Want to make your board more effective? Look for a lead independent director with the fortitude and skillset to constructively navigate the relationship with bank management.
While the role is still evolving, bankers have identified some attributes of successful, effective and productive lead directors. These include undisputable independence, forthrightness and an ability to facilitate productive conversations, both in and outside the board room.
As the board’s representative with management, undisputable independence is crucial to a lead director’s ability to be an effective counterweight. It can empower the lead director to act as a conduit of constructive conversations for management and have direct, and sometimes uncomfortable, conversations on behalf of fellow board members.
When speaking with management, lead directors should include an accurate and timely summary of what is discussed in any executive sessions. These sessions allow directors to express concerns and articulate expectations for management in a transparent manner — something they may not be comfortable discussing directly with the CEO. An effective lead independent director can transform these discussions into palatable and productive feedback for executives.
During board meetings, directors — not management — should guide the conversation and focus on key issues. Lead directors can help facilitate consensus and alignment between the board and management, enabling both groups to have candid conversations and ultimately share the same strategic focus.
Building consensus also includes working to making board meetings more effective. A concise, timely meeting agenda representing key board matters can lead to strategic discussions and allow directors to thoughtfully prepare for a productive meeting. Start by surveying fellow directors about matters of importance and sharing discussion points and summaries with management. This can give the board time and space to focus on critical matters during a meeting and help avoid rushing through important topics.
A board of directors is filled with a variety of personalities, so a lead independent director’s demeanor and communication style can impact its success. Effective lead independent directors must be comfortable addressing awkward or sensitive topics and have the ability to lead discussions without becoming a dominant presence in the board room. Facilitating and eliciting perspectives from other directors can coalesce key information, so all the directors feel they have been heard and management understands what is expected of them.
The specificities of the role — and the tasks the lead independent director governs — caution against frequent rotation of this role, which could be viewed as lack of strength on the board, ineffective leadership, or even a lack of commitment to governance. Rotating this role too frequently could also lead to a reduction in the board’s overall productivity.
Assess current and potential board members for candidates who could effectively serve as lead independent director, and weigh the possibility of bringing in a new board member to provide the necessary skills.
For more information on the role of lead independent director, contact Susan Sabo at susan.sabo@CLAconnect.com or 704-816-8452 or Todd Sprang at todd.sprang@CLAconnect.com or 630-954-8175.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.
CLA exists to create opportunities for our clients, our people, and our communities through our industry-focused wealth advisory, outsourcing, audit, tax, and consulting services. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.
In financial analysis, the question of “How are we doing?” should almost always be answered with “Compared to what?”
As directors prepare for year-end meetings, there are a number of key ways executives and directors can improve the bank’s approach to benchmarking. A focused program can decrease workload, reduce information overload and yield strategic insight. Here are five ways banks can start.
1. Reconsider Your Peers
Most bank directors are familiar with the national asset-based peer groups featured in Federal Deposit Insurance Corp.’s Uniform Bank Performance Report, or UBPRs. These peer groups can serve an important purpose when it comes to macro-prudential purposes (such as regulatory monitoring for safety and soundness within the entire banking system). But for bankers trying to extract value from this data, we recommend looking beyond asset sizes toward more relevant factors such as geography, funding strategy and lending portfolio.
2. Look Toward Leaders, Not Averages
Being above average is not the same thing as being a leader. Rather than compare themselves against the mean or median, banks should be more focused on how they stack up to the best of their peers. If they want to set realistic goals for high performance, boards should first understand what excellence looks like across a relevant set of bank peers.
3. Use Multiple Peer Groups
It’s rare that a bank can be purely labeled as an agricultural or commercial or industrial lender, or something similar. By design, most community banks have a balanced and diversified portfolio of loans and services. The same can be said for funding sources, risk tolerances, investments and fiduciary activities, among others. Despite these complexities, many banks tend to benchmark themselves against a single, universal peer group. Executives may find it more productive and insightful to use multiple, targeted peer groups, depending on the context of the analysis.
4. Add Context to Trends
Trend charts are a powerful way to monitor for constant improvement — but they only tell half of the story. Many bankers will close out 2021 celebrating a much deserved “record year;” a smaller group of insightful executives will pause to consider their stellar results in the context of the entire sector’s stellar results. Nearly every bank has been excelling at growing the portfolio, capturing fee income and improving efficiency ratios. Prudent directors should ask for additional context.
5. Limit the Scope
Since Qaravan’s inception in 2014, we have helped hundreds of banks pull together board packs, dashboards, decks, report cards and all sorts of other financial reports. The biggest challenge our clients encounter in this process is the information overload they inflict on the report recipients. In a sincere attempt to arm directors with as much information as possible, bank management ends up sending the board an overwhelming amount of data. Pulling these “kitchen sink” reports together is not easy, and it takes bank staff away from more important things. Directors can help minimize the inefficiencies associated with these data calls by encouraging a more focused review of key performance benchmarks.
I started my banking career in the credit management training program of a regional bank, where I later became the head of corporate banking. Subsequently, I became a chief credit officer and, ultimately, the CEO and board chairman of a community bank. This experience, coupled with 30 years of providing credit risk management services for banks from de novos to one of the 10 largest financial institutions in the world, has allowed me to see many changes in the way banks’ credit risk management (CRM) identifies, measures, monitors, controls and reports credit risk. There have been some very good improvements — along with some activities that miss the mark on best practices.
Strategy without execution is ineffective at best. Whether it is football or banking, execution is the key to success. Execution of strategy for CRM’s three lines of defense requires that each line must perform its job and communicate with the other two lines for the “team” to win.
What I have observed for many years now is that the members of the first line — like client-facing loan officers and relationship and portfolio managers — are often too focused on production and minimize their role as the first line of defense as it relates to credit risk issues and red flags. Communication with borrowers is often lacking or reactive, and isn’t documented, except in a sales capacity. This became more apparent during the early stages of the Covid-19 pandemic, when banks critically needed more information on their borrowers and the first line was often unprepared.
How can the second line of credit risk management defense — like credit officers, credit departments and loan approvers — do their job properly without up-to-date information? How can the third line — loan review, internal audit and compliance — do their job without up-to-date information? Quite simply, they can’t. If the key link in the chain does not perform to best practices, the chain breaks.
I once made a presentation to a bank board and a director took issue with my mentioning that the bank was not receiving borrower financial statements promptly and analyzing them. He told me that the bank was doing great, with no delinquencies or charge offs, and that getting financial statements was merely paperwork without any value. What he did not understand, of course, was that delinquencies and charge-offs were lagging indicators; the financial statements — or lack thereof — were leading indicators. This principle remains true today: Banks have better results in problem loan situations when they can detect problems early and deal with them before it is too late to effectively negotiate with the borrower.
For the safety and soundness of a bank’s asset quality, and the protection of all constituencies, better monitoring of borrowing relationships and their risk profiles by the first line makes all three lines more effective. This ultimately improves a bank’s portfolio performance, profitability and asset quality and can be accomplished without harming production, since additional borrower contact can also present new opportunities for sales. Bank management can promote this mindset with more focus on matching job descriptions and performance reviews to incentive compensation, with a significant component tied to continuous monitoring of borrowers. The now-frequently unused practice of a regular customer calling program, with documented call reports on substantive credit issues, could substantially improve the first line’s performance.
Now is the time for banks to act. The board and management team must emphasize and focus on this priority to all three lines, rather than waiting for the shoe to drop. Many borrowers may be under their institution’s radar, due to deferrals and Paycheck Protection Program loans masking their true operational and financial position. Every bank’s portfolio contains borrowers at risk as the economy continues reflecting the challenges of the past several years and deferrals expire. The first line can mitigate the potential damage through more intensive customer contact to detect issues of concern.
Just 29% of chief executives, and 17% of chief information and chief technology officers, say they rely on members of their board for information about technology’s impact on their institution, according to Bank Director’s 2021 Technology Survey. But what if a bank could leverage their board as a resource on this issue, helping to connect the dots between technology and its overall strategy?
Coastal Financial Corp., based in Everett, Washington, has brought on board members over the past three years with experience working in and supporting the digital sector: Sadhana Akella-Mishra, chief risk officer at the core provider Finxact; Stephan Klee, chief financial officer at the venture capital firm Portage Ventures and former CFO of Zenbanx, a fintech acquired by SoFi in 2017; Rilla Delorier, a retired bank executive who until last year led digital transformation at Umpqua Bank; and Pamela Unger, a certified public accountant who created software to support her work with venture capital firms. That deep bench of technology expertise helps the bank evolve, according to CEO Eric Sprink, by better understanding opportunities and risks. The board can even help $2 billion Coastal identify and bring on staff.
“The board has always been entrepreneurial at its basis, and some of the core values that we developed as a board were, be flexible, be unbankey and live in the gray — and those are [our] board values,” Sprink says. “We’ve really worked hard to continually ask people to join our board that continue that evolution and entrepreneurial spirit with some specialty that they bring.”
Bank Director’s recent Technology Survey finds that roughly half of bank boards discuss technology at every board meeting; another 30% make sure it’s a quarterly agenda item. That’s been the picture for several years in our survey, given technology’s importance in an increasingly digital economy.
But for many community bank boards, the expertise reflected in the boardroom hasn’t caught up to today’s reality — just 49% of board members and executives representing a bank smaller than $10 billion in assets report that their board has a director with a background or expertise in technology. And these skills are even rarer for discrete areas affecting bank strategies and operations, from cybersecurity (25% say they have such an expert on their board) to digital transformation (20%) and data analytics (16%).
Bank boards would benefit greatly from this expertise — and many of them know it, says J. Scott Petty, a partner at the executive search firm Chartwell Partners. “When I interview boards and we go through an assessment process, it’s always the No. 1 thing they talk about,” he says. “There’s no one there [who] can really understand what their head of technology is talking about. So, whatever they say, they go, ‘OK, well, you’re the tech expert.’”
In Bank Director’s 2021 Governance Best Practices Survey conducted earlier this year, board members identify their two most vital functions: holding management accountable for achieving strategic goals in a safe and sound manner, and meeting the board’s fiduciary responsibilities to shareholders.
If board members can’t pose a credible challenge to management when it comes to discussions on technology — asking pointed questions about a rising budget item for the majority of banks, as our recent research finds — then they can’t effectively fulfill their two most important duties. And boards also will find themselves unable to contribute to the bank’s strategy in the way they could or should.
Directors with technology expertise can help boards provide effective oversight and link technology and strategy, says Petty. “That’s the No. 1 [thing] — that fiduciary responsibility to really understand how the bank [aligns] its business strategy with its technology strategy.”
Petty shares a comprehensive list that identifies how technology expertise in the boardroom can contribute to the board’s oversight and strategic functions. These include:
Linking technology to the overall business strategy
Asking incisive questions of the bank’s CIO and/or CTO, and holding them accountable for goals, deadlines and budgets
Providing effective oversight of information security as well as Bank Secrecy Act/anti-money laundering (BSA/AML) compliance
Offering input and guidance on the bank’s technology initiatives
Giving feedback on innovation, customer experience and acquisition, product development, digital integration, cross-selling opportunities and similar areas
Asking pointed questions and deliberating about these technology matters isn’t just a fiduciary responsibility — it makes banks better, points out Jeff Marsico, president of The Kafafian Group, a consulting firm. Technology use by the industry isn’t new, he notes, but community bank boardrooms are typically composed of older members who will be inherently less tapped into what’s going on in the digital banking space. As a result, “they don’t have enough base knowledge to be challenging to management and therefore management knows, ‘I’m not going to be particularly challenged here,’” Marsico says. “[Boards] need somebody with enough knowledge to be able to challenge management — because then management gets better.”
Marsico sees flaws in most boards’ often-informal nomination processes. Performance evaluations, he notes, aren’t adequately used by the industry to identify gaps in board composition, and board members are often reticent to leave. Bank Director’s governance research backs this up, finding that roughly half of boards representing banks between $1 billion and $10 billion in assets conduct an annual performance assessment; that drops to 23% of boards below $1 billion in assets. Fewer than 20% overall use that assessment to modify the board’s composition.
Finding technology skill sets may challenge community bank boards, but Petty recommends a few ways that nominating committees can expand their search. Banks aren’t alone in the digital evolution, which affects practically every sector of the economy. With that in mind, he suggests looking at other industries for prospective board members. “Take an industry-agnostic look to find technology experts from organizations that are larger than the current institution,” Petty says.
Colleges, universities or vocational schools may also provide a resource to tap into technology expertise. “They typically are also at the forefront of talking about digitization across industries,” Petty adds.
While boardrooms should benefit from recruiting members with expertise for the digital age, that doesn’t excuse directors from enhancing their own understanding of the topic.
The 2021 Technology Survey finds board members highly reliant on bank executives and staff (87%) for information about the technologies that could affect their institution — right behind articles and publications (96%) as directors’ top resources.
While input from the bank’s executive team is critical, it’s important that directors leverage their own backgrounds, in addition to taking advantage of ongoing training and informational resources, to ask the right questions of these executives.
Marsico recommends that boards focus on strategy in every board meeting, with regular quarterly updates on the bank’s progress on executing the strategy. Other sessions should provide opportunities to educate board members on what’s going on in the banking environment — and should include external points of view. These could include technology vendors or representatives from the various associations serving the banking community. Petty suggests bringing in a former technology executive of another, larger bank who could brief members on what they’re seeing in the marketplace.
“[Boards] can get an outsider’s perspective that breathes fresh air into what is the possible — because I don’t think they know what is the possible,” says Marsico.
Petty also points to increasing interest in forming board-level technology committees. Bank Director’s 2021 Compensation Survey, conducted earlier this year, found that 23% of banks use such a committee.
“Even the smaller banks will have a technology committee, because it’s such a major focus for any institution to drive the digitization of how they go to market, how they leverage the digital experience for the customer, how they leverage the digital product offerings, [and] how they use digital to acquire new customers and onboard new customers,” says Petty.
Bank Director’s 2021 Technology Survey, sponsored by CDW, surveyed more than 100 independent directors, CEOs, COOs and senior technology executives of U.S. banks below $100 billion in assets to understand how these institutions leverage technology in response to the competitive landscape. The survey was conducted in June and July 2021.
Bank Director’s 2021 Compensation Survey, sponsored by Newcleus Compensation Advisors, surveyed 282 independent directors, chief executive officers, human resources officers and other senior executives of U.S. banks below $50 billion in assets to understand talent trends, cultural shifts, CEO performance and pay, and director compensation. The survey was conducted in March and April 2021.
Bank Director’s 2021 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP, surveyed 217 independent directors, chairs and chief executives of U.S. banks below $50 billion in assets. The survey was conducted in February and March 2021, and explores the fundamentals of board performance, including strategic planning, working with the management team and enhancing the board’s composition.
Increasingly, community banks are considering remote or hybrid work arrangements as a way to bring on hard-to-find and in-demand talent at the employee level. They may want to consider doing something similar for their boards, as well.
Many community banks define “community” as a geographic market and draw director talent from that pool. But increasingly, boards require skills, experiences and perspectives that may be difficult to find in-market. These institutions may want to expand their search to include out-of-market or remote directors with relevant, needed skills, but will need to tailor their assessment and interview process to ensure the remote director meshes well with the local directors.
“A board seat is a rare and precious thing,” says Alan Kaplan, founder and CEO of Kaplan Partners, which helps banks with board advisory and executive searches. “Boards need to be thinking about always having fresh and current skills on the board, and being proactive, thoughtful and deliberate about board succession and repopulation.”
Kaplan says about 20% to 25% of director searches he’s done have considered a remote or out-of-market candidate, but he believes more banks should consider it. Community banks of all sizes are seeking directors with expertise or backgrounds in cybersecurity and technology. As they grow, they’re also looking for financial experts or people who have experience with strategic human capital and management at large companies — which boards may struggle to find in their market. Other institutions may lack qualified candidates that are considered diverse in their racial or gender identity. To combat this, boards can leverage the experience they gained operating remotely during the coronavirus pandemic, which could make it easier to accommodate a director who is outside an institution’s markets.
Citizens & Northern Corp., a $2.3 billion bank in Wellsboro, Pennsylvania, added its first out-of-market director in 2016 as it searched for a financial expert to join the board. Through networking, CEO Brad Scovill was referred to Terry Lehman, a retired CPA who had more than two decades of experience at national and regional accounting firms and had served as the leader of the financial services team. There was a catch, however: Although Lehman lived in Pennsylvania, he was more than 150 miles away from the bank’s headquarters.
“He’s not flying in from Hawaii, but he’s not next door either,” Scovill says.
Citizens & Northern’s board balanced Lehman’s unfamiliarity with the bank’s market area against his expertise in bank auditing and risk. In the interview process, they discussed his ability to connect with the bank’s culture and found it helpful that he had worked with dozens of different community banks over his career. They decided to add him; in May, he was appointed chairman.
Banks may hesitate to add a director who doesn’t live in the bank’s market or is familiar with its culture. But Kaplan points out that most banks would still maintain a majority of directors in-market if they appoint one or two remote directors.
Across the country, Everett, Washington-based Coastal Financial Corp. began adding remote directors after making the strategic decision in 2017 to remain independent and pursue the then-unusual business line of providing financial technology partners with back-end banking services, known as banking as a service, or BaaS. Its customer base would now include tech companies across the country, and the board needed the expertise to better network and serve them, along with compliance, governance and risk expertise, says board Chairman Christopher Adams.
“Our footprint would be into different communities and fintechs, which meant that we were going to have customers across the country,” he says. “Our board needed to represent that.”
Since that time, the $2 billion bank added Stephan Klee, who is based on the East Coast, because of his experience investing in fintechs, and Sadhana Akella-Mishra, who lives in California and serves as chief risk officer at a fintech core provider. There’s a director in Portland, one in Chicago and another on the East Coast. While there are still local directors, Adams says that having board members spread out across the country has brought a variety of perspectives and conversations, especially around technology, to the bank.
Both Scovill and Adams say it’s essential that banks approach the board appointment and interview process thoughtfully and with a sense of formality. Coastal decided to add remote directors after conducting a skills-matrix assessment and continues to question what expertise the board needs. Adams says that keeping the bank’s values at the core of conversations have helped the existing board figure out if a new remote director would be a good fit. And Kaplan recommends that banks look for remote directors who have a strong sense of community and ask about their affinity for community engagement during the interview.
Scovill credits Citizens & Northern’s process for identifying, interviewing and onboarding new board members as the driver behind the board’s willingness to consider a remote director. This assessment process evaluates a prospective directors’ talents and experience and guides the current board through the interview process so they can have meaningful, productive conversations. It also lays out expectations for director performance and participation.
Both Scovill and Adams believe most community banks would be well served by adding one or two remote directors with essential, sought-after skills to their boards. They also added that a search doesn’t have to involve a headhunter or executive search firm; instead, community banks can tap their existing network of attorneys, investment bankers and auditors for recommendations.
“It’s not just ‘Someone knows somebody, he seems a good person that the other seven directors know well so let’s put him on the board,’” Citizens & Northern’s Scovill says. “The old boy network has gone away, but the network hasn’t gone away.”
Scovill acknowledges that adding a new director to a board can change the group dynamic, and an out-of-town director could be an additional wrinkle in that consideration.
“Quality people with good experiences are quality people with good experiences,” he says. “If we get to know them and build those relationships, they seem to work out fine, as long as we commit to that effort.”
Building a diverse board —as defined by gender, race and ethnicity — is a controversial issue in many corporate boardrooms today, banks included. An increasing number of large institutional investors and stock exchanges like the Nasdaq Stock Market are pushing for it, and a small but growing number of states either mandate it or are instituting disclosure requirements.
But not everyone is convinced that greater diversity inherently leads to better governance, as illustrated by results of Bank Director’s 2021 Governance Best Practices Survey. Fifty-nine percent of the respondents agreed that diversity as defined by race, gender and ethnicity improves the performance of a corporate board. However, 36% agreed with statement but said the impact was overrated, and 5% disagreed that greater diversity improves performance.
James J. McAlpin Jr., a partner at Bryan Cave Leighton Paisner LLP and leader of the firm’s banking practice group, is a strong proponent of board room diversity. “I have experienced the power of diversity on a bank board of which I am a member,” he says. “We have gone from a board of eight men and one woman three years ago to now a majority female board. There is a difference resulting from that positive transformation. Our board is probably more risk averse that it used to be. We seem to be better prepared as a group for meetings. And as a group we ask more probing questions.”
Sponsored by Bryan Cave, the survey polled 217 directors and chief executives at banks under $50 billion in assets in February and March of 2021. The majority of the respondents were independent board members. Almost half of the participants represented banks with $1 billion to $10 billion in assets.
Diversity is just one of many issues covered in this year’s survey. The list includes the practice of credible challenge, the desire for collegiality versus the freedom to disagree, board assessments, the board’s role in strategic planning and CEO performance evaluations. The survey results have been divided into five modules: board practices, the board/management relationship, strategic planning, board refreshment and diversity, and the role of the independent director.
The white paper also includes the insights of two experienced directors who helped us interpret the results: David. L. Porteous, the lead director at Huntington Bancshares, a $175 billion asset bank headquartered in Columbus, Ohio; and C. Dallas Kayser, the independent chair at City Holding Co., a $5.9 billion bank located in Charleston, West Virginia.
Ninety-nine percent of the survey respondents said that personal integrity was the most important attribute of an independent director, followed by the ability to exercise sound judgment at 96% and accountability at 94%.
“Regardless the size of the bank, the role of the independent director is pretty much the same,” says Porteous, who has served on the Huntington board since 2003, and as lead director since 2007. “There has to be a level of commitment, and that commitment has to be to your fellow directors. It has to be to the leadership of the organization, it has to be to the shareholders, to the community and to the regulators. If there comes a time when you just can’t dedicate that level of commitment, you should probably step down.”
To read more about these critical board issues, read the white paper.
To view the full results of the survey, click here.
Four women currently serve on the board at Eagle Bancorp Montana, the $1.3 billion asset holding company for Opportunity Bank of Montana. That’s by design, says Chairman Rick Hays.
“[We] decided that we needed to have a larger board,” Hays says, after a 2012 branch acquisition doubled its footprint in Montana and prompted a later increase from seven to nine members. The Helena, Montana-based commercial bank wanted to add directors representing its expanded geography, along with younger board members and women. Maureen Rude, who joined the board in 2010, was the sole female director at that time.
“We had all the board members, all the executive officers, the local market presidents in those communities, all looking for people with the characteristics we were looking for,” says Hays. Expanding its networks worked: Two women joined in 2015, and the fourth, public accountant Cynthia Utterback, in 2019. During that time, the bank also replaced a male director with another man with a technology background.
“We’re looking for the best possible candidates,” Hays says. “If you decide what you want and commit to getting it, you can get it done.” Adding new perspectives and backgrounds benefits the board and the bank, he adds. “I firmly believe that diversity is about the best possible business decision we can make; I’ve experienced it over and over in a variety of organizations.”
Almost 60% of the directors and CEOs responding to Bank Director’s 2021 Governance Best Practices Survey believe that diversity in the boardroom improves corporate performance. However, fewer than half — 39% — have three or more board members who they’d consider to be diverse, based on gender, race or ethnicity.
The benefits of diversity in the boardroom are frequently touted by corporate governance experts, and many of the survey participants shared their experience. Here are a few of the comments we received:
“[D]iversity has helped shape everything from policies to product positioning.” — Lead director of a public bank between $1 billion and $10 billion in assets
“We have diversity in age, gender, geography, ethnicity and career experience. Creates more robust questioning when discussing products, trends, issues to ensure full vetting, understanding and ramifications of decisions.” — Independent director, public bank above $10 billion in assets
“[Due to diversity] [w]e have re-visited agendas, meeting logistics, and historical approaches to initiatives with a fresh lens.” — Independent chair at a private bank between $1 billion to $10 billion in assets
Sixty-five percent of respondents want to add more directors with diverse backgrounds, but almost as many (61%) believe it’s difficult to identify and recruit them to serve on the board. These candidates may be in high demand, but the survey finds that respondents representing more diverse boards report that it’s easier to recruit diverse candidates with the skills and expertise their organization needs.
As Rick Hays at Eagle Bancorp Montana illustrates, diverse boards broaden their networks to recruit diverse, qualified candidates. But an analysis of the habits of diverse boards yields further clues about their practices. They tend to have mechanisms in place to create space on the board, and to identify the skills and attributes they’re seeking.
Board evaluations can be valuable tools to evaluate governance practices and identify disengaged members. The survey finds that diverse boards more frequently use and also make deeper use of performance assessments, from assessing the effectiveness of the entire board, to identifying underperforming directors and conducting one-on-one conversations with directors.
Bank Director offers a board evaluation and peer assessment through its membership program. Mascoma Bank, a Lebanon, New Hampshire-based mutual, uses this evaluation annually. Clay Adams, the $2.4 billion bank’s CEO, says the tool provides a framework for the board to assess its practices, such as ensuring that the board is receiving an appropriate level of detail about the bank’s operations.
“We’re always thinking about how to do things better,” says Adams. “We use the board effectiveness survey to make sure that we’re on the right path.”
Peer evaluations are less commonly used by bank boards — 24% say their board uses one. Respondents representing boards with three or more diverse members (36%) are more likely to use this tool.
Mascoma’s board conducts a peer assessment every other year, under the purview of the governance committee. Adams has served on other boards that used similar assessments, which he believes provide tremendous value in driving conversations with underperforming directors. “Diverse board member or not,” he adds, “if a person is not fulfilling the duties — duty of trust, duty of care, duty of loyalty — then they shouldn’t be on the board.”
Bank Director included Mascoma Bank in its analysis of the Top 25 Bank Boards for Women earlier this year; the mutual has since added two more women to its board, so its composition is now evenly split between men and women. Adams emphasizes the importance of intention in building a diverse, skilled board. “We’re constantly talking about it [and encouraging] board members to think about people they come across in their lives or reaching out to communities where we may not — as a board, as individuals — interact,” he says.
Adams hopes to further diversify the boardroom. “We’d like to have a [person of color] on our board,” he says. “We live in a predominantly white region, northern New England. Therefore, we need to work a little harder to network with people who are members of that community.”
Mascoma also incorporates term limits for directors — 15 consecutive years — and a mandatory retirement age, at 72, as mechanisms to regularly open seats on the board. These policies were last examined by Bank Director in 2020; our survey found that boards with “several” diverse directors were slightly more likely to use a mandatory retirement age or term limits.
Getting the right mix of skill sets, backgrounds and experiences results from a gradual, deliberate process, says Hays. “When we’ve filled any of our board slots, we’ve probably had discussions for a year and a half to two years to get there,” he says, due to the value Hays and the board place on its composition. “It takes time to find the people we were so fortunate to find [and] bring onto the board. We could not have done it any sooner.”
Due to ongoing changes in the banking industry — from demographic shifts to the drive to digital — it’s never been more important for bank boards to get proactive about strategy. James McAlpin Jr., a partner at Bryan Cave Leighton Paisner and global leader of the firm’s banking practice group, shares his point of view on three key themes explored in the 2021 Governance Best Practices Survey.
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.
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.
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.