKinsey study finds that a lack of flexibility, among other issues, drives women in particular to leave the workforce. The authors also advise that companies “should look for ways to re-establish work-life boundaries” — putting policies in place to assure meeting times and work communications occur within set hours, and encouraging employees to take advantage of flexible scheduling. Unfortunately, employees often worry that taking advantage of these benefits will damage their reputation at work. “To mitigate this, leaders can assure employees that their performance will not be measured based on when, where, or how many hours they work. Leaders can also communicate their support for workplace flexibility [and] can model flexibility in their own lives. … When employees believe senior leaders are supportive of their flexibility needs, they are less likely to consider downshifting their careers or leaving the workforce.”

Flexibility and remote work can help companies retain valued employees.

It’s difficult to change a culture, especially if you believe that what you’re doing works. But sometimes, culture can change around you.  I’d encourage you to approach these issues with fresh eyes to ensure your leadership team can direct the change — not the other way around.

Don’t Put Diversity on the Backburner
Almost half of respondents to Bank Director’s 2020 Compensation Survey told us their bank doesn’t measure its progress around diversity and inclusion, indicating to me that they don’t have clear objectives around creating an inclusive culture that hires, retains and rewards employees despite race, ethnicity or gender.

Further, just 39% of the CEOs and directors responding to our 2020 Governance Best Practices Survey told us their board has several members who are diverse, based on race, ethnicity or gender. And almost half believe that diversity’s impact on a company’s performance is overrated.

Employees and customers take this issue seriously. Rockland, Massachusetts-based Independent Bank Corp., which has been recognized for LGBTQ workplace equality by the Human Rights Campaign since 2016, incorporates inclusion in its “cycle of engagement.” This starts with engaged employees who provide a higher level of service that delights customers, resulting in strong financial performance for the institution, allowing the company to invest back into its employees — continuing the virtuous cycle.

The $13 billion bank’s culture promotes respect, teamwork, empathy — and inclusion, COO Robert Cozzone told me in a recent interview. “Think about working for a company where you enjoy being around the people that you work with, you enjoy the work that you do, you buy into the mission of the company — you’re going to be much more productive than if you don’t have those things,” he says. Today, “It’s all that more important to show [employees] care and empathy and understanding.”

Small, rural banks may believe it’s difficult to hire diverse talent, making it nearly impossible for them to tackle this issue. Expanding remote work options, mentioned earlier, can help. But ultimately, it’s an issue that companies nationwide will need to address as the demographics of the country change. “We all need to do better [on] diversity and inclusion,” one survey respondent wrote. “Many of us out in rural America don’t have as many opportunities, but we need to keep this topic front of mind, and [read] information and stories on how to be more intentional.”

Directors Must Be Engaged and Educated
The 2020 Governance Best Practices Survey also found 39% indicating that at least some members of their board aren’t actively engaged in board meetings; 36% said some members don’t know enough about banking to provide effective oversight.

That survey, conducted just before the pandemic effectively shut down the U.S. economy, found executives and directors identifying three top challenges to the viability of their institution: pressure on net interest margins (53%), meeting customer demands for digital options (40%) and industry consolidation and the growing power of big banks. Further, most directors said that staying on top of the changes occurring in the industry is one of the great challenges facing their board.

Confronting these issues will require engaged and knowledgeable leadership.

Bank Director’s 2020 Compensation Survey, sponsored by Compensation Advisors, surveyed 265 independent directors, CEOs, human resources officers and other senior executives of U.S. banks to understand trends around the acquisition of talent, CEO performance and pay, and director compensation. The survey was conducted in March and April 2020.

Bank Director’s 2020 Technology Survey, sponsored by CDW, surveyed more than 150 independent directors, CEOs, chief operating officers and senior technology executives of U.S. banks to understand how technology drives strategy at their institutions and how those plans have changed due to the Covid-19 pandemic. It also includes compensation data collected from the proxy statements of 98 public banks. The survey was conducted in June and July 2020.

Bank Director’s 2020 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner, surveyed 159 independent directors, chairmen and CEOs of U.S. banks under $50 billion in assets to understand the practices of bank boards, including board independence, discussions and oversight, engagement and refreshment. The survey was conducted in February and March 2020.

Bank Director has published several recent articles and videos about issues related to today’s economic environment. Our Online Training Series includes units on “Managing the Balance Sheet in a Zero-Rate Environment” and “Managing Through the Coronavirus Pandemic.” You may also consider watching Bank Director Editor at Large Jack Milligan’s conversation with Huntington Bancshares CEO Steve Steinour, which focuses on “Strategic Planning in an Age of Uncertainty.”

Our Bank Services membership program also includes licenses to FinXTech Connect, which helps banks identify technology providers. You can find out more about that tool and how to access it here.

Cybersecurity Practices for the Board

Several high-profile data breaches in 2019 assured that cybersecurity remains a top concern for bank boards and executive teams. Capital One Financial Corp. and Facebook revealed significant breaches last year — 106 million and over 500 million, respectively — so it’s no wonder that 87% say their anxiety over the issue has increased, according to Bank Director’s 2020 Risk Survey.

In response, more than three-quarters of directors and executives say they’ve increased oversight of cybersecurity and data privacy.

It’s a thorny issue for banks to manage. This isn’t a typical risk like credit that leverages bank leaders’ expertise and knowledge to ensure their practices are safe and sound. With cybersecurity, the threat level changes almost constantly, and the hacker trying to infiltrate your organization could be a world away.

Yet, the buck stops with the board. While management is charged with the implementation of the bank’s cyber risk program, it’s the board’s duty to ensure the bank is protected.

Unfortunately, board oversight is too often taken seriously only after an incident occurs, rather than before.

Basic Responsibilities
In its IT Examination Handbook, the Federal Financial Institutions Examination Council outlines responsibilities for bank boards. They include:

  • Overseeing the development, implementation and maintenance of the information security program
  • Communicating expectations to management and holding them accountable
  • Approving policies, plans and programs
  • Ensuring the program’s effectiveness by reviewing assessments and reports, and discussing management’s recommendations for improvement

How boards fulfill these duties varies. Most oversee cybersecurity within a committee; 19% as a full board.

Further, the frequency with which the board as a whole reviews cybersecurity can be as often as every meeting or as infrequent as annually (or less). The size of the bank appears to have little bearing on how often boards address this issue.

Regulators expect, at minimum, an annual review. But given the pace of change in the cyber threat landscape, meeting the minimal standard isn’t adequate. Bank boards need to take cybersecurity more seriously.

“If you’re talking cybersecurity less frequently than quarterly, I don’t think you can truly manage that risk to your institution,” says Craig Sanders, a partner at survey sponsor Moss Adams. “You can’t get enough data points to really understand what the risk profile is or isn’t doing in your institution in terms of [protecting the bank].”

At a minimum, the FFIEC says management should report to the board annually on the risk assessment process, risk management and control decisions, third-party arrangements, testing results, security breaches and management response, and recommendations for updates to the program. A designated information security officer should report directly to the board, as well.

In the survey, 76% indicate that the bank’s chief information security officer meets regularly with the board.

Next-Level Oversight
The FFIEC’s Cybersecurity Assessment Tool (CAT) has been made available by the interagency body to evaluate all facets of a bank’s cybersecurity program, including the activities the board engages in as part of its oversight capacity.

Annie Goodwin, the risk oversight chair at $13.7 billion Glacier Bancorp, says the CAT is among the tools in the Kalispell, Montana-based bank’s cybersecurity arsenal. “It’s valuable in assessing cybersecurity preparedness,” she says. “During the safety and soundness exam, the CAT tool is often reviewed, and our board is very familiar with it.”

The CAT provides a list of attributes that indicates a bank’s maturity within each domain: threat intelligence and collaboration, cybersecurity controls, external dependence management, cyber incident management and resilience, and cyber risk management and oversight, including the board’s role. Maturity levels are rated from baseline — a bare-minimum standard indicating the lowest level of maturity, intended for banks exhibiting minimal inherent risk — to advanced and innovative, the two highest levels.

Given the continued prominence of cybersecurity as a threat to the industry, the survey asked directors and executives about some of the advanced and innovative activities for board oversight. The results confirm that some practices are more common than others.

Almost three-quarters of respondents indicate their board participates in training to better understand the cyber threats facing the bank.

Cybersecurity has become a more frequent topic of discussion for the board at Cross Plains, Wisconsin-based SBCP Bancorp. “Rightly so,” says CEO Jim Tubbs, given increased threats to the $1.3 billion bank and its customers. “The first step is informing and educating [the board],” he says. “The second step is having them understand from us — senior management — or from our external auditors, to be able to provide them appropriate reports or knowledge in regards to how we are handling cyber risk, and how [we are] testing our own systems and how our audit function is working.”

Using data to facilitate strategic decisions and monitor cyber risk (27%) is one of the least common practices reported by respondents, along with benchmarking cybersecurity staffing against peer institutions (10%).

Sanders says more progressive organizations are asking for benchmarking metrics to better budget for cybersecurity and technology, to gauge whether they’re spending enough to protect their institution.  “What are peer banks spending, and where are they [in terms of] maturity?” he says.

Incorporating more of the practices outlined in the CAT promises to augment the board’s ability to oversee cybersecurity as a risk.

“When you look at the intent of the [regulatory] guidance, and as you move from baseline maturity level to advanced, evolving, innovative — as you move up that chain, the governance piece becomes more heavily focused. They expect more participation” on the part of the board, says Sanders. “A small percentage of banks [say], ‘We want to move to evolving, or we want to move to advanced.’ Those are the ones that are spending more money and committing more to it, [and] their board and management team have a better harmony about what that program should look like and see the value in it.”

Bank Director’s 2020 Risk Survey, sponsored by Moss Adams, surveyed 217 independent directors, CEOs, chief risk officers and other senior executives of U.S. banks under $50 billion in assets. The survey was conducted in January 2020 and focused on the top risks facing financial institutions at that time, including cybersecurity, credit and interest rate risks, and emerging issues.

You can read more about the “Cyber War” facing the banking industry in the second quarter issue of Bank Director magazine. Additionally, Bank Director’s Online Training Series contains information on the board’s role in overseeing cybersecurity. Unit 11 covers best practices for the board. Unit 21 addresses further responsibilities, as well as the importance of an incident response plan and employee training.

A Bank Board’s Role During a Pandemic

Don’t just sit there — do  something!

This is probably the normal emotional reaction of many bank directors as the COVID-19 pandemic consumes large chunks of the U.S. economy, possibly putting their institutions at risk if the crisis leads to a deep and enduring recession.

The role of the board, even in a crisis of this magnitude, is still to provide oversight rather than manage. The board’s role doesn’t change during a crisis, but certainly the governance process must become more focused and strategic, the pace of deliberations must quicken and communication becomes even more important.

Bank boards are ultimately responsible for the safety and soundness of their institutions. While senior management devotes their full attention to running the bank during a time of unprecedented economic turmoil, the board should be looking ahead to anticipate what might come next.

“I think the challenge for [directors] is to gauge the creeping impact on their bank over the next few months,” says James McAlpin, who heads up the banking practice at Bryan Cave Leighton Paisner in Atlanta. “The board’s role is oversight … but I believe that in certain times — and I think this is one of them — the oversight role takes on a heightened importance and the board needs to focus on it even more.”

Many economists expect the U.S. economy to tip into a recession, so every board needs to be looking at the key indicia of the health of their bank in relation to its loan portfolio. “I’ve spoken to a few CEOs and board members over the past couple of weeks where there are active conversations going on about benchmarks over the next few months,” says McAlpin. “‘If by, say, the end of April, certain events have occurred or certain challenges have emerged, this is what we’ll do.’ In other words, there’s pre-planning along the lines of, ‘If things worsen, what should be our response be?’”

This is not the first banking crisis that David Porteous, the lead director at Huntington Bancshares, a $109 billion regional bank in Columbus, Ohio, has lived through. Porteous served on the Huntington board during the previous banking crisis, recruiting a new executive management team and writing off hundreds of millions of dollars in bad loans. That experience was instructive for what the bank faces now.

Porteous says one of the board’s first steps during the current crisis should be to take an inventory of the available “assets” among its own members. Are there directors whose professional or business experience could be helpful to the board and management team as they work through the crisis together?

Communication is also crucial during a crisis. Porteous says that boards should be communicating more frequently and on a regular schedule so directors and senior executives can organize their own work flow efficiently. Given the social distancing restrictions that are in effect throughout most of the country, these meetings will have to occur over the phone or video conferencing.

“You may have meetings normally on a quarterly or monthly basis, but that simply is not enough,” Porteous says. “You need to have meetings in between those. What we have found at Huntington that served us very well in 2008 and 2009 and is serving us well now, we have set a time — the same day of the week, the same time of the day, every other week — where there’s a board call. So board members can begin to build their plans around that call.”

Porteous says the purpose of these calls is for select members of the management team to provide the board with updates on important developments, and the calls should be “very concise, very succinct” and take “an hour or less.”

Porteous also suggests that either the board’s executive committee or a special committee of the board should be prepared to convene on short notice, either virtually or over the phone, if a quick decision is required on an important matter.

C. Dallas Kayser, the non-executive chairman at City Holding Co., a $5 billion regional bank headquartered in Charleston, West Virginia, says that when the pandemic began to manifest itself in force, the board requested reports from all major divisions within the bank. “The focus was to have everybody drill down and tell us exactly how they’re responding to customers and employees,” he says. Like Porteous at Huntington, Kayser has asked the board’s executive committee to be available to meet on short notice. The full board, which normally meets once a month, is also preparing to meet telephonically more often.

As board chair, Kayser says he feels a special responsibility to support the bank’s chief executive officer, Charles “Skip” Hageboeck. “I’ve been in constant conversations with Skip,” he says. “I know that he’s stressed. Everyone is, in this situation.” Being a CEO during a crisis can be a lonely experience.  “I recognize that, and I’ve made myself available for discussions with Skip 24/7, whenever he needs to bounce anything off of me,” Kayser says.

One of the things that every board will learn during a crisis is the strength of its culture. “The challenges that we all face in the banking industry are unprecedented, and it really becomes critical now for all directors, as well as the senior leadership of the organizations that they oversee, to work together,” says Porteous. One sign of a healthy board culture is transparency, where neither side holds back information from the other. “You should have that all the time, but it’s even more critical during a crisis. Management and the board have got to have a completely open and transparent relationship.”