9 Ways to Do Executive Sessions Right

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After a long day of meetings, many directors would prefer to adjourn rather than continue on to executive session. Executive sessions are nothing more than a shapeless time slot at the end of the regular board agenda, right?

No. Executive sessions are an important part of good corporate governance. But executive sessions are only worth having when directors take the time to do them right. Below are nine considerations to keep in mind to maximize this time.

1. Executive sessions should be a priority, not an afterthought. Lead independent directors should always include a time slot on the board meeting agenda for executive sessions. They should also take the time to stress to the directors the importance of staying for and participating in executive sessions. Many companies fail to hold effective executive sessions because they don’t leave enough time for them, so make the time.

2. Lead independent directors should use the agenda effectively. Staying in touch with the management team between meetings is useful. Independent directors should use those discussions to compose a short-form agenda for each executive session.

Executive sessions are not simply a time to talk about the management team members in their absence. Executive sessions provide a valuable forum for open discussion on a host of topics on independent directors’ minds.

3. The CEO should be included (and then excluded) from executive sessions. At the onset of an executive session, the non-CEO management team members should recuse themselves. It can be very useful to include the CEO in the first portion of the executive session. And it can be just as useful to exclude the CEO for the rest of the session.

4. The board of directors should adopt a formal executive session policy. The policy should set forth how executive sessions should be conducted. Having a formal policy can eliminate ambiguity, foster trust and make the sessions more productive.

5. Lead independent directors should always keep minutes of the executive sessions and make sure the board gets credit for holding the sessions. The minutes should only generally indicate that the session occurred and summarize the topics discussed. When making a formal decision, the director should keep more detailed minutes.

The director should maintain the minutes appropriately. Inherently, sensitive topics may be discussed in executive session. Knowing this, many companies ask their independent lead director or outside legal counsel to serve as the custodian of executive session minutes to preserve the confidentiality of the matters covered.

6. Post-meeting reporting should be done regularly. After each executive session, the lead independent director should report back out to the CEO on any matters that warrant the CEO’s attention. This reporting-out mechanism ensures there will be follow up to important workstreams and helps to build, rather than erode, the management team’s trust.

7. Leverage all resources. As with any meeting, directors meeting in executive session benefit from having all resources at their disposal. Independent directors should always consider asking management to prepare materials on the agenda’s topics. Using outside presenters is an effective way to bring other expert perspectives to the session.

8. Participants should be encouraged to collaborate but never to conspire. The CEO and the management team should be included in helping the independent directors give shape to the executive sessions and in assisting the directors in following up on the sessions.

Take measures to make clear to management that the sessions are not merely gossip time for the directors to discuss the management team. Rather, the sessions are another forum for independent directors to develop consensus to guide the company for the benefit of all its constituents.

9. The lead independent director and the CEO should follow up on the key executive session discussion points. Follow up can include board training, policy changes and management presentations — even a topic that makes its way onto the agenda of the next regularly scheduled board meeting.

Finally, and maybe most importantly, directors do not need to meet in executive session for a long period of time when there are not any matters that warrant their extended attention. However, it is important to take the time to initiate an executive session to offer up the opportunity for candid discussion, regardless of the topic.

Five Actions That Bank Directors Can Take Now

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Recent stress in the banking sector continues to affect the operations and financial positions of banks in the U.S. While executive management teams analyze events and take actions to address the needs of their institutions and customers, there are important oversight actions that corporate directors of banks, especially mid-sized banks with total assets of between $50 billion and $250 billion can take to fulfill their role of looking out for the interests of the bank’s shareholders.

1. Understand and challenge management’s viewpoint on changing risks and dislocations, including how potential continued rate increases and a potential “higher for longer” interest rate environment could affect the bank’s strategy and objectives.
Directors should ask management to support and explain their critical assumptions, especially in situations where they differ from the perspectives of regulators, investors, rating agencies, financial analysts and industry observers. Boards should also carefully consider how management proposes to recalibrate risk appetite as the environment changes; in doing so, they should challenge the methodologies and metrics they use to set critical limits.

Some key questions to ask include:

  1. Has the bank established risk tolerances that are sufficient enough to capture current and emerging risks that have come to light?
  2. Are those risk tolerances complemented by key risk indicators and reporting? Given current events, should they be adjusted?
  3. Are risk acceptance decisions sufficiently governed and supported, and are the implications well understood?
  4. Does the board receive high-quality reports that convey clear, impactful insights supported by facts and analysis?

2. Review the details of executive management’s crisis action plans and the range of market and economic scenarios that management is considering.
Evaluate the availability and adequacy of management’s crisis resiliency, specifically capital and contingency funding. Some key questions to ask include:

  1. Has management appropriately tested the bank’s contingency plans?
  2. Is management documenting the lessons learned from those tests and adjusting plans based on the results?
  3. Has management performed multiple tabletop simulation exercises?
  4. Does the bank have communication plans in place that consider all relevant media outlets, including social media?

3. Obtain independent perspectives by meeting in executive session with the chief risk officer (CRO) and the chief audit executive.
Boards should seek the CRO’s and CAE’s independent perspectives on the bank’s current risk profile in relation to the board-approved risk appetite and strategy, as well as the adequacy of executive management’s risk management and crisis response plans. In addition, the CRO and CAE can provide an independent evaluation of the strengths and weaknesses of the bank’s risk management capabilities given the current environment. In particular, boards should seek their evaluation of the quality of risk data, the speed with which analyses and reports can be produced and the capabilities of crisis response talent.

4. Assess whether the board and the bank’s management teams have the right skills and sufficient resources.
The scope and nature behind the current market stress — and the scope and nature of the required response — strains existing key personnel on the board and in management. Boards should determine whether they have skill gaps in areas relevant to the current stress and where they may need subject matter expertise and training. Immediate areas of focus could include capital planning, liquidity management, regulatory strategy, crisis management, financial reporting, regulatory compliance, recovery and resolution planning, and business integrations.

In performing this assessment, boards should consider whether they run the risk of being overly dependent on a single board member in one or more of these areas, which can lead to overreliance or dependency on a key person. Further, boards should also focus on making sure that senior management, treasury and independent risk management functions have sufficient resources and capabilities to execute their responsibilities.

5. Plan ahead for the post-stress environment.
We believe that heightened regulatory requirements for mid-sized banks are inevitable, and that standards that are currently applicable to banks with assets exceeding $250 billion will progressively be applied to smaller institutions, such as those with assets between $50 billion and $250 billion. To prepare, boards for institutions with assets of $50 billion and above should consider:

      • Launching a comprehensive evaluation of board practices in light of the principles outlined in the Federal Reserve’s supervisory guidance for boards at banks with more than $100 billion in assets, SR21-3. They should carefully consider the degree to which an evaluation should be executed by independent parties.
      • Gaining an understanding of how a potential tightening of regulatory standards for mid-sized banks would affect the institution. For instance, would the bank need to make upgrades to its capital and liquidity risk management frameworks and systems? How would the bank’s talent needs change? What changes would the bank need to make to senior management and board governance? How will operations and controls need to change? What are management’s plans to address these changes?

How One Bank Transformed Its Board & Shareholder Base in 6 Years

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The McConnell family has had a controlling interest in Pinnacle Financial Corp., based in Elberton, Georgia, since the 1940s. But over the past few years, Jackson McConnell Jr., the bank’s CEO and chairman, has worked to dilute his ownership from roughly 60% to around a third. “It’s still effective control, but it’s not an absolute control,” he says.

McConnell, a third-generation banker, has seen a lot of family-owned banks struggle with generational change in ownership as well as management and board succession issues, and he’s seen some of it firsthand when Pinnacle acquires another bank. It’s a frequent problem in community bank M&A. In Bank Director’s 2023 Bank M&A Survey, 38% of potential sellers think succession is a contributing factor, and 28% think shareholder liquidity is. 

“One of the things that I’ve experienced in our effort to grow the bank [via M&A is] the banks that we’re buying … maybe the ownership is at a place where they would like to liquidate and get out, or the board [has] run its course, or the management team is aging out,” he says. “And they end up saying the best course of action would be to team up with Pinnacle Bank.” 

There’s not another generation of McConnells coming through the ranks at $2 billion Pinnacle, and he doesn’t want the same result for his bank. “I want to make sure that I’m doing everything that I can to put us in a position to continue to perpetuate the company and let it go on beyond my leadership,” he says. Putting the long-term interests of the bank and its stakeholders first, Pinnacle is reinventing itself. It’s transitioned over the past few years from a Subchapter S, largely family-owned enterprise with fewer than 100 owners to a private bank with an expanded ownership base of around 500 shareholders that’s grown through M&A and community capital raises. As this has transpired, Pinnacle’s also shaking up the composition of the board to better reflect its size and geographic reach, and to serve the interests of its growing shareholder base.

Pinnacle is a “very traditional community bank,” says McConnell. It’s located in Northeast Georgia, with 27 offices in a mix of rural and what he calls “micro metro” markets, primarily college towns. It has expanded through a mix of de novo branch construction and acquisitions; in 2021, it built three new branches and acquired Liberty First Bank in Monroe, Georgia — its third acquisition since 2016. 

The bank’s acquisitions, combined with three separate capital raises to customers, personal connections and community members in its growing geographic footprint, have greatly expanded the bank’s ownership. 

But McConnell says he’s sensitive to the liquidity challenges that affect the holders of a private stock, who can’t access the public markets to buy and sell their shares. “We’ve done several things to try to provide liquidity to our shareholders, to cultivate buyers that are willing to step up,” McConnell says. “You can’t call your broker and sell [the shares] in 10 minutes, but I can usually get you some cash in 10 days. If you’re willing to accept that approach, then I can generally overcome the liquidity issue.” Sometimes the bank’s holding company or employee stock ownership plan (ESOP) can be a buyer; McConnell has also cultivated shareholders with a standing interest in buying the stock. The bank uses a listing service to facilitate these connections.

“We have a good story to tell,” McConnell says. “We’ve been very profitable and grown and have, I think, built a good reputation.”

The board contributes to that good reputation, he says. During one of the bank’s capital raises, McConnell met with a potential buyer. He had shared the bank’s private placement memorandum with the investor ahead of time and started his pitch. But the buyer stopped him. “He said, ‘Jackson, it’s OK. I’ve seen who’s on your board. I’m in,’” McConnell recalls. “That really struck me, to have people [who] are visible, [who] are known to be honorable and the type of people you want to do business with … it does make an impact.”  

The current makeup of Pinnacle’s board is the result of a multi-year journey inspired by the bank’s growth. Several years ago, the board recognized that it needed to represent the bank’s new markets, not just its legacy ones. And as the bank continued to push toward $1 billion in assets — a threshold it passed in 2020 — the board became concerned that the expertise represented in its membership wasn’t appropriate for that size. 

“If we wanted to be a billion dollar bank, we needed a billion dollar board,” says McConnell. The board started this process by discussing what expertise it might need, geographic areas that would need representation, and other skills and backgrounds that could help the bank as it grew. 

The board also chose to change its standing mandatory retirement policy to retain a valuable member. While the policy still has an age component, exceptions are in place to allow the bank to retain members still active in their business or the community, and who actively contribute to board and committee meetings. 

But there was a catch, says McConnell. “We said, ‘OK, we’re going to do this new policy to accommodate this particular board member — but for us to do this here and make this exception, let’s all commit that we’re going to do a renewal process that involves bringing in some new board members, and some of you voluntarily retiring.’” The board was all-in, he says. “I had a couple of board members approach me to say, ‘I don’t want to retire, but I’m willing to, because I think this is the right way to go about it,’” he recalls.

Conversations with directors who still view themselves as contributing members can be a challenge for any bank, but McConnell believes the board’s transparency on this has helped over the years, along with the example set by those retiring legacy board members. Over roughly six years, Pinnacle has brought on nine new board members. That’s a sizable portion of the bank’s outside directors, which currently total 10.

McConnell leveraged his own connections to fill that first cohort of new directors in 2016. The second and third cohorts leveraged the networks of Pinnacle’s board members and bankers. McConnell has had getting-to-know-you conversations with candidates he’s never previously met, explaining the bank’s vision and objectives. But he’s also transparent that it may not be a fit in the end for the individual or the board. “We talked openly about what we were trying to do, and also openly about how I might end up recruiting you, only to say, ‘No,’ later,” he says.

Director refreshment is an ongoing process; Bill McDermott, one of the independent directors that McConnell first recruited in 2016, confirms that the board spends time during meetings nominating prospective candidates for board seats.  

Both McConnell and McDermott say the diversity of expertise and backgrounds gained during the refreshment process has been good for the bank. Expansion into new markets led to bringing on an accountant and an attorney, as well as two women: a business owner and the chief financial officer of a construction company, who now make up two of the three women on the board.  

New, diverse membership “adds a lot of energy to the room. It’s been very successful,” says McConnell.

To onboard new directors, there’s a transition period in which the new directors and outgoing board members remain on the board for the same period of time — anywhere from six to 12 months — so sometimes the size of the board will fluctuate to accommodate this. 

It can take new directors with no background in banking time to get used to the ins and outs of a highly regulated industry. That’s led to some interesting discussions, McConnell says. “There is some uneasiness and awkwardness to some of the questions that get asked, but it’s all in the right spirit.” 

External education, in person and online, helps fill those gaps as well. McDermott says the board seeks to attract “lifelong learners” to its membership.

One of the factors that attracted McDermott to Pinnacle was the bank’s culture, which in the boardroom comes through as one built on transparency and mutual respect. “I was just attracted by an environment where everybody checked their egos at the door. The relationships were genuine,” he says. “[T]hat kind of environment, it’s so unique.” And he says that McConnell sets that tone as CEO.

“There is lively discussion,” says McDermott. “Jackson encourages people to ask thoughtful questions, and sometimes those thoughtful questions do lead to debate. But in the end, we’ve been able to synthesize the best part of the discussions around the table and come up with something that we think is in the best interest of the bank.”

Additional Resources
Bank Director’s Online Training Series library includes several videos about board refreshment, including “Creating a Strategically Aligned Board” and “Filling Gaps on Your Board.” For more context on term limits, read “The Promise and the Peril of Director Term Limits.” To learn more about onboarding new directors, watch “A New Director’s First Year” and “An Onboarding Blueprint for New Directors.” For more information about the board’s interaction with shareholders, read “When Directors Should Talk to Investors.” 

Bank Director’s 2023 Bank M&A Survey, sponsored by Crowe LLP, surveyed 250 independent directors, CEOs, chief financial officers and other senior executives of U.S. banks below $100 billion in assets to examine current growth strategies, particularly mergers and acquisitions. Bank Services members have exclusive access to the complete results of the survey, which was conducted in September 2022. 

Lessons Learned from HBO’s “Succession”

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My wife and I recently completed watching all three seasons of HBO’s “Succession.” It’s a wild ride on many levels, full of deceitful and dysfunctional family dynamics, corporate political backstabbing, and plain old evil greed. Despite this over-the-top intertwined family and business drama, there are quite a few relevant lessons worthy of attention from bank leaders and board members. Three in particular stand out to me.

First: Succession planning is always vital, and never more so in an organization (public or private) with any element of familial involvement. As is well known, all boards of directors should be paying close attention to succession for the CEO role and other key leadership positions. In the HBO show, there is no clear line of succession, and the company’s 80-year-old patriarch (who experiences major health issues early in season 1) has not only failed to plan for his eventual departure but has all four children thinking they can and should take over the “family” business. Only one of the four is even close to qualified, and he becomes compromised by external events. Meanwhile, daddy plays each sibling against each other. It is a mess which devolves into chaos at various times, seriously impacting both the fortunes and future independence of the business.

Second: Where is the board of directors? In this instance, the company, Waystar Royco, is a publicly traded global media and entertainment conglomerate, but the board is not governing at all. The single most important responsibility of any board of directors is the decision of “who leads”. This goes beyond the obvious CEO succession process, ideally in a planned, orderly leadership transition or worst case, a possible emergency situation. It more broadly relates to an ongoing evaluation of the CEO and his or her competency relative to the skills, experiences, leadership capabilities, temperament and market dynamics. Too many boards allow CEOs to determine when their time is up, rather than jointly crafting a plan for a “bloodless transition of power,” that encourages (or even forces) a constructive change of leadership. In “Succession,” the board is comprised of cronies of the patriarch — and his disengaged brother — who are both beholden to and intimidated by their successful and highly autocratic CEO.

Lastly, in any company with a sizable element of family ownership, the separation of economic ownership and executive leadership is vital. While at times the progeny of a successful founder and leader prove extremely capable (see Comcast’s Brian Roberts), this is often the exception rather than the rule. Therefore, the board and/or owners ideally will address this dynamic head-on, accepting that professional management is indeed the best way to enhance economic value for shareholders and family members while encouraging the offspring and descendants to keep their hands off and cash the checks. Many privately held banks grapple with this same dynamic.

Such decisions, of course, are fraught with peril for those involved, which “Succession” endlessly highlights. Creating the proper governance structure and succession plans is rarely easy, especially when personal and financial impacts weigh heavily on the individuals involved. Still, with the board’s prime directive of leadership selection top of mind, and a commitment to candor and transparency, the outcome will likely be much better than simply ignoring the elephant in the room.

When season four of HBO’s “Succession” rolls around, it will surely provide more examples of how not to govern properly.

Fighting Disaster Through Business Continuity Planning

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As Hurricane Ian began to coalesce in the Caribbean in late September, all of Florida hunkered down. This included Climate First Bancorp, the holding company for $250 million Climate First Bank, which serves primarily commercial organizations. The storm was initially expected to make landfall in the U.S. by hitting St. Petersburg, Florida, Climate First’s headquarters. The bank’s leaders knew that they had to begin preparations, so they turned to their business continuity plan. 

The two-year-old bank is also in the middle of shifting its data storage to a third-party, so servers aren’t hosted at individual branches. As the storm rolled forward, though, the bank had to undergo a temporary shift of the data and operations from the St. Pete location to one in Winter Park, near Orlando. This gave the organization protection in case St. Petersburg saw significant damage. 

It served them well. As the state suffered flooding and destruction that reports have estimated between $50 billion and $65 billion, St. Petersburg and Orlando avoided the worst of the storm. Still, customers saw little disruption and the experience further prepared Climate First Bank for another hurricane that would hit weeks later. “We’re a climate focused bank, and this is supposed to be more than a 100-year flood,” says Lex Ford, president at Climate First Bank. “How many years in a row have we had a 100-year flood?”

Business continuity planning isn’t just a nice-to-have, but a requirement by regulators. How robust the continuity plan is, however, will determine how ready the organization can react when unexpected disturbances or upheavals in the normal course of business occurs. With the rate of natural disasters rising, so does the possibility that banks will have to lean on continuity preparation. Boards have a responsibility to ensure that such plans have robust strategies in place, but many organizations lack certain coverage.

Business continuity planning within institutions shifted in response to Covid-19. With more than 80% of executives and directors reporting that their organizations have remote workers, 44% saw a gap in their bank’s business continuity plan with regards to remote work procedures and policies, according to Bank Director’s 2022 Risk Survey, conducted in January 2022. That rate is down from 77% admitting such a gap in 2021. 

Meanwhile, despite the increase in intensity of hurricanes and other tropical storms since 1995, according to the Environmental Protection Agency, only 16% of respondents said their board has discussed the impact of climate change on the organization at least annually, according to the 2022 Risk Survey. Six out of 10 respondents said their board and senior leadership team understood the physical risks the bank faced due to climate change.

But when it comes to continuity preparations, “you’re not just planning for things that are obvious,” says Julie Stackhouse, a director at $27 billion Simmons First National Corp., headquartered in Pine Bluff, Arkansas. Stackhouse also served at the Federal Reserve Bank of Minneapolis in 2001, and was at a meeting in the New York Federal Reserve during 9/11. She witnessed first-hand the response of financial institutions. This experience of seeing banks react to the sudden attack crystalized the importance of continuity planning for Stackhouse.

When a disaster hits, “human beings have an emotional response,” says Stackhouse. Employees will worry about family and friends, not just the bank. During these moments, “you need to think about the practicality of personality,” Stackhouse adds.

How will employees respond under the pressure of an attack or a storm that destroys nearby homes, or a ransomware that could threaten their jobs? Considering those emotions during moments of clarity — and planning for an expectation that some employees won’t be available — is vital to the success of any continuity plan. For boards, ensure that management has considered the employees’ emotional response to such situations, or else the best plan may prove worthless when pressure rises. 

Climate First’s plan deals with the human side by spreading employees across the state. Even with two branches, the majority of its employees work from home. This served them well during Ian. But the bank took its experience with Ian and began to expand the states that it would hire from to ensure an interruption in Florida wouldn’t impact every employee of the bank. Some employees work permanently outside the state, and others occasionally do. “Many [new hires] live three, four, five states away,” Ford says. 

It’s one strategy the bank has used to counter the threat of any one incident shutting the organization down. But it’s a solution unique to the institution itself. For directors, it’s vital to review the continuity plan, seeking insight into key issues for the individual bank. 

“The first question” for boards, says Stackhouse, “is have you seen the business continuity plan? Do you know how often it’s updated? Do you know if the key expectations are laid out in the plan?” 

Stackhouse says that it’s surprising how many directors have failed to even inquire about the plan on this basic level. Once you have looked at the plan, though, you need to go further, asking about how communication will occur if a disturbance to the organization’s infrastructure takes place, Stackhouse says. How will leaders communicate with employees and each other? Banks should have tactics in place for such communication and expect different layers of disruption. You may not know what unexpected disaster could eventually impact the organization, but you can lean on other scenarios — in the news or experienced directly by the bank — to prepare in case communication is disrupted in an unexpected way.

Another key question: Does the bank have business continuity staff? As a director, know what their roles are, what they do and how they handle key issues within the continuity strategy. Having ownership over the continuity plan will prevent it from becoming a secondary concern. “It is never a good answer if it’s everybody’s responsibility,” adds Stackhouse. 

One of the best ways to pressure test your institution’s continuity plan is to have practice runs with scenarios that could prevent the bank from operating. Discussing these scenarios will allow the organization to see what works, what doesn’t and what should be tweaked. Directors should take part in many of those tests, since they will likely be a key resource if a large enough event takes place. Not to mention, in such scenarios, management may lean on boards of directors for guidance.

For community banks, where resources may be more limited, focus on events that are more likely to occur. This will depend on the organization but could be a hurricane or extended power outage or cyberattack. Having run-throughs while leaning on the continuity plan will test what the C-suite has put together. Did communication hold? What additional resources do employees need to do their job? How did they react? Seeing this under a guided test-run will ease nerves if the real event occurs. 

Larger banks may have a team that can run specialized tests to simulate very specific scenarios, like, say, a war or unexpected attack on the nation. While you may not know what scenario will occur, having these test-runs will allow the bank to have case studies on hand, in the event a similar disruption happens.

For Climate First, the plan they put in place served them through the hurricane season this year. They will incorporate their experience into continuity planning for the future. The goal? To ensure customers never realize a disruption occurred. 

With the most distant client living in Hawaii, that person “probably didn’t even know we were going through a storm,” says Ford. 

“And I hope they couldn’t tell.” 

* * *  

For more information about other aspects of business continuity planning, consider reading “Getting Proactive About Third-Party Cyber Risk,” or  “The Topic That’s Missing From Strategic Discussions.” 

Bank Director’s 2022 Risk Survey, sponsored by Moss Adams LLP, surveyed 222 independent directors, CEOs, chief risk officers and other senior executives of U.S. banks below $100 billion in assets to gauge their concerns and explore several key risk areas. The survey was conducted in January 2022.

Do Independent Chairs Reduce CEO Pay?

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In an advisory vote earlier this year, shareholders roundly rejected JPMorgan Chase & Co.’s executive compensation package, particularly a whopping  $52.6 million stock option award for CEO and Chair Jamie Dimon. But at the same time, shareholders voted against a proposal to split those roles.

The proxy advisory firms Glass Lewis and Institutional Shareholder Services favor separating the CEO and chair roles. “Executives should report to the board regarding their performance in achieving goals set by the board,” Glass Lewis explains in its 2022 voting guidelines. “This is needlessly complicated when a CEO chairs the board, since a CEO/chair presumably will have a significant influence over the board.”

An analysis of Bank Director’s Compensation Survey data, examining fiscal year 2019 through 2021, finds that CEOs earn less when their board has an independent chair. Most recently, the 2022 Compensation Survey, sponsored by Newcleus Compensation Advisors, found that banks with separate CEO and chair roles reported median total CEO compensation of $563,000, compared to $835,385 where the role was combined. 

The results are striking, but they should be taken with a grain of salt. The information collected from the survey, which is anonymous, doesn’t include factors like bank performance. Respondents skewed toward banks with an independent chair. And data alone can’t sufficiently describe what actually occurs in corporate boardrooms.

“I can’t really say which model works better. Look at Jamie Dimon; that’s worked really well for the shareholders of JPMorgan Chase, whereas I think there have been three or four initiatives to try to split that role,” says Jim McAlpin Jr., a partner at the law firm Bryan Cave Leighton Paisner. McAlpin also serves on the board of Bank Director’s parent company, DirectorCorps. “It was voted down every time by the shareholders.”

CEOs typically negotiate when and whether they’ll eventually be named chair when they join a bank, says McAlpin. “If you have a very impactful, strong CEO who wants to be chair — most boards will not deny him or her that position, because they want [that person] running the bank.” It’s a small price to pay, he adds, for someone who has such a dramatic influence on the bank’s performance. “There is nothing more important to the bank than a CEO who has a clear vision, who can show leadership, form a good team and can execute well,” says McAlpin. 

But it’s important to remember that boards represent the interests of the shareholders. “The most important thing a board has to do is hire and retain a quality CEO. Part of retaining is getting the compensation right,” says McAlpin. “It’s important for the board to control that process.” 

McAlpin favors appointing a lead director when the CEO also has the chair position, to provide input on the agenda and contribute to the compensation process. 

Truist Financial Corp., in response to shareholder pressure around chair independence in 2020, “strengthened” its lead independent director position, according to its 2022 proxy statement. Former Piedmont Natural Gas Co. CEO Thomas Skains has served as lead independent director of the Charlotte, North Carolina-based bank since March 2022. Skains has the authority to convene and set the agenda for executive sessions and other meetings where the chair isn’t present; provide input on the agenda, and approve board materials and schedules; and serve as a liaison between the independent directors and CEO and Chair William Rogers Jr. 

But one individual can’t single-handedly strengthen the board, says Todd Leone, a partner and global head of executive compensation at McLagan. The compensation committee is responsible for the company’s pay programs, including executive compensation, peer benchmarking, reviewing and approving executive compensation levels, recommending director compensation, evaluating the CEO’s performance and determining the CEO’s compensation. With that in mind, Leone says the strength of the compensation committee — and the strength of its committee chair — will influence the independence of these decisions.

Leone also believes that increased diversity in the boardroom over the years has had a positive effect on these deliberations. “A diverse board, in my experience, they’re asking more questions,” he says. “And through that process of asking those questions, various things get unearthed, and the end result generally is stronger pay programs.”

Twelve years of Say-on-Pay — where public company shareholders offer an advisory vote on the top executives’ compensation — has also benefited those decisions, he says. Today, most long-term incentive plans are based on a selection of metrics, such as return on assets, income growth, asset quality and return on equity, according to Bank Director’s 2022 Compensation Survey. And in August, the U.S. Securities and Exchange Commission passed a pay versus performance disclosure rule that goes into effect for public companies in the fiscal year following Dec. 16, 2022.

“There’s a much higher bar for getting these plans approved,” says Leone, “because the compensation committees feel much more responsibility for their role in that process.”

In McAlpin’s experience, the best CEOs have confidence in their own performance and trust the process that occurs in the boardroom. “If they don’t like the results, they’ll give feedback, but they let the process unfold,” he says. “They don’t try to overtly influence the process.”

Heading into 2023, Leone notes the whipsaw effects that have occurred over the past few years, due to the pandemic, strong profitability in the banking sector and looming economic uncertainty. These events have had abnormal effects on compensation data and the lens through which boards may view performance. “We’re in a very volatile time, and we have been on pay since the pandemic,” says Leone. “Boards, [compensation] committees and executive management have to be aware of that.” 

Using the Succession Plan to Evaluate Talent

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Boards have many duties, from overseeing the long-term strategy of the institution, to approving executive pay packages, to vetting and approving the budget. But one job that they often leave for another day: succession planning. Yet, for forward-thinking banks, having a process for succession not only can strengthen the organization in the future, but also build talent today.

Brian Moynihan, chairman and CEO of Bank of America Corp., recently spoke about this very fact. Despite not having plans to leave the institution he’s led since 2010, the 62-year-old Moynihan explained that the bank reworks its succession plan twice a year.

“We have a deep succession planning process that we go through every six months [on] the board that alternates between the senior most people and then … I do it multiple levels down so we’re always looking,” said Moynihan in an interview last December with CNBC’s Closing Bell. “The board will pick somebody. My job is to have many people prepared.”

Such a clear process makes Bank of America unique, in some regards. While surveys over the years have tried to pinpoint how many companies have formal succession plans, organizations often avoid outlining it to investors, leaving it an open question. The Securities and Exchange Commission revised disclosure rules in November 2020 to encourage companies to outline human capital resources, like diversity rates, employment practices, and compensation and benefits. Of the first 100 forms filed by companies with $1 billion in market capitalization, only 5% of the companies added any additional detail to the succession planning process, according to researchers working with Stanford University and corporate data provider Equilar. Bank Director’s 2019 Compensation Survey found 37% of bank executives and board members reporting that their bank had not designated a successor or potential successors for the CEO.

So much of a bank’s long-term success has to do with having a clear plan if the head of the business must leave. This becomes especially true if the CEO must step aside suddenly, like for a health concern or other emergency. It’s on the board to lead this search. But when done right, it can also become a powerful tool to prepare internal and external talent, a process embraced by the current CEO. 

David Larcker has studied CEO succession planning as a professor at Stanford Graduate School of Business, where he leads the school’s Corporate Governance Research Initiative. “One of the two key things that boards do is hiring and firing the CEO,” says Larcker. Many boards, though, “do not put in enough time and effort in succession,” he adds.

By not taking an active approach to this part of the job, it can lead to the wrong hire, resulting in years of poor management. Larcker says one of the reasons for a lack of proper succession plans is often because it’s one of the least exciting roles a board undertakes, so it gets put to the backburner. Plus, since you rarely replace the CEO, it’s not always a priority.

Larcker and his research team sought to identify what occurs when a board lacks a succession plan. They looked at scenarios where the CEO left abruptly, either because the person resigned, retired or made other transitions. These are often the reasons disclosed to the public; in reality, the company may have fired a CEO without stating that fact. Out of the various scenarios, the researchers identified situations where the board and CEO likely parted ways due to performance. 

Out of all the media citations, 67% of the time the company named a permanent successor in the announcement; in 10% of the cases, it appointed a permanent successor but after a delay; and 22% of the time it named an interim successor. Those moments of upheaval provide investors with the clearest insight into whether the board took a proactive approach to succession, since the plans aren’t often public.

When a company named an interim successor, that was one of the clearest signs that the organization fired the CEO without a plan in place, and the stock performance of the company performed the worst after the announcement. Also, it’s worth noting that 8% of the time, the company named a current board member to the CEO role. When that occurred, the company’s stock price often performed worse than when internal or external candidates were chosen. 

What separates the organizations that can name a successful permanent successor from those that can’t? Often, it’s the organizations that have a clear line to the talent that’s growing inside and outside of the bank.

John Asbury knows all too well the need for this line of succession — it’s how he got the head role at Atlantic Union Bankshares, Corp., a $20 billion public bank based in Richmond, Virginia.  When Asbury was tapped as CEO in 2017, he followed G. William Beale, who had helmed the bank — then known as Union Bankshares Corp. — for almost 25 years. The bank had done a full executive search starting two years before Beale stepped away. Now, despite not having any plans to retire, Asbury, 57, takes the job of building succession within the entire organization seriously. 

“There are too few people in the industry who understand how the bank actually works or runs front to back,” Asbury says. “Oftentimes they have their area of specialty and not much else.”

Asbury, who sits on the board of directors as well, works with his human resources and talent evaluators to identify those within the organization who can fill executive roles. In addition to empowering them as executives, he gets them face time with the board. This provides the board with the ability to interact and know the talent that the bank has in the stable. 

“We want these folks to understand how the organization works, and we want them at the table to talk about not just strategy for their business unit, but the bank strategy as well,” Asbury says.

Asbury recently showed this leadership style in a public way by announcing that President Maria Tedesco would add the role of chief operating officer, and he would hand over managing many of the day-to-day operations to Tedesco. This isn’t a succession plan put in place. Instead it’s giving Tedesco the ability to have 85% of the organization reporting to her, while she and other executives at the bank continue to report to Asbury. 

Asbury thinks the move was needed to allow him the freedom to focus on growing Atlantic in other ways. But it also provides Tedesco with hands-on training in managing the organization. Despite the move, Asbury says that it doesn’t prevent him from working with the board on succession plans. 

The compensation committee, which Asbury does not sit on, also runs succession planning at Atlantic Union Bank. Sometimes boards may be hesitant to discuss succession if the current CEO views the discussion as antagonistic. But Atlantic Union undergoes an emergency succession plan evaluation once a year — currently, Tedesco would step in as interim CEO if something unexpected occurred to Asbury. She even sits in on every board meeting except when the executive team is being discussed. 

It’s a conversation that boards cannot be afraid to have. “If the CEO is on the board, that committee or board, has to own the process,” Larcker says.

What doesn’t work when it comes to succession planning? Having the new CEO step into the company while the outgoing CEO continues to helm the business for a few months to a year, added Larker. This design creates confusion from both the leadership and the staff on who they should listen and report to. “Ultimately, it’s a bad sign,” Larcker says.

Asbury knows that all too well. When he took the Atlantic Union role, Beale held the CEO position for three months while Asbury got acquainted with the organization. Within a few weeks, though, Beale let Asbury know that he would clear out the office and Asbury could call him if any questions arose. “Shorter is better in terms of transition,” Asbury adds. 

That can only happen with a plan in place.

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.”

3 Steps to Planning for Climate Risk

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Last year, President Joe Biden’s Executive Order on Climate-Related Financial Risk and the resulting report from the Financial Stability Oversight Council identified climate change as an emerging and increasing threat to U.S. financial stability.

A number of financial regulatory and agency heads have also spoken about climate risk and bank vulnerability.

Now the question is: What should banks be doing about it now? Here are three steps you can take to get started:

1. Conduct a Risk Assessment
Assessing a financial institution’s exposure to climate risk poses an interesting set of challenges. There is the short-term assessment for both internal operations and business exposures: what is happening today, next month or next year. Then there are long-term projections, for which modeling is still being developed.

So where to begin?
Analyzing the potential impacts of physical risk and transition risk begins with the basic question, “What if?” What if extreme weather events continue, how does that impact or alter your operational and investment risks? What if carbon neutral climate regulations take hold and emissions rapidly fall? Widen your scope from credit risk to include market, liquidity and reputational risk, which is taking on new meaning. Bank executives may make reasonable decisions to stabilize their balance sheet, but those decisions could backfire when banks are seen as not supporting their customers in their transition.

Regional and smaller financial institutions will need more granular data to assess the risk in their portfolios, and they may need to assemble local experts who are more familiar with climate change’s impact on local companies.

2. Level Up the Board of Directors
Climate change has long been treated as part of corporate social responsibility rather than a financial risk, but creating a climate risk plan without executive support or effective oversight is a fool’s errand. It’s time to bring it into the boardroom.

Banks should conduct a board-effectiveness review to identify any knowledge gaps that need to be filled. How those gaps are filled depends on each organization, but climate change expertise is needed at some level — whether that be a board member, a member of the C-suite or an external advisor.

The next step is incorporating climate change into the board’s agenda. This may already be in place at larger institutions or ones located in traditionally vulnerable areas. However, recent events have made it clear that climate risk touches everything the financial sector does. Integrating climate risk into board discussions may look different for each financial institution, but it needs to start happening soon.

3. Develop a Climate-Aware Strategy
Once banks approach climate risk as a financial risk instead of simply social responsibility, it’s time to position themselves for the future. Financial institutions are in a unique position when formulating a climate risk management strategy. Not only are they managing their own exposure — they hold a leadership role in the response to carbon neutral policies and regulation.

It can be challenging, but necessary, to develop a data strategy with a holistic view across an organization and portfolio to reveal where the biggest risks and opportunities lie.

Keeping capital flowing toward clients in emission industries or vulnerable areas may seem like a high risk. But disinvestment may be more detrimental for those companies truly engaged in decarbonization activities or transition practices, such as power generation, real estate, manufacturing, automotive and agriculture. These exposures may be offset by financing green initiatives, which have the potential to mitigate transition risk across a portfolio, increase profit and, better yet, stabilize balance sheets as the economy evolves into a carbon neutral world.

How Two Community Banks Added Remote Directors, and Why More Should

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Increasingly, community banks are considering remote or hybrid work arrangements as a way to bring on hard-to-find and in-demand talent at the employee level. They may want to consider doing something similar for their boards, as well.

Many community banks define “community” as a geographic market and draw director talent from that pool. But increasingly, boards require skills, experiences and perspectives that may be difficult to find in-market. These institutions may want to expand their search to include out-of-market or remote directors with relevant, needed skills, but will need to tailor their assessment and interview process to ensure the remote director meshes well with the local directors.

“A board seat is a rare and precious thing,” says Alan Kaplan, founder and CEO of Kaplan Partners, which helps banks with board advisory and executive searches. “Boards need to be thinking about always having fresh and current skills on the board, and being proactive, thoughtful and deliberate about board succession and repopulation.”

Kaplan says about 20% to 25% of director searches he’s done have considered a remote or out-of-market candidate, but he believes more banks should consider it. Community banks of all sizes are seeking directors with expertise or backgrounds in cybersecurity and technology. As they grow, they’re also looking for financial experts or people who have experience with strategic human capital and management at large companies — which boards may struggle to find in their market. Other institutions may lack qualified candidates that are considered diverse in their racial or gender identity. To combat this, boards can leverage the experience they gained operating remotely during the coronavirus pandemic, which could make it easier to accommodate a director who is outside an institution’s markets.

Citizens & Northern Corp., a $2.3 billion bank in Wellsboro, Pennsylvania, added its first out-of-market director in 2016 as it searched for a financial expert to join the board. Through networking, CEO Brad Scovill was referred to Terry Lehman, a retired CPA who had more than two decades of experience at national and regional accounting firms and had served as the leader of the financial services team. There was a catch, however: Although Lehman lived in Pennsylvania, he was more than 150 miles away from the bank’s headquarters.

“He’s not flying in from Hawaii, but he’s not next door either,” Scovill says.

Citizens & Northern’s board balanced Lehman’s unfamiliarity with the bank’s market area against his expertise in bank auditing and risk. In the interview process, they discussed his ability to connect with the bank’s culture and found it helpful that he had worked with dozens of different community banks over his career. They decided to add him; in May, he was appointed chairman.

Banks may hesitate to add a director who doesn’t live in the bank’s market or is familiar with its culture. But Kaplan points out that most banks would still maintain a majority of directors in-market if they appoint one or two remote directors.

Across the country, Everett, Washington-based Coastal Financial Corp. began adding remote directors after making the strategic decision in 2017 to remain independent and pursue the then-unusual business line of providing financial technology partners with back-end banking services, known as banking as a service, or BaaS. Its customer base would now include tech companies across the country, and the board needed the expertise to better network and serve them, along with compliance, governance and risk expertise, says board Chairman Christopher Adams.

“Our footprint would be into different communities and fintechs, which meant that we were going to have customers across the country,” he says. “Our board needed to represent that.”

Since that time, the $2 billion bank added Stephan Klee, who is based on the East Coast, because of his experience investing in fintechs, and Sadhana Akella-Mishra, who lives in California and serves as chief risk officer at a fintech core provider. There’s a director in Portland, one in Chicago and another on the East Coast. While there are still local directors, Adams says that having board members spread out across the country has brought a variety of perspectives and conversations, especially around technology, to the bank.

Both Scovill and Adams say it’s essential that banks approach the board appointment and interview process thoughtfully and with a sense of formality. Coastal decided to add remote directors after conducting a skills-matrix assessment and continues to question what expertise the board needs. Adams says that keeping the bank’s values at the core of conversations have helped the existing board figure out if a new remote director would be a good fit. And Kaplan recommends that banks look for remote directors who have a strong sense of community and ask about their affinity for community engagement during the interview.

Scovill credits Citizens & Northern’s process for identifying, interviewing and onboarding new board members as the driver behind the board’s willingness to consider a remote director. This assessment process evaluates a prospective directors’ talents and experience and guides the current board through the interview process so they can have meaningful, productive conversations. It also lays out expectations for director performance and participation.

Both Scovill and Adams believe most community banks would be well served by adding one or two remote directors with essential, sought-after skills to their boards. They also added that a search doesn’t have to involve a headhunter or executive search firm; instead, community banks can tap their existing network of attorneys, investment bankers and auditors for recommendations.

“It’s not just ‘Someone knows somebody, he seems a good person that the other seven directors know well so let’s put him on the board,’” Citizens & Northern’s Scovill says. “The old boy network has gone away, but the network hasn’t gone away.”

Scovill acknowledges that adding a new director to a board can change the group dynamic, and an out-of-town director could be an additional wrinkle in that consideration.

“Quality people with good experiences are quality people with good experiences,” he says. “If we get to know them and build those relationships, they seem to work out fine, as long as we commit to that effort.”