An Unlikely Journey Through Digital Transformation

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There are probably few bankers in the country who understand the challenges of digital transformation better than Mike Butler. It’s a journey that Butler has been on for the last several years. It has been unlikely journey as well, because Butler started out his career as a traditional banker and later became president for national consumer finance at Cleveland, KeyCorp.

Butler’s transformation started at First Trade Union Bancorp, a federally chartered thrift in Boston that was once owned by two pension funds. He joined the bank as CEO in 2008 but wasn’t able to start executing on a digital-first strategy until 2014. Over the next several years, Butler oversaw the radical transformation of that thrift into a tech-forward consumer bank. Renamed Radius Bancorp, it sold to LendingClub Corp. in 2020.

Even when he was at KeyCorp, Butler saw digital as the future of banking and he wanted to put that into practice. “I’d rather be where the future is than the past, and I’d rather take a chance on trying to build the organization for what I thought the future was going to be like,” he told Bank Director in a 2016 interview.

Butler is now on his second transformational journey, this time as CEO of Grasshopper Bancorp, a digital bank based in New York that focuses on small businesses and the innovation economy. Like consumer, Butler believes the small business market is ripe for disruption by tech-forward banks.

In this edition of the Slant podcast, Butler shares his experiences at Radius and Grasshopper, talks about what he has learned including the importance of culture, people and passion, and offers advice to other bankers who have embarked on the same journey towards innovation.

Why Attracting and Retaining Talent is No Longer Good Enough

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Every year, Cornerstone Advisors conducts a survey of community-based financial institution CEOs that asks what their top concerns are. The 2022 survey produced the biggest one-year change we have ever seen. A full 63% of executives identified the ability to attract qualified talent as a key concern, up from just 19% the year before.

No doubt this focus on talent is at least partially the result of the sheer number of new topics requiring industry expertise. Think digital currencies. Embedded finance. BaaS. Buy now pay later. Gen 3 core systems. Artificial intelligence and machine learning. How many of those topics would have been on any FI’s training curriculum two years ago? Yet boards now ask about every one of those topics in terms of the financial institution’s strategy.

However, attracting qualified talent won’t be enough. Every financial institution has knowledge and expertise that can only be developed internally, simply because the knowledge build is so unique to the industry, including:

  • Processes unique to a line of business: There is no school or degree for bank processes, front or back office. And they vary by financial institution.
  • Regulations: The practical application of regulations to specific situations at the institution requires deep “inside” knowledge.
  • Vendors and systems: The vendor stack and roadmaps, and the institution’s databases, make its knowledge requirements unique.

In short, there is no university diploma that can be obtained for many areas of the bank – and, in my opinion, the further you get into the back office, the truer this is.

At Cornerstone Advisors, we’re observing that banks need to focus on “build or buy” of key skills and knowledge for the next generation of leaders and managers. Some thoughts about what we see working:

1. Have a clear list of jobs, skills, and knowledge that will need to be developed versus hired. Everybody will have a different list, of course, but four areas where we consistently see the biggest “build” need are:

    • Payments: While there are certainly people that can come to a bank or credit union with a great deal of understanding about payments, there is the entire back-office component – disputes, fraud, reconciliation, vendor configuration options, et al. – that can be learned only on the job.
    • Commercial credit: An institution’s required credit expertise will depend on its business and niches. For example, knowledge of national environmental lending will be unique from that of import/export letter of credit. Unfortunately, peers and competitors don’t have a deep bench to abscond with.
    • Digital marketing: This is simply too new an area for there to be loads of potential applicants with loads of expertise and experience. Even if execs can find candidates with broad digital marketing experience (they’re out there), they will need to understand the nuances of banking and what will constitute meaningful marketing opportunities in particular client segments.
    • Data analytics: There are a growing number of available people with very strong data skills, but even if hired they will need to come to grips with the complexity of the institution’s data structure.

2. Don’t ignore the importance of the apprenticeship model when building talent. Most leaders at FIs can point to on-the-job training they received early in their careers that has been the basis of their success. The apprenticeship model has worked for centuries and still works well at the modern bank.

3. Balance the in-person need for apprenticeship training with the new realities of remote work demands. In a recent Accenture study, over 60% of employees surveyed felt their productivity had increased due to working at home, and only 13% felt it hadn’t. Whether it is a new hire or re-skilling of an existing employee, the message of “five days in the office” won’t sell. Getting the right amount of face time for development while giving the new generation of stars an appealing work-life balance will be a key challenge for HR groups.

A clear, disciplined, focused plan for development of the next generation of talent is more crucial than ever. There are times when buying talent from elsewhere just won’t be an option due to cost, availability, or the risk of retaining those same people. The good news? Some of the best opportunities might be right in front of you in your existing workforce.

Lessons Learned from HBO’s “Succession”

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My wife and I recently completed watching all three seasons of HBO’s “Succession.” It’s a wild ride on many levels, full of deceitful and dysfunctional family dynamics, corporate political backstabbing, and plain old evil greed. Despite this over-the-top intertwined family and business drama, there are quite a few relevant lessons worthy of attention from bank leaders and board members. Three in particular stand out to me.

First: Succession planning is always vital, and never more so in an organization (public or private) with any element of familial involvement. As is well known, all boards of directors should be paying close attention to succession for the CEO role and other key leadership positions. In the HBO show, there is no clear line of succession, and the company’s 80-year-old patriarch (who experiences major health issues early in season 1) has not only failed to plan for his eventual departure but has all four children thinking they can and should take over the “family” business. Only one of the four is even close to qualified, and he becomes compromised by external events. Meanwhile, daddy plays each sibling against each other. It is a mess which devolves into chaos at various times, seriously impacting both the fortunes and future independence of the business.

Second: Where is the board of directors? In this instance, the company, Waystar Royco, is a publicly traded global media and entertainment conglomerate, but the board is not governing at all. The single most important responsibility of any board of directors is the decision of “who leads”. This goes beyond the obvious CEO succession process, ideally in a planned, orderly leadership transition or worst case, a possible emergency situation. It more broadly relates to an ongoing evaluation of the CEO and his or her competency relative to the skills, experiences, leadership capabilities, temperament and market dynamics. Too many boards allow CEOs to determine when their time is up, rather than jointly crafting a plan for a “bloodless transition of power,” that encourages (or even forces) a constructive change of leadership. In “Succession,” the board is comprised of cronies of the patriarch — and his disengaged brother — who are both beholden to and intimidated by their successful and highly autocratic CEO.

Lastly, in any company with a sizable element of family ownership, the separation of economic ownership and executive leadership is vital. While at times the progeny of a successful founder and leader prove extremely capable (see Comcast’s Brian Roberts), this is often the exception rather than the rule. Therefore, the board and/or owners ideally will address this dynamic head-on, accepting that professional management is indeed the best way to enhance economic value for shareholders and family members while encouraging the offspring and descendants to keep their hands off and cash the checks. Many privately held banks grapple with this same dynamic.

Such decisions, of course, are fraught with peril for those involved, which “Succession” endlessly highlights. Creating the proper governance structure and succession plans is rarely easy, especially when personal and financial impacts weigh heavily on the individuals involved. Still, with the board’s prime directive of leadership selection top of mind, and a commitment to candor and transparency, the outcome will likely be much better than simply ignoring the elephant in the room.

When season four of HBO’s “Succession” rolls around, it will surely provide more examples of how not to govern properly.

Do Independent Chairs Reduce CEO Pay?

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In an advisory vote earlier this year, shareholders roundly rejected JPMorgan Chase & Co.’s executive compensation package, particularly a whopping  $52.6 million stock option award for CEO and Chair Jamie Dimon. But at the same time, shareholders voted against a proposal to split those roles.

The proxy advisory firms Glass Lewis and Institutional Shareholder Services favor separating the CEO and chair roles. “Executives should report to the board regarding their performance in achieving goals set by the board,” Glass Lewis explains in its 2022 voting guidelines. “This is needlessly complicated when a CEO chairs the board, since a CEO/chair presumably will have a significant influence over the board.”

An analysis of Bank Director’s Compensation Survey data, examining fiscal year 2019 through 2021, finds that CEOs earn less when their board has an independent chair. Most recently, the 2022 Compensation Survey, sponsored by Newcleus Compensation Advisors, found that banks with separate CEO and chair roles reported median total CEO compensation of $563,000, compared to $835,385 where the role was combined. 

The results are striking, but they should be taken with a grain of salt. The information collected from the survey, which is anonymous, doesn’t include factors like bank performance. Respondents skewed toward banks with an independent chair. And data alone can’t sufficiently describe what actually occurs in corporate boardrooms.

“I can’t really say which model works better. Look at Jamie Dimon; that’s worked really well for the shareholders of JPMorgan Chase, whereas I think there have been three or four initiatives to try to split that role,” says Jim McAlpin Jr., a partner at the law firm Bryan Cave Leighton Paisner. McAlpin also serves on the board of Bank Director’s parent company, DirectorCorps. “It was voted down every time by the shareholders.”

CEOs typically negotiate when and whether they’ll eventually be named chair when they join a bank, says McAlpin. “If you have a very impactful, strong CEO who wants to be chair — most boards will not deny him or her that position, because they want [that person] running the bank.” It’s a small price to pay, he adds, for someone who has such a dramatic influence on the bank’s performance. “There is nothing more important to the bank than a CEO who has a clear vision, who can show leadership, form a good team and can execute well,” says McAlpin. 

But it’s important to remember that boards represent the interests of the shareholders. “The most important thing a board has to do is hire and retain a quality CEO. Part of retaining is getting the compensation right,” says McAlpin. “It’s important for the board to control that process.” 

McAlpin favors appointing a lead director when the CEO also has the chair position, to provide input on the agenda and contribute to the compensation process. 

Truist Financial Corp., in response to shareholder pressure around chair independence in 2020, “strengthened” its lead independent director position, according to its 2022 proxy statement. Former Piedmont Natural Gas Co. CEO Thomas Skains has served as lead independent director of the Charlotte, North Carolina-based bank since March 2022. Skains has the authority to convene and set the agenda for executive sessions and other meetings where the chair isn’t present; provide input on the agenda, and approve board materials and schedules; and serve as a liaison between the independent directors and CEO and Chair William Rogers Jr. 

But one individual can’t single-handedly strengthen the board, says Todd Leone, a partner and global head of executive compensation at McLagan. The compensation committee is responsible for the company’s pay programs, including executive compensation, peer benchmarking, reviewing and approving executive compensation levels, recommending director compensation, evaluating the CEO’s performance and determining the CEO’s compensation. With that in mind, Leone says the strength of the compensation committee — and the strength of its committee chair — will influence the independence of these decisions.

Leone also believes that increased diversity in the boardroom over the years has had a positive effect on these deliberations. “A diverse board, in my experience, they’re asking more questions,” he says. “And through that process of asking those questions, various things get unearthed, and the end result generally is stronger pay programs.”

Twelve years of Say-on-Pay — where public company shareholders offer an advisory vote on the top executives’ compensation — has also benefited those decisions, he says. Today, most long-term incentive plans are based on a selection of metrics, such as return on assets, income growth, asset quality and return on equity, according to Bank Director’s 2022 Compensation Survey. And in August, the U.S. Securities and Exchange Commission passed a pay versus performance disclosure rule that goes into effect for public companies in the fiscal year following Dec. 16, 2022.

“There’s a much higher bar for getting these plans approved,” says Leone, “because the compensation committees feel much more responsibility for their role in that process.”

In McAlpin’s experience, the best CEOs have confidence in their own performance and trust the process that occurs in the boardroom. “If they don’t like the results, they’ll give feedback, but they let the process unfold,” he says. “They don’t try to overtly influence the process.”

Heading into 2023, Leone notes the whipsaw effects that have occurred over the past few years, due to the pandemic, strong profitability in the banking sector and looming economic uncertainty. These events have had abnormal effects on compensation data and the lens through which boards may view performance. “We’re in a very volatile time, and we have been on pay since the pandemic,” says Leone. “Boards, [compensation] committees and executive management have to be aware of that.” 

Back to the Office

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Although studies have shown most workers like hybrid or remote work opportunities, CEOs rarely like the concept.

A recent KPMG survey across industries this summer found that 65% of CEOs see in-person work as optimal over the next three years. It was even higher for bank CEOs: 69% of them envision their operations fully in-person during that time frame. Only 24% of bank CEOs envision a hybrid work environment, with both in-person and at-home work, during the next three years.

One of those who dislikes the idea of hybrid work is Fifth Third Bancorp CEO Tim Spence. But Spence has an interesting take on why hybrid or remote work doesn’t work well for banking. While many bank CEOs talk about the importance of in-person work to foster a certain culture, Spence sees another reason, too. While tech companies may embrace the concept of a diverse workforce throughout the world plugging in via videoconferences and online chat, banks have long been deeply rooted in their communities where they do business.

The questions every bank faces are now: Will workers feel as motivated to volunteer and make financial donations when they’re not working in local communities where the bank operates? What happens to a corporation’s philanthropic endeavors when its workforce is diffused through the country?

I met up with Spence in late October at the company’s headquarters in Cincinnati. “My biggest fear about the movement in some quarters of the economy toward remote work is that it’s severing the link between headquarters employers and their responsibilities to the communities where their employees live,” he says.

Like many banks, Fifth Third’s financial success is tied up in the success of its communities. The $206 billion bank traces its roots to Cincinnati back more than 160 years; today, it is a major philanthropic entity in the Queen City and its employees contribute sizable volunteer hours. For Spence, being in a community means physical presence and the ability to be out with clients.

“There’s not another regional bank with a more significant share of its balance sheet attached to manufacturing and transportation and logistics companies than Fifth Third,” he says. “Those folks had to [work in-person during the early days of the pandemic] and we needed to be there with them.”

That doesn’t mean no one works from home at Fifth Third. Spence says about 15% to 20% of positions are eligible for remote work. The rest of the employee base works with their managers if they need an alternative work arrangement, for example, to accommodate caregiving responsibilities. But there’s no across-the-board hybrid work that’s available to all employees.

These issues have been on my mind lately as I head to Bank Director’s Bank Compensation & Talent Conference Nov. 7 to Nov. 9 in Dallas. Compensation consultants, executive recruiters and human resources officers at banks will talk about designing compensation programs, attracting and retaining staff and the ever-shifting regulatory environment. Stay tuned for more on those topics in the days ahead.

Becoming a CEO

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The chief executive officer is usually the single most important person in any organization, but it’s a job that most individuals grow into over time. The transition is often filled with challenges and difficult learning experiences.

Such was the case for Ira Robbins, the chairman and CEO at Valley National Bancorp, a $54 billion regional bank headquartered in Wayne, New Jersey. The 48-year-old Robbins was just 43 when he succeeded long-time CEO Gerald Lipkin in 2018. Lipkin, on the other hand, was closing in on his 77th birthday when he passed the baton to Robbins after running the bank for 42 years.

Robbins is deeply respectful of Lipkin but shares that one immediate challenge he faced was changing a culture that hadn’t kept pace with the bank’s growth over the years. He said Valley National was a $20 billion bank that operated as if it was still a $5 billion bank. Changing that culture was not easy, and he had to make some very difficult personnel decisions along the way.

Robbins is thoughtful, introspective and candid about his growth into the CEO role at Valley National. His reflections should be of great interest to any banker who hopes to someday become a CEO.

This episode, and all past episodes of The Slant Podcast, are available on Bank Director, Spotify and Apple Music.

Using the Succession Plan to Evaluate Talent

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Boards have many duties, from overseeing the long-term strategy of the institution, to approving executive pay packages, to vetting and approving the budget. But one job that they often leave for another day: succession planning. Yet, for forward-thinking banks, having a process for succession not only can strengthen the organization in the future, but also build talent today.

Brian Moynihan, chairman and CEO of Bank of America Corp., recently spoke about this very fact. Despite not having plans to leave the institution he’s led since 2010, the 62-year-old Moynihan explained that the bank reworks its succession plan twice a year.

“We have a deep succession planning process that we go through every six months [on] the board that alternates between the senior most people and then … I do it multiple levels down so we’re always looking,” said Moynihan in an interview last December with CNBC’s Closing Bell. “The board will pick somebody. My job is to have many people prepared.”

Such a clear process makes Bank of America unique, in some regards. While surveys over the years have tried to pinpoint how many companies have formal succession plans, organizations often avoid outlining it to investors, leaving it an open question. The Securities and Exchange Commission revised disclosure rules in November 2020 to encourage companies to outline human capital resources, like diversity rates, employment practices, and compensation and benefits. Of the first 100 forms filed by companies with $1 billion in market capitalization, only 5% of the companies added any additional detail to the succession planning process, according to researchers working with Stanford University and corporate data provider Equilar. Bank Director’s 2019 Compensation Survey found 37% of bank executives and board members reporting that their bank had not designated a successor or potential successors for the CEO.

So much of a bank’s long-term success has to do with having a clear plan if the head of the business must leave. This becomes especially true if the CEO must step aside suddenly, like for a health concern or other emergency. It’s on the board to lead this search. But when done right, it can also become a powerful tool to prepare internal and external talent, a process embraced by the current CEO. 

David Larcker has studied CEO succession planning as a professor at Stanford Graduate School of Business, where he leads the school’s Corporate Governance Research Initiative. “One of the two key things that boards do is hiring and firing the CEO,” says Larcker. Many boards, though, “do not put in enough time and effort in succession,” he adds.

By not taking an active approach to this part of the job, it can lead to the wrong hire, resulting in years of poor management. Larcker says one of the reasons for a lack of proper succession plans is often because it’s one of the least exciting roles a board undertakes, so it gets put to the backburner. Plus, since you rarely replace the CEO, it’s not always a priority.

Larcker and his research team sought to identify what occurs when a board lacks a succession plan. They looked at scenarios where the CEO left abruptly, either because the person resigned, retired or made other transitions. These are often the reasons disclosed to the public; in reality, the company may have fired a CEO without stating that fact. Out of the various scenarios, the researchers identified situations where the board and CEO likely parted ways due to performance. 

Out of all the media citations, 67% of the time the company named a permanent successor in the announcement; in 10% of the cases, it appointed a permanent successor but after a delay; and 22% of the time it named an interim successor. Those moments of upheaval provide investors with the clearest insight into whether the board took a proactive approach to succession, since the plans aren’t often public.

When a company named an interim successor, that was one of the clearest signs that the organization fired the CEO without a plan in place, and the stock performance of the company performed the worst after the announcement. Also, it’s worth noting that 8% of the time, the company named a current board member to the CEO role. When that occurred, the company’s stock price often performed worse than when internal or external candidates were chosen. 

What separates the organizations that can name a successful permanent successor from those that can’t? Often, it’s the organizations that have a clear line to the talent that’s growing inside and outside of the bank.

John Asbury knows all too well the need for this line of succession — it’s how he got the head role at Atlantic Union Bankshares, Corp., a $20 billion public bank based in Richmond, Virginia.  When Asbury was tapped as CEO in 2017, he followed G. William Beale, who had helmed the bank — then known as Union Bankshares Corp. — for almost 25 years. The bank had done a full executive search starting two years before Beale stepped away. Now, despite not having any plans to retire, Asbury, 57, takes the job of building succession within the entire organization seriously. 

“There are too few people in the industry who understand how the bank actually works or runs front to back,” Asbury says. “Oftentimes they have their area of specialty and not much else.”

Asbury, who sits on the board of directors as well, works with his human resources and talent evaluators to identify those within the organization who can fill executive roles. In addition to empowering them as executives, he gets them face time with the board. This provides the board with the ability to interact and know the talent that the bank has in the stable. 

“We want these folks to understand how the organization works, and we want them at the table to talk about not just strategy for their business unit, but the bank strategy as well,” Asbury says.

Asbury recently showed this leadership style in a public way by announcing that President Maria Tedesco would add the role of chief operating officer, and he would hand over managing many of the day-to-day operations to Tedesco. This isn’t a succession plan put in place. Instead it’s giving Tedesco the ability to have 85% of the organization reporting to her, while she and other executives at the bank continue to report to Asbury. 

Asbury thinks the move was needed to allow him the freedom to focus on growing Atlantic in other ways. But it also provides Tedesco with hands-on training in managing the organization. Despite the move, Asbury says that it doesn’t prevent him from working with the board on succession plans. 

The compensation committee, which Asbury does not sit on, also runs succession planning at Atlantic Union Bank. Sometimes boards may be hesitant to discuss succession if the current CEO views the discussion as antagonistic. But Atlantic Union undergoes an emergency succession plan evaluation once a year — currently, Tedesco would step in as interim CEO if something unexpected occurred to Asbury. She even sits in on every board meeting except when the executive team is being discussed. 

It’s a conversation that boards cannot be afraid to have. “If the CEO is on the board, that committee or board, has to own the process,” Larcker says.

What doesn’t work when it comes to succession planning? Having the new CEO step into the company while the outgoing CEO continues to helm the business for a few months to a year, added Larker. This design creates confusion from both the leadership and the staff on who they should listen and report to. “Ultimately, it’s a bad sign,” Larcker says.

Asbury knows that all too well. When he took the Atlantic Union role, Beale held the CEO position for three months while Asbury got acquainted with the organization. Within a few weeks, though, Beale let Asbury know that he would clear out the office and Asbury could call him if any questions arose. “Shorter is better in terms of transition,” Asbury adds. 

That can only happen with a plan in place.

Margin With a Mission

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Darrin Williams didn’t become CEO by getting promoted through the management ranks of the banking industry. In fact, as a lawyer, he spent some of this time suing banks and publicly traded companies before later serving in the Arkansas House of Representatives. But his passion for lifting his community through financial education led him to the $2 billion Southern Bancorp in Arkadelphia, Arkansas, one of the largest Community Development Financial Institutions in the country. Williams talks about his early influences and the influx of support for the CDFI industry following the murder of George Floyd. 

Additional episodes of The Slant Podcast are now available on Spotify and Apple Music!

Evaluating Your CEO’s Performance

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If a core responsibility of a bank board of directors is to hire a competent CEO to run the organization, shouldn’t it also review that individual’s performance?

In Bank Director’s 2021 Governance Best Practices Survey, 79% of responding board members said their CEOs’ performance was reviewed annually. However, 15% said their CEOs were not reviewed regularly, and 7% said the performance of their CEOs had been assessed in the past but not every year.

The practice is even less prevalent at banks with $500 million in assets or less, where just 56% of the survey respondents said their CEOs were reviewed annually. Twenty-eight percent said they have not performed a CEO performance evaluation on a regular basis, while 16% said their boards have evaluated their CEO in the past but not every year.

Gary R. Bronstein, a partner at the law firm Kilpatrick Townsend, regularly counsels bank boards on a variety of issues including corporate governance. “It doesn’t surprise me, but it’s a problem because it should be 100%,” he says of the survey results. “One of the most important responsibilities of a board is having a qualified CEO. In fact, there may not be anything more important, but it’s certainly near the top of the list. So, without any type of evaluation of the CEO, how do you gauge how your CEO is doing?”

A CEO’s effectiveness can also change over time, and an annual performance evaluation is a tool that boards can use to make sure their CEO is keeping pace with the growth of the organization. “There are right leaders for right times, [and] there are right leaders for certain sizes,” says Alan Kaplan, CEO of the executive search and board advisory firm Kaplan Partners. “There are situations that sometimes call for a need to change a leader. So, how is the board to know if it has the right leader if it doesn’t do any kind of formal evaluation of that leader?”

One obvious gauge of a CEO’s effectiveness is the bank’s financial performance, and it’s a common practice for boards to provide their CEOs with an incentive compensation agreement that includes such common metrics as return on assets, return on equity and the growth of the bank’s earnings per share, tangible book value and balance sheet.

Bank Director’s 2021 Compensation Survey contains data on the metrics and information used by bank boards to examine CEO performance.

But just because a CEO hits all the targets in their incentive plan, and the board is satisfied with the bank’s financial performance, doesn’t mean that no further evaluation is necessary. Delivering a satisfactory outcome for the bank’s shareholders may be the CEO’s primary responsibility, but it’s certainly not the only one.

A comprehensive CEO evaluation should include qualitative as well as quantitative measurements. “There are a lot of different hats that a CEO wears,” says Bronstein. “It probably starts with strategy. Has the CEO developed a clear vision for the bank that has been communicated both internally and externally? Other qualitative factors that Bronstein identifies include leadership — “Is the CEO leading the team, or is the CEO more passive and being led by others?” — as well as their relationship with important outside constituencies like the institution’s regulators, and investors and analysts if the bank is publicly held.

Additional qualitative elements in a comprehensive CEO assessment, according to Kaplan, could include such things as “development of a new team, hiring new people, opening up a new office [or starting] a new line of business.” An especially high priority, according to Kaplan, is management succession. If the current CEO is nearing retirement, is there a succession process in place? Does the CEO support and actively participate in that? If this is a priority for the board, then including it in the CEO’s evaluation can emphasize its importance. “Grappling with succession in the C-suite and [for] the CEO when you have a group of senior people who are largely toward the end of their career should be a real high priority,” Kaplan says.

Ideally, a CEO evaluation should involve the entire board but be actively managed by a small group of directors. The process is often overseen by the board’s compensation committee since the outcome of the assessment will be a critical factor in determining the CEO’s compensation, although the board’s governance committee could also be assigned that task. Other expected participants include the board’s independent chair or, if the CEO is also chair, the lead director.

“I think it should be a tight group to share that feedback [with the CEO], but all the directors should provide input,” says Kaplan. Once that has been summarized, the chair of the compensation or governance committee, along with the board chair or lead director, would typically share the feedback with the CEO. “I think the board should be aware of what that feedback is, and it should be discussed in executive session by the full board without the CEO present,” Kaplan says. “But the delivery of that feedback should go to a small group, because no one wants a 10-on-one or 12-on-one feedback conversation.”

Another valuable element in a comprehensive assessment process is a CEO self-assessment. “I think it’s a good idea for the CEO to do a self-evaluation before the evaluation is done by a committee or the board,” says Bronstein. “I think that can provide very valuable input. If there is a discrepancy between what the board determines and what the self-evaluation determines, there ought to be a discussion about that.”

CEO self-assessments are probably done more frequently at larger banks, and a good example is Huntington Bancshares, a $174 billion regional bank headquartered in Columbus, Ohio. In a white paper that explored the results of Bank Director’s 2021 Governance Best Practices Survey in depth, David L. Porteous — the Huntington board’s lead director — described how Chairman and CEO Stephen Steinour prepares a self-evaluation for the board that examines how he performed against the bank’s strategic objectives for the year. “It’s one of the most detailed self-assessments I’ve ever seen, pages long, where he goes through and evaluates his goals, he evaluates the bank and how we did,” Porteous said.

Porteous also solicits feedback on Steinour’s performance from each board member, followed by an executive session of the board’s independent directors to consolidate its feedback. This is then shared with Steinour by Porteous and the chair of the board’s compensation committee.

Bronstein allows that not every CEO is willing to perform such a detailed self-assessment. “If the CEO is confident about his or her position with the board and with the company, they should feel comfortable to be open about themselves,” he says.

“The Best Strategic Thinker in Financial Services”

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strategy-7-19-19.pngThe country’s most advanced bank is run by the industry’s smartest CEO.

Co-founder Richard Fairbank is a relentless strategist who has guided Capital One Financial Corp. on an amazing, 25-year journey that began as a novel approach to designing and marketing credit cards.

Today, Capital One—the 8th largest U.S. commercial bank with $373.2 billion in assets—has transformed itself into a highly advanced fintech company with national aspirations.

The driving force behind this protean evolution has been the 68-year-old Fairbank, an intensely private man who rarely gives interviews to the press. One investor who has known him for years—Tom Brown, CEO of the hedge fund Second Curve Capital—says that Fairbank “has become reclusive, even with me.”

Brown has invested in Capital One on and off over the years, including now. He has tremendous respect for Fairbank’s acumen and considers him to be “by far, the best strategic thinker in financial services.”

I interviewed Fairbank once, in 2006, for Bank Director magazine. It was clear even then that he approaches strategy like Sun Tzu approaches war. “A strategy must begin by identifying where the market is going,” Fairbank said. “What’s the endgame and how is the company going to win?”

Fairbank said most companies are too timid in their strategic planning, and think that “it’s a bold move to change 10 percent from where they are.” Instead, he said companies should focus on how their markets are changing, how fast they’re changing, and when that transformation will be complete.

The goal is to anticipate disruptive change, rather than chase it.

“It creates a much greater sense of urgency and allows the company to make bold moves from a position of strength,” he said.

This aggressive approach to strategy can be seen throughout the company’s history, beginning in 1988 when Fairbank and a former colleague, Nigel Morris, convinced Richmond, Virginia-based Signet Financial Corp. to start a credit card division using a new, data-driven methodology. The unit grew so big so fast that it dwarfed Signet itself and was spun off in 1994 as Capital One.

The company’s evolution since then has been driven by a series of strategic acquisitions, beginning in 2005 when it bought Hibernia Corp., a regional bank headquartered in New Orleans. Back then, Capital One relied on Wall Street for its funding, and Fairbank worried that a major economic event could abruptly turn off the spigot. He sought the safety of insured deposits, which led not only to the Hibernia deal but additional regional bank acquisitions in 2006 and 2008.

Brown says those strategic moves probably insured the company’s survival when the capital markets froze up during the financial crisis. “If they hadn’t bought those banks, there are some people like myself who don’t think Capital One would be around today,” he says.

As Capital One’s credit card business continued to grow, Fairbank wanted to apply its successful data-driven strategy to other consumer loan products that were beginning to consolidate nationally. Over the last 20 years, it has become one of the largest auto lenders in the country. It has also developed a significant commercial lending business with specialties like multifamily real estate and health care.

Capital One is in the midst of another transformation, to a national digital consumer bank. The company acquired the digital banking platform ING Direct in 2011 for $9 billion and rebranded it Capital One 360. Office locations have fallen from 1,000 in 2010 to around 500, according to Sandler O’Neill, as the company refocuses its consumer banking strategy on digital.

When Fairbank assembled his regional banking franchise in the early 2000s, the U.S. deposit market was highly fragmented. In recent years, the deposit market has begun to consolidate and Capital One is well positioned to take advantage of that with its digital platform.

Today, technology is the big driver behind Capital One’s transformation. The company has moved much of its data and software development to the cloud and rebuilt its core technology platform. Indeed, it could be described as a technology company that offers financial services, including insured deposit products.

“We’ve seen enormous change in our culture and our society, but the change that took place at Capital One’s first 25 years will pale in comparison to the quarter-century that’s about to unfold,” Fairbank wrote in his 2018 shareholders letter. “And we are well positioned to thrive as technology changes everything.”

At Capital One, driving change is Fairbank’s primary job.