Governance Best Practices: Taking the Lead

Due to ongoing changes in the banking industry — from demographic shifts to the drive to digital — it’s never been more important for bank boards to get proactive about strategy. James McAlpin Jr., a partner at Bryan Cave Leighton Paisner and global leader of the firm’s banking practice group, shares his point of view on three key themes explored in the 2021 Governance Best Practices Survey.

  • Taking the Lead on Strategic Discussions
  • Making Meetings More Productive
  • The Three C’s Every Director Should Possess

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.

How One Bank Chairman Created a Diverse Board

When Charles Crawford Jr. took over as chairman and CEO of Philadelphia-based Hyperion Bank in August 2017, the 11-year-old de novo’s board had shrunk from 15 directors at its inception to the statutory minimum of just five, and its future was anything but certain.

Hyperion had been formed in 2006, but never seemed to find its stride. “When you start a new bank you typically lose money for the first two years, and by year three you should have enough critical mass to be achieving profitability for your shareholders,” says Crawford. “Unfortunately for Hyperion, they lost money for seven straight years. A lot of those 15 board members said ‘You know what? This isn’t so fun.’” One by one, most of them left the board.

Crawford had also formed a new bank in 2006, but this venture turned out to be much more successful than Hyperion. Crawford’s bank — known as Private Bank of Buckhead and situated in an upscale community north of Atlanta – was sold in 2017. After the sale, an investor in both Private Bank and Hyperion asked him to take a close look at its operation and perhaps join the board. Crawford says he saw “a great entrepreneurial opportunity” and signed on.

Since then, Crawford has raised $18 million in capital, which has enabled the $250 million asset bank to finally begin to grow, and opened a branch in the Atlanta market. He has also rebuilt the Hyperion board almost from scratch. Today’s board has eight members, including an African American male, who joined the board in 2018, and three females who signed on in the fourth quarter of 2019. Crawford values the different experiences and points of view – often referred to as diversity of thought – that the group brings to the governance process.

“To me, it’s not just gender and ethnic diversity,” Crawford says. “It’s backgrounds and skillsets and knowledge, and that people think differently and ask different questions.” Hyperion’s board diversity didn’t occur by accident. “You do have to be very intentional to be able to build a diverse board or a diverse workforce,” he says.

One of Crawford’s challenges in rebuilding the board was his unfamiliarity with the Philadelphia business community. He graduated from the University of Pennsylvania but hadn’t lived in Philadelphia for over 30 years, so he didn’t know a lot of people there. One of his first recruits was Robert N.C. “Bobby” Nix III, an African American attorney with extensive experience serving on bank boards, including one occasion when he had to step in and take over as the interim CEO. Crawford was introduced to Nix by another Hyperion director who has since left the board.

Nix says he quickly developed a rapport with Crawford. “He is a very accomplished banker and a really bright and nice guy,” Nix says. “I got along with Charlie really well and had a great comfort level with him. And we talked about a lot of stuff about how I would like to see the bank go, and he actually listened.”

One of Nix’s suggestions was to recruit an economist because Hyperion is an active construction lender and that tends to be a cyclical business. Crawford later brought to the board Lara Rhame, the chief U.S. economist at FS Investments, an alternative asset manager in Philadelphia. Crawford started playing tennis after he moved to Philadelphia as a way of meeting people, and a fellow tennis player connected him to Rhame. Crawford said he was looking to add more talent to the Hyperion board.

“Lara and I had coffee and I explained what the bank was up to and [what] the mission [was] and got to know her background,” Crawford says. “I’ve never had an economist on my bank board, but it is very valuable. She helps not just me but the other directors and bank management see the big picture of what’s going on.”

Crawford first met another female director – Gretchen Santamour, a partner at the Philadelphia law firm Stradley Ronon, where she specializes in business restructurings and loan workouts – through a public relations consultant that did some work for the bank. Santamour invested in Hyperion when Crawford did a capital raise and later sent him a note. “She said, ‘I’m glad to see that you have a female on your bank board. Most community banks I’m aware of don’t. If you ever want to add to that let me know. I’d be glad to help you.’ I took that very literally and followed up with Gretchen later and said, ‘I got your note and frankly with your experience as an attorney and [with] workouts, and being so engrained in the Philadelphia business community, how about you? Would you be willing to serve? And she said she would.’ So she, too, has been a great addition.”

A third female director at Hyperion is Jill Jinks, CEO at Insurance House Holdings, an agency located in Marietta, Georgia. Jinks had been an investor in the Private Bank of Buckhead and had served on the board. Jinks also invested in Hyperion when Crawford did his capital raise, and when Hyperion expanded into the Atlanta market, he asked Jinks to become a director. “I had the experience of having her as a director for a decade on my previous bank [board] and I knew her,” Crawford says. “She chaired my audit committee – she’s chairing [Hyperion’s audit committee] now – and I knew she would be of great value to us, both in the Atlanta market and in general with governance.”

In addition to himself, other Hyperion directors include Louis DeCesare, Jr., the bank’s president and chief operating officer who joined the company in 2013; James McAlpin, Jr., a partner at the Atlanta-based law firm Bryan Cave Leighton Paisner and leader of the firm’s financial services client services group; and Michael Purcell, an investment adviser and former Deloitte & Touche audit partner with deep ties in the Philadelphia business community.

The story of how Crawford rebuilt the bank’s board reveals several important truths about board diversity. When bank boards need to recruit a new director they tend to rely on personal networks, and some of Hyperion’s directors were individuals that Crawford already knew. But the Hyperion board’s diversity is also intentional. Board diversity won’t happen unless the people driving the refreshment process make it happen through a deliberate process.

“As you can tell from my story, and I think this would be true with most community banks, we didn’t hire a big recruiting firm to help us ‘ID’ directors,” Crawford says. “My advice is, reach out to community organizations … by being involved. I remember back at my Atlanta bank, I served on the City of Atlanta Board of Ethics and it exposed me to a whole different group of people. And the chair of that board … was [an] African-American [who] had served on the Delta Credit Union board and he ended up joining my board. It’s just another example of, if you get out in the community, you’re going to get exposed to and meet people you otherwise wouldn’t if you’re sitting in your boardroom, or office, hoping they’ll come to you.” Nix, Rhame and Santamour are a case in point; all were unknown to Crawford before he recruited them to the board.

Crawford has another piece of advice for bank boards looking to be more inclusive. “Building a diverse board … is an ongoing, moving target,” he says. “I don’t think you’re ever done, as your community ebbs and flows, to make sure that either your board or our workforce looks like your community.”

A Deeper Dive Into Board Pay

How you pay your board may have a surprising effect on its total pay package, according to Bank Director’s 2020 Compensation Survey. This exclusive analysis has been created specifically for members of our Bank Services program.

Across asset sizes, banks paying an annual retainer generally award more total compensation to the board compared to their fee-only peers or those that award a mix of the two. This analysis focuses solely on cash compensation for the full board, in the form of meetings fees and retainers. Committee compensation is excluded due to variances in structure and meeting frequency, although 63% award committee fees.

Estimated Annual Pay, by Type and Asset Size

 >$10B$1B – $10B$500M – $1B$250M – $500M<$250MAll Banks
Annual Retainer Only$595,000$380,000$312,750$180,000$150,000$400,000
Meeting Fee Only$921,000$120,000$140,000$105,000$65,000$107,500
Both Retainer + Fees$225,000$118,000$90,000$85,400$77,500$105,000

*Estimated annual pay assumes 10 directors per board and 10 meetings per year, based on the 2020 Compensation Survey.

The low usage of meeting fees by banks above $10 billion in assets, and of annual retainers by banks below $500 million in assets, result in smaller data sets for those groups.

So, are retainer-only banks overpaying their boards? Are fee-only banks underpaying theirs?

Board responsibilities have risen greatly since the last financial crisis more than a decade ago. Regulators expect more from directors; while the buck stops with the CEO, that individual ultimately reports to the board. So, while it’s hard to say what’s right and what’s wrong when it comes to board pay, the gradual, increased use of annual retainers — from 61% five years ago to 70% today — reflects a realization by many boards that their members are spending more time outside of meetings on bank matters, whether that’s reviewing board packets or educating themselves on issues important to the oversight of the bank.

Annual retainers can better demonstrate the amount of the work directors put in. 

What’s more, technology has expanded how the board can meet. Some boards already offered phone and video conferencing options to more-remote members, like snowbirds who head south for the winter. The Covid-19 pandemic forced entire boards to adopt these measures, so they could become a more permanent feature for some. Should those attending virtually be compensated differently?

Annual Cash Compensation Per Director, by Type and Asset Size

 >$10B$1B – $10B$500M – $1B$250M – $500M<$250MAll Banks
Annual Retainer Only$59,500$38,000$31,275$18,000$15,000$40,000
Meeting Fee Only$92,100$12,000$14,000$10,500$6,500$10,750
Both Retainer + Fees$45,000$28,000$22,500$17,900$14,500$24,000

*Estimated annual pay per director assumes 10 meetings per year, based on the 2020 Compensation Survey. The low usage of meeting fees by banks above $10 billion in assets, and of annual retainers by banks below $500 million in assets, result in smaller data sets for those groups.

Getting the compensation mix right is vital to attracting the new talent a board needs to oversee the bank. Boards are often seeking someone younger. They may be looking to add gender or ethnic diversity. Or they may be looking for new skills.

While the 2017 Compensation Survey indicated that directors serve for loftier reasons than a supplemental paycheck — 62% cited personal growth as the top reason they serve — new, younger directors could be balancing an already high-pressure career with family obligations. And other organizations could be seeking their valuable time. Your bank likely isn’t the only one in its community on the hunt for board talent.

“It’s difficult to fully compensate someone for their time as a director,” says Flynt Gallagher, president of Compensation Advisors. “If you’re going to pay them for the time they put in, the skills they bring to the board — they’d be unaffordable.”

But boards still need to make it worthwhile to serve. Simultaneously, they may feel pressure to maintain current pay levels during the economic downturn.

Compensation committees could consider awarding equity compensation, which wasn’t factored into this analysis. Equity provides a way to pay directors more — and gives them additional skin in the game — without having an outsized effect on total compensation. Roughly half of survey respondents, primarily at public banks, awarded equity to outside directors in fiscal year 2019, at a median fair market value of $30,000. 

Bank Director’s 2020 Compensation Survey, sponsored by Compensation Advisors, surveyed 265 independent directors, CEOs, human resources officers and other senior executives of U.S. banks to understand trends around the acquisition of talent, CEO performance and pay, and director compensation. The survey was conducted in March and April 2020. Compensation data for directors and CEOs for fiscal year 2019 was also collected from the proxy statements of 98 publicly traded banks. Fifty-three percent of the total data represent financial institutions above $1 billion in assets; 59% are public.

Several units in Bank Director’s Online Training Series focus on compensation matters. You can also learn more about finding new talent for the board by reading “Cast a Wider Net for Your Next Director” and “How to Recruit Younger Directors.” If you’re considering virtual meetings, read “Best Practices for Virtual Board Meetings” to learn more about navigating that shift.

Best Practices for Virtual Board Meetings

Dallas Kayser, the chairman at $5.1 billion City Holding Co. in Charleston, West Virginia, says his board has essentially been “on call” throughout the coronavirus crisis, with more frequent board and executive committee meetings to discuss issues like how the bank will offer small business customers the Paycheck Protection Program loans launched under the Coronavirus Aid, Relief, & Economic Security (CARES) Act.

But given the nature of the pandemic, which has shut down many sectors of the U.S. economy, directors aren’t meeting face-to-face in the boardroom. Instead, they’re meeting virtually. 

Covid-19 has quickly changed how boards conduct their business.

Meeting virtually isn’t new. We’ve had the technology for years, and many boards already had some sort of virtual attendance option in place for far-flung directors — snowbirds, for example, or those more distantly located from the bank’s headquarters. The difference now? “This is the first and only time we’ve all 100% been forced to do it, if we want to meet. That’s why it feels new,”  says Dottie Schindlinger, the executive director of Diligent Institute, part of governance software provider Diligent Corp.

As boards have quickly learned, there are important considerations to keep in mind when meeting virtually. Bank Director compiled the following checklist, based on conversations with industry experts, for your board’s consideration as it navigates this shift.

1. Establish ground rules.
First, the board should understand how state laws and other regulations govern virtual board meetings, including how it will impact procedures like establishing a quorum and voting. Also, review the board’s policies and bylaws to see if they should be updated for meeting virtually.

You’ll also want to consider how the technology used by the board impacts seemingly simple matters like minutes and roll call. If the board is using an audio-only format, a roll call will be necessary. It will also be important for directors to introduce themselves before speaking, to ensure accurate minutes.

The board should also weigh the pros and cons of audio versus video technology. Many find discussions more productive through video, due to the ability to pick up on others’ visual cues.

However, using video raises new questions that boards will have to consider. Should someone record the meeting? Should directors be required to use web cams, so everyone can see one another? Should directors be encouraged to use headsets, to ensure conversations are private? And if the bank’s staff runs the technology, how can the board meet in executive session?

And it’s important to understand any technology needs directors may have now that they’re logging in from their homes. The iPad the bank purchased a few years ago may not be able to run the latest and greatest video-conferencing solution. Also, someone at the bank will need to serve as “tech support” as the board gets used to this new way of meeting.

2. Rethink the agenda.
Consider shorter, more frequent meetings, and focus the agenda on the critical issues that the board needs to discuss at that time. Ensure materials are received in advance to allow sufficient time to review, as directors can’t spend time catching up during the shorter meetings. And clearly define roles in advance, if needed. Who will lead the discussion on a particular issue? Who will take minutes?

Also, wrap up the meeting by reviewing the key items discussed and items that require further action, recommends Denise Kuprionis, the president of The Governance Solutions Group.

And sometimes, old-school methods work. Kayser at City Holding prints out the agenda, so he can check off items as they’re discussed.

3. The role of the facilitator could evolve.
The chair or lead director should make a more concerted effort to engage every director. Everyone’s voice should be heard.

Kuprionis recommends keeping a list of all board members at hand, so no one’s forgotten. “You’re listening to a conversation, you’re participating [and] you get caught up,” she says. “If you have that list in front of you … it helps you remember who’s not there.”

Also, be emboldened to speak up when someone’s dominating the conversation. It’s easy in face-to-face meetings for a single individual to do this; the problem is compounded when visual cues have been removed. Discuss — as a board — how these directors can be reined in. One solution Schindlinger recommends is time limits. When one director has spoken for a predetermined time limit, the chair can interrupt or mute that individual, and move on to request input from other board members.

For more on facilitating effective meetings, read “A Roadmap for Productive Board Discussions.”

4. Ensure secure communications.
Not all formats provide the security boards need, so that should be considered as specific technologies are reviewed. Are passwords required? Is there a waiting room feature, so guests — like executives — can be held outside the meeting until the board is ready?

You’ll also want to wean directors off paper packets, or at least talk with some directors about how to access and print their materials securely. Don’t discuss board business via email, says Schindlinger. “You know the old adage, ‘never waste a good crisis?’ Well, hackers have really taken that to heart. They are looking for opportunities to exploit all of us right now, because we’re vulnerable,” she says. We’re stressed about the pandemic and the economy, cooped up in our houses and spending more time online. “This is not the time to send out stuff via email.”

Also, consider how side conversations will be managed. While Schindlinger says assigning a “board buddy” can be helpful to new directors trying to gain a grasp of the board’s culture, those conversations should be secure — not through text or email. Board portals like Diligent or Nasdaq’s Director’s Desk, which is used at City Holding, allow directors to conduct one-on-one exchanges safely.

Virtual board meetings could become part of the new normal that emerges out of the Covid-19 crisis. It may be awhile before we’re all ready to convene in groups and what’s more, some directors may like the experience. Kayser sees benefits in saving travel and time, along with the ability to schedule discussions on short notice. However, he also feels that discussions on deeper issues — an acquisition, for example — could be challenging.

Boards have an opportunity now to figure out how to make virtual meetings work. “There are no playbooks about this stuff right now,” says Schindlinger. “The right answer is going to be the right answer for your board. Your board is going to come up with the right ideas and vote those in. Just have the conversation.”

Why We Ignore Big Risks

Should we have seen COVID-19 coming?

A pandemic was far from the top risk on corporate radars a few months ago, even though experts in a variety of fields warned about the possibility of one for years.

Best-selling author Michele Wucker refers to risks like this as “gray rhinos.” It’s a metaphor for the obvious challenges that societies tend to neglect, often due to the size of the risk.

“It’s meant to evoke a two-ton thing with its horn [pointed] straight at you, and pawing the ground, snorting, probably about to charge,” says Wucker, the author of “The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore.” She is the CEO and founder of Gray Rhino & Co., which helps leaders and organizations identify and respond to these risks.

To learn about preparing for the next big threat, I interviewed Wucker about why we often ignore obvious threats, and how to approach the next crisis. The transcript that follows has been edited for brevity, clarity and flow.

BD: What are the most powerful forces that keep us from identifying and addressing gray rhinos?
MW: There are psychological and organizational and governmental [forces] that keep us from recognizing what we need to. Human beings are hardwired to ignore some of the things that we don’t want to see. We tend to deny information if we don’t like it — if we don’t like the solution to a problem. A lot of this is unconscious. So, when you recognize that unconscious bias, you’re way ahead of everybody else because it makes you much more able to see what’s in front of you.

But in terms of organizations and governments, more structural and policy factors, some of them have to do with decision-making. We like to surround ourselves with people who think the way that we do. And when we do that, it confirms what we already think. It makes us even less likely to see red flags. So, decision-making processes and organizational culture are one reason.

In terms of governments and even corporations, the incentives that we’ve set up are misaligned.

Businesses look so much at quarterly earnings, and too often pay so much attention to the short term, that they forget they are putting long-term value at risk. And for politicians who are looking at election cycles of just a few years, it’s much easier for them to tell people what they want to hear and kick the can down the road so that the problem explodes on the next guy’s watch. Our society tends to reward people for picking up the mess after the fact. And when somebody makes a hard decision that prevents the mess from happening in the first place, we don’t celebrate as much as we should.

BD: One of the things we often talk about [at Bank Director] is the danger of groupthink and the lack of diversity on corporate boards. As we’re looking at the impact of this pandemic, I would not be surprised to see things like diversity and similar initiatives taking a back seat to these more short-term concerns that we’re seeing now. Is that a mistake?
MW: Absolutely. It would be a huge mistake to stop looking at how we can make better decisions by bringing the right voices around the table, having a group of people who can overcome groupthink. And really what would be most helpful now would be an extra emphasis on who else are you going to bring to the table to help solve the problems right now? An injection of diversity in decision-making could be one of the most important factors helping us to not just get out of the crisis, but set ourselves up for future success.

In “The Gray Rhino,” I quote [European Central Bank President] Christine Lagarde … [her] comment that if Lehman Brothers had been Lehman Sisters instead, we wouldn’t have had that problem. In my mind, that’s not quite right. It should have been Lehman Siblings, because too much of any gender or outlook or perspective or risk attitude is the wrong approach to take. There’s a lot of research showing that when you have diverse voices in different demographics, different specializations, different perspectives, you’re much better set up to make good decisions for the future.

One problem we are having right now is that there were unintended consequences of some of the decisions that were made to get us out of the 2008 crisis. It’s important when you’re getting out of a crisis to make sure that you’re not setting yourself up for something worse down the road, and to put in place check-in measures along the way, to make sure that the fixes you put in place are working the way you meant them to.

BD: Crises can force change. What do you hope to see business leaders learn from this current crisis to ensure they’re better prepared for the next crisis on the horizon?
MW: I love the way you phrased that because people are always trying to look backwards, because they’re so used to thinking of black swans. [Editor’s Note: A “black swan” refers to a rare, unforeseeable crisis.] It’s important to look back to learn what we’ve done wrong, but unless you apply it to the future, it’s a bit of an exercise in futility.

The biggest lesson I think people should learn is how important it is to be proactive about problems, particularly big problems that seem overwhelming. It’s very important for everybody to do their part to address problems. … Leaders really need to focus on two new mindsets. One, proactive, long-term, forward-looking emphasis on creating value, and thinking in complex systems. The Business Roundtable statement last August about restating the purpose of a corporation was interesting in that way. They came out and said it’s no longer a matter of prioritizing your shareholders alone, because if you don’t think about all of the other stakeholders in your orbit, that has the potential to reduce shareholder value.

I think it really brought a complex systems approach to this debate in business communities. For so long, people had looked just at shareholders, and thought about other stakeholders’ needs as a zero-sum game. This new systems-thinking approach shows how they’re all related; that you can’t effectively protect your shareholders unless you’re also looking at your other stakeholders. That brings us back to your point about having diverse voices and making sure you’re getting all the inputs you need.

BD: What are the other gray rhinos that banks and corporations might be ignoring right now?
MW: I’ve been focusing personally on a trio of interrelated gray rhinos. Inequality. The fact that the people in the bottom whatever percent you want to apply are falling behind. [This is] already hurting economic growth and making the entire economy much more vulnerable, as we’re now seeing in a painful way. So, inequality is the first one.

Second one is climate change, which is closely related to inequality, because the people who are contributing the most to greenhouse gas emissions and climate change generally tend to not be the same ones as the people who are affected the most. And third, financial fragilities, which are closely related to both climate change and inequality, as we’re seeing right now when the bottom part of the population loses their jobs and they’re blown apart, taking the whole economy down with it.

As we saw in the conversations in Davos in January, and with BlackRock’s statement about climate risk and investment risk being one and the same, there’s a close relationship between climate change decisions and shoring up the way that the whole financial system and the global economy works. Many central banks and researchers around the world last year made the point that insurers are undercapitalized if you look at the potential impact of climate change.

I think there’s also complex systems thinking, a limit to that — if you’re financing fossil fuel companies, but you have other investments that are negatively affected by climate change, say oceanfront property, then you’re basically investing in hurting the other companies and investments in your portfolio.

So, that trio to me is important, and the pandemic has shown how dangerous all three of them are and that we need to deal with all three of them together.

Board Governance For The New Year

Business conditions, financial markets and competitive landscapes are always changing. But perhaps there is no arena of business undergoing a more significant transformation at the moment than corporate governance.

Whether driven by activists investors, regulators, institutional shareholders, governance gadflies or best practices, corporate governance is in the crosshairs for many organizations today. And in the banking sector — where some in Washington have placed a bullseye on the industry’s back — an enhanced focus on governance is the order of the day.

Bank boards today would be well served to pay close attention to three important aspects of governance: board composition, size and director age and tenure. When left to their own devices, too often inertia will set in, causing boards to ignore needed enhancements to corporate governance and boardroom performance. Even in the private company and mutual space, there is room for improvement and incorporation of best practices if a bank wants to continue to remain strong and independent.

Some governance advocates adopt a certain viewpoint that downplays an institution’s history. “If you were building the board for your bank today at its current size, how many of the existing directors would you select for the board?” the viewpoint goes. This obviously ignores historical contributions and the context that took the bank to its current state.  However, as the old saying goes: “What got you here often won’t get you there.”

For many institutions — particularly those that have grown significantly through acquisition — the size of the board has become unwieldy. Oftentimes, executives doled out seats to get a deal done; in some extreme cases, boards now have 16, 18, 20 — or more — directors.

While this allows for ample staffing of committees, pragmatically there may be too many voices to hear before the board can make decisions. At the same time, banks with only six or seven  directors may not be able to adequately staff board committees, and perhaps operate as a “committee of the whole” in some cases.  Often times, this low number of directors implies a high level of insularity.

Research from sources including both Bank Director and the National Association of Corporate Directors suggests that the average board size is between 10 and 11 directors, including the CEO. Furthermore, the CEO is now typically the sole inside director, unless the CEO transition plan is underway and a president has been named as heir apparent to the CEO role (similar to KeyCorp’s September 2019 succession announcement). Too many or too few directors can impede a board’s effectiveness, and 75% of public boards have between nine and 12 directors.

Board composition, of course, speaks to the diversity seated around the board table. Whether you accept the prevailing sentiment or not, there is ample evidence that boards with more diverse perspectives perform better. In order to garner more diverse viewpoints, the board needs to be less homogenous (read: “not full of largely middle-aged white men”) and more representative of the communities served and employee demographics of today and tomorrow. And let’s not forget about age diversity, which helps to bring the perspectives of younger generations (read: “vital future customers and employees”) into the boardroom. One real world example: How would you feel if your bank lost a sizable municipal deposit relationship because a local ordinance required a diverse board in order to do business with an institution? It can happen.

Lastly, many boards are aging. The average public director today is 63 — roughly two years older than a decade ago. And as directors age and begin to see the potential end of their board service, a number of community bank boards have responded by raised their mandatory retirement age and prolonging the inevitable. Yet with rising tenure and aging boards, how can an institution bring on next-level board talent to ensure continued strong performance and good governance, without becoming unnecessarily large? Boards need to stay strong and hold to their longstanding age and tenure policies, or establish a tenure or retirement limit, in order to allow for a healthy refresh for the demands ahead.

High-performing companies typically have high-performing boards. It is rare to see an institution with strong performance accompanied by a weak or poorly governed board. Boards that take the time to thoughtfully optimize their size, composition and refreshment practices will likely improve the bank’s performance — and the odds of continued independence.

Creating the Correct Dividend Policy


dividend-7-17-19.png“I believe non-dividend stocks aren’t much more than baseball cards. They are worth what you can convince someone to pay for it.” – Mark Cuban, investor and owner of the NBA’s Dallas Mavericks

Directors can use dividends to convey confidence and attract yield-hungry investors, but they must strike a balance between payouts and future growth.

Dividends are an important part of the capital management strategy at many banks, and the operating environment has made yield more important to analysts and investors. A bank’s dividend policy is a highly visible signal of management’s confidence to deliver consistent results. The board of directors is responsible for determining a bank’s cash dividend; it is paramount they strike the right payout.

After carefully considering regulatory capital requirements, a board still has a fair amount of discretion when establishing the dividend policy while retaining sufficient funds for growth. Boards often weigh dividends against share repurchases to manage capital. However, trading multiples and capital levels heavily influence stock repurchases, which tend to be more discretionary than regular dividend payments. A lower tax rate on dividends and ordinary income is another factor that favors dividends over share repurchases.

Dividends can be a good measure of corporate governance. A dividend payout policy means that investors can worry less about unchecked growth or inefficient investments that do not maximize shareholder value.

Optimal Dividend Policy
The appropriate capital management policy can help a bank achieve an optimal trading multiple. The optimal dividend policy depends on a company’s earnings growth, capital requirements and ability to communicate its strategy to the investment community. Although cash dividends have been historically respected by bank investors, the prolonged low interest rate environment and the perception that banks are increasingly utility-like has elevated the importance of dividend payouts.

There is, however, an opportunity cost of using cash to pay out dividends rather than fuel growth initiatives. And an increased dividend can indicate that management expects higher future cash flows and possibly higher future valuations.

The Federal Reserve’s monetary policy encourages yield-hungry investors to favor stocks over fixed-income instruments. Given the current economic and interest rate environment, equity investors can achieve the safety of bonds through a combination of cash dividends and any upside from capital appreciation inherent in stocks. Dividend popularity has increased, due to respectable corporate cash flows, more favorable tax rates, and broad consumer confidence in the economy and stock market. Currently, the S&P 500 dividend yield is around 1.86 percent, compared to a 2.4 percent yield on 10-year Treasury notes.

In response to these considerations, management should determine the retention ratio, which lies in the earnings power above the dividend payment. Effectively measuring market, liquidity and credit risk—often done through stress testing—is vital to determining the margin of protection a bank needs to ensure the consistency of dividend payments. The DuPont formula, where return on equity equals return on assets times the equity multiplier, should underpin the financial perspective.

Industry-wide challenges like continued pressure on net interest margins and a diminishing ability to trim reserves will stretch the safety margin in the current environment. Banks with slower earnings growth need to carefully determine their dividend payout ratios. Increasing or stable dividends are generally positive signals to the market regarding the institution’s financial condition and prospects, while a dividend cut could paint a negative picture.

Changing Investor Views
The attitudes of analysts and the investment community regarding dividends have come full circle. This was not always the case, as investors preferred that banks retain capital for growth or to fund stock repurchases.

Retail investors, including executives and members of the board, are attracted to community bank stocks because of the sector’s predictable dividend payments. Directors would be well advised to focus on their bank’s dividend policy and the efficient use of capital as part of their fiduciary duties to shareholders.

Five Critical Mistakes to Avoid in Any Headquarters Project


headquarters-5-15-19.pngCorporate headquarter projects are likely one of the biggest investments a bank will make in itself.

With a lot of time and money on the line, it is no surprise that these massive projects quickly become an area of major stress for executives. Most management teams have limited experience in executing projects of this kind. The stakes are high. Bad workplace design costs U.S. businesses at least $330 billion annually in lost efficiency, productivity and overall employee engagement, according to Facility Executive.

A lot can go wrong when planning a corporate headquarters. Executives should use a data-based approach and address these issues in order to avoid five critical oversights:

1. Overpromising and Under-delivering to the Board
You should feel confident that every decision for your planned headquarters is the right one. The last thing you want to do after you get the board’s approval on the size, budget and completion date for the project is go back for more money and time because of educated guesses or bad estimates.

Avoiding this comes down to how you approach the project. Select a design-build firm that considers your needs and asks about historical and projected growth, trends and amenities, among other issues. This will help mitigate risk and create a plan, budget and timeline based on research and deliberation

2. Miscommunication Between Design and Construction
Partnering with a design-build firm helps alleviate the potential for miscommunication and costly changes between architects and construction crews. Look for firms with a full understanding of costs, locally available resources and current rates, so they can design with a budget in mind. Some firms offer a guaranteed maximum price on a project that can eliminate surprises. 

3. Missing the Mark on Efficiencies and Adjacencies
The way employees work individually and collaborate with others is changing. Growing demand for work areas like increased “focus spaces,” more intimate conference rooms and other amenities should not to be ignored. Forgetting to consider which departments should be next to each other to foster efficiency is also an oversight that could dampen your bank’s overall return. Look for a firm that has an understanding of banking and how adjacencies can play a role in efficiency that can guide you toward which trends are right for your bank.

4. Outgrowing the New Space too Soon
I have witnessed a project that was not properly planned, and the board was asked to fund another project for a new, larger building only five years after the first one. As you can probably imagine, the next project is being watched and scrutinized at every turn.

Most architectural designers will ask you what you want and may look at whatever historical data you provide. Beyond that, how will you know if the building will last? A good design-build firm should incorporate trends from the financial industry into your design; a great one will provide you with data, projected growth patterns and research, so you can demonstrate to the board that the bank is making the right investment and that the new space will last.

5. Forgetting the People Piece
Not communicating with your employees or leadership on the reasons behind the change or how to use the new space often means leaving money and happiness on the table. The design and the features of the building frame the company culture, but the people complete the picture.

Make sure to show your workforce the purpose of the new space. Help get everyone excited and on the same page with the use, process and procedures. Do not drop the ball after the hard work of building the headquarters.

When it comes to any project—especially one of this size and magnitude—always measure twice and cut once.

Review Your Director Equity Plans


equity-4-17-19.pngOutside director compensation has been on the minds of shareholders and compensation committees after a 2017 court decision and a continuing focus of proxy advisory firms that recommend how institutional investors vote on matters presented to public company stockholders.

In late 2017, the Delaware Supreme Court issued a decision involving claims of excessive nonemployee director compensation at Investors Bancorp, a Short Hills, New Jersey-based bank. In that case, the court applied a higher legal standard to decisions made by directors about their own compensation.

Since the 2017 decision, other cases have been settled involving similar claims against public companies, and more new cases were filed in 2018. The two primary proxy advisory firms have also shown an enhanced focus since the 2017 decision on compensation awarded to outside directors.

With these cases in mind, focus on outside director compensation continues, and public companies especially should review their decision-making processes about discretionary stock equity plans and non-employee director compensation.

Stockholder claims concerning the conduct of directors generally are subject to review under the business judgment rule, where the presumption is that the board acted in good faith, on an informed basis and in the best interests of stockholders.

In cases where the business judgment rule applies, the court will not second-guess a board’s business decision.

Before the Investors Bancorp decision, this was the standard applied to cases challenging director compensation decisions, with a few exceptions. In the cases where the Delaware courts reviewed challenges to director compensation approved by directors themselves, the courts recognized a stockholder ratification defense for director compensation in cases in which stockholders had approved the following:

  • An equity plan that provides for fixed awards
  • The specific awards made under an equity plan
  • An equity plan that includes “self-executing” provisions—awards that are determined based on a formula specified in the plan without further discretion by the directors
  • An equity plan that includes “meaningful limits” on director compensation—a cap on the awards that could be made to nonemployee directors

In cases where a company can take advantage of the stockholder ratification defense, the company can seek dismissal of the stockholder claim under the business judgment rule.

In the Investors Bancorp case, the Delaware Supreme Court considered the scope of stockholder ratification of director compensation decisions for the first time in more than 50 years, and in doing so limited the ratification defense when directors make equity awards to themselves under an equity incentive plan.

The Delaware court determined that the more onerous rule—the “entire fairness” test—applies, where a plaintiff can show a majority of the board was interested or lacked independence regarding the decision, or would receive a personal financial benefit from the decision.

For equity grants awarded to directors under the plan, that test requires the board to prove equity incentive awards they grant themselves are fair to the company and its stockholders. The Delaware court found that while the stockholders in the Investors Bancorp case had approved the general parameters of the equity plan that contained a limit on the aggregate amount of stock awards that could be made to directors, they had not ratified the specific awards to directors and, therefore, the business judgment rule did not apply.

The decision therefore calls into question whether the ratification defense is still feasible for plans that contain only “meaningful limits” on director awards. The Delaware Supreme Court sent the case back to the lower court to review under the entire fairness standard, and that case is currently pending.

Key Takeaways
Boards and compensation committees should consider the following to mitigate potential risks in implementing equity incentive plans or making awards to directors under existing equity incentive plans:

  • Careful consideration of peer group selection
  • Retention of a compensation consultant experienced in banking
  • Whether to include director compensation limits in equity plans
  • Ensuring that director compensation decisions are made after a robust process that accounts for market practices and peer group practices

And finally, boards and compensation committees should carefully describe the decision-making process and other key factors for equity awards to nonemployee directors in the company’s annual proxy statement.