Tales From Bank Boardrooms

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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. 

Regulatory Crackdown on Deposit Insurance Misrepresentation

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Federal banking regulators have recently given clear warnings to banks and fintechs about customer disclosures and the significant risk of customer confusion when it comes to customers’ deposit insurance status.

On July 28, 2022, the Federal Deposit Insurance Corporation and the Federal Reserve issued a joint letter to the crypto brokerage firm Voyager Digital, demanding that it cease and desist from making false and misleading statements about Voyager’s deposit insurance status, in violation of the Federal Deposit Insurance Act, and demanded immediate corrective action.

The letter stated that Voyager made false and misleading statements online, including its website, mobile app and social media accounts. These statements said or suggested that: Voyager is FDIC-insured, customers who invested with the Voyager cryptocurrency platform would receive FDIC insurance coverage for all funds provided to, and held by, Voyager, and the FDIC would insure customers against the failure of Voyager itself.

Contemporaneously with the letter, the FDIC issued an advisory to insured depository institutions regarding deposit insurance and dealings with crypto companies. The advisory addressed the following concerns:

  1. Risk of consumer confusion or harm arising from crypto assets offered by, through or in connection with insured banks. This risk is elevated when a nonbank entity offers crypto assets to the nonbank’s customers, while offering an insured bank’s deposit products.
  2. Inaccurate representations about deposit insurance by nonbanks, including crypto companies, may confuse the nonbank’s customers and cause them to mistakenly believe they are protected against any type of loss.
  3. Customers can be confused about when FDIC insurance applies and what products are covered by FDIC insurance.
  4. Legal risk of insured banks if a crypto company or other third-party partner of the bank makes misrepresentations about the nature and scope of deposit insurance.
  5. Potential liquidity risks to insured banks if customers move funds due to misrepresentations and customer confusion.

The advisory also includes the following risk management and governance considerations for insured banks:

  1. Assess, manage and control risks arising from all third-party relationships, including those with crypto companies.
  2. Measure and control the risks to the insured bank, it should confirm and monitor that these crypto companies do not misrepresent the availability of deposit insurance and should take appropriate action to address any such misrepresentations.
  3. Communications on deposit insurance must be clear and conspicuous.
  4. Insured banks can reduce customer confusion and harm by reviewing and regularly monitoring the nonbank’s marketing material and related disclosures for accuracy and clarity.
  5. Insured banks should have appropriate risk management policies and procedures to ensure that any services provided by, or deposits received from, any third-party, including a crypto company, effectively manage risks and comply with all laws and regulations.
  6. The FDIC’s rules and regulations can apply to nonbanks, such as crypto companies.

At a time when crypto companies are increasingly criticized for courting perceived excessive risk and insufficient transparency in their business practices, the FDIC and other banking agencies are moving to ensure that these companies’ practices do not threaten the banking industry or its customers. On Aug. 19, the FDIC issued letters demanding that five crypto companies cease and desist from making false and misleading statements about their FDIC deposit insurance status and take immediate corrective action.

In addition to the FDIC’s suggestions in its advisory, we suggest both banks and fintech vendors consider the following measures to protect against regulatory criticism or enforcement:

  1. Banks should build the right to review and approve all communications to bank customers into their vendor contracts and joint venture agreements with fintechs and should revisit existing contracts to determine if any adjustments are needed.
  2. Banks should consult with legal counsel as to current and expected regulatory requirements and examination attitudes with respect to banking as a service arrangements.
  3. Fintechs should engage with experienced bank regulatory counsel about the risks inherent in their business and contractual arrangements with insured banks by which the services of the fintech is offered to bank customers.
  4. Banks should conduct appropriate diligence as to their fintech partners’ compliance framework and record.

Additionally, should a bank’s fintech partner go bankrupt, the bank should obtain clarity — to the extent that it’s unclear — as to whether funds on deposit at the bank are property of the bankruptcy estate or property of a non-debtor person or entity; in this case, the fintech’s customers. If funds on deposit are property of non-debtor parties, the bank should be prepared to address such party’s claims, including by obtaining bankruptcy court approval regarding the disposition of such funds on deposit. Additionally, the bank may have claims against the bankrupt fintech entity, including claims for indemnity, and should understand the priority and any setoff rights related to such claims.

Research Report: Fortifying Boards for the Future

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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

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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

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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

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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 [email protected].

2022 Governance Best Practices Survey: Complete Results

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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.

Will More Banks Form this Uncommon Board Committee?

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committee-2-22-19.pngIt wasn’t in response to a cybersecurity event or a nudge from regulators that prompted Huntington Bancshares’ board to create a Significant Events Committee in early 2018.

Instead, says Dave Porteous, lead director at the $108 billion bank based in Columbus, Ohio, it was old-fashioned governance principles that drove Huntington’s board to establish the ad hoc committee responsible for responding to the biggest risk faced by banks today: cybersecurity threats.

“Particularly over the last 10 years, the world is changing so quickly it has really become incumbent upon all boards, in my view, to continually be evaluating their governance structure and whether or not they need to make adjustments … to how the world is changing,” Porteous says.

Ask any bank executive or director right now to name the things that cause them to lose sleep at night and cybersecurity will almost invariably be at the top of the list.

Millions of personal records have already been compromised globally, and it can cost even a small bank millions of dollars to rectify a single cyber event. Yet, while it is a common topic in boardrooms, it hasn’t yielded widespread governance restructuring at banks across the United States.

Bank Director’s 2018 Technology Survey found that 93 percent of the 161 chief bank executives, senior technology officers and directors said cybersecurity is an issue of focus by their board.

But a 2018 analysis by Harvard Law School found that just 7 percent of all S&P 500 companies have separate technology committees, though 29 percent of large public bank holding companies above $10 billion in assets have set up just such a thing. This is significant because, as the study noted, cybersecurity is often the responsibility of the technology committee.

Significant events have over time produced mandated changes in corporate structure, like the requirement in Dodd-Frank requiring banks above $10 billion in assets to have a separate risk committee, or the requirement in Sarbanes-Oxley that an audit committee oversee a bank’s independent auditor.

But Porteous argues that banks should not wait for changes in the law to force them into structural changes. The changes should emerge instead from ongoing conversations at institutions about new trends and threats.

“To me the critical thing is constantly be assessing and challenging yourself as a board on the way in which you govern and not to be afraid to make adjustments,” Porteous says. “In other words, create committees to address the current or upcoming issues that enhance the focus (of the board).”

For Huntington, the establishment of the Significant Events Committee was years in the making, but finally came after the board realized it was having similar discussions about the same topic at the board level and in separate committees.

“It was a natural thing for us to take these discussions we were having, both at the board meeting and various committee-level meetings, and then decide that we were spending a significant amount of time in those discussions that it was going to be critically important,” Porteous says.

When formed, the committee included Huntington CEO Stephen Steinour, who chaired the committee; the lead director; the chairs of the technology, risk and audit committees and the “lead cyber director,” the 2018 company proxy said. The committee has since been folded into the broader Technology Committee because of overlapping skill sets, Porteous says, but the bank can reestablish it or other ad hoc committees as necessary.

One such committee was Huntington’s Integration Committee, created when the bank acquired FirstMerit Corp. in 2016. The committee met three times in 2017 after the acquisition and was later dissolved.

But it’s not just cybersecurity or M&A that should qualify as a significant event worthy of a board’s attention. Recurring natural disasters, for instance, including hurricanes in the Southeast and wildfires in the West are examples that might merit a similar response.

Whatever the issue, Porteous suggests boards continually assess their governance structure through annual board-level assessments or just paying attention to what’s in the newspaper every day.

“It’s critical to make those adjustments or adapt to the changing world,” Porteous says.

A Roadmap for Productive Board Discussions

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bank-board-10-11-18.pngYou can’t drive a car to a new destination without a roadmap, and a board can’t conduct a productive meeting—and ultimately, effectively oversee the organization—without a well-thought agenda that keeps meetings focused on discussing what’s important, and helping the board stay proactive on the potential opportunities and threats facing their bank. What’s placed on that agenda, and when it’s discussed, differs a bit from bank to bank. But there are several issues that should be on every agenda, and some that should be addressed regularly, albeit less frequently.

At every meeting
Bank board agendas don’t differ from a standard corporate agenda in many respects. There should be a call to order, review and approval of minutes from the previous meeting, and a review of reports.

For a bank, every meeting should include a review of financial reports, with the chief financial officer on hand to address questions and discuss items in detail. Directors will also want to review loan reports, at which point the board will typically hear from the senior loan officer. Reports from the committee chairs should also be heard at every board meeting.

New business will include updates on strategic initiatives, including milestones and progress. Actions taken by the bank to address regulatory concerns should also be addressed, though how frequently this item appears on the agenda will depend on how much hot water the bank is in with its examiners. Trends impacting the growth and financial performance of the bank should also be discussed.

Old business should also be addressed in the agenda, and it’s an area often overlooked by banks, according to Bob Brown, a managing director at Kaplan Partners and board member at $84 million asset County Savings Bank in Essington, Pennsylvania. He previously spent 40 years at PwC. If management was instructed to take a certain action, or the board decided it would circle back to an issue, those matters shouldn’t be dropped.

Regular items to address
Risk, cybersecurity and technology are top concerns for bank boards, but directors are split on how often these topics need to be discussed by the full board. Twenty-six percent of respondents to Bank Director’s 2018 Risk Survey said their board discusses cybersecurity at every meeting, compared to 37 percent who do so quarterly. Half of the respondents to the 2018 Technology Survey said their board discusses technology at every meeting, compared to 37 percent who cover the topic quarterly.

The board should discuss management and incentive compensation semiannually, advises Brown. And don’t forget the auditors: Internal auditors should address the board semiannually, and external auditors annually.

Board education should be woven into the agenda at least quarterly, and should cover a variety of topics relevant to directors’ level of expertise as well as any ongoing regulatory, economic or competitive concerns. Regularly bringing in outside experts can also stimulate productive dialogue among board members.

Every year, the board should review board and committee charters, as well as key policies and loan loss reserves. The makeup of the board should also be assessed annually, using a board matrix or evaluation, or both. A board matrix is a grid that lists all the directors on one axis, and the skill sets and attributes needed on the board on the other. This check-the-box-style exercise can be an easy way to identify gaps where additional expertise is needed.

Strategic planning should occur annually and will drive the agenda by setting the priorities that the board will want to follow up on throughout the year. “That then drives what senior management does,” says Jim McAlpin, a partner and leader of the financial services client service group at the law firm Bryan Cave Leighton Paisner. Does the bank need to renew its contract with its core vendor, or seek another solution? Does it make sense to build a new branch? These decisions should be fueled by the strategic plan. “It’s good to take stock, set direction and plan, and then over the course of the next year refer back to that plan and refer back to the priorities when engaging with the CEO,” he says.

McAlpin recommends that strategic planning take place off site if possible, with the board spending a half day or day talking about the bank’s strategic direction.

The board chairman—or the lead director, if the chairman is not independent—often develops the agenda, with input from the chief executive. Committee chairmen should also weigh in to ensure those areas are addressed. Individual directors should feel welcome to contribute to the agenda, and there should be room to speak up during meetings. “A good agenda should include a line item in which the chair asks if there are any additional matters the directors think should be addressed,” says McAlpin.

An annual discussion that sets the agenda for the year—tied to the strategic planning session—can help boards better drive what’s on the agenda, says Brown. The governance and nominating committee can then take that conversation and finetune the scope of the board’s agenda for the year, with input from the board before it’s finalized.

Getting the right input
It’s important to hear from other members of the management team and ask questions directly of the heads of the respective areas of the organization, rather than relying on one source—the CEO—for that information. Ideally, the board should hear from the CFO at every board meeting to address financial matters. The heads of legal, compliance, human resources and information technology should also be available to address their areas of expertise, when needed. McAlpin recommends asking open-ended questions to gain their perspectives and address any of the board’s concerns. “If I were a board member, I’d rather [their answers] be unfiltered,” rather than through the CEO, he says.

Brown also recommends that the board hear from business line leaders at least annually, to better understand these important areas of the business.

Aside from better understanding the bank, it’s important for the board to understand the depth of the management team. “Perhaps the most important role a board has is selecting and evaluating the CEO,” says Brown. “Succession planning is a key responsibility, and understanding the management team’s depth, strengths and weaknesses of management team members, and having the chance to see them in action … is really important.”

Independent directors should also make time to discuss issues without management present, in an executive session, advises Brown.

Facilitating effective discussions
The board agenda will structure the discussion, but it’s on the board to ensure those discussions are fruitful. First and foremost, materials should be provided in advance, so directors have time to prepare.

Remote participation has become more common as technological solutions like web conferencing make this option easier and can be a good way to attract younger candidates with diverse backgrounds, who may still be building their careers, to the board, says Dottie Schindlinger, vice president at Diligent. But make sure discussions are secure. Don’t reuse the same conference call number and passcode every time—this can easily be accessed by a disgruntled ex-employee, for example, who then gains access to sensitive conversations. And directors shouldn’t use their personal emails to discuss board matters. Web portals, such as that offered by Diligent, can help boards store and access information, and communicate safely.

Remote attendance can have its disadvantages, and there are always directors who tend to dominate a discussion. An effective facilitator—usually the chairman or lead director—will overcome these hurdles and ensure everyone’s voice is heard. Pointed, open-ended questions can help engage introverted board members. Making sure one director speaks at a time cuts out crosstalk and helps remote directors understand what’s discussed.

McAlpin emphasizes that it’s important to have an actual discussion—not just directors passively listening to what the CEO has to say, or other members of management, or the committee chairs. And this underscores the need to assemble a strong board. “Some of the most effective CEOs, I’ve found, are those who purposefully build a strong board—a board consisting of board members with a range of strong experience, good insight and a willingness to share feedback and make suggestions,” he says.

What to Know: The Yield Curve is Squeezing Banks, and Other Topics

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governance-9-28-17.pngOne of the biggest challenges of serving as a bank director is understanding all of the changes that are occurring in a very complex and highly regulated industry. Most independent directors do not have a career background in banking, and while they usually bring an experienced and thoughtful perspective to their board service, they still have to learn about the industry and stay abreast of the many changes that are occurring.

This week Bank Director held the 2017 Bank Board Training Forum in at The Ritz-Carlton Buckhead in Atlanta, where 225 attendees comprised of independent directors, chairmen, lead directors and chief executive officers met for a day and a half to hear presentations on the latest industry developments, discuss their common problems in peer collaboration sessions and network at refreshment breaks throughout the day and at the Monday evening reception. This is the fourth year that we have held this event and the attendance has more than doubled over that period of time, which I think is a strong indication that directors view professional education as an important process. The agenda included presentations and panel discussions on audit, compensation, risk and technology, as well as the industry’s recent performance.

This year we also invited chairmen, lead directors and CEOs to meet separately on the first day in small group peer exchanges where they were able to share their experiences, discuss a variety of issues they have in common and learn from each other.

Some of the topics under discussion included the disappointing trajectory of interest rates, and proposed Federal Reserve supervisory guidance that will clarify the role of the bank board.

In the opening presentation, John Freechak, a principal at the investment banking firm Piper Jaffray Companies, reported on how a flattening yield curve in recent months is a sign that the industry’s margin pressure from low interest rates might not be easing any time soon. Freechak explained that interest rate spreads had widened following the victory by Donald Trump in the 2016 presidential election. Early market optimism that the Trump Administration would be able to achieve meaningful regulatory reform and tax cuts helped maintain those spreads into early spring, but the well documented legislative struggles by the administration and Republican-controlled Congress has led to an erosion of confidence. The Federal Reserve has said it intends to gradually raise rates, but long-term rates have yet to move appreciably. “The dwindling spread has hurt the profitability of banks as they reach for yield in a low interest rate environment,” said Freechak.

And proposed guidance on supervisory expectations for bank boards of directors, released by the Federal Reserve Board in August and intended to pertain only to banks with assets of $50 billion or more, could end up having a wider application, according to Jim McAlpin, a partner at the law firm Bryan Cave, in a presentation on board culture. “While initially applicable only to the largest banks, application of these expectations would likely spread to all banks,” McAlpin said. One of the core board responsibilities defined in the proposed guidance is to oversee the development of the bank’s strategy. “Much of what passes for strategic planning in banks is actually operational planning and budgeting,” McAlpin said. “High performance boards have a strong sense of ‘we,’ coupled with an expectation of success. This leads them to become more proactive and assertive in the strategic planning process.” Bank Director digital magazine’s November issue will discuss this issue in greater depth.

The 2018 Bank Board Training Forum will be held September 10-11 at the Four Seasons Hotel in Chicago.