How Bank Executives Can Address Signs of Trouble

As 2021’s “roaring” consumer confidence grinds to a halt, banks everywhere are strategizing about how best to deal with the tumultuous days ahead.

Jack Henry’s annual Strategic Priorities Benchmark Study, released in August 2022, surveyed banks and credit unions in the U.S. and found that many financial institutions share the same four concerns and goals:

1. The Economic Outlook
The economic outlook of some big bank executives is shifting. In June 2022, Bernstein Research hosted its 38th Annual Strategic Decisions Conference where some chief executives leading the largest banks in the U.S., including JPMorgan Chase & Co., Wells Fargo & Co. and Morgan Stanley, talked about the current economic situation. Their assessment was not entirely rosy. As reported by The New York Times, JPMorgan Chase Chairman and CEO Jamie Dimon called the looming economic uncertainty a “hurricane.” How devastating that hurricane will be remains a question.

2. Hiring and Retention
The Jack Henry survey also found 60% of financial institution CEOs are concerned about hiring and retention, but there may be some hope. A 2022 national study, conducted by Alkami Technology and The Center for Generational Kinetics, asked over 1,500 US participants about their futures with financial institutions. Forty percent responded they are likely to consider a career at a regional or community bank or credit union, with significant portion of responses within the Generation Z and millennial segments.

3. Waning Customer Loyalty
The imperative behind investing in additional features and services is a concern about waning customer loyalty. For many millennials and Gen Z bank customers, the concept of having a primary financial institution is not in their DNA. The same study from above found that 64% of that cohort is unsure if their current institution will remain their primary institution in the coming year. The main reason is the ease of digital banking at many competing fintechs.

4. Exploding Services and Payment Trends
Disruptors and new competition are entering the financial services space every day. Whether a service, product or other popular trend, a bank’s account holders and wallet share are being threatened. Here are three trends that bank executives should closely monitor.

  • The subscription economy. Recurring monthly subscriptions are great for businesses and convenient for customers: a win-win. Not so much for banks. The issue for banks is: How are your account holders paying for those subscriptions? If it’s with your debit or credit card, that’s an increased source of revenue. But if they’re paying through an ACH or another credit card, that’s a lost opportunity.
  • Cryptocurrency. Your account holders want education and guidance when it comes to digital assets. Initially, banks didn’t have much to do with crypto. Now, 44% of execs at financial institutions nationwide plan to offer cryptocurrency services by the end of 2022; 60% expect their clients to increase their crypto holdings, according to Arizent Research
  • Buy now, pay later (BNPL). Consumers like BNPL because it allows them to pay over time; oftentimes, they don’t have to go through a qualification process. In this economy, consumers may increasingly use it to finance essential purchases, which could signal future financial trouble and risk for the bank.

The Salve for It All: The Application of Data Insights
Banks need a way to attract and retain younger account holders in order to build a future-proof foundation. The key to dealing with these challenges is having a robust data strategy that works around the clock for your institutions. Banks have more data than ever before at their disposal, but data-driven marketing and strategies remains low in banking overall.

That’s a mistake, especially when it comes to data involving how, when and why account holders are turning to other banks, or where banks leave revenue on the table. Using their own first-party data, banks can understand how their account holders are spending their money to drive strategic business decisions that impact share of wallet, loyalty and growth. It’s also a way to identify trouble before it takes hold.

In these uncertain economic times, the proper understanding and application of data is the most powerful tool banks can use to stay ahead of their competition and meet or exceed account holder expectations.

Chief Risk Officers Help Community Banks Navigate Uncertain Environment

The role of chief risk officer is no longer relegated to the largest banks. Ever since the Great Recession of 2007 to 2008, banks of all sizes have begun incorporating chief risk officers into the C-suite.

Nowadays, the role could be more useful than ever as community banks confront an assortment of risks and opportunities, including cybersecurity, emerging business lines such as banking as a service, as well as rising inflation and a potential recession.

In the earliest days of the pandemic, Executive Vice President and Chief Risk Officer Karin Taylor and the teams that report to her helped executives at Grand Forks, North Dakota-based Alerus Financial Corp. understand the potential impacts on the business and coordinate the bank’s response. They addressed employee concerns, made decisions about how to sustain the business during the pandemic, performed stress tests and helped human resources with establishing new policies and communication.

“[CROs] bring some discipline in planning and operations because we facilitate discussion about risks, help identify risk and help risk owners determine if they’re going to accept risk or mitigate risk. And then we do a lot of reporting on it,” she says. “If anything changed in the pandemic, perhaps it was a better understanding of how [the risk group] could better support the organization.”

At $3.3 billion Alerus, Taylor reports directly to the CEO and serves as the executive liaison for the board’s risk and governance committees. Her reporting lines include the enterprise risk group as well as the bank’s legal, compliance, fraud teams, credit and internal audit teams (internal audit also reports to the audit committee). Those kinds of reporting lines allows CROs to help manage risk holistically and break down information silos, says Paul Davis, director of market intelligence at Strategic Resource Management. Their specific risk perspective makes them useful liaisons for community bank directors, who are usually local business people and not necessarily risk managers.

“You’re going to have one member of the management team [at board meetings] talk about opportunities,” he says. “It’s the CRO’s job to say, ‘Here are the tradeoffs, here the potential risks, here the pitfalls and the things we need to be mindful of.’”

Southern States Bancshares, a $1.8 billion institution based in Anniston, Alabama, decided to add a CRO in 2019 as the company prepared to go public. Credit presented the largest risk to the bank, so then-Chief Credit Officer Greg Smith was a natural fit.

His job includes reviewing risk that doesn’t neatly fit into other areas of the bank. He also serves as liaison for the risk committee and sits in on other meetings, like ALCO, to summarize the takeaways.

“While I was focused on risk the entire time I’ve been at the bank, this broadened that horizon and it expanded my perception of risk,” he says.

For instance, the bank’s rollout of the new loan loss accounting standard made him consider risk in the bond portfolio. Working with several attorneys on the board made him think about reputation risk when the bank launched new products and services. That expanded perspective allows him to raise considerations or concerns that different committees or areas of the bank may not be focused on. He can also help the bank price its risk appropriately.

Taylor sees her role as helping Alerus and its directors and executives make empowered decisions; her job isn’t just to say “No,” but to help the bank understand and explore opportunities based on its risk appetite. However, she doesn’t think all community banks need a CRO. Banks of similar asset sizes may have very different levels of complexity and strategies; adding another title may be a strain on limited resources or talent. The most important thing, she says, is that executives and the board feels that they have the right information to make decisions. To that end, Taylor shared a list of questions directors should ask when ascertaining if banks have appropriate risk personnel.

Questions for Directors and Executives to Ask:

  • Do you feel you have a holistic view of risk for your organization?
  • Do you think you have the information you need to understand your risk profile and identify potential pitfalls or risk to your strategy, as well as being able to address opportunities?
  • Is there a good understanding of the importance of, and accountability, for risk management throughout the organization?
  • Can these questions be answered by existing staff, or should we consider hiring for a chief risk officer position?

The Nuts and Bolts on Executive Sessions

A board’s success can depend on the strength of the independent directors. But as boards become more centralized around the CEO’s carefully choreographed meetings, there’s greater potential for kabuki-style processes, with all decisions eventually funneling through one member of management. Executive sessions may be instrumental to the strength of independent directors and should be a part of the board’s meeting schedule.

Most boards believe they hold management accountable. Nearly three-in-four (74%) of the directors, chairs and chief executives surveyed by Bank Director in 2021 said their board had several directors willing to ask difficult, challenging questions. Another 72% felt free to exercise their own independent judgement if they disagreed with a board decision. Yet, in Bank Director’s 2022 Governance Best Practices Survey a year later, 24% believe that holding management accountable would improve the governance process.  

Executive sessions can be a powerful tool in the toolbox for independent directors to hold management accountable and allow room for directors to gain a stronger understanding of certain concepts before coming to a decision. 

“Whoever is chairman controls the agenda,” says James McAlpin Jr., a partner at the law firm Bryan Cave Leighton Paisner LLP, which has sponsored Bank Director’s annual Governance Best Practices Survey. Sometimes, the CEO retains the chair title and directs the agenda. Sometimes, an independent director retains the chair title. Boards have to decide which model works best for them, while ensuring independent directors have a voice. Executive sessions help ensure that directors can discuss scenarios when the chairs “may not raise the matters themselves,” he adds.

By addressing such topics in open forums, directors can determine if they’re viewing certain issues as other members do or if there’s a lack of cohesion on strategies. Discrepancies in opinions or doubts on a strategy may not come to the surface if the issue isn’t brought up during the normal process of a board meeting. 

Executive sessions occur when a group of directors call for time to discuss an item or topic, without the presence of specific individuals. There’s no hard-fast rule, although they generally involve independent directors without the presence of executives. This typically would exclude the CEO, if he or she sits on the board. But it could include a group of directors that do not participate in a certain committee, for instance, but who can provide broader input. Or it could include the CEO but exclude everyone else in the room who doesn’t sit on the board. 

Since executive sessions aren’t transcribed, they allow for a free flow of conversation. This gives the directors a chance to express their feelings on certain topics, bring up concerns or even ask questions of a sensitive nature. While it may seem as if such sessions would be awkward to call, since the CEO or other executives may wonder why such conversation needs to take place, there’s a tactic to counteract this potential. 

“It’s recommended to have them on regularly scheduled basis,” says Charles Elson, the founding director of the Weinberg Center for Corporate Governance at the University of Delaware. By building them into the agenda, he adds, they don’t become an unusual, uncomfortable situation since everyone knows when potential leadership issues will be discussed. Among directors and CEOs surveyed by Bank Director in 2021, 38% said the board held an executive session at the end of every board meeting, while 16% held them quarterly and 24% called one whenever independent directors wanted one.

For companies listed on the New York Stock Exchange (NYSE) or Nasdaq, it’s less of a social concern and more of a proper practice. Both exchanges require companies to incorporate executive sessions of the independent directors on a regular basis. Nasdaq defines that as at least twice a year (if not more), while the NYSE leaves the definition more open-ended. Such executive sessions provide an outlet for directors at community and private banks as well, serving as a valuable way to address concerns without worrying about hurting others’ feelings or working relationships.

Historically, executive sessions have been a tool of senates and parliaments, but they began to make their way to the boardroom at a greater rate in the mid-1990s. Directors needed a way to speak on certain topics off the record; this resulted in having small meetings with one or two directors over lunch or on the way to the parking lot. Instead, executive sessions formalize these conversations, encouraging directors to speak as a group. This can not only lead to a greater awareness of a certain type of thinking among directors but can also provide stronger conclusions, questions and coordinated insights for management or the board at large.

“It’s not so much hiding [issues] but addressing them in an appropriate way,” says Chip MacDonald, a financial services lawyer at the law firm Jones Day. “Whether it’s a committee function or whole board function, if you have full-time employees or officers on the board, you may want to exclude them.”

McAlpin, who works with boards at community and family banks, has often suggested that a board move to executive session when discussing certain topics that require more room for debate or discussion. 

“They provide particularly strong value when there’s an issue that’s difficult to discuss in front of the CEO or chair,” he says. “It’s better to have the discussion than not and if you do it on a regular basis, it provides open time for people to just share notes.”

The areas of discussion that are addressed during a session can run the gamut, from strategy, managerial issues, regulatory concerns or an investigation. The reason for the session will determine the people that may be present during the conversation.

The discussions are off the record, but this isn’t meant to imply that there’s nefarious conversations happening. In some cases, it might provide an open forum for direction on a new strategy. Or it may even allow for “due process,” says MacDonald. 

For instance, say there’s an accusation made against a certain member of the management team. While it’s important to scrutinize, a board may not want to make it publicly known until they have a chance to investigate the impropriety. Why? First, the board has to make sure that the accusation has validity before divulging it in a board meeting transcription. Second, the board must ensure it has a plan in place to address the issue. The closed-door executive session provides room for directors to plan.

But executive sessions also offer a way to address regular aspects of the oversight role. For instance, when discussing pay potential of top executives, the compensation committee will meet without any executives around to determine pay. This will be presented to the full board. If directors want to discuss the committee’s findings without offending certain individuals on the board — like the CEO — then an executive session would be prudent in such cases. 

The same tools can address potential strategies presented to the board. Or, in the case of a regulatory concern, the directors may want to discuss with fewer people so they have a clear understanding of the problem before coming to a decision. 

For an executive session to take place, there’s no specific quorum required, and there are no rules around whether executives should stay or go. In some organizations, a specific independent director runs all executive sessions; in others, any director can call one at any time. In both cases, the directors that seek an executive session or the director that handles executive sessions — often a lead independent director — can determine who stays and who goes. 

There’s also no requirement that the directors inform the CEO, or anyone else not in on the conversation, about what occurred during the session. But experts advise that it’s often good practice to have one director speak with the CEO after the conversation to provide a high-level recap of the talk. This doesn’t need to occur — and probably shouldn’t if directly addressing CEO wrongdoing. The regular communication with a CEO, however, can ease the potential of imaginations running wild. 

“It’s probably never a comfortable moment,” says McAlpin. “They may always wonder what is discussed in the room; best practice, have the lead outside director give an overview of what was discussed.”

The session cannot come to a decision that’s final or binding. Instead, it may provide a game plan in addressing an issue with the full board. Once the game plan is set, the directors can bring it to the full board for a vote. 

Executive sessions ensure that the directors’ game plan has the input of everyone involved. With that insight, then the board can operate with a full and robust voice. Failing to do so, would “be a breach of duty,” says MacDonald.

How HR Can Combat the Great Resignation

Human resource executives continue to confront and address the ever-shifting priorities that are critical to helping companies maneuver current trends in the workplace.

The coronavirus pandemic, coupled with rising inflation, has disrupted the American workforce. In response, human resource professionals are responding intentionally and thoughtfully to tackle the rising challenges head on. But according to a Human Resource Executive’s survey published in January 2022, 86% report feeling more stressed as they continue to focus on remaining effective business partners. The following are some of the most pertinent talent and employment issues facing banks today and how they impact human resource divisions.

Pay Transparency Laws
An increasing number of states and municipalities require employers to disclose salary ranges to current or prospective employees, a trend that could spread nationwide as prospective employees seek pay transparency and equity at the interview and hiring stage. This requires HR executives to ensure that pay transparency laws are enforced, while demonstrating that salary expectations are commensurate with what the market will bear. Additionally, remote work further complicates the issue, as companies regularly recruit across state lines.

Aside from legal issues, employees today want to know how their current pay range is formulated and which promotional opportunities are available for their career path. Human resource professionals should be prepared for these conversations during onboarding. Without a proactive and well-thought-out message coming from management, employees may assume the worst and — at the very least — begin to explore what the market might pay them for their skills.

Explainable Salary Ranges
Wages are increasing faster than they have in the past 20 years. It is critical that HR professionals educate all internal stakeholders on the methodology they use to develop salary ranges. Typically, HR managers at community banks purchase a mere two or three third-party salary surveys that are used to formulate expected pay ranges for all positions in the company.

In contrast, a documented and communicated compensation methodology can decrease concerns about pay disparity and discrimination. Due to inflation, companies may want to analyze base pay levels semi-annually this year, as opposed to the end-of-year norm, to retain talent.

Reexamining Variable Pay
Strategic HR teams are often involved in crafting departmental scorecards that align performance with board priorities. Something I often say is, “The right bonus program, with the right incentives for the right people, can drive performance.”

Creating a stretch goal structure or modifying who is eligible to participate in an annual bonus program based on corporate results can alter the dynamics of a bank’s compensation strategy and overall financial performance, which is why this topic should be a conversation between the chief human resource officer and CFO. Banks can bolster their talent acquisition strategies by regularly reexamining their incentive payouts and targets to ensure they are delivering a positive return on investment and are competitive.

Embracing a Changing Work Culture
Many financial institutions are enhancing their benefits to demonstrate they truly value their employees. That ranges from shorter vesting periods for paid time off to pet insurance. However, one of the most desirable benefits is a hybrid/remote work arrangement. Banks that refuse to embrace this new model — where it makes sense — need to be prepared to pay more in order to get the attention of top candidates.

However, those benefits cannot be considered in a vacuum. Executives and their HR teams should consider work expectations and their impact on corporate culture as well. In the past, some firms expected employees to work long hours and on weekends in the office in order to advance. But studies are showing a different outcome: burnout. The expectation that employees will forgo a work/life balance for their career is no longer the norm. A culture of self-care for all employees will go much further in promoting a productive and purposeful workforce.

2022 is already proving to be one of the most taxing for HR teams in terms of talent acquisition, management and retention. Banks will continue to face challenges as inflation, salary expectations and work culture changes. But there are proven ways to produce an effective corporate strategy that builds and supports a healthy organization, and generates a good return for investors. Remaining agile, promoting a culture of self-care and paying competitive to market rates will remain fundamental to the success of high-performing banks.

Hail to the Chiefs

Does creating snappy job titles lead to a better performing or more “in touch” bank? Possibly. But we are skeptical and at this point, it is too early to ascribe empirical evidence to say “yes’ or “no.”

The proliferation of titles such as “Head of Digital Banking,” “Head of Consumer Insights and Innovation,” “Cannabis Risk Officer” and so on have signaled priorities, but have they accomplished anything? In practice, it seems some new titles are not well aligned with the new skills needed to drive strategy or promote innovation. In some — or many — instances, it might be counterproductive if a bank is parsing responsibilities even further, muddying the waters on who is responsible for executing what.

We often see this in employee development. Many first-line supervisors, and even executive management, are under the false belief that the Chief People Officer, another name for the head of human resources, is primarily responsible for employee development. As a result, we see little execution that results in well-developed employees who can move the bank forward.

A common weakness uncovered in the bank strategy sessions or process improvement engagements that our firm undertakes is bank silos. Do titles lead to more silos or to more collaboration? Your chief innovation officer is not responsible for creating an end-to-end paperless mortgage experience that can go from application to close in less than three weeks. Your head of mortgage lending is — and that is based on knowing what customers demand.

Prior to advances in technology, the industry was awash in data. With these advances, there is even more of it. This is what drives banks to enlist data scientists, a functional position we highly support — although it is perhaps an exaggerated title. In a recent banking podcast, Kim Snyder, CEO and founder of data visualization firm KlariVis, spoke eloquently about data governance and integrity. How do we pull meaningful data out of our systems if we lack discipline in what we put in them?

How to use the data, how to make sure the data is well aligned across the organization and determining  who is responsible is the conundrum all banks face. Commercial lenders might belly ache about being held accountable for a client’s total relationship, which may affect compensation or how employees or how a bank markets their services. But this makes the lender keenly interested in viewing the total relationship across loans and deposits, wealth and other third-party systems that impacts many organizational silos.

Why would banks want to create even more silos with these newfangled chiefs? Convincing executive management teams that they are responsible for the entire bank, not solely their functional positions, has been a struggle. Would we exacerbate that struggle by creating positions that tell the head of commercial lending they are no longer responsible for their employees’ development or the department’s diversity since the bank now has a chief diversity officer? When many are responsible, nobody is accountable.

When executing a mission in the military, the senior officer of the operation issues something called a “Commander’s Intent.” This communicates to each unit what the commander deems success, such as “It is the Commander’s Intent that this mission degrades the enemy’s surface to air missile capability by 75%.” Each unit commander plays a role in executing the Commander’s Intent, with appropriate coordination. Could banking use such cultural discipline to achieve executives or the boards’ intent, without developing creative job titles or dispersing responsibilities to chief this or chief that?

We at The Kafafian Group think so. Keep your organization simple. Define roles and accountabilities. Issue your Commander’s Intent for missions that you currently use chiefs to define. Coordinate accountabilities and focus on execution and organizational learning. Success will be evident; one day, your bank will be called a “Top Performer” or an “Innovator” — a title that any executive management team can get behind.

How Bankers Can Use Relativity to Power Tech Decisioning

“A good plan, violently executed now, is better than a perfect plan next week.” – Gen. George Patton Jr.

Banking has been around for thousands of years, but digitization of the industry is new and moving fast. The changes have left some bankers feeling stuck, overwhelmed with the sheer number of technology choices, and envious of competitors rocketing into the future.

Back in the boardroom, directors are insisting the team design its own rocket, built for speed and safety, and get it to the launch pad ASAP. The gravity of this charge, plus the myriad other strategic initiatives, means that the bank is assessing its tech choices and outlook with the same exhaustive analytical vigor as other issues the bank is facing, and at the same speed. This is a subtle, but significant, error.

Based on experience leading both financial institutions and fintechs, I’ve seen how a few firms escaped this trap and outperformed their competitors. The secret is that they approach tech decisions on a different timescale, operationalizing a core principle of Albert Einstein’s theory of special relativity known as time dilation: that, put very simply, time slows down as velocity increases.

How can executives apply relativity to banking?
Our industry exercises its colossal analytical muscles every day, but this strength becomes a weakness when we overanalyze. Early in my career, I reported to a credit officer who routinely agonized over every small business loan. Each one seemed unique and worthy of lengthy discussion. He would only issue a decline after investing many hours of the team’s time analyzing together; the team lost money on loans the bank never made.

The same mistake can occur when banks assess their fintech options. Afraid of missing a risk factor and anxious to please the board, executives fall into the trap of overanalyzing. There’s good reason to justify this approach; major projects like a core conversion are truly worthy of great care and deliberation.

But most tech decisions are not as risky and irreversible as a new core. Just as we can download apps to a phone and later remove them, the industry has embraced the concept popularized by Amazon’s former CEO Jeff Bezos of a “two-way door” to deliver turnkey solutions that are fully configured and ready to use in a matter of hours. Developers are writing new code and deploying to the cloud continuously, with no downtime. A few companies, including Cirrus, even offer money-back guarantees, to eliminate a bank’s perceived risk from the decision.

Tech moves fast. What can happen when a bank accepts this challenge and invests in rapid tech decisioning? There are three important aspects of time dilation to consider:

1. Even at only a slightly higher velocity, it has been empirically proven that time marginally slows down. The rate of change in time increases parabolically as velocity increases.
This means that increasing the speed with which your bank makes decisions, even a tiny bit, pays off immediately, and the learning curve will magnify payoffs as the bank improves its decision-making process. There’s a significant compounding effect to this discipline.

2. When traveling at faster speeds, time appears to be passing no differently; to an outside observer, your clock is ticking slower.
Once the team is accustomed to making good tech decisions rapidly, its normative behaviors may seem odd to outsiders. Your colleagues in other internal departments who have become jaded by previous approval cycles may not be able to believe how rapidly your bank is now able to stand up new solutions. Your firm will accomplish much more than before.

3. The faster your velocity, the more mass you accrue.
Making decisions quickly frees up time for more decisions. Decision-making is a force multiplier. It’s not just your clients who will appreciate the upgrade — your vendors will be energized as well, and far more likely to treat you as a valued partner than a counterparty.

Intrinsically, banking exists to solve problems, but to solve problems, we must make decisions. Decision-making is a core competency of good banking. The bankers who are winning — and, candidly, having a lot more fun these days — approach their tech decision process with the same care and weight as their credit decision process. They no longer make tech decisions on a banking timetable; instead, they are creating time by moving faster.

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.

How Lead Independent Directors Drive Effective Boards

Want to make your board more effective? Look for a lead independent director with the fortitude and skillset to constructively navigate the relationship with bank management.

While the role is still evolving, bankers have identified some attributes of successful, effective and productive lead directors. These include undisputable independence, forthrightness and an ability to facilitate productive conversations, both in and outside the board room.

As the board’s representative with management, undisputable independence is crucial to a lead director’s ability to be an effective counterweight. It can empower the lead director to act as a conduit of constructive conversations for management and have direct, and sometimes uncomfortable, conversations on behalf of fellow board members.

When speaking with management, lead directors should include an accurate and timely summary of what is discussed in any executive sessions. These sessions allow directors to express concerns and articulate expectations for management in a transparent manner — something they may not be comfortable discussing directly with the CEO. An effective lead independent director can transform these discussions into palatable and productive feedback for executives.

During board meetings, directors — not management — should guide the conversation and focus on key issues. Lead directors can help facilitate consensus and alignment between the board and management, enabling both groups to have candid conversations and ultimately share the same strategic focus.

Building consensus also includes working to making board meetings more effective. A concise, timely meeting agenda representing key board matters can lead to strategic discussions and allow directors to thoughtfully prepare for a productive meeting. Start by surveying fellow directors about matters of importance and sharing discussion points and summaries with management. This can give the board time and space to focus on critical matters during a meeting and help avoid rushing through important topics.

A board of directors is filled with a variety of personalities, so a lead independent director’s demeanor and communication style can impact its success. Effective lead independent directors must be comfortable addressing awkward or sensitive topics and have the ability to lead discussions without becoming a dominant presence in the board room. Facilitating and eliciting perspectives from other directors can coalesce key information, so all the directors feel they have been heard and management understands what is expected of them.

The specificities of the role — and the tasks the lead independent director governs — caution against frequent rotation of this role, which could be viewed as lack of strength on the board, ineffective leadership, or even a lack of commitment to governance. Rotating this role too frequently could also lead to a reduction in the board’s overall productivity.

Assess current and potential board members for candidates who could effectively serve as lead independent director, and weigh the possibility of bringing in a new board member to provide the necessary skills.

For more information on the role of lead independent director, contact Susan Sabo at susan.sabo@CLAconnect.com or 704-816-8452 or Todd Sprang at todd.sprang@CLAconnect.com or 630-954-8175.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.

CLA exists to create opportunities for our clients, our people, and our communities through our industry-focused wealth advisory, outsourcing, audit, tax, and consulting services. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.

Top 25 Bank Boards for Women

In early December, Nasdaq filed a proposal with the Securities and Exchange Commission that would require its listed companies to disclose diversity statistics about their board’s composition. Boards must include at least one female and, at minimum, one minority or LGBTQ board member. While the exchange recently made some changes to the proposal - to address the concerns of small boards with five or fewer members, for instance — there’s no denying that pressure has been mounting when it comes to improving diversity on corporate boards.

Just look at 2020 alone: Institutional Shareholder Services reiterated that it would vote against the nominating chair of Russell 3000 and S&P 1500 companies that lack female representation. Goldman Sachs Group announced that it will only take companies public if they have at least one diverse board member. And California and Washington both had gender diversity requirements in place for companies headquartered there.

“Diversity of thought forces [boards] to look at solutions in a different way, to look at problems in a different way,” says Kara Baldwin, a partner at Crowe LLP. “It’s simply good business to make sure you have those differing viewpoints.”

But corporate boards often do the bare minimum when it comes to adding women: An analysis of Russell 3000 boards by 50/50 Women on Boards finds that only 5% are gender-balanced, meaning women hold roughly half of board seats.

In a new analysis using its proprietary database of the nation’s 5,000 public, private and mutual bank boards, Bank Director identified the 25 bank boards with the highest representation of women. We focused on banks above $300 million in assets, given the lack of data on very small, private institutions. Only 11 of the banks we examined would meet the goal set by 50/50 Women on Boards.

Women, it should be noted, comprise 51% of the population and 58% of the workforce, according to the U.S. Census Bureau.

Both big and small banks, public and private, topped our list, showing that diversity is not exclusively a big bank issue. Webster Financial Corp. of Waterbury, Connecticut, with $32.6 billion in assets, and The Falls City National Bank, with $456 million in assets out of Falls City, Texas, top our list. Both boast boards with a membership that’s 56% female — well above the normal balance typically found on corporate boards. Rounding out the list are $1.9 billion First Bank of Highland Park, in Highland Park, Illinois, and Principal Financial Group, the holding company for $4.5 billion asset Principal Bank in Des Moines, Iowa. Both 12-person boards include five women, comprising 42% of membership. Last year, 50/50 Women on Boards found that women held 23% of board seats at Russell 3000 companies.

About six years ago, First United Corp., which has $1.7 billion in assets, started to intentionally focus on its composition, both in terms of skills and backgrounds. “We want to be more relevant to our customers and to our communities, for our shareholders, looking at that whole stakeholder group [including] employees,” says Carissa Rodeheaver, the Oakland, Maryland-based bank’s chair and chief executive. That includes representing diverse backgrounds, in terms of gender, race and ethnicity, and age.

This year, First United will begin using a skills matrix — a practice that helps boards map their directors’ expertise and backgrounds to identify gaps. A diversity and inclusion policy, put in place by the nominating and governance committee, will ensure the board considers a diverse slate of director candidates. “The pool has to be diverse, and that will continue to naturally lend itself to keeping that diversity of thought on the board,” says Rodeheaver. “It’s a great formula that leads to a well-rounded board.”

First United brought on three new directors in the past year — all women, it turns out, who are skilled in regulatory compliance, finance and project management, says Rodeheaver.

Lisa Oliver, the chair and CEO at The Cooperative Bank of Cape Cod, a $1.2 billion mutual bank headquartered in Hyannis, Massachusetts, places a high value on the “lived experiences” often uncovered when building diverse boards.

While the traditional executives and professionals often found on corporate boards — current and former CEOs, accountants, regulators and attorneys — still provide valuable insights, banks “have to think about the new needs of banking, and how that aligns with a whole different genre of people and the pipeline we need to cultivate,” says Oliver. For example, boards often seek technology and cybersecurity expertise; these skills aren’t often found at the top of an organization. Or a board might look for someone who can represent an industry that’s important to their bank, like healthcare.

C-suites are still predominantly male and predominantly white: Looking further down an organization chart might serve up an experienced candidate who also brings a diverse perspective to the table.

“You have to work harder; you have to expand that group of who you know,” says Baldwin. “You must be intentional — that’s really important.”

Oliver also wants to attract and retain younger directors to the board at “The Coop,” as the bank is called locally, but has struggled to retain young women as board members and corporators during the pandemic. (Corporators elect board members, but the position can also serve as a training ground of sorts for board candidates.)

“The pandemic has created great stress for young people to [serve] on the board,” says Oliver. One director, a business owner and single mother with a child at home, had to resign, she says. Oliver believes boards should consider how they can structure meetings to make the role more manageable for younger board members who are building their careers and businesses. “Not death by committee meeting, but what are the critical four committees we need to have?” she says. “There’s an art and a science to creating the agenda within that and providing the data to analyze risk, make it manageable.” A 400-page board packet can be difficult to fit into anyone’s schedule, much less that of a Gen X or millennial professional balancing family and career.

Oliver wonders if today’s more remote environment — with boards meeting virtually — could help them attract candidates from nearby Boston — a technology hub boasting a highly educated workforce.

Boards should consider looking outside their local community to find diverse, qualified board members, says Baldwin. Nearby cities, as Oliver posits, could be a valuable well of talent.

Both First United and The Coop are putting practices in place to help make room for new views: First United will declassify its board this year, and Oliver says her bank is putting term limits in place.

And both CEOs tell me that building the board their bank needs is a continuous process. “We need to constantly be looking and identifying individuals that make sense [for our board] and backfill that pipeline,” says Rodeheaver.

“We have to reflect the community around us, or else we’re not able to hit on some of the challenges that we face,” Oliver adds. “It takes effort, and it takes time, and it has to be a constant process.”

Top 25 Bank Boards For Women

Bank Name (Ticker) State Total # Directors % Women on the Board
Webster Financial Corp. (WBS) CT 9 56%
The Falls City National Bank TX 9 56%
Lead Financial Group MO 9 55%
First United Corp. (FUNC) MD 12 50%
The Cooperative Bank of Cape Cod MA 14 50%
First National Bank Alaska (FBAK) AK 8 50%
Boston Private Financial Holdings (BPFH) MA 8 50%
New Triplo Bancorp PA 6 50%
Andrew Johnson Bancshares TN 8 50%
Johnson Financial Group WI 10 50%
Minnwest Corp. MN 16 50%
GSB, MHC MA 15 47%
Cambridge Bancorp (CATC) MA 17 47%
First Capital (FCAP) IN 13 46%
Mascoma Bank VT 13 46%
Ledyard Financial Group (LFGP) VT 11 45%
First Seacoast Bancorp (FSEA) NH 9 44%
Orbisonia Community Bancorp PA 7 43%
Stearns Financial Services MN 7 43%
Lockhart Bankshares TX 7 43%
National Cooperative Bank OH 14 43%
MidFirst Bank OK 7 43%
Olympia Federal Savings and Loan Assn. WA 7 43%
Principal Financial Group (PFG) IA 12 42%
First Bank of Highland Park* IL 12 42%

Source: Bank Director internal data, plus bank websites and public filings, as of February 2020. Banks under $300 million in assets weren’t examined given the scarcity of data about these institutions.
*First Bank of Highland Park was left off this ranking when it first published. Bank Director regrets the omission.

What is Your Bank Measuring?

Recent comments around diversity from Wells Fargo & Co.’s CEO brought renewed attention and focus on a problem that continues to plague corporations, including banks.

In a video call with staff over the summer, Charles Scharf pointed to a “limited pool of Black talent” as the reason why the bank missed its diversity and inclusion (D&I) targets. 

Scharf has since walked back those comments. “There are many talented diverse individuals working at Wells Fargo and throughout the financial services industry, and I never meant to imply otherwise,” he told employees. “I’ve worked in the financial services industry for many years, and it’s clear to me that, across the industry, we have not done enough to improve diversity, especially at senior leadership levels.” 

Wells Fargo, it should be noted, has established clear D&I goals. It expands on these in a recent press release: Diverse candidates must be considered for key roles, and the bank plans to integrate D&I into business plans and reviews. An anti-racism training course is under development. And the achievement of D&I goals will directly impact executive compensation decisions.

Most banks lack that level of commitment: 42% don’t have a formal D&I program, according to Bank Director’s 2020 Compensation Survey.

Rockland, Massachusetts-based Independent Bank Corp. details its “Inclusion Journey” for 2020 through a nine-page document that’s posted on its website. For the $13 billion holding company, which operates Rockland Trust Co., this includes conducting an assessment to identify strengths and weaknesses throughout the organization, and establishing a D&I council co-chaired by senior vice president and Director of Human Resources Maria Harris.  

“We have a responsibility to create an environment where respect, understanding and innovation are at our core,” says Harris. “Every colleague is critical to our growth as a company, and we are committed to a culture of teamwork, inclusion and employee engagement.”

Resource groups build awareness and address the needs of female and LGBTQ employees. In response to current events, the bank has offered webinars on self-care during the Covid-19 pandemic and conducting open discussions on racism. “These have been very beneficial for folks to better understand systemic racism and how to become an ally,” explains Harris. All new employees receive D&I training, which focuses on unconscious bias and related behaviors. 

Just 22% of survey respondents say their bank tracks participation in D&I focused training; even fewer — 10% — measure employee resource group participation and formation.  

Rockland Trust tracks applicants, hires, transfers, promotions and terminations, says Harris. It also measures employee tenure, participation in professional development programs and conducts exit interviews. All of this data informs the bank’s D&I goals. 

“Our current initiative to advance front-line professionals of color was created to address findings from our data, which demonstrated that although minorities were participating in our internal career pathing program, they were not advancing at the same rate,” she explains. “We wanted to proactively change that within our organization.”

For many companies, focusing on D&I helps strengthen the culture, while attracting talented employees who will ensure its success. 

That requires leadership.

 “Trying to lead an organization without taking measurements is like trying to coach a football game without yard markers,” wrote Ritz-Carlton founder Horst Schulze in his book “Excellence Wins: A No-Nonsense Guide to Becoming the Best in a World of Compromise.” 

Bank Director’s 2020 Governance Best Practices Survey reveals that too many directors — 48% — don’t fully buy into the idea that diversity on the board has a positive effect on corporate performance. Connecting the dots, one can assume that they don’t place a lot of value on building an effective D&I program within their bank, either.