Tales From Bank Boardrooms

If anyone in banking has seen it all, it’s Jim McAlpin. 

He’s sat in on countless board deliberations since he got his start under the late Walt Moeling, a fellow Alabamian who served as his mentor at Powell, Goldstein, Frazer & Murphy, which later merged with Bryan Cave in 2009. 

“That’s how I started in the banking world, literally carrying Walt’s briefcase to board meetings. Which sometimes was a very heavy briefcase,” quips McAlpin. Moeling made sure that the young McAlpin worked with different attorneys at the firm, learning various ways to practice law and negotiate on behalf of clients. “He was my home base, but I also did lending work, I did securities work, I did some real estate work. I did a lot of M&A work” in the 1990s, including deals for private equity firms and other companies outside the banking sector.

But it’s his keen interest in interpersonal dynamics and his experience in corporate boardrooms, fueled by almost four decades attending board meetings as an attorney and board member himself, that has made McAlpin a go-to resource on corporate governance matters. Today, he’s a partner at Bryan Cave Leighton Paisner, and he recently joined the board of DirectorCorps, Bank Director’s parent company. 

“I’ve gone to hundreds of meetings, and each board is different. You can have the same set of circumstances more or less, be doing the same kind of deal, facing the same type of issue or regulatory situation,” he says. “But each set of people approaches it differently. And that fascinates me.”  

McAlpin’s a consummate storyteller with ample anecdotes that he easily ties to lessons learned about corporate governance. Take the time he broke up a physical fight during the financial crisis. 

“During that time period, I saw a lot of people subjected to stress,” he says. “There are certain people who, under stress, really rise to the occasion, and it’s not always the people you think are going to do so. And then there are others who just fall apart, who crumble. Collectively as a board, it matters.”

Boards function based on the collection of individual personalities, and whether or not those directors are on the same page about their organization’s mission, goals and values. McAlpin’s intrigued by it, saying that for good boards, the culture “permeates the room.”

McAlpin experienced the 1990s M&A boom and the industry’s struggles through the financial crisis. On the precipice of uncertainty, as interest rates rise and banks weather technological disruption, he remains bullish on banking. “This is a good time to be in banking,” he says. “It’s harder to get an M&A deal done this year. So, I think it’s caused a lot of people to step back and say, ‘OK, what are we going to do over the next few years to improve the profitability of our bank, to grow our bank, to promote organic growth?’. … [That’s] the subject of a lot of focus within bank boardrooms.”

McAlpin was interviewed for The Slant podcast ahead of Bank Director’s Bank Board Training Forum, where he spoke about the practices that build stronger boards and weighed in on the results of the 2022 Governance Best Practices Survey, which is sponsored by Bryan Cave. In the podcast, McAlpin shares his stories from bank boardrooms, his views on corporate culture and M&A, and why he’s optimistic about the state of the industry. 

Research Report: Fortifying Boards for the Future

Good corporate governance requires, among many other things, a strong sense of balance.

How do you bring in new perspectives while also sticking to your core values? How does the board balance responsibilities among committees? What’s the right balance between discussion about the fundamentals of banking, versus key trends and emerging issues?

There’s an inherent tension between the introduction of new ideas or practices and standard operating procedures. We explore these challenges in Bank Director’s 2022 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP. But tension isn’t necessarily a bad thing.

The survey polled 234 directors, chairs and chief executives at U.S. banks with less than $100 billion in assets during February and March 2022. Half of respondents hailed from banks with $1 billion to $10 billion of assets. Just 9% represent a bank above the $10 billion mark. Half were independent directors.

We divide the analysis into five modules in this report: board culture, evaluating performance, building knowledge, committee structure and environmental, social and governance oversight in the boardroom. Jim McAlpin, a partner at the Bryan Cave law firm in Atlanta and leader of the firm’s banking governance practice, advised us on the survey questions and shared his expertise in examining the results.

We also sought the insights of three independent bank directors: Samuel Combs III, a director and chair of the board’s governance committee at $2.8 billion First Fidelity Bancorp in Oklahoma City; Sally Steele, lead director with $15.6 billion Community Bank System in DeWitt, New York; and Maryann Goebel, the compensation and governance chair at $11 billion Seacoast Banking Corp. of Florida, which is based in Stuart, Florida. They weighed in on a range of governance practices and ideas, from the division of audit and risk responsibilities to board performance assessments.

The proportion of survey respondents representing boards that conduct an annual performance assessment rose slightly from the previous year’s survey, to 47%. Their responses indicate that many boards leverage evaluations as an opportunity to give and receive valuable feedback — rather than as an excuse to handle a problem director.

Forty-seven percent of respondents describe their board’s culture as strong, while another 45% rank it as “generally good,” so the 30% whose board doesn’t conduct performance assessments may believe that their board’s culture and practices are solid. Or in other words, why fix something that isn’t broken? However, there’s always room for improvement.

Combs and Steele both attest that performance evaluations, when conducted by a third party to minimize bias and ensure anonymity, can be a useful tool for measuring the board’s engagement.

Training and assessment practices vary from board to board, but directors also identify some consistent knowledge gaps in this year’s results. Survey respondents view cybersecurity, digital banking and e-commerce, and technology as the primary areas where their boards need more training and education. And respondents are equally split on whether their board would benefit from a technology committee, if it doesn’t already have one.

And while directors certainly do not want to be mandated into diversifying their ranks, in anonymous comments some respondents express a desire to get new blood into the boardroom and detail the obstacles to recruiting new talent.

“Our community bank wants local community leaders to serve on our board who reflect our community,” writes one respondent. “Most local for[-] profit and not-for-profit boards are working to increase their board diversity, and there are limited numbers of qualified candidates to serve.”

To read more about these critical board issues, read the white paper.

To view the results of the survey, click here.

Building a Better Nominating/Governance Committee

Boards could be missing out on valuable opportunities to better leverage their nominating/governance committees. 

There’s broad agreement on the responsibilities that many nominating/governance committees are tasked with, according to the directors and CEOs responding to Bank Director’s 2022 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP. Half of the survey participants serve on this committee. But the results also suggest there are areas that these committees may be overlooking. 

As chair of the governance committee at $2.8 billion First Fidelity Bancorp in Oklahoma City, Samuel Combs III views the committee’s overarching duty as being responsible for the board’s broader framework and committee infrastructure. He says, “We try to determine if we are balanced in what we’re covering and in our allocation of resources, board members’ time [and] assignments to certain committees.” 

First Fidelity’s governance committee typically meets three to four weeks ahead of the board meeting to develop the agenda, often working closely with the CEO to do so, Combs says. Devoting this advanced time to craft the agenda means that the board can devote sufficient time later to discussing important strategic issues. 

The survey’s respondents report that their boards’ nominating/governance committees are generally responsible for identifying and evaluating possible board candidates (92%), recommending directors for nomination (89%), and developing qualifications and criteria for board membership (81%). 

Far fewer respondents say their governance committee is responsible for making recommendations to improve the board (57%) or reviewing the CEO’s performance (40%). 

While the suggestion is unlikely to come from the chief executive, a bank’s CEO could benefit from regular reviews by the nominating/governance committee, says Jim McAlpin, a partner at Bryan Cave and leader of the firm’s banking practice group. Reviewing the CEO’s performance gives the board a chance to talk about what’s working and what could be improved, separate from compensation discussions. 

“The only review he or she [typically] gets is whether the compensation remains the same,” says McAlpin, who also serves as chair of the nominating/governance committee at a $300 million bank located in the Northeast. “Beyond compensation, there’s very rarely feedback to the CEO.” 

Almost half (47%) of the survey respondents say their board goes through regular evaluations. Among those, 60% say the nominating/governance committee chair or the committee as a whole leads that process. That tracks with the roughly half (53%) who name reviewing directors’ performance as a responsibility of the nominating/governance committee. 

First Fidelity’s board alternates board evaluations with peer evaluations every other year, but Combs stresses a holistic approach to those. “Not only do you evaluate, but you spend time reviewing it with the group,” he says. “And then with each independent board member, if necessary. And we usually give them the option of having that conversation with myself and the CEO, post-evaluation.” 

McAlpin suggests another exercise that nominating/governance committees could consider: Make it a regular practice — say every 2 or 3 years — to locate and review every committee’s charter. It can be useful to regularly review each committee’s scope of responsibilities and also provides an opportunity to update those responsibilities when needed. 

“Does it list all of the things the committee does or should be doing? And secondly, does it list things that the committee is not doing?” McAlpin says. “It’s a fairly basic thing, but important in corporate hygiene.”

Forty-five percent task the governance/nominating committee with determining whether the board should add new committees. In the case of First Fidelity, the governance committee discussed how to handle oversight of cybersecurity issues and whether it would benefit from a designated cybersecurity committee. The governance committee ultimately assigned that responsibility largely to its audit committee, with some support from its technology committee. 

Nominating/governance committees should also stay apprised of emerging issues and trends, like intensifying competition for talent and increased focus on environmental, social and governance issues. Those may ultimately help governance committees better assess the skills and expertise needed on the board, which about three-quarters of respondents identify as a key duty of the governance committee. 

“It’s good for nominating and governance committees to be forward thinking, to be thinking about the composition of the board, to be thinking about the skill sets of the board, the diversity of the board,” says McAlpin. 

Many boards may assign primary responsibility for talent-related issues to their compensation committee, but Combs argues that it should also concern the governance committee, especially in the tough, post-Covid recruiting landscape. “Talent acquisition, talent retention, talent management should have always been at this level, in my opinion,” Combs says. “These emerging trends should lead you to how you position yourself with your board talent, as well as your staffing talent.” 

The Promise and the Peril of Director Term Limits

Bank boards seeking to refresh their membership may be tempted to consider term limits, but the blunt approach carries several downsides that they will need to address.

Term limit policies are one way that boards can navigate crucial, but sensitive, topics like board refreshment. They place a ceiling on a director’s tenure to force regular vacancies. Bringing on new members is essential for banks that have a skills or experience gap at the board level, or for banks that need to transform strategy in the future with the help of different directors. However, it can be awkward to implement such a policy. There are other tools that boards can use to deliver feedback and ascertain a director’s interest in continued service.

The average age of financial sector independent directors in the S&P 500 index was 64.1 years, according to the 2021 U.S. Spencer Stuart Board Index. The average tenure was 8.3 years. The longest tenured board in the financial sector was 16 years.

“I believe that any small bank under $1 billion in assets should adopt provisions to provide for term limits of perhaps 10 years for outside directors,” wrote one respondent in Bank Director’s 2022 Governance Best Practices Survey.

The idea has some fans in the banking industry. The board of directors at New York-based, $121 billion Signature Bank, which is known for its innovative business lines, adopted limits in 2018. The policy limits non-employee directors to 12 years cumulatively. The change came after discussions over several meetings about the need for refreshment as the board revisited its policies, says Scott Shay, chairman of the board and cofounder of the bank. Some directors were hesitant about the change — and what it might mean for their time on the board.

“In all candor, people had mixed views on it. But we kept talking about it,” he says. “And as the world is evolving and changing, [the question was: ‘How do] we get new insights and fresh blood onto the board over some period?’”

Ultimately, he says the directors were able to prioritize the bank’s needs and agree to the policy change. Since adopting the term limits, the board added three new independent directors who are all younger than directors serving before the change, according to the bank’s 2022 proxy statement. Two are women and one is Asian. Their skills and experience include international business, corporate governance, government and business heads, among others.

And the policy seems to complement the bank’s other corporate governance policies and practices: a classified board, a rigorous onboarding procedure, annual director performance assessments and thoughtful recruitment. Altogether, these policies ensure board continuity, offer a way to assess individual and board performance and create a pool of qualified prospects to fill regular vacancies.

Signature’s classified board staggers director turnover. Additionally, the board a few years ago extended the expiring term of its then-lead independent director by one year; that move means only two directors leave the board whenever they hit their term limits.

Shay says he didn’t want a completely new board that needed a new education every few years. “We wanted to keep it to a maximum of a turnover of two at a time,” he says.

To support the regularly occurring vacancies, Signature’s recruitment approach begins with identifying a class of potential directors well in advance of turnover and slowly whittling down the candidates based on interest, commitment and individual interviews with the nominating and governance committee members. And as a new outside director prepares to join the board, Signature puts them through “an almost exhausting onboarding process” to introduce them to various aspects of the bank and its business — which starts a month before the director’s first meeting.

But term limits, along with policies like mandatory retirement ages, can be a blunt corporate governance tool to manage refreshment. There are a number of other tools that boards could use to govern, improve and refresh their membership.

“I personally think term limits have no value at all,” says James J. McAlpin Jr., a partner at Bryan Cave Leighton Paisner LLP.

He says that term limits may prematurely remove a productive director because they’re long tenured, and potentially replace them with someone who may be less engaged and constructive. He also dislikes when boards make exceptions for directors whose terms are expiring.

In lieu of term limits, he argues that banks should opt for board and peer evaluations that allow directors to reflect on their engagement and capacity to serve on the board. Regular evaluation can also help the nominating and governance committee create succession plans for committee chairs who are near the end of their board service.

Perhaps one reason why community banks are interested in term limits is because so few conduct assessments. Only 30% of respondents to Bank Director’s 2022 Governance Best Practices Survey, which published May 16, said they didn’t conduct performance assessments at any interval — many of those responses were at banks with less than $1 billion in assets. And 51% of respondents don’t perform peer evaluations and haven’t considered that exercise.

For McAlpin, a board that regularly evaluates itself — staffed by directors who are honest about their service capacity and the needs of the bank — doesn’t need bright-line rules around tenure to manage refreshment.

“It’s hard to articulate a reason why you need term limits in this day and age,” he says, “as opposed to just self-policing self-governance by the board.”

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.

Building Optimism in Times of Uncertainty

It is no secret that the past few years have lacked certainty or stability. It only takes a few seconds of searching the internet, watching the news or looking at social media to be reminded of some aspect of doom and gloom going on in the world. It can be easy for us to get focused on the negative, and it certainly does not help when headlines highlight this angle.

As a manager or leader within your organization, it has become increasingly important to home in on your abilities to find and bring optimism to your culture and team. Optimism is hopefulness and confidence about the future or the successful outcome of something.

For some people, this outlook may come more naturally; for many of us, this will take active effort.

“Some people are optimistic by nature, but many of us learn optimism as well. Anyone can learn to be optimistic. The trick is to find purpose in work and life,” says Dr. Leah Weiss, a professor at the Stanford Graduate School of Business who specializing in mindfulness in the workplace and was quoted in an NBC News article about optimism.

With the New Year upon us, here are seven steps that bank executives and directors can take to proactively move to a more-optimistic orientation in 2022.

  1. Reflect on 2021 and write down some things that you are grateful for. Try not to let your immediate thoughts or mood of the day drive your reflections.
  2. Evaluate who you spend your time with. Plan to spend more time around people that you consider positive.
  3. Communicate goals and what success looks like for your organization this year.
  4. Create a plan to celebrate the small wins that you will encounter in the year ahead. It will be easier to celebrate personally and with your team if you have a tentative plan ahead of time.
  5. Take time to acknowledge small things you appreciate about your employees and coworkers. If you are in a remote environment this may just be a quick text, team’s message or email.
  6. Everyone had their own version of 2021, and giving them an opportunity and outlet to express their experience and decompress could create more space for being optimistic about the future.
  7. Watch less news and read fewer headlines.

We may not know what this next year will bring exactly but certainly there will be a mix of good and bad to come. “Positive thinking does not mean that you ignore life’s stressors. You just approach hardship in a more productive way,” says Kimberly Hershenson, a licensed master social worker, in the same article.

With some small steps of proactiveness, hopefully we can help shift our own mindset and those around us to identify, appreciate and rally around the positive. If we can do this, we can inspire more unity and alignment within our organizations, drive more loyalty from our teams and in turn produce more positive results for our organizations.

Turning to Technology as Margins Shrink

It’s a perfect storm for bank directors and their institutions: Increasing credit risk, low interest rates and the corrosive effects of the coronavirus culminating into a squeeze on their margins.

The pressure on margins comes at the same time as directors contend with a fundamental new reality: Traditional banking, as we know it, is changing. These changes, and the speed at which they occur, mean directors are wrestling with the urgent task of helping their organizations adapt to a changing environment, or risk being left behind.

As books close on 2020 with a still-uncertain outlook, the most recent release of the Federal Deposit Insurance Corp.’s Quarterly Banking Profile underlines the substantial impact of low rates. For the second straight quarter, the average net interest margin at the nation’s banks dropped to its lowest reported level.

The data shows that larger financial institutions have felt the pain brought about by this low-rate environment first. But as those in the industry know, it is often only a matter of time until smaller institutions feel the more-profound effects of the margin contraction. The Federal Reserve, after all, has said it will likely hold rates at their current levels through 2023.

In normal times, banks would respond to such challenges by cutting expenses. But these are not normal times: Such strategies will simply not provide the same long-term economic benefits. The answer lies in technology. Making strategic investments throughout an organization can streamline operations, improve margins and give customers what they want.

Survey data bears this out. Throughout the pandemic, J.D. Power has asked consumers how they plan to act when the crisis subsides. When asked in April about how in-person interactions would look with a bank or financial services provider once the crisis was over, 46% of respondents said they would go back to pre-coronavirus behaviors. But only 36% of respondents indicated that they would go back to pre-Covid behaviors when asked the same question in September. Consumers are becoming much more likely to use digital channels, like online or mobile banking.

These responses should not come as a surprise. The longer consumers and businesses live and operate in this environment, the more likely their behaviors will change, and how banks will need to interact with them.

Bank directors need to assess how their organizations will balance profitability with long-term investments to ensure that the persistent low-rate environment doesn’t become a drag on revenue that creates a more-difficult operating situation in the future.

The path forward may be long and difficult, but one thing is certain: Banks that aren’t evaluating digital and innovative options will fall behind. Here are three key areas that we’ve identified as areas of focus.

  • Technology that streamlines the back office. Simply reducing headcount solves one issue in cost management, which is why strategic investments in streamlining, innovating and enhancing back-office processes and operations will become critical to any bank’s long-term success.
  • Technology that improves top-line revenues. Top-line revenue does not grow simply by making investments in back-office technologies, which is why executives must consider solutions that maximize efforts to grow revenues. These include leveraging data to make decisions and improving the customer experience in a way that allows banks to rely less on branches for growth.
  • Technology that promotes a new working environment. As banks pivoted to a remote environment, the adoption of these technologies will lead to a radically different working environment that makes remote or alternative working arrangements an option.

While we do not expect branch banking to disappear, we do expect it to change. And while all three technology investment alternatives are reasonable options for banks to adapt and survive in tomorrow’s next normal, it is important to know that failing to appropriately invest will lead to challenges that may be far greater than what are being experienced today.

Directors’ Defense Against the Pandemic Impact on Credit

Bank directors and management teams must prepare themselves and their institution for the potential for an economic crisis due to the COVID-19 outbreak.

This preparation process is different than how they would manage credit issues in more traditional economic downturns; traditional credit risk management tools and techniques may not apply or be as effective. Directors and others in bank management may need to consider new alternatives and act quickly and deliberately if they are going to be successful during this very difficult time.

The traditional three lines of defense against quickly elevating credit risk may not work to prevent the credit impact of the new coronavirus and its consequences. The “horse is out of the barn” and no existing, normal risk management system can prevent some level of losses. This pandemic is the proverbial black swan.

The real questions now are how can banks prepare to deal with the related issues and problems?

Some institutions are likely to be better prepared, including those with:

  • A strong capital base.
  • Good, conservative allowance reserve levels.
  • Realistic credit risk assessments and portfolio ratings prior to the pandemic.
  • Are poised to take part in a potential acquisition.
  • A good strategic approach that is not materially swayed by quarterly earning pressures.
  • A management and board that “tells it like it is” and is realistic.
  • Good relationship with regulators, CPA firms, professionals and investors.

What are a bank’s options when trying to assess and manage the pandemic’s impact?

  • Deny the problem and kick the can down the road.
  • Wait for the government and regulators to provide solutions or a playbook for the problems.
  • Sell the bank — most likely at a big discount if at all.
  • Liquidate the bank, likely only after expending capital, with assistance from the Federal Deposit Insurance Corp.
  • Be proactive and put in place processes to deal with the problem and consequences.

There are some steps a bank can take to be proactive:

  • Identify emerging and potential problems and the options to handle them, and then create a plan that is strategic, operational and provides the best financial result.
  • Commit to doing what’s right for the bank, its employees, customers and community.
  • Enhance or replace the current credit risk management system with a robust identification, measurement, monitoring, control and reporting program.
  • Adopt an “all hands-on deck” to improve focus and deal with material issues in a priority order, deferring things that do not move the needle.
  • Assess internal resources and consider moving qualified personnel into areas that require more focus.
  • Seek outside professional assistance, if needed, such as loan workout or portfolio analysis and planning.
  • Perform targeted reviews of portfolio segments that are or may become challenged because of the pandemic and potential fallout, along with others may have had weaker risk profiles before the pandemic.
  • Communicate the issues such as the magnitude of the financial challenge to employees, the market, regulators, CPAs and other professionals who provide risk management services to your bank.
  • Deal with problems head-on and decisively to maintain credibility and respect from various constituencies while achieving a superior result.

It is best for everyone in the bank to work together and act quickly, thoughtfully, honestly and strategically. There will, of course, be some expected and understood need in the short term for increases in allowance provisioning. If planning and actions are executed well, the long-term results will improve the bank’s performance and enhance its credibility with the market, regulators and all other professionals. Just as valuable as an outcome is that your bank’s reputation will be enhanced with your employees, who will be proud to have been part of the effort during these difficult times.

Using Succession Planning to Unlock Compensation Challenges

compensation-9-16-19.pngSuccession planning could be the key solution boards can use to address their biggest compensation challenges.

Succession planning is one of the most critical tasks for a bank’s board of directors, right up there with attracting talented executives and compensating them. But many boards miss the opportunity of allowing succession planning to drive talent retention and compensation. Banks can address two major challenges with one well-crafted plan.

Ideally, succession planning is an ongoing discussion between executive management and board members. Proper planning encourages banks to assess their current talent base for various positions and identify opportunities or shortfalls.

It’s not a static one-and-done project either. Directors should be aware of the problems that succession planning attempts to solve: preparing future leaders, filling any talent voids, attracting and retaining key talent, strategically disbursing training funds and ultimately, improving shareholder value.

About a third of respondents in the Bank Director’s 2019 Compensation Survey reported that “succession planning for the CEO and/or executives” was one of the biggest challenges facing their banks. More popular challenges included “tying compensation to performance,” “managing compensation and benefit costs,” and “recruiting commercial lenders.”

But in our experience, these priorities are out of order. Developing a strategic succession planning process can actually drive solutions to the other three compensation challenges.

There are several approaches boards can use to formulate a successful succession plan. But they should start by assessing the critical roles in the bank, the projected departure dates of those individuals, and information and guidance about the skills needed for each position.

Boards should be mindful that the current leaders’ skill sets may be less relevant or evolve in the future. Susan Rogers, organizational change expert and president of People Pinnacle, said succession planning should consider what skills the role may require in the future, based on a company’s strategic direction and trends in the industry and market.

The skills and experiences that got you where you are today likely won’t get you where you need to go in the future. We need to prepare future leaders for what’s ahead rather than what’s behind,” she said.

Once a board has identified potential successors, it can now design compensation plans that align their roles and training plans with incentives to remain with the organization. Nonqualified benefit plans, such as deferred compensation programs, can be effective tools for attracting and retaining key bank performers.

According to the American Bankers Association 2018 Compensation and Benefits Survey, 64% of respondents offered a nonqualified deferred compensation plan for top management. Their design flexibility means they can focus on both longer-term deferrals to provide retirement income or shorter-term deferrals for interim financial needs.

Plans with provisions that link benefits to the long-term success of the bank can help increase performance and shareholder value. Bank contributions can be at the board’s discretion or follow defined performance goals, and can either be a specific dollar amount or a percentage of an executive’s salary. Succession and training goals can also be incorporated into the plan’s award parameters.

Such plans can be very attractive to key employees, particularly the young and high performing. For example, assume that the bank contributes 8% of a $125,000 salary for a 37-year-old employee annually until age 65. At age 65, the participant could have an account balance equal to $1,470,000 (assuming a crediting rate equal to the bank’s return on assets (8%), with an annual payment of $130,000 per year for 15 years).

This same participant could also use a portion of the benefit to pay for college expenses for two children, paid for with in-service distributions from the nonqualified plan. Assume there are two children, ages three and seven, and the employee wants $25,000 a year to be distributed for each child for four years. These annual $25,000 distributions would be paid out when the employee was between ages 49 and 56. The remaining portion would be available for retirement and provide an annual benefit of $83,000 for 15 years, beginning at age 65.

Boards could use a plan like this in lieu of stock plans that have similar time horizons. This type of arrangement can be more enticing to younger leaders looking at shorter, more mid-term financial needs than a long-term incentive plan.

And many banks already have defined benefit-type supplemental retirement plans to recruit, retain, and reward key executives. These plans are very popular with executives who are 45 and older, because they provide specific monthly distributions at retirement age.

It is important that boards craft meaningful compensation plans that reward older and younger executives, especially when they are vital to the bank’s overall succession planning efforts and future success.