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.

12 Questions Directors Should Ask About New Bank Activities


governance-3-18-19.pngA bank’s board of directors must answer to a variety of constituencies, including shareholders, regulatory agencies, customers and employees. At times those constituencies may have competing interests or priorities. Other times, what may appear to be competing interests are actually variations of aligned interests.

One area where this is particularly true is the board’s responsibility to strike the right balance between driving revenues and ensuring the bank adheres to its risk appetite established as part of its enterprise risk management framework.

The failure to strike this proper balance can be devastating to the institution, and if widespread, could result in consequences across the entire industry, such as the 2008 financial crisis. As technology and innovation accelerate the pace of change in the banking industry, that balance will become more critical and difficult to manage. And as banks explore ways to increase profits and remain competitive, especially with respect to noninterest income, bank directors will need to remain diligent in their oversight of new bank activities.

Regulators have offered guidance to bank boards on the subject. For example, the Office of the Comptroller of the Currency (OCC) issued a bulletin in 2017 that defines “new activities” to include new, modified, and/or expanded products and services and provide guidance related to risk management systems for new activities. While it is management’s role to execute strategy and operate within the established risk appetite on a day-to-day basis, the board’s role is to oversee and evaluate management’s actions, and the board should understand the impact and risks associated with any new activities of the bank.

To exercise this responsibility, directors should challenge plans for new activities by posing the following questions to help them determine if the proper risk approach has been taken. Questions may include:

  • Does the activity align with the bank’s strategic objectives?
  • Was a thorough review of the activity conducted? If so what were the results of that review and, specifically, what new or increased risks are associated with the activity, the controls, and the residual risk the bank will be assuming?
  • Is the associated residual risk acceptable given the bank’s established risk appetite?
  • Is the bank’s infrastructure sufficient to support the new activity?
  • Are the right people in place for the activity to be successful (both the number of people required and any specific expertise)?
  • Are there any new or special incentives being offered for employees? If so, are they encouraging the correct behavior and, just as importantly, discouraging the wrong behavior?
  • What are the specific controls in place to address any risks created?
  • How will success be measured? What reporting mechanism is in place to track success?
  • Will there be any impact on current customers? Or in the case of consumers, will there be any disparate impact or unfair or deceptive acts or practices (UDAAP) implications?
  • What third parties are required for successful implementation?
  • What limits on the amount of new business (concentration limits) should be established?
  • Are the applicable regulators aware of the bank’s plans, and what is their position/guidance?

These threshold questions will assist directors in becoming fully informed about the proposed new activities, and the answers should encourage follow up questions and discussions. For example, if third parties are necessary, then the focus would shift to the bank’s vendor management policies and procedures. Discussions around these questions should be properly documented in the meeting minutes to evidence the debate and decision-making that should be necessary steps in approving any new bank activity.

If these questions had been posed by every bank board contemplating the subprime lending business as a new activity, it may have averted the challenges faced by individual banks during the financial crisis and lessened the impact on the entire industry.

In the future, if boards seek the answers to these questions, the following discussions will help ensure directors will give thoughtful consideration to new activities while properly balancing the interests of all of their constituencies.

How to Recruit Younger Directors


recruirment-6-22-18.pngA stagnant board is an ineffective one. While some directors can serve long tenures and continue to be actively engaged in the affairs of the bank, some directors grow less effective. What’s more, a board composed of directors who have served together for a number of years, or even decades, can grow complacent in their approach to bank strategy and oversight. This isn’t in the best interest of shareholders, employees or customers.

So how can boards fight complacency? Bring on some new blood. “That’s the attraction of bringing a young person in,” says Ben Wynd, a 40-year-old director at Franklin Financial Network, a $4.1 billion asset bank holding company headquartered in Franklin, Tennessee. He joined the board in 2015 and is an accountant with public company reporting expertise. “I have a desire to grow my practice. I have a desire to grow and become successful individually. I have energy, and I ask a lot of questions.”

It is rare for a bank to bring on a director aged 40 or younger as Franklin Financial has done. The 2018 Compensation Survey, conducted in March and April, finds that a whopping 84 percent report their board lacks any directors in this age group.

But boards like that of Franklin Financial, as well as $1.8 billion asset ESSA Bancorp in Stroudsburg, Pennsylvania, and $2.4 billion asset Sierra Bancorp in Porterville, California, are finding a way to attract young professionals to their board. Here’s how.

Actively seek prospective younger directors.
Your board can’t count on a skilled, young professional just falling out of the sky, so at least one director on the board should be advocating for the addition of younger perspectives and identifying potential board members. The more directors serving as advocates, the better.

Wynd says Paul Pratt Jr., a director who served on the Franklin Financial board since its 2007 founding, was just that sort of advocate. (Pratt’s term expired in 2018, but he continues to serve on the bank board.) “Any time I see a great talented young person, I try to engage them” and understand their goals, Pratt says. “There’s a lot of supreme young talent out there that needs to be on bank boards helping make critical decisions on how the bank grows.”

Board members can also leverage friends and family to identify prospective board members.

“A member of the board lived in my community and is friendly with my parents,” says Christine Gordon, 42, a director at ESSA since 2016, who has a background as a lawyer and experience as the deputy chief compliance officer at Olympus Corp. of the Americas, as well as deep connections in the community. “He approached me and asked whether I’d be interested in joining the board and talked to me a bit about what it would entail.”

Similarly, Vonn Christenson, a 38-year-old attorney who was appointed to Sierra Bancorp’s board in 2016, says he was approached by a Sierra director who was his parents’ friend and neighbor. “The bank had been expanding, had been acquiring other banks and was looking to expand more. Their board members were aging, so they were looking to add some members.”

Communicate the benefits of serving on a bank board.
Prospective younger directors with the skill sets that bank boards need are in demand, and not just within the banking industry. “In all honesty, I probably have more opportunities [to serve on boards] than I have time and than my wife is willing to allow me to, so I’ve had to be selective in what I am involved in,” says Christenson. Make sure that the busy young professionals you seek as board members understand the benefits of serving on the board, as well as the bank’s growth trajectory.

And as much as long-term bank directors say that serving on a board is not about the money—just 14 percent of survey respondents indicate that offering a competitive director compensation package is a top challenge relative to their board’s composition—it could be the factor that leads an in-demand professional to pick your board over another.

Christenson says he had the opportunity to serve on the board of a local hospital but turned it down in favor of the bank. The bank “is a local success story in many ways, so there’s some more prestige that goes with it,” he says. Christenson also knew more members of the bank’s board, and “there’s compensation on the bank board, whereas it was voluntary on the hospital board.”

Ease the time burden.
Juggling the professional demands of younger directors may necessitate rethinking how the board approaches meetings. Gordon has found web conferencing to be effective in allowing her to participate in ESSA’s board meetings when she’s traveling for work. And using technology like a board portal can help streamline board materials, making them easier to digest. “They’ve got a real nice platform to produce materials and keep them organized for future reference,” says Gordon. The board provided tablets to directors, so they can easily access the board portal.

Invest in creating a successful board.
New directors, particularly younger ones, won’t be up to speed about the issues facing the banking industry, or even the fundamentals. “Educating new board members is very important. You join a bank board where folks have been there for years and years,” says Gordon. “I’ve been a board director for a couple of years, and I’m still learning.”

New directors should also meet with key members of the executive team, as well as one-on-one with board members. At ESSA, the management team teaches new directors about the bank and its primary areas of focus, says Gordon. The board also brings in speakers about specific topics, which can be vital to director education for old and new board members.

Investing in external training can be beneficial as well. But also expect to field a lot of questions from engaged new directors. And remember, those questions can benefit the board as a whole by leading if they lead to an examination of the bank’s practices and strategy. That’s the benefit of a fresh perspective, after all.

Ensure there’s a process to make room for new board members.
Age diversity goes both ways—the board benefits from the views of young professionals as well as older, established directors who better understand the banking industry and have a historic perspective of their markets.

Establishing a mandatory retirement age can help cycle ineffective directors off the board, but some banks are uncomfortable with the possibility of losing engaged older directors. Providing exceptions for particularly skilled and effective board members, coupled with a mandatory retirement age, can be effective, as can term limits for banks uncomfortable with designating an age cap.

Conducting a board evaluation with individual director assessments and using a board matrix to identify knowledge gaps can be useful tools to create space on the board regardless of age. To be effective, a strong governance chair or similar director should be empowered to have conversations with board members who aren’t pulling their weight.

In the survey, 44 percent of respondents reveal concern about recruiting tech-savvy directors. While youth is no substitute for technology expertise, and technology expertise isn’t limited to the young, it’s important to remember that younger directors are more likely to have an intuitive handle on technology trends, particularly as relates to the bank’s retail and commercial customers.

But youth isn’t synonymous with engagement. New directors should “bring a vision and new ideas to help bring the bank into the future,” says Christenson.

Bank Director’s 2018 Compensation Survey was sponsored by Compensation Advisors, a member of Meyer-Chatfield Group. Click here to view the full results to the survey.

Investor Pressure Points for the 2018 Proxy Season


proxy-2-9-18.pngInvestors need to stay focused on long-term performance and strategy in 2018. So says Larry Fink, the chief executive of BlackRock, the world’s largest asset manager with $6.3 trillion in assets under management, in a recent and well-circulated letter. “Companies must be able to describe their strategy for long-term growth,” says Fink. “A central reason for the risk of activism—and wasteful proxy fights—is that companies have not been explicit enough about their long-term strategies.”

Focusing on long-term success isn’t controversial, but Fink’s letter underlines the fact that proxy advisors and investment management firms are more frequently looking at broader issues—gender diversity and equality, and other cultural and environment risks—that can serve as indicators of long-term performance.

Board composition will continue to be a growing issue. BlackRock, along with State Street Global Advisors, the asset management subsidiary of State Street Corp., both actively vote against directors where boards lack a female member. “[Institutional investors] are tired of excuses,” says Rusty O’Kelley, global leader of the board consulting and effectiveness practice at Russell Reynolds Associates. “Regional banks [in particular] need to take a very close look at board quality and composition.” Fink, in his letter, said that diverse boards are more attuned to identifying opportunities for growth, and less likely to overlook threats to the business as they’re less prone to groupthink.

The use of board matrices, which help boards examine director expertise, and disclosure within the proxy statement about the use of these matrices, are increasingly common, according to O’Kelley. The varied skill sets found on the board should link to the bank’s overall strategy, and that should be communicated to shareholders. Expertise in cybersecurity is increasingly desired, but that doesn’t necessarily mean the board should seek to add a dedicated cybersecurity expert. “Institutional investors view cybersecurity as a risk the entire board should be paying attention to,” says O’Kelley. “They want all directors to be knowledgeable.”

Some investors are pursuing gender equality outside of the boardroom. On February 5, 2018, Bank of New York Mellon Corp. disclosed the pay gap between men and women—the fourth bank to do so in less than a month, following Citigroup, Bank of America Corp. and Wells Fargo & Co. “Investors are demanding gender pay equity on Wall Street, and we have no intention of easing up,” said Natasha Lamb, managing partner at the investment firm Arjuna Capital, in a release commenting on BNY Mellon’s gender pay disclosure. These banks, along with JPMorgan Chase & Co., Mastercard and American Express, rejected Arjuna’s proposals last year to disclose the pay gap between male and female employees, along with policies and goals to address any gap in compensation.

A domino effect can occur with these types of issues. “[Activist investors will] move on to the next bank,” says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

Shareholders are aware that cultural risks can damage an organization. This includes bad behavior by employees—Wells Fargo’s account opening scandal, for example—as well as an organization’s approach to sexual harassment and assault, an issue that has received considerable attention recently due to the “Me Too” movement. “Shareholders are very focused on whether or not boards and management teams are doing a sufficient job in trying to understand what the tone is throughout the organization, understand what the corporate culture is,” says Paul DeNicola, managing director at PwC’s Governance Insights Center. Metrics such as employee turnover or the level of internal complaints can be used to analyze the organization’s culture, and companies should have a crisis management plan and employee training program in place. Boards are more frequently engaging with employees also, adds DeNicola.

Investors are keenly aware of environmental risks following a year that witnessed a record-setting loss estimate of $306 billion due to natural disasters, according to the National Oceanic and Atmospheric Administration. Institutional investors expect boards to consider the business risk related to environmental change, says O’Kelley, particularly if the bank is at greater risk due to, for example, a high level of real estate loans in coastal areas.

Finally, investors will be looking at how organizations use the expected windfall from tax reform. “What will you do with the increased after-tax cash flow, and how will you use it to create long-term value?” said Fink in his letter. It’s an opportunity for companies to communicate with shareholders regarding how additional earnings will be distributed to shareholders and employees, and investments made to improve the business.

In an appearance on CNBC’s “Squawk Box,” Fink explained that BlackRock votes with the companies it invests in 91 percent of the time due to the engagement that occurs before the proxy statement is released. Fink’s preference is that engagement occurs throughout the year—not just during proxy season—to produce better long-term results for the company’s investors.

Engaging with shareholders—and listening to their concerns—can help companies succeed in a serious proxy battle. “If you have good relations with your investors, you’re apt to, in a contest, fair a bit better,” says Elson.

Seven Secrets of Succession Success


succession-1-19-18.pngOne of a bank board’s most vital responsibilities is overseeing the plan of succession for the CEO. Whether driven by a looming retirement or change in the incumbent’s personal timeline, a well-orchestrated plan of succession and leadership continuity reassures employees, investors and communities. Unfortunately, too many bank boards still take a passive approach to CEO succession, rather than acknowledging that as directors, they are responsible for the selection and ongoing evaluation of CEO performance.

Good succession planning for any executive role starts with understanding the potential succession timeline and the bank’s strategy. These seven steps will help to guide the board and incumbent CEO in developing a solid succession plan.

  1. Understand the succession timeline. What is the intended horizon for the incumbent leader to remain at the helm? This timeline is often fluid, which can create a challenge for the board. It is natural for many healthy CEOs to struggle with stepping out of a role that has been so closely tied to their personal identity. Yet, boards must insist on some understanding of the timing in order to maximize the development of potential internal contenders and to avoid frustrating executives who are waiting in the wings.
  2. Strategy informs profile. One of the most critical elements of planning for CEO succession is the bank’s strategic plan. The direction of the bank going forward should help to clarify the skills and attributes required in the bank’s next leader. Given the massive transformation of the industry over the past decade, the old maxim—what got you here may not get you there—may truly apply. Directors need to align around the bank’s strategy to develop a profile for the bank’s next CEO.
  3. Identify key skills. There are countless technical and industry skills needed in a bank leader today—so many, in fact, that it is virtually impossible to find an executive with all of the ideal requisite experiences. So, prioritize the specific banking skills that the bank must have versus those the board would like to have. Key experiences such as commercial credit skills, regulatory experience, balance sheet management, board experience and risk management are often considered critical to success as a bank CEO today.
  4. Determine critical attributes. What are the most important elements of a potential leader’s personal style and leadership philosophy that are necessary at this time for the institution? For example, most community banks see a CEO’s community presence and visibility as critical for success, as well as creating and achieving a strategic vision. Strong communication skills, cultural agility and the ability to attract top talent also rank high these days.
  5. Develop a process. Successful succession at the CEO and other executive levels involves a robust and thoughtful process, not just putting together a list of who the board knows or who the incumbent leader suggests. Boards today not only need to select a superior executive as their next leader, but are often called upon to defend their decision—and how they made it—to investors, customers and their communities. This does not mean that an external or formal search is always warranted, but it does mean that there needs to be a genuine effort to source, screen, assess and validate serious contenders, which ultimately adds credibility to the board and the selected leader.
  6. Make your bank attractive to star talent. Despite the declining number of banks in the country today, the crop of qualified bankers available to fill the growing ranks of retiring CEOs is not deep enough. Thus, the market is competitive for top bankers, and relocating someone to a new and potentially smaller market remains a challenge. Star bankers will ask tough questions of the board and will want to understand the bank’s strategy, as well as the level of support, engagement and strategic value they can expect from the bank’s directors.
  7. Prepare for an emergency. As most boards know, the bank should plan for the best and prepare for the worst. Reviewing and updating the bank’s emergency succession plan on a regular basis is a must for good governance and regulatory satisfaction. There have been too many instances where this backup plan has been called into action. Having a scenario ready to keep the train on the tracks during an unexpected situation is critical to keeping the institution moving forward.

There is no greater responsibility for a bank’s board of directors than ensuring that the organization has the right leader in place. While there are many important elements to successful CEO succession, the most important point is to maintain the topic of leadership succession as a regular and ongoing board-level discussion.

Improving Governance By Using Board Portals


board-portal-12-11-17.pngIf you counted the minutes in a day that you save because of technology, it would add up to quite a bit. With so many issues confronting financial boards, adequate time for strategic planning is a valuable commodity, so time is exactly what busy board members of financial institutions need.

Changes in the economy and the financial markets have complicated matters for boards of all sizes. Larger banks and conglomerates are finding it difficult to adapt to increasing regulations. Community banks are finding it harder to compete with larger banks. At the same time, financial institutions are finding it difficult to provide the level of technology that their customers want and need, in addition to other significant strategic issues.

Board portals help directors focus more of their time on strategic decisions. These portals have all of the features that directors need, and ensure that the information they need is available to them wherever they are, while also remaining secure.

Preparing board handbooks manually with paper copies and binders places a huge burden on the board secretary. Every time a board meeting approaches, the secretary spends countless hours copying and collating documents, and filing them into the proper sections of the handbook. Updating a board portal requires some work on the part of board secretaries, but they only have to upload a document one time. And secretaries can limit access to certain documents only to the people who need to view them.

In addition to the time savings, board portals provide material and environmental savings. Financial institutions save the cost of reams of copy paper, other office supplies and the labor to assemble board books. The savings can net banks upwards of $1,100 per board meeting. Board portals are environmentally friendly as well. Banks and credit unions contribute less paper to the landfills, and they expend less electricity to produce it. According to a recent analysis by Diligent, boards of banks and credit unions can save up to $10,000 a year by using a board portal.

Board Portals Provide Mobility and Improve Security
There’s nothing worse than the panic that a director of a bank feels in learning that an important piece of paper is missing from the board book. This could happen easily enough with busy board members who travel often for business and pleasure as they juggle suitcases and briefcases in cars and on airplanes. Board portals let busy directors access their board documents with ease on any electronic device, including laptops, tablets and phones. Directors no longer need to lug heavy board books through busy airports and risk valuable information getting into the wrong hands. Most board portals have a double authentication process with a user ID, password and scrambled PIN code, so even if an electronic device gets lost or stolen, sensitive board information remains safe and secure.

Choosing a Board Portal
While board portals are generally intuitive and user-friendly, some directors who are not adept at technology may find that they have a learning curve. But most board directors adapt quickly with a little training and experimentation.
Board portals for banks are a single tool that stores meeting materials, communications, bylaws, archived documents and more in neatly arranged files. Many of the features that board portals provide are of great use to directors, particularly board rosters, board biographies, electronic surveys, voting history and shared notations. Many portals also have a built-in time tracker, so directors know how much time they are spending on board business. This feature can help boards evaluate whether directors are dedicating enough time to board service to comply with proper governance principles. Once they get used to the tool, board members appreciate the ease of posting news items, linking documents, sharing agenda items and calendars, and using the chat and email features. Premium products may also include offline capability, which is an important feature for many bank board directors.

Look for a board portal product that is easy to use and that has knowledgeable customer service support that is available around the clock. As with most products that consumers buy, less expensive board portals aren’t necessarily the best value. Board directors will spend a significant amount of time on the portal, so it’s best to conduct a thorough review of the features, usability, speed and functionality before investing in a portal. The right board portal will do all that you need it to do and more.

What Makes Activist Investors Go After Banks


activism-11-6-17.pngShareholders of public companies pushing to nominate activists in the boardroom are becoming more common. Boards of directors aren’t necessarily keen on the idea, although it’s becoming frequent enough that attitudes among board directors are becoming more accepting as they become accustomed to it.

Proxy Access Is Changing Relationships Between Directors and Shareholders
Board directors and shareholders clearly have different motives and perspectives about the demographics of board seats, especially when it comes to their views on proxy access.

Some of the larger public companies use a proxy access system. Companies that use the proxy access system typically have a governance committee or nominating committee that recruits and vets board candidates to fill the slots of board directors whose terms have ended. The board secretary prepares a proxy card with a listing of board director nominees and mails it out to the shareholders. Most share classes offer shareholders one vote per share. Shareholders can then vote for candidates on the slate by proxy or in person at the annual shareholder’s meeting, or write in a candidate of their own choosing. Activist shareholders and large shareholders favor the proxy access system because directors represent their interests and proxy access gives them a strong say in the choice of board directors.

The proxy access system is not as popular with directors as it is with investors. Board directors assess the expertise, talents, diversity and independence of boards when forming the voting slate. Nominating committees feel that they know what the board needs to help the company progress, so they should be able to select the nominees with little or no interference from shareholders.

Activism May Potentially Disrupt the Integrity of Corporate Governance
As activism begins to invade boardrooms, many are questioning other longstanding principles of good corporate governance and whether they still have meaning in today’s financial arena. For example, directors have typically had board terms that are staggered. The reason for this is to maintain some sense of tenure, history and experience on the board. In today’s climate, groups of formidable investors believe that directors should be elected every year. This approach gives shareholders the right to clean house when profit margins are lagging.

In recent decades, it has been common for directors to serve on multiple boards. Changes in the financial industry call into question whether directors who sit on many boards can truly meet the time constraints to effectively strategize and comply with the growing set of regulations. Weak boards create a climate that is ripe for activists to gain control. Large companies are prime targets for activists when they have large boards with weak skill sets and overly long-term appointments.

Procter & Gamble Is the Largest Company to Face a Proxy Fight
Procter & Gamble is one such large company that is facing the possible intrusion of an activist shareholder. Nelson Peltz is the CEO and founder of Trian Fund Management. With 3.3 billion P&G shares, Trian is one of Procter & Gamble’s largest shareholders. Trian has been dissatisfied with Procter & Gamble’s repeated poor returns. Their solution is to nominate and elect Nelson Peltz to the board of directors. As Peltz has a reputation for being a billionaire activist, the P&G board is justifiably concerned.

Trian cites many reasons for putting an activist on the board. In addition to disappointing shareholder returns, Procter & Gamble’s market share is deteriorating, and while they’ve cut some costs, the cost of bureaucracy is excessive.
Trian says that the culture of Procter & Gamble’s board is highly resistant to change, so it’s no surprise that the pressure is making them uneasy. Trian shareholders have given the board chances to improve results in the past, but their strategies have been unsuccessful. Now, Trian is insisting on the addition of a financially motivated, independent director, and they’ve chosen Peltz. Trian shareholders are not being completely unreasonable. They are offering to reappoint whichever director loses his or her board seat, once Peltz gets appointed.

Defending Against Activists
No board is exempt from the risk of a proxy fight, especially when earnings reports are not showing good results. The best defense against activism is to work at keeping performance metrics high. Companies experiencing a downturn for any reason would do well to spend time on researching which activists may have their eyes on a board seat. Knowing who is interested in joining the board will help directors anticipate what the activist wants to change and have some plans in place if a proxy fight looks imminent.