Searching for the Next Generation of Bank Board Leaders

governance-11-4-15.pngCorporate boards have historically been predominantly comprised of men, who are either C-suite executives or major investors. Corporate boardrooms in many circles are referred to as men’s clubs with women representing only one fifth of the 1,210 board seats at 100 of the largest U.S. public companies. Banks however, represent a positive trend in board diversity with 22 percent of board seats held by women at the top 25 banks. A study of 2,360 companies conducted by Credit Suisse found that companies with women board members have a higher return on equity, of 4 percentage points on average, when compared to companies with no women board members. While there is a correlation, companies with diverse leadership are also better able to attract top talent, improve their customer orientation and drive employee satisfaction, which all lead to increased returns and profitability.

Board Diversity
The lack of women in board seats is a direct correlation to the lack of women in senior management or C-suite roles compared to their male counterparts. Several large public companies are making great strides to cast away previous recruiting tactics, bringing in new and refreshing initiatives around diversifying the board makeup. Many believe boards should be representative of a company’s customers and employees, but the statistics show that is just not the case. While directionally there has been a shift, it has taken decades to arrive at this point. Boards of today should embrace diversity in the broadest sense, whether that involves gender, age, culture or ethnic diversity, because the net effect of a broad range of perspectives and expertise is board effectiveness.

The Expertise Trend
Moving away from a narrow representative board and focusing instead on functional needs on boards, where specific members will have functional experience, whether in risk, operations, technology, compliance or audit, is another forward-thinking strategy. Proven C-suite executives bring a wealth of knowledge and experience, but surrounding those folks with functional experts will only add to the success and diversity of the board. Driving diversity in thought and experience will lead to more constructive dialogue inside the boardroom, ultimately driving the effectiveness and success of the board and company as a whole. Diversity at all levels is a driving thought behind board hiring, but the statistics still show that although a focus, boards have significant room for diversity growth whether relating to industry, sector, gender or ethnicity.

Aging Board
The average age of board directors at S&P 500 companies has increased from 60 to 63 years old during the past 17 years. Experience is a critical attribute, but in the changing economic environment of today, companies are forced to take a front window approach. Institutions are setting a mandatory retirement age regardless of performance. In some cases, this might hinder a board in the short term, but potentially drive diversity and enhance the board’s overall effectiveness when boards are forced to replace their older members with newcomers. In PwC’s Annual Corporate Directors Survey, of the 934 directors who responded, age was one of the top three reasons attributed to the lack of performance and the need for replacement. While a great percentage of companies have a mandatory retirement age, there are extenuating circumstances when that is waived. The same is true for term limits. It is good to keep those in the 10- to 15-year range, but once again, they can be waived in certain instances if the board deems it necessary.

Bank board recruiting continues to evolve and many banks are seeking non-banking professionals to complement existing banking boards. Just recently, Boston Private Bank and Trust recruited Kimberly S. Stevenson, the current chief information officer at computer manufacturer Intel to its board. Given the amount of reliance on technology within the financial services industry, her background represents the positive trend towards diversity in gender and industry. Assembling a compatible, diverse and successful board is a challenging goal, but a worthy one where the pay-off is measurable and invaluable. With a rapidly changing workforce, boards will be forced to stay current with the broader trends. There is a need for more diverse boards to complement the next generation of senior management.

CEO Evaluations: Providing Feedback that Makes a Difference

2-24-14-pearl-meyer.pngAs year-end numbers are released and the board wraps up items concerning the prior year, the task of conducting the CEO’s performance review moves higher on directors’ to-do lists. The review often is placed on an already jam-packed agenda, resulting in a process that leaves both directors and the CEO feeling the review was more a formality than an opportunity to provide meaningful feedback.

We have found that directors have greater success in capturing the feedback they really want to convey to the CEO if they define performance from a broader perspective and develop a more open-ended review process that involves dialogue around performance, rather than rating scales.

What Does CEO Performance Encompass?
Defining performance with the question, “Did we make our numbers?” does not ensure ongoing sustainability. CEOs play a very diverse role within a financial institution, ranging from setting the strategic vision of the business to meeting financial targets to navigating new channels to improve the customer experience.

To capture the multiple competencies required of a chief executive, we recommend that performance be assessed on the basis of seven distinct dimensions:

  1. Strategy and Vision – How well does the CEO convey the bank’s vision and develop a clear guide for current and future courses of action?
  2. Leadership – How well does the CEO motivate and energize employees to implement the business strategy and achieve the bank’s vision?
  3. Innovation/Technology – Does the CEO have a vision for the development of new/better products and services? Is there an IT strategy in place to improve the customer experience and assist in operational and risk management?
  4. Operating Metrics – Is the bank meeting its current financial objectives? Has progress been made in achieving mid- and long-term financial performance objectives?
  5. Risk Management – Is the bank adequately managing its risk and receiving satisfactory regulatory reviews?
  6. People Management – To what extent does the CEO take steps to improve and expand the capabilities of senior managers? Does the CEO’s management style convey a high level of ethics and respect for employees?
  7. External Relationships – How well does the CEO interact with shareholders, the board, customers, regulators, media and other stakeholders?

Establishing the Process
The key factors in a successful evaluation process are first, to ensure that the entire board has the opportunity to provide input and second, to have a designated committee that drives the process. Boards can tailor the steps in the process described below to their own bank’s culture and needs:

  1. The CEO conducts a self-assessment at the end of the fiscal year based on the seven performance dimensions described above, highlighting his/her achievement of the goals and directives established by the board for that year.
  2. The board committee designated to conduct the review discusses the CEO’s self-evaluation and its members’ own observations regarding performance around the seven dimensions. The focus should be on identifying both good performance and key areas for improvement, rather than on trying to cover every aspect of performance in detail. Directives for the upcoming year may also be established at this time.
  3. The committee’s discussion is documented, a process that is often handled by a trusted outside party who collects and organizes the group’s thoughts. Doing so in memo form, rather than using a rating scale, has the advantage of providing more detail on certain aspects of CEO performance, as well as allowing for examples of where performance over the past year was exceptional or fell short.
  4. The rest of the board reviews the committee’s preliminary evaluation and substantive comments are incorporated. The final evaluation is then submitted to the full board and reflected in the minutes.
  5. Designated directors meet with the CEO. It’s good practice to have two directors, such as the chairmen of the board and compensation committee, conduct the review.
  6. The CEO reports back to the board on key messages and preliminary ideas regarding directives. This ensures that the key points were heard and that actions are in place to address the objectives established by the board for the year at hand.

By broadening the definition of performance and having an established and more open-ended process, directors can get to the heart of the feedback they want to communicate to their CEO. The process above assists directors in identifying areas in which the CEO may need to focus, either because they are strengths that need further development or because they inhibit his/her ability to be effective in certain aspects of the role.

Dealing with M&A: What You Don’t Know Can Hurt You

Dealing with a potential sale or acquisition can be a stressful time for a bank’s board. Bank Director asked speakers at its upcoming Acquire or Be Acquired conference in Phoenix, Arizona, to describe what bank boards understand the least about M&A transactions, with an eye toward improving a board’s readiness to deal with these issues.

What aspect of M&A transactions do bank boards understand the least?

Kanaly-Mark.pngThe most misunderstood part of the M&A process, from a board perspective, is the difference between the current deal environment—where deals are priced as a function of tangible book value, and are measured by the earn-back period and the cost savings—versus deals in the ‘90s and early 2000s, which were priced based upon earnings and opportunity (growth). This leads to large disconnects on pricing, opportunity, etc.

— Mark Kanaly, partner, Alston & Bird LLP

Plotkin_Ben.jpgGenerally, boards struggle with the concepts related to relative valuation. In other words, how do you evaluate the currency you are receiving in return for the sale of the company? This involves much more than simply looking at the stock market trading values of both involved companies. In particular, the growth prospects and quality of earnings of an acquirer should be important considerations in the analysis of relative valuation.

— Ben A. Plotkin, executive vice president and KBW vice chairman, Stifel Financial Corp.

Quad-Rich.pngShareholder value in an M&A transaction is more about what happens after closing than the multiple achieved at signing. For sellers, it means acquiring an attractively priced currency with upside potential, a strong dividend and liquidity. It means finding an experienced partner to navigate the regulatory approval process, access additional capital if necessary, and treat new customers, employees, shareholders and communities like their own. For buyers, it means setting, and then exceeding, reasonable financial expectations, executing the operational integration flawlessly, blending two cultures into one, and putting customers first. Many high multiple transactions have turned out poorly for the seller and low multiple transactions have turned out poorly for the buyer because of a lack of planning and execution.

— Richard L. Quad, senior managing director & co-head, Financial Institutions Group, Griffin Financial Group LLC

Hay_Laura.pngWe often find that directors are surprised at the impact golden parachute provisions have for the bank and the executive. As boards continue to eliminate gross-up provisions, they often make decisions on how to handle change-in-control severance payments that would be subject to excise tax without any financial analysis or review of the other agreement provisions. We have found situations where the aggregate cost of all severance payments could be a barrier or that payments to certain executives are far lower than intended. Digging into the change-in-control provisions and running financial scenarios can help to avoid surprises that could derail a deal.

— Laura A. Hay, managing director, Pearl Meyer & Partners Comprehensive Compensation

Duffy-John.pngI would have to believe that the aspect of M&A transactions that is truly least understood by most directors of bank boards is the accounting. Hopefully, the financial expert and lead director on the board understand the financial and accounting issues on any merger, but I doubt that most directors really grasp the nuances of merger accounting in a mark-to-market world. The impact that certain accounting assumptions can have on the pro forma balance sheet and the forward income statement are material and it is critical that board members grasp those issues if they want to understand how their shareholder constituency will react to an announced transaction.

— John Duffy, vice chairman, Keefe, Bruyette & Woods, Stifel Financial Corp.

Dugan-John.pngSmith-Scott.pngBank boards (and management) do not always appreciate the need to brief regulators early about a potential transaction, well before an agreement is signed and the transaction is announced. Post-financial crisis, regulators are taking a much more active role in scrutinizing transactions for issues, and it is far easier than it used to be for deals to get delayed or even scuttled based on regulatory concerns. In this climate it is much better to vet transactions early so that any regulatory concerns can be identified and addressed early—or, if the regulatory obstacles are insurmountable, to learn that early, before wasting time and resources.

— John C. Dugan, partner and Scott F. Smith, partner, Covington & Burling LLP

McCollom-Mark.pngMany times, boards do not appreciate the level of capital required to make a transaction happen. In many deals, the mark-to-market adjustments and merger-related costs (including but not limited to management contracts, technology contract costs, balance sheet restructurings, severance, branch closure costs and professional fees) are too large, and a deal becomes prohibitive. Purchase price as a percentage of tangible book value (P/TBV) is sometimes misleading, as adjusted P/TBV may show a much higher net purchase price for a target.

— Mark R. McCollom, senior managing director & co-head, Financial Institutions Group, Griffin Financial Group LLC

Murphy-Jared.pngColeman-Samuel.pngM&A transactions invariably require decision making under uncertainty. The time available to buyers to evaluate target companies or lines of business is generally compressed. Sellers face analogous uncertainty as to whether markets are adequately valuing their business. A by-product, and an arguably unintended positive consequence of the current phase of regulatory scrutiny, is that banks are putting in place comprehensive, rigorous, and extensively tested and validated risk models. As these modeling regimes come on stream and become routinized, buyers and sellers alike (and their boards) will be armed with powerful new tools to make decision making far more transparent and efficient than in the past.

— Jared Murphy, managing director and Sam Coleman, managing director, BlackRock

The Board’s Role in Succession Planning

10-23-13-Barack.pngGiven the increase in shareholder activism and regulatory oversight, financial institutions have to revisit succession planning as part of their governance practices. What if your CEO, or other senior executives, cannot continue to perform in their roles? Your shareholders and regulators want to know that you have in place a solid plan of action if called upon in an emergency or as part of your long-term vision.

Because succession planning is not a new idea, only a recent hot topic, you may already be familiar with it. You may already do it consciously or without realizing it. In either case, you are a step ahead. Whether you are in the lead or still a bit behind, it is a good idea to consider a few issues with respect to succession planning.

Fiduciary Duty

Directors have a fiduciary duty to work toward identification and mitigation of major business risks, including the loss of senior executives. Turnover can be unforeseen and immediate or it can be expected and deliberate, or somewhere in between. The board must consider its possible impact on the company. In addition to considering a CEO successor, the board should also consider other key positions like the chief financial officer, chief operating officer, division heads and other key officers.

Succession Planning for Executives

There are no set rules for succession planning. The board has free reign, but should focus its efforts to be productive. An initial step would be to open dialogue with the most senior executives within the company. Ask if they have given thought to their own long-term plans. Ask their thoughts on succession. Ask about contingency plans. After the board understands where the company is, it can begin to develop a plan to get the company where it should be. In developing its plan, the board should consider:

  • Will succession planning be a task for the entire board or a committee?
  • Will the CEO be “on board” with the effort?
  • What are the short- and long-term business needs that the plan must meet? Is there a specific timeline?
  • Is it best to have separate short-term and long-term plans?
  • For which executive officer positions is a plan most critical?
  • What skills and experience are required for each position?
  • Has the incumbent identified any potential successors?
  • Does the potential successor require additional training or professional development?
  • If the incumbent has not considered succession planning, how does the board evaluate potential successors? Should the process be different for internal and external candidates?
  • Does the board need the assistance of external advisors to successfully implement its plan?

Once established, it is critical for the board to regularly revisit its succession plan. In order to stay on course, the board should consider scheduling time quarterly to discuss progress toward the plan.

Also, the board must guard against the process turning negative. A mishandled attempt at succession planning can lead to bruised egos and weakened morale, especially among internal candidates passed over for promotions. The board should strive for a process that allows potential successors to understand they are critical to the organization and what they need to do to continue to grow within the organization. At the same time, the board needs to avoid creating an overly competitive environment that fosters discord and animosity among executive team members.

Succession Planning for Directors

Not only must a board of directors address the risks associated with executive succession, it must also look internally at director succession to ensure that the composition of the board continues to satisfy the changing needs of the company. Self-assessment and evaluation should be part of the board’s annual process leading to the recommendation of the slate of directors for the annual shareholder vote. The board should view director succession in the short-term and long-term. It is somewhat unsettling that the most commonly cited form of board succession planning is a mandatory retirement age. That is not enough. Boards must consider the qualitative skills required to serve as a director, where people with such skills can be found and how they might be attracted to board service. Finding individuals who are willing to serve as board members is an increasingly difficult task, but not an impossible one. Proper planning will go a long way toward ensuring that your board of directors remains vital.