Is Your Board Suitably Engaged?

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board-effectiveness-9-2-15.pngI was in a board meeting the other day for one of my community bank clients. The president of the bank, let’s call him Hank, had just finished giving a presentation to the directors about a new product that the bank was considering rolling out. When the president finished giving his presentation, the chairman leaned back in his chair, locked his hands behind his head and declared: “Well, that was a very nice presentation Hank. Frankly, if it is good enough for Hank, it is good enough for me.”

Suffice it to say that this vignette does not depict a highly functioning board of directors. Sadly, however, it is not uncommon to hear similar conversations in boardrooms across the country, particularly in smaller community banks. It is this type of deferential attitude that can result in regulatory fallout for directors and the institutions they serve. Most lawsuits brought by the Federal Deposit Insurance Corp. in the wake of a bank failure are brought on the basis of the board being “asleep at the switch.” This article will provide a couple of helpful tips that you should consider implementing to make sure that your board remains suitably engaged to oversee the bank’s management and create maximum value for the institution’s shareholders.

  • Your board should reflect the make-up of the bank’s customer base and the communities it serves. A diverse group of directors representing the predominant industry groups in your bank’s markets will ensure that your board has the appropriate expertise and understanding of the unique issues facing the bank and its customers. This will help you ask the right questions and accurately evaluate the risks presented by customers and other issues the bank faces.
  • Choose a strong, but thoughtful chairman. Oftentimes, a board can be dominated by the individual running the meetings and decisions of the board largely reflect the thinking of the chairman. While it is important to select a chairman who is not afraid to make decisions, that person should also be open and thoughtful to differing opinions and should not discourage robust discussion of the issues. To this end, it is often a good idea to bifurcate the role of chairman from the CEO of the institution. An independent chairman can maintain an objective perspective and not develop tunnel vision, which can often result from being “too close” to the issues.
  • Maintain board visibility during regulatory examinations. One thing that bank examiners like to see is that the board’s engagement extends beyond the boardroom itself.  It is a good idea to have representatives from the board of directors stop in to see the examiners once or twice during the examination process. It can be as casual as simply checking in to make sure everything is going alright, or to answer any questions that have arisen during the exam that have not yet been adequately addressed by bank personnel. Examiners are often impressed when board members take an active interest in the examination process and engage with the examiners other than during the meeting to present the results of the exam.
  • Don’t let your meetings get hijacked by one issue. It is very easy for one issue to dominate a board meeting, particularly an issue that a number of the directors are passionate about. It is critical to maintain a manageable agenda and to have appropriate leadership to be able to stay on task during meetings. Otherwise, one of two things can happen: (i) other equally important issues can be given short shrift and hasty decisions can be made, or (ii) meetings can drag on for hours and directors can become more interested in their other obligations than in the business at hand. If it appears that a more robust discussion on an issue is warranted than the allotted time would permit, the chairman should table the issue for the next meeting (or a special meeting if time is of the essence), in order to make sure that appropriate consideration is given to all agenda items.

The items covered in this article only scratch the surface of how to keep your board suitably engaged. The important take-away, however, is that a failure to adequately run the board could result in significant harm to the institution and personal liability for the directors. The board of directors of an insured financial institution is the gatekeeper of the institution and should actively and meaningfully participate in overseeing and directing the operations of the institution.

Asking the Right Questions: How a Board Should Approach Credible Challenge

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A well thought out decision making process is key to the success of the board and the financial institution as a whole. Regulators and auditors are looking to see that the board is thorough and educated with their actions. In this video, Lynn McKenzie of KPMG LLP lays out the importance of the credible challenge to management and how to best approach the process in the boardroom.

  • Why is it important for the board to provide a credible challenge?
  • Could credible challenge sour the relationship between the CEO and the board?
  • How should the board provide evidence of oversight?
  • What is the right level of detail in the minutes?

The Link Between Board Diversity and Smart Business

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board-of-directors.pngOur time is one of rapid technological and social change. The baby boom generation is giving way to a more diverse, technology-focused population of bank customers. In conjunction with the lingering effects of the Great Recession, these changes have worked to disrupt what had been a relatively stable formula for a successful community bank.

Corporate America has looked to improve diversity in the boardroom as a step towards bringing companies closer to their customers. However, even among the largest corporations, diversity in the boardroom is still aspirational. As of 2014, men still compose nearly 82 percent of all directors of S&P 500 companies, and approximately 80 percent of all S&P 500 directors are white. By point of comparison, these figures roughly correspond to the percentages of women and minorities currently serving in Congress. Large financial institutions tend to do a bit better, with Wells Fargo, Bank of America and Citigroup all exceeding 20 percent female board membership as of 2014.

However, among community banks, studies indicate that female board participation continues to lag. Although women currently hold 52 percent of all U.S. professional-level jobs and make 89 percent of all consumer decisions, they composed only 9 percent of all bank directors in 2014. Also of interest, studies by several prominent consulting groups indicate that companies with significant female representation on boards and in senior management positions tend to have stronger financial performance.

In light of these studies, new regulations mandating the formulation of diversity policies are understandable. The Securities and Exchange Commission instituted mandatory statements of diversity policy for publicly traded companies in recent years. This initiative has also been echoed in a recent policy statement from the Federal Reserve that focuses on a company’s “organizational commitment to diversity, workforce and employment practices…and practices to promote transparency of organizational diversity and inclusion.” These initiatives are meant to promote a corporate culture that allows for what is known as “effective challenge.” Demonstrating effective challenge, which includes the company’s ability to avoid group-think and to include new voices in critical debates, is a cornerstone of the federal bank regulators’ risk management model. In the eyes of these regulators, a more inclusive and diverse board is more likely to create effective challenge, improving the institution’s governance and operation.

As a result, board diversity goes to the heart of effective corporate governance—does the board have the skill set and perspective needed to keep pace with a rapidly changing economy? Are directors asking the right questions of management and their advisors? And do directors have access to the appropriate information to make good decisions for the institution’s shareholders? Incorporating fresh voices and skills into the boardroom can shore up weaknesses and allow the board to better represent the institution’s customers.

But increased diversity on a bank board goes beyond just gender and racial diversity. It also includes greater range in the age of the directors and inclusion of skill sets, such as technology expertise, that are necessary in understanding risk in today’s business environment. Here are some ways to consider diversity in your organization:

  • Start with the strategic plan. Is your institution contemplating remaining an independent institution for the foreseeable future or is it looking to sell in the near term? The answer to that question will likely be a key driver of how and when to incorporate new voices into the boardroom.
  • Reassess your market. The pace of demographic change is increasing. Failing to have a strong handle on who lives and works in your market area can result in lost opportunities. These shifts can drive organic growth and new product offerings in your market or signal a need to expand your footprint.
  • Reach out to current and potential customers.  Board composition is a strong signal as to which customers the bank seeks to serve. Is your board a help or a hindrance in reaching out to the customers targeted by your strategic plan?

Evaluating board diversity should not focus only on numbers or quotas, but rather on whether the board has the human resources it needs to reflect its community and to provide the perspective necessary to manage the bank profitably into the future. On this basis, tapping into a deepening pool of diverse director candidates as part of an effort to build a more transparent and inclusive corporate culture is just smart business. 

What New Directors Are You Adding to Your Board?

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board-effectiveness-7-17-15.pngWhat types of new directors are banks adding to their boards? The following are responses from DirectorCorps-member banks, a diverse bunch of publicly traded and private banks ranging in asset size from less than $100 million to $10 billion. While hardly a scientific poll, the responses show that banks are looking for specific expertise that helps them accomplish their strategic goals. For small institutions, that primarily means adding board members who can bring business to the bank as well as knowledge about their communities. It may also mean mergers and acquisition expertise or financial acumen. Interestingly enough, no one said they had recently added a risk expert or a technology expert, types that some of the larger banks are increasingly adding to their boards.

Here is what we asked:

Q. If you have added new directors to the board in the past two years, what skills or backgrounds do they have and how are they different from the skills or backgrounds of existing members? Please write 2-3 sentences, telling why these skills are now important to your bank.

When we started our bank in 2000, our board was composed almost entirely of successful entrepreneurs. Our board is still strongly entrepreneurial in nature but as the bank has grown, we have added new members with more corporate executive level experience to enhance our perspective on the issues and opportunities facing a more complex and growing organization. Going forward, we may need to add member(s) who meet the regulatory requirements of a “financial expert” to give our audit committee greater depth and to provide for future succession as audit committee chairman.

—Director of a publicly traded bank with more than $1 billion in assets

Our bank added two new directors in 2014. Their respective skill sets and backgrounds further broadened our board’s capabilities in two key areas: expanding our community development efforts and the growth of our business banking enterprise. One director is the executive director at one of our community’s largest nonprofits; the other is the chief executive of a well-known business with significant ties to the local and regional business communities. In both cases, they have contributed to these areas and others in the short period they’ve been with us.

—CEO of a privately owned bank with more than $1 billion in assets

We added a new director last fall [who] is from one of our newer and potentially large marketing areas. He is a lawyer with a background in banking law and bank M&A. These are two areas where we have no board member with expertise. While we have acquired banks in the past, we don’t have anyone with his kind of expertise.

—Director of publicly traded bank with more than $2 billion in assets

Our last two directors are at the top of their respective professions.  They are well connected in the business community which is good for new business development at our bank. Our board has a business development culture. The new directors bring additional prospects to the table.

—Director of publicly traded bank with more than $1 billion in assets