Using the Succession Plan to Evaluate Talent

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

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

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

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.”

Governance Best Practices: Taking the Lead

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

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

Top 25 Bank Boards for Women

In early December, Nasdaq filed a proposal with the Securities and Exchange Commission that would require its listed companies to disclose diversity statistics about their board’s composition. Boards must include at least one female and, at minimum, one minority or LGBTQ board member. While the exchange recently made some changes to the proposal - to address the concerns of small boards with five or fewer members, for instance — there’s no denying that pressure has been mounting when it comes to improving diversity on corporate boards.

Just look at 2020 alone: Institutional Shareholder Services reiterated that it would vote against the nominating chair of Russell 3000 and S&P 1500 companies that lack female representation. Goldman Sachs Group announced that it will only take companies public if they have at least one diverse board member. And California and Washington both had gender diversity requirements in place for companies headquartered there.

“Diversity of thought forces [boards] to look at solutions in a different way, to look at problems in a different way,” says Kara Baldwin, a partner at Crowe LLP. “It’s simply good business to make sure you have those differing viewpoints.”

But corporate boards often do the bare minimum when it comes to adding women: An analysis of Russell 3000 boards by 50/50 Women on Boards finds that only 5% are gender-balanced, meaning women hold roughly half of board seats.

In a new analysis using its proprietary database of the nation’s 5,000 public, private and mutual bank boards, Bank Director identified the 25 bank boards with the highest representation of women. We focused on banks above $300 million in assets, given the lack of data on very small, private institutions. Only 11 of the banks we examined would meet the goal set by 50/50 Women on Boards.

Women, it should be noted, comprise 51% of the population and 58% of the workforce, according to the U.S. Census Bureau.

Both big and small banks, public and private, topped our list, showing that diversity is not exclusively a big bank issue. Webster Financial Corp. of Waterbury, Connecticut, with $32.6 billion in assets, and The Falls City National Bank, with $456 million in assets out of Falls City, Texas, top our list. Both boast boards with a membership that’s 56% female — well above the normal balance typically found on corporate boards. Rounding out the list are $1.9 billion First Bank of Highland Park, in Highland Park, Illinois, and Principal Financial Group, the holding company for $4.5 billion asset Principal Bank in Des Moines, Iowa. Both 12-person boards include five women, comprising 42% of membership. Last year, 50/50 Women on Boards found that women held 23% of board seats at Russell 3000 companies.

About six years ago, First United Corp., which has $1.7 billion in assets, started to intentionally focus on its composition, both in terms of skills and backgrounds. “We want to be more relevant to our customers and to our communities, for our shareholders, looking at that whole stakeholder group [including] employees,” says Carissa Rodeheaver, the Oakland, Maryland-based bank’s chair and chief executive. That includes representing diverse backgrounds, in terms of gender, race and ethnicity, and age.

This year, First United will begin using a skills matrix — a practice that helps boards map their directors’ expertise and backgrounds to identify gaps. A diversity and inclusion policy, put in place by the nominating and governance committee, will ensure the board considers a diverse slate of director candidates. “The pool has to be diverse, and that will continue to naturally lend itself to keeping that diversity of thought on the board,” says Rodeheaver. “It’s a great formula that leads to a well-rounded board.”

First United brought on three new directors in the past year — all women, it turns out, who are skilled in regulatory compliance, finance and project management, says Rodeheaver.

Lisa Oliver, the chair and CEO at The Cooperative Bank of Cape Cod, a $1.2 billion mutual bank headquartered in Hyannis, Massachusetts, places a high value on the “lived experiences” often uncovered when building diverse boards.

While the traditional executives and professionals often found on corporate boards — current and former CEOs, accountants, regulators and attorneys — still provide valuable insights, banks “have to think about the new needs of banking, and how that aligns with a whole different genre of people and the pipeline we need to cultivate,” says Oliver. For example, boards often seek technology and cybersecurity expertise; these skills aren’t often found at the top of an organization. Or a board might look for someone who can represent an industry that’s important to their bank, like healthcare.

C-suites are still predominantly male and predominantly white: Looking further down an organization chart might serve up an experienced candidate who also brings a diverse perspective to the table.

“You have to work harder; you have to expand that group of who you know,” says Baldwin. “You must be intentional — that’s really important.”

Oliver also wants to attract and retain younger directors to the board at “The Coop,” as the bank is called locally, but has struggled to retain young women as board members and corporators during the pandemic. (Corporators elect board members, but the position can also serve as a training ground of sorts for board candidates.)

“The pandemic has created great stress for young people to [serve] on the board,” says Oliver. One director, a business owner and single mother with a child at home, had to resign, she says. Oliver believes boards should consider how they can structure meetings to make the role more manageable for younger board members who are building their careers and businesses. “Not death by committee meeting, but what are the critical four committees we need to have?” she says. “There’s an art and a science to creating the agenda within that and providing the data to analyze risk, make it manageable.” A 400-page board packet can be difficult to fit into anyone’s schedule, much less that of a Gen X or millennial professional balancing family and career.

Oliver wonders if today’s more remote environment — with boards meeting virtually — could help them attract candidates from nearby Boston — a technology hub boasting a highly educated workforce.

Boards should consider looking outside their local community to find diverse, qualified board members, says Baldwin. Nearby cities, as Oliver posits, could be a valuable well of talent.

Both First United and The Coop are putting practices in place to help make room for new views: First United will declassify its board this year, and Oliver says her bank is putting term limits in place.

And both CEOs tell me that building the board their bank needs is a continuous process. “We need to constantly be looking and identifying individuals that make sense [for our board] and backfill that pipeline,” says Rodeheaver.

“We have to reflect the community around us, or else we’re not able to hit on some of the challenges that we face,” Oliver adds. “It takes effort, and it takes time, and it has to be a constant process.”

Top 25 Bank Boards For Women

Bank Name (Ticker) State Total # Directors % Women on the Board
Webster Financial Corp. (WBS) CT 9 56%
The Falls City National Bank TX 9 56%
Lead Financial Group MO 9 55%
First United Corp. (FUNC) MD 12 50%
The Cooperative Bank of Cape Cod MA 14 50%
First National Bank Alaska (FBAK) AK 8 50%
Boston Private Financial Holdings (BPFH) MA 8 50%
New Triplo Bancorp PA 6 50%
Andrew Johnson Bancshares TN 8 50%
Johnson Financial Group WI 10 50%
Minnwest Corp. MN 16 50%
GSB, MHC MA 15 47%
Cambridge Bancorp (CATC) MA 17 47%
First Capital (FCAP) IN 13 46%
Mascoma Bank VT 13 46%
Ledyard Financial Group (LFGP) VT 11 45%
First Seacoast Bancorp (FSEA) NH 9 44%
Orbisonia Community Bancorp PA 7 43%
Stearns Financial Services MN 7 43%
Lockhart Bankshares TX 7 43%
National Cooperative Bank OH 14 43%
MidFirst Bank OK 7 43%
Olympia Federal Savings and Loan Assn. WA 7 43%
Principal Financial Group (PFG) IA 12 42%
First Bank of Highland Park* IL 12 42%

Source: Bank Director internal data, plus bank websites and public filings, as of February 2020. Banks under $300 million in assets weren’t examined given the scarcity of data about these institutions.
*First Bank of Highland Park was left off this ranking when it first published. Bank Director regrets the omission.

How One Bank Chairman Created a Diverse Board

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Deeper Dive Into Board Pay

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

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

Estimated Annual Pay, by Type and Asset Size

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

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

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

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

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

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

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

Annual Cash Compensation Per Director, by Type and Asset Size

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

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

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

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

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

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

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

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

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

Best Practices for Virtual Board Meetings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why We Ignore Big Risks

Should we have seen COVID-19 coming?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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