2022 Governance Best Practices Survey: Culture & Composition

Even the strongest corporate boards benefit from a regular infusion of fresh ideas.

Culture, composition and governance practices — all of these are critical elements for boards to fulfill their oversight role, support management, and maintain the bank’s vision, mission and values. The results of the 2022 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP, suggest that while most directors and CEOs believe their board’s culture is generally solid, they also see room for improvement in certain areas.

Specifically, the majority (54%) say their boardroom culture would benefit from adding new directors who could broaden the board’s perspective. In comments, some expressed a desire to get more tech expertise, greater diversity and younger directors into the boardroom. Others cited a need to retire ineffective directors or cut out micromanagement.

Bringing new perspectives, skills and backgrounds to the table can help boards tackle a host of rapidly evolving challenges, from cybersecurity to environmental or social risks.

Culture can be hard to define, and the survey finds varying opinions about the attributes of a strong board culture. Forty-five percent point to alignment around common goals and 42% value engagement with management on the performance of the bank. Just 30% favor an independent mindset as an important attribute of board culture, something that can be derived through cultivating diverse perspectives in the boardroom.

A majority believe gender, racial and ethnic diversity can improve the board’s performance, similar to previous surveys. Yet, 58% claim it’s difficult to attract suitable board candidates representing diverse racial and ethnic backgrounds.

That’s not necessarily for lack of trying, however. When asked to explain why they find it hard to attract diverse board candidates, many respondents state that they have a limited pool of candidates in their markets or personal networks. But that’s changing as the U.S. population grows more diverse.

“We have a very non-diverse community, although it is changing,” writes one respondent. “I believe the difficulty will lessen with time.”

Key Findings

ESG Oversight
A vast majority – 82% – believe that measuring and understanding where banks stand on environmental, social and governance issues is important for at least some financial institutions, but there’s little uniformity when it comes to how boards address ESG. Nearly half – 45% – say their board does not discuss or oversee ESG at all. Forty-four percent say their board and management team has developed or has been working to develop an ESG strategy for their bank.

Training Mandates Vary
Forty-nine percent indicate that all directors must meet a minimum training requirement; 36% say training is encouraged but not required of members. Just over half of respondents say their board has an effective onboarding process in place for new directors. However, 27% say their board lacks an onboarding process and 13% say their current onboarding process is ineffective.

Knowledge Gaps
Respondents identify cybersecurity, digital banking and commerce, and technology as the top areas where their boards need more knowledge and training. Forty-three percent also believe they could use more education about ESG issues.

Board Evaluations
Almost half, or 47%, of respondents conduct board evaluations annually; another 23% assess their board’s performance, but not on a yearly basis. Of those that performed assessments, 58% say they then created an action plan to address gaps identified in those evaluations.

Assessing Peer Performance
Few boards take advantage of peer-to-peer evaluations, with 51% revealing that their board does not use this tool, nor have they discussed it. Of the 29% of respondents whose bank has conducted a peer evaluation, 83% use the exercise to inform conversations with individual directors about their performance.

Committee Structure
An overwhelming majority of respondents say their board had enough directors to staff all its committees, but 16% say that would no longer be the case if they added more committees. Nearly all respondents say their committees are provided adequate resources to carry out their jobs. The survey reveals continued variation in risk governance practices, with 54% managing audit and risk oversight within separate committees. In boardrooms where there isn’t a technology committee, half believe their organization would benefit from one.

To view the high-level findings, click here.

Bank Services members can access a deeper exploration of the survey results. Members can click here to view the complete results, broken out by asset category and other relevant attributes. If you want to find out how your bank can gain access to this exclusive report, contact bankservices@bankdirector.com.

2022 Governance Best Practices Survey: Complete Results

Bank Director’s 2022 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner, surveyed 234 independent directors, chairs and chief executives of U.S. banks below $100 billion in assets, with the majority of respondents representing regional and community banks. Members of the Bank Services program now have exclusive access to the full results of the survey, including breakouts by asset category.

The survey regularly explores the fundamentals of board performance, and this year examines board culture, committee structure, and how ESG is governed in the boardroom, along with practices such as evaluations and training that help boards improve their performance. The survey was conducted in February and March 2022.

Click here to view the complete results.

Key Findings

ESG Oversight
A vast majority – 82% – believe that measuring and understanding where banks stand on environmental, social and governance issues is important for at least some financial institutions, but there’s little uniformity when it comes to how boards address ESG. Nearly half – 45% – say their board does not discuss or oversee ESG at all. Forty-three percent say their board and management team has been working to develop an ESG strategy and defined goals for their bank.

Training Mandates Vary
Forty-nine percent indicate that all directors must meet a minimum training requirement; 36% say training is encouraged but not required of members. Just over half of respondents say their board has an effective onboarding process in place for new directors. However, 27% say their board lacks an onboarding process and 13% say their current onboarding process is ineffective.

Knowledge Gaps
Respondents identify cybersecurity, digital banking and commerce, and technology as the top areas where their boards need more knowledge and training. Forty-three percent also believe they could use more education about ESG issues.

Board Evaluations
Almost half, or 47%, of respondents conduct board evaluations annually; another 23% assess their board’s performance, but not on a yearly basis. Of those that performed assessments, 58% say they then created an action plan to address gaps identified in those evaluations.

Assessing Peer Performance
Few boards take advantage of peer-to-peer evaluations, with 51% revealing that their board does not use this tool, nor have they discussed it. Of the 29% of respondents whose bank has conducted a peer evaluation, 83% use the exercise to inform conversations with individual directors about their performance.

Committee Structure
An overwhelming majority of respondents said their board had enough directors to staff all its committees, but 16% say that would no longer be the case if they added more committees. Nearly all respondents said their committees are provided adequate resources to carry out their jobs. The survey reveals continued variation in risk governance practices, with 54% managing audit and risk oversight within separate committees. In boardrooms where there isn’t a technology committee, half believe their organization would benefit from one.

Opportunities For Transformative Growth

The bank space has fundamentally changed, and that has financial institutions working with more and more third-party providers to generate efficiencies and craft a better digital experience — all while seeking new sources of revenue. In this conversation, Microsoft Corp.’s Roman Chwyl describes the rapid changes occurring today and how software-as-a-service solutions help banks quickly respond to these shifts. He also provides advice for banks seeking to better engage their technology providers.

Topics addressed include:

  • Focusing Technology Strategies
  • Partnership Considerations
  • Leveraging Digital for Growth
  • Planning for 2022 and Beyond

The Next Wave of Digital Transformation

There is no question that digital transformation has been a long-term trend in banking.

However, innovation is not instantaneous. When faced with the obstacles the recent pandemic presented, bankers initially accelerated innovation and digital transformation on the consumer side, thanks to a broad scope of impact and the technology available at the time to streamline human-to-human interactions.

Now, as easy-to-use technology that automates complex interactions between human and machine and machine-to-machine (M2M) interactions becomes more readily available, the banking industry should consider how it can transform their own business and the banking experience for their business clients.

The First Wave
Why were consumers first served in the early days of the pandemic? Because there are often a lot of consumers to serve, with similar use cases and needs. When many account holders share the same finite problems, it can be easier for banks to commit personnel and financial resources to software that addresses those needs. The result is the capability to solve a few big problems while allowing the bank to effectively serve a large base of consumers with a mutual need, generating a quick and viable return on investment.

The first wave of digital transformation in banking concentrated on consumers by focusing on digitizing human-to-human interactions. They created an efficient process for both the bank employee along with the customer end-user, and then quickly moved to enable human-to-machine interactions with the same outcome. This transformation can be seen in previous interactions between consumers and bankers, like account opening, check deposits, personal financial management, credit and debit card disputes and initiating payments — all of which can now be done by a consumer interacting directly through a digital interface. This is also known as human-to-machine interactions.

In contrast, business interactions with banks tend to be more nuanced due to regulations, organizational needs and differences based on varying industries. For instance, banks that manage commercial escrow accounts for property managers and landlords, municipalities, government agencies, law firms or other companies with sub-accounting needs frequently navigate various security protocols and regional and local compliance. Unfortunately, these complexities can slow innovation, like business online account opening that is only now coming to market decades after consumer online account opening.

The Next Wave
Automating these business interactions was once thought to be too large of an undertaking for many banks — as well as software companies. But now, more are looking to digitally transform these interactions; software development is easier, further advanced and less costly, making tackling complex problems achievable for banks.

This will mark the next wave of digital transformation in banking, as the potential benefits have a greater effect for businesses than consumers. Because profits for each business client are much higher than consumer accounts, banks can expect strong returns on investment by investing in value-add services that strengthen the banking experience for business clients. And with so many niche business verticals, there is opportunity for institutions to build a strong commercial portfolio with technology that addresses vertical-specific needs.

While the ongoing, first wave of digital transformation is marked by moving human-to-human interactions to human-to-machine, the next wave will lead to more machine-to-machine interactions. This is not a new concept: Most bankers have connected two separate software systems, and have heard of M2M interactions through discussions about application programming interfaces, or APIs. But what may not be clear to executives is how these M2M interactions can be extremely helpful when solving for frustrating business banking processes.

For example, a law firm may regularly open trust and escrow accounts on behalf of their clients. Through human-to-human interaction, their processes are twofold: recording client information in an internal software system and then providing the necessary documentation to their bank, via branch visit or phone, to open the account. They need to engage in additional communication to learn the balance, move money or close the account.

Transforming this to a human-to-machine interaction could look like the bank providing a portal through which the firm could open, move funds and close the account on their own. While this is an excellent improvement for the law firm and bank, it still requires double data entry into internal software and banking software.

Here, banks can introduce machine-to-machine automation to improve efficiency and accuracy, while avoiding extraneous back and forth. If the bank creates a direct integration with the internal software, the law firm would only need to input the information once into their software to automatically manage their bank accounts.

The digital transformation of business banking has arrived; in the coming years, machine-to-machine automation will become the gold standard in the financial services industry. These changes provide a unique opportunity for banks to help attract and satisfy existing and prospective business clients through distinctive offerings.

Focusing on ESG

In this episode of Looking Ahead, Crowe LLP Partner Mandi Simpson talks with Al Dominick about what’s driving greater focus on environmental, social and governance (ESG) issues, and explores some of the fundamentals that boards should understand. She also sheds light on how boards can consider shareholder return and balance long-term ESG strategy with a short-term view on profitability, and provides tips on how boards can better focus on this important issue.

Information Overload

One of the biggest challenges facing all bank directors is the voluminous amount of information they need to read and comprehend before every board and committee meeting. More than a third of the board members responding to Bank Director’s 2021 Governance Best Practices Survey reported that not all directors review materials before board meetings — reducing the effectiveness of their boards.

Board and committee meeting packets — most of which are distributed electronically through secure board portals — can easily reach several hundred pages, particularly at large banks with complex operations. The packets are typically distributed several days in advance of board and committee meetings, often on a Thursday or a Friday, so directors have the weekend to read through them.

It is difficult to subscribe a best practice to board packets because they often reflect what board and committee members want to see. But there are certain standards that should apply. At a minimum, the board packet should provide a comprehensive overview of the bank’s performance, while highlighting any issues of concern that require the board’s attention. At the committee level, the packet should provide an overview of relevant areas that a particular committee is working on.

Packets should be well organized and include a complete agenda for each board and committee meeting, along with any supplemental information that is provided. There is a general tendency to provide more information than less, but it should be easily accessible to the directors.

It’s also important that the information be contextualized. The quality and utility of the information from a governance oversight perspective is generally more important than the sheer quantity of what’s being provided.

James A. McAlpin Jr., a partner and global leader of the banking practice group at Bryan Cave Leighton Paisner, says that board packets often include too much irrelevant information. McAlpin also sits on the board of Hyperion Bank, a $300 million asset community bank in Philadelphia. “I don’t need a listing of every new loan, because I don’t know these borrowers,” he says. “I need a listing of what the trends are. What is the net interest margin? What are the concentrations?” Concentration risk was a big problem for many banks during the financial crisis, McAlpin adds. “It didn’t happen over a period of one or two months, it happened over a period of time, and no one got it because no one was focused on that as a trip wire,” he says.

And the packets themselves shouldn’t be viewed as stone tablets that came down from Mount Sinai. Boards should periodically review whether the packets’ structure and organization, as well as the information being provided, still meets directors’ needs. “You may be comfortable with the board package, but when was the last time everybody, including your committee chairs, said, ‘Do we like the format? Do we like the information presented?’” says McAlpin. “‘What’s missing?’ Very few boards have that conversation.”

The board at Community Bank System, a $15 billion regional bank holding company headquartered in DeWitt, New York, meets 10 times a year. There is also a separate board for Community Bank, N.A., the holding company’s banking subsidiary. Holding company directors also serve on the bank board; the meetings occur back to back. Meetings of the board’s three standing committees — audit, compensation and governance — usually occur before the two board meetings.  Lead Director Sally A. Steele, who joined the board in 2003 and served as chair from 2017 to 2021, says the holding company and bank boards, as well as each committee, receive their own packet with a separate agenda and supplemental information.

There’s a lot to read before meetings, according to Steele. The audit committee packet in particular can be expansive, running to as many as 300 pages. The packets for the compensation and governance committees, as well as the holding company and bank boards, are generally smaller. But taken all together, Steele says, the information “can be really voluminous.”

Should a director attempt to read every single page if the board packet runs several hundred pages? That may be impractical — and perhaps unnecessary. Steele practices something that might be described as selective reading. “It depends on which [packet] you’re talking about,” she says. Steele is not a member of the audit committee and thus does not attempt to dig through that particular pile of information, even though she and all other non-audit committee members receive it. “Do the folks on [the audit] committee read all of it? I honestly believe they do. You can tell by the questions they ask,” she says.

As the board’s lead director, and previously as its chair, Steele reads both board packets in their entirety, as well as the packets of the committees she does serve on. “I would guess most directors focus on the committees they’re on, and the material that’s there, and then probably the bank board and holding company material,” she says. “It’s a lot of information.”

Steele believes it is the responsibility of every director to come to board and committee meetings well prepared. That includes having sufficiently reviewed the information that has been sent out in advance, even if members haven’t read every word. In fact, the Community Bank System board goes through an annual assessment process that is administered by its governance committee, and preparedness is a key part of the evaluation. “In our boardroom, it would not go over very well if people were not prepared,” she says. “I think it’s part of your fiduciary obligation to be prepared for meetings. Goes without saying.”

Plowing through an expansive board packet can be a challenging exercise for new directors who don’t have enough experience to prioritize what they must read word for word over what they can more lightly review. McAlpin believes it would be helpful if one of the more experienced directors “would offer to talk to them over lunch, or meet privately and go through the packet with them to get some sense of what has happened historically and what the packet is,” he says. “I think most boards do not do a very good job of new director orientation.

When Community Bank System recruits a new director, the board tries to lighten the new member’s load by assigning the individual to only one committee. But Steele sees no way around the fact that most new directors will have a steep learning curve, and that includes plowing through the board packet and knowing how to prioritize what’s in it.

“I’ve never found that you can have too much information,” Steele says. “There comes a point in time where you understand what’s important and what’s not. Then you get to choose if you feel it’s important enough for you to spend time on. … I just think there’s a price you pay for being a new director, and it’s figuring out and understanding what’s important and what’s not important.”

Laying Down a Foundation for Bank Boards Through Assessment, Alignment

There are few things in life that remain unchanged for their entirety, and that is certainly true of corporate boards of directors. A board’s ability to plan ahead for retirements, unexpected departures and shifts in business scale is imperative in maintaining a successful franchise.

As the cornerstone of leadership, the board’s composition plays a critical role in a corporation’s performance. In the banking sector, the board’s commitment encompasses the shareholders, to whom it has a fiduciary obligation, and to its management team, for which it has oversight responsibility. The board’s collective experience and knowledge of its members provides tremendous value, empowering the trajectory of the bank’s strategy.

But without the proper strategies in place, even the most robust board rooms are vulnerable to unexpected changes in the industry. An estimated 50% of all boards are operating without a strong succession plan. The absence of sufficient forethought poses incredible risk to a bank’s present and future stability. In contrast, establishing a foundation for preparedness through a board assessment process can help ensure the board is aligned to the strategic direction of the bank, and is prepared to address an ever-evolving business landscape.

The ideal board assessment approach allows for a standardized, yet customizable process. With careful attention to the uniqueness of every institution, the right steps will allow directors to examine their board’s strategic alignment to the functional and industry expertise needed to support the bank’s growth. A thorough assessment generates a “road map” of future director needs, along with updated governance framework. The assessment process can be led by the governance committee, the lead independent director, the chairman or a third-party firm. Here is the process we recommend:

Intake Session
Having conversations with board stakeholders that are focused on the bank’s long-term vision and short-term objectives will shape the strategy of the organization. This should also take into account the unique culture of the bank’s management team, coupled with any shareholder dynamics that can help guide the framework output and objectives.

Board Assessment
Develop a list of director questions and conduct one-on-one interviews with each director. Some categories of questions to ask include director professional background, contributions and engagement, director aspiration and a deep dive on director profile and skills. We also recommend developing a skills matrix as an effective tool to assess directors.

Future Board Framework
A healthy director composition analysis requires that the board compile a thorough report that includes the findings of the board interviews and member assessments. Directors should have candid discussions about the skills and expertise the board needs to fill identified gaps and needed changes. Directors should revisit all governance elements such as terms and limits, size of board, committee structures, election process and succession issues, among others. We recommend that bank directors develop a final three-year board framework plan to implement the identified changes.

Refreshment
Boards should follow this plan to refresh overall board governance, implementing new processes over time as to not dispute important social and cultural matters. Boards should also use a director refreshment plan to bring on new directors that fill experience and skills gaps identified as part of the board assessment process.

Often, a third-party firm is brought in to lead the overall assessment and refreshment process, working closely with the chairman or the board’s governance and nominating committee. Given the complexities of crafting and gauging a board’s optimal composition, a firm can be helpful with managing that assessment process from beginning to end. Additionally, a third party can help recruit a strategic director with the needed industry and functional expertise, with the added benefit of bringing forward a more diverse candidate pool to consider.

Strong bank boards continue to adapt to strategic objectives and maximize shareholder returns. Time and time again, companies that thrive consistently focus on going deeper with corporate board best practices. For emerging institutions, going through the assessment process for the first time is typically challenging; this process inherently implies impending change. Boards that regularly engage in director assessment and revisit their overall governance framework tend to produce better shareholder returns. Is your board focused on how to elevate the oversight function for the organization?

Honing Your Strategic Vision

The financial institutions examined in Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP, demonstrate the fundamentals of successful, long-term performance. What can we learn from these top performers — and how should bank leaders navigate today’s challenging environment? Crowe Partner Kara Baldwin explores these issues, based on the lessons learned in the RankingBanking study, and shares her own expertise. To view the complete results of the 2021 RankingBanking study, click HERE.

  • Weaving Digital Into Your Bank’s Strategy
  • Being Efficient Without Being “Cheap”
  • Today’s Uncertain Credit Environment
  • Considerations for Bank Boards

Coronavirus Tests Banks’ Emergency Succession Planning

When it comes to emergency succession planning, banks prepare for the worst and hope for the best.

The coronavirus crisis has reminded us of the importance of emergency succession planning at banks, as well as related disclosure considerations. Boards must create emergency succession plans in the event a key executive become incapacitated. Some institutions may need to activate these plans during the pandemic and may wish they had spent more time detailing them in calmer, more predictable times.

“When you think of disasters, a lot of people think of natural disasters and don’t really think about pandemics. That’s where that succession planning comes in: Not that we wouldn’t have this for a natural disaster, but the chances of somebody dying is pretty small,” says Laura Hay, a managing director at executive compensation firm Pearl Meyer. “Here, there’s a much higher likelihood of, at least temporarily, needing some additional support.”

The coronavirus pandemic may last for months, if not over a year, in the United States. There were about 800,000 confirmed cases and about 40,000 deaths as of April 22, according to economic data firm YCharts; 4.16 million tests have been administered. Some groups are at higher risk for a severe illness from Covid-19 than others, according to the Center for Disease Control and Prevention, including adults over than 65 and individuals who have underlying medical conditions.

Executives and directors at many banks are particularly vulnerable, based off this. Seventy-two percent of CEOs at institutions participating in Bank Director’s 2019 Compensation Survey were 55 or older; 2% were older than 74. Board members were in the same demographic, with a median director age of 64.

At least one financial firm has disclosed a death of an executive due to Covid-19: Jefferies Group CFO Peg Broadbent died of complications related to the coronavirus in late March, according to Jefferies Financial Group.

Spirit of Texas Bancshares Chairman and CEO Dean Bass took medical leave after contracting the coronavirus, according to an April 7 regulatory filing from the Conroe, Texas-based bank. The board appointed Chief Lending Officer David McGuire to serve as interim CEO and director Steven Morris to serve as acting chairman in his absence. Bass resumed his duties at the $2.4 billion bank on April 13, according to a subsequent filing.

Emergency succession plans differ from long-term succession plans in key ways, Hay says. It is prudent for boards to inform the individual who will be appointed interim or successor in an emergency to prepare them for the role, while directors may want to keep their thoughts on long-term succession plans under wraps. More than one-third of respondents to Bank Director’s 2019 Compensation Survey had not designated or identified successors for the CEO.

“People need to get more detail in their plans, and they should not just focus on the CEO,” Hay says. “You need to identify and communicate who that person is, and probably allow them to talk about how a succession would work, with a certain level of detail.

In times like these, banks may want to extend contingency planning to the board as well. This will not be a theoretical exercise for some companies, Hay says; a director at one of her clients recently died from Covid-19. Other directors may be available to step in, though banks should have conversations about appointing an acting committee head who could fill the potential vacancy.

Another major consideration for banks during the pandemic will be the decision to disclose a diagnosis or illness of an executive. Securities rules gives “substantial discretion” to boards weighing the material nature of such disclosures, according to a January article by Fenwick & West attorneys. A disclosure is only necessary when there is “‘a present duty to disclose’ and the information is considered ‘material,’” they wrote.

The wide range of Covid-19 symptoms and outcomes means the disclosures will probably be on a “case by case” basis, factoring in the materiality of the individual or affected operations, says John Spidi, a partner in the corporate practice group at Jones Walker.

“In those cases where it is not completely clear disclosure is required under SEC regulations, it’s probably a good idea to make the disclosure if the individual involved has a material impact on the company or its results of operations,” he says.

Boards may even opt to not disclose if the executive can continue performing their key duties, which seems to be what Morgan Stanley did after Chairman and CEO James Gorman tested positive for Covid-19 in mid-March. Gorman led regular calls with the bank’s operating committee and board of directors in self-isolation. He shared the news in early April via a video message to employees, saying that he did not experience severe symptoms and has fully recovered, Reuters reported.

Hopefully very few banks will need to activate their emergency succession plans, but Hay says creating detailed strategies protects shareholders and keeps operations stable during an otherwise chaotic time.

“If you don’t have a plan, or your plan is super high level where you have to think about how you’re actually going to deploy it, you’re behind the eight ball,” she says.

Tackling M&A as a Board

Success in executing a bank’s growth strategy — from acquiring another institution to even selling the bank — begins with the discussions that should take place in the boardroom. But few — just 31%, according to Bank Director’s 2020 Bank M&A Survey — discuss these issues at least quarterly as a regular part of the board’s agenda.

Boards have a fiduciary duty to act in the best decisions of shareholders, and these discussions are vital to the bank’s overall strategy and future. Even if management drives the process, directors must deliberate these issues, whether it’s the prospective purchase or another entity of selling the bank.

The survey affirms the factors driving M&A activity today: deposits, increased profitability and growth, and the pursuit of scale. There are common barriers, as well; price in particular has long been a sticking point for buyers and sellers.

M&A plays an important role in most banks’ strategies. One-quarter intend to be active acquirers, and 60% prefer to focus on organic growth while remaining open to making an acquisition.

However, roughly 4% of banks are acquired annually — a figure that doesn’t line up with the 44% of survey respondents who believe their bank will acquire another institution this year.

Conversations in the boardroom, and the strategy set by the board, will ultimately lead to success in a competitive deal landscape.

“Having strong, frequent communications with the board is very much part of our M&A process, and I can’t emphasize how important it is,” says Alberto Paracchini, CEO at Chicago-based Byline Bancorp. The $5.4 billion asset bank has closed three deals in the past five years. “With proper communication, good transparency and frequent communication as to where the transaction stands, the board is and can be not only a great advisor but a good check on management.”

The board at Nashville, Tennessee-based FB Financial Corp. discusses M&A as part of its annual strategic planning meeting. Typically, an outside advisor talks to the board at that time about the industry and provides an outlook on M&A. Also, they’ll “talk about our bank and how we fit into that from their perspective,” including potential opportunities the advisor sees for the organization, says Christopher Holmes, CEO of the $6.1 billion asset bank. Progress on the strategy is discussed in every board meeting; that includes M&A.

So, what should directors discuss? Overall, survey respondents say their board focuses on markets where they’d like to grow (69%), deal pricing (60%), the size of deals their bank can afford (57%) and/or specific targets (54%).

“It starts with defining what your acquisition strategy is,” says Rick Childs, a partner at Crowe LLP. Identifying attractive markets and the size of the target the bank is comfortable integrating is a good place to start.

At $6.1 billion asset Midland States Bancorp, strategic discussions around M&A center around defining the attributes the board seeks in a deal. Annually, directors at the Effingham, Illinois-based bank discuss “what do we like in M&A — deposits and wealth management and market share,” says CEO Jeffrey Ludwig. “[We] continue to define what those types of items are, what the marketplace looks like, where’s pricing today.”

Given the more than 400 charters in Illinois, the board sees ample opportunity to acquire, and the board evaluates potential deals regularly. The framework provided by the board ensures management focuses on opportunities that meet the bank’s overall strategy.

The board at $13.7 billion asset Glacier Bancorp, based in Kalispell, Montana, is “very involved in M&A,” says CEO Randall Chesler. Management shares with the board which potential targets they’re having conversations with and how these could fuel the bank’s strategy. “We start to show them financial modeling early on [so] that they can start to understand what a transaction might look like,” he says. “They’re really engaged early on, through the process and afterwards.” Once a transaction goes through, the board keeps tabs on the status of the conversion and integration.

Having M&A experience on the board can aid these discussions. Overall, 78% of respondents say their board includes at least one director with an M&A background.

These directors can help explain M&A to other board members and challenge management when necessary, says Childs. “They can be a really valuable member of the team and add their experience to the overall process to make sure that it isn’t all groupthink; that there’s somebody that can challenge the process, and make sure [they’re] asking the right questions and keeping everybody focused on what the impact is.”

A number of banks don’t plan to acquire via acquisition. How often should these boards discuss M&A? More than half of survey respondents who say their bank is unlikely to acquire reveal that their board discusses M&A infrequently; another 20% only discuss M&A annually.

Jamie Cox, the board chair at $265 million asset Alamosa State Bank, based in Alamosa, Colorado, says her bank strongly prefers organic growth. Still, the board discusses M&A quarterly at a minimum. “We would be remiss if we ignored it completely, because opportunity is always out there, but you’ve got to be looking for it,” she says. “Whether it’s your key strategy or a secondary strategy, it’s always got to be on the table.”

In charter-rich Wisconsin, Mike Daniels believes too many community bank boards aren’t adequately weighing whether now’s the time to sell. “I don’t want to be as bold as to say that they’re not doing their fiduciary responsibility to their shareholders, but are they really looking at what their strategic options are?” says Daniels, executive vice president at $3.1 billion asset Nicolet Bancshares and CEO of its subsidiary, Nicolet National Bank.

Green Bay, Wisconsin-based Nicolet has an investment banker on staff who can model the financial results for potential acquisition targets. “We’re having M&A dialogue on a regular basis at the board level because we can do this modeling — here’s who we’re talking to, here’s what we’re talking about, here’s what it would mean,” says Daniels.

The board sets the direction for what the bank should evaluate as a potential target. How success is measured should derive from those initial discussions in the boardroom.

“We’re real disciplined on that tangible book value earnback and making sure there’s enough earnings accretion,” says Ludwig. A deal isn’t worth the effort if earnings per share accretion is less than 2% in his view. Any cost saves or revenue synergies are factored into the bank’s earnback estimate. “We’re fairly conservative on the expense saves and diligent about getting at least what we’ve disclosed we could get, and we don’t put any revenue synergies in our model.”

Bank Director’s 2020 Bank M&A Survey, sponsored by Crowe, surveyed more than 200 independent directors, CEOs and senior executives to examine acquisition and growth trends. The survey was conducted in August and September 2019. Bank Director’s 2020 RankingBanking study, also sponsored by Crowe, examines the best M&A deals completed between Jan. 1, 2017, and Jun. 30, 2018, detailing what made those deals successful. Additional context around some of these top dealmakers can be found in the article “What Top Acquirers Know.” The Online Training Series also includes a unit on M&A Basics.