What to Look for in Your Next CEO: Part II


CEO-11-2-15.pngSelecting your bank’s next chief executive officer remains the board’s single most important responsibility. The risk of selecting an underprepared or inadequate leader is high, and can impact the bank’s strategic direction, reputation and ultimately, its viability. As highlighted last month, there are many critical banking industry skills needed in a leader today. In addition, there are intangible competencies and leadership qualities which are equally vital for the success of the CEO and the institution. Here, we emphasize ten leadership competencies and attributes which have proven vital for bank CEOs.

Leadership and Vision
As the late great management guru Peter Drucker famously stated, “management is doing things right; leadership is doing the right things.” CEOs must be able to set the proper course for an institution by outlining the company vision, and inspire employees to follow this mission.

Broad-based Communication Skills and Executive Presence
Every board member should desire these qualities in a CEO, but they can’t be taken for granted. Today’s CEO must communicate through a broader array of channels than ever before, and to a wide audience beyond the bank’s customers, employees and communities. When you add investors and regulators to the mix, the presence and style of communication become increasingly important.

Cultural Agility
The U.S. today is a bigger melting pot than ever. As a result, a bank’s customers and employees have become ever more diverse. A growing number of new businesses are started by women and minorities, so the agility to appreciate a more varied constituency is critical for banks that want to grow.

The Ability to Assess and Attract Top Talent
This may be one of the most underappreciated elements of successful leadership. Stars want to work with stars, and the ability to bring superior talent into the organization has never been more important. Talented employees have become one of the few remaining differentiators between banks.

Adaptable and Flexible
The banking industry continues to evolve rapidly and, at times, dramatically. Adaptability and flexibility are newer traits that successful CEOs must deploy. Technology leads the pack in terms of change, but regulatory focus and customer desires shift as well, and banks need leaders who can respond quickly and effectively.

Strong Execution Skills
While having a current and well-developed strategic plan will always be important, execution is the other side of the coin. The ability to drive the plan forward is the key to enhanced performance, and the variable in successful execution always comes down to managing people.

Ahead of the Curve on Industry Trends
It’s not enough to know what the current trends are. Standout leaders not only see where the industry is heading, but begin formulating responses to these trends so their bank can stay ahead of the pack.

A Focus on Accountability
There is little room in today’s bank for complacency. In a competitive and cost-conscious environment, many banks seek a leader who can enhance accountability, and recognize and reward individual performance.

Builds a “Culture of Excellence”
Excellence is a habit, as the saying goes. Banks that truly seek to distinguish themselves should cultivate a culture that practices excellence every day. Leaders who understand the need to “raise the bar” to survive and thrive will drive this focus home.

Knows How to Work Constructively With a Board of Directors
One of the quickest ways for a bank CEO to falter is to lose the trust of the board. A successful CEO must appreciate the pressure that directors face, from regulators, investors and communities, and partner with the board to manage the pressures and challenges that the institution is facing almost daily. A truly constructive working relationship benefits everyone.

For banks today, the intangible aspects of effective leadership are as important as the technical skills and industry expertise. While the tangible proficiencies may be more obvious and identifiable on the surface, it is often the attributes, competencies and qualitative elements of leadership that make the difference in the success of truly great CEOs.

Maintaining Internal Audit Independence Regardless of Structure


Whether your bank uses an in–house, an outsourced or co-sourced internal audit function, the internal audit program must be independent. And no matter the arrangement, management and the board have a degree of responsibility for internal audit’s efficacy—as such, they must accept ownership of this function even where it is fully outsourced.

As part of this, national chartered banks need to comply with the requirements issued by the Office of the Comptroller of the Currency (OCC) in October 2013 entitled “Third Party Relationships: Risk Management Guidance,” which deals with the selection and ongoing oversight of all critical third-party relationships, including outsourced or co-sourced internal audit arrangements. Although the guidance is addressed to national banks, it also establishes a best practices approach for state chartered banks that are supervised by the Federal Reserve or Federal Deposit Insurance Corp. The OCC guidance stipulates that banks must implement effective risk management processes to actively manage outsourced vendors, and that the roles and responsibilities for overseeing and managing all third-party relationships be specific and clearly defined. Therefore, whether the bank outsources or co-sources all or parts of an internal audit program, it does not diminish the responsibility of its board of directors and senior management with respect to overseeing and managing the program.

So the question becomes how best to manage outsourced or co-sourced internal audit relationships while optimizing the independence that is necessary for boards and audit committees in the fulfillment of their responsibilities.

Banks are deploying a variety of approaches driven by organizational structure, cost or culture. Sometimes these are successful, but they often fall short of regulatory expectations.

It is possible to achieve a quality internal audit program as long as the board and management adhere to a number of key principals and are truly committed to having an internal control environment that helps the bank manage its risks.

Our firm has helped hundreds of banks implement effective internal audit programs in both full outsourced and co-sourced scenarios. Some of the elements that we have found most critical to building an effective program include:

Corporate Governance: Corporate governance and the tone at the top is the foundation of an effective program. This entails setting up a structure that includes direct reporting to the chairman of the audit committee while, at the same time, having appropriate internal management oversight. Often that oversight resides with the chief risk officer of the bank. However, we have observed successful programs that use compliance officers or an in-house internal auditor. Independence is derived from board and management commitment, setting the tone and culture within the bank.

Internal Audit Risk Assessment and Audit Plan: The success of an internal audit program is highly dependent on identifying the risk profile of the bank and developing an appropriate audit plan that addresses those risks. Just a few of the areas complicating today’s bank risk environment include  information security and technology driven service delivery channels, consumer compliance and BSA/AML compliance requirements and interest rate risk management.

Experienced and Qualified Internal Audit Team: A successful internal audit program is simply not possible without deploying the right expertise and experience to audit the different aspects of a bank’s business and compliance requirements.

A successful internal audit program is often accomplished by seeking an outsourced or co-sourced solution which, based on regulatory guidance, management is responsible for managing. However, independence does not need to be compromised—particularly if the bank culture and tone at the top are committed to an independent risk-based internal audit program.

Supreme Court Ruling Could Impact Your Bank


disparate-impact-10-16-15.pngOn June 25, 2015, nearly four years after first agreeing to consider the question, the Supreme Court issued a decision in the case Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc., holding that disparate impact claims may be brought under the Fair Housing Act (FHA). The Court’s decision confirms that, irrespective of intent, an institution engaged in residential real estate-related transactions such as mortgage lending may be held liable for a practice that has an adverse impact on members of a particular racial, religious, or other statutorily protected class.

However, the Court pointed out the following important limitations on the ability of plaintiffs to raise claims:

  • It is not sufficient to point out statistical disparities alone. Instead, plaintiffs must show that a defendant’s policy or policies caused that disparity.
  • Policies may only be challenged under disparate impact analysis if they are “artificial, arbitrary and unnecessary barriers.”
  • A defendant’s valid business justification may not be rejected unless a plaintiff identifies an alternative practice that has less disparate impact while still serving the entity’s legitimate needs.

To receive the benefit of any heightened standard resulting from the Court’s opinion, however, financial institutions must be willing to litigate. To avoid litigation in the first place, experience has shown that proactive steps taken by financial institutions can protect against possible disparate impact claims. Those steps include, for example:

Internal Audits and Fair Lending Risk Analysis
Financial institutions should be proactive in identifying and analyzing lending portfolios to identify areas susceptible to statistical challenge. One of the most reliable methods of doing so is to conduct routine statistical self-assessments on a portfolio-wide basis, appropriately structured to ensure attorney-client privilege will apply. Institutions should conduct periodic assessments, analyze the results (including file reviews of any outliers), and tailor policies and procedures to address the results, thus ensuring the institution is alert to potential disparities and can address any fair-lending related issues before they become supervisory concerns.

Policies and Procedures
Institutions should carefully review their policies and procedures to identify instances in which discretion is permitted in any aspect of underwriting or other credit processes, as discretion may give rise to discriminatory results. To the extent policies and procedures allow for discretion or exceptions, institutions should craft corporate governance mechanisms to approve such exceptions or departures from common practice as well as record keeping procedures to ensure proper documentation. In effect, the financial institution is creating a record of why it departed from its normal business practices. To the extent that the institution considers any changes to its policies and procedures as a result of its review, senior management should articulate the business- or risk-related reasons why such changes were or were not made.

Corporate Governance and Documentation
With increased scrutiny from regulators on fair lending issues, any business decisions that may involve practices that could have a disparate impact on a protected class, such as changing or discontinuing a particular product or service, should be carefully considered and the justifications for them should be clearly documented. Institutions should establish corporate governance procedures that provide for review of material changes to product and services offerings by senior management and fair lending/risk committees. The results of the review, including assessments of the reasons for the business decisions at issue, should be documented through meeting minutes and other records.

The Inclusive Communities decision almost certainly will embolden private plaintiffs and government agencies to assert claims of disparate impact discrimination. Proactive steps taken now can head off years of litigation and costly settlements by preventing statistical disparities from ripening into claims of discrimination. Financial institutions should aggressively review and enhance their compliance efforts to ensure the compliance of their business policies and practices.

What to Look for in Your Next CEO: Part I


bank-ceo-10-1-15.pngSelecting a chief executive to lead your institution is a bank board’s single most important responsibility. Everything flows from this decision, including the bank’s strategy, reputation, the ability to attract critical talent, investor and employee confidence and the credibility of the board itself. Selecting an underprepared or inadequate leader—no matter how well liked or how long employed—can quickly send a bank in the wrong direction.

The list of optimal skills required in a bank CEO today could easily include dozens of items. Here we will highlight ten technical skills that we see as “must haves.” Next month, we will highlight ten leadership competencies and attributes which will complement the qualifications below.

Experience Working with Regulators
Regulatory relations were barely on the radar screen for bank leaders a decade ago, unless the bank was in trouble. However, in today’s altered regulatory climate, the ability to forge a positive working relationship with a bank’s varied regulators has become a critical element of success.

Balance Sheet Management Experience
The extended low interest rate environment has put pressure on bank spreads like never before. With interest rate risk and margin pressures on the front burner, CEOs need to understand the construction of their balance sheet, including capital strategy, more deeply than before.

Commercial Credit Skills
You can never have too much credit skill in a bank, in our opinion. Credit quality issues will quickly turn a good bank into an underperformer. The path to the CEO’s desk still goes through the commercial lending area more often than any other area.

Experience with Corporate Governance
Boards are under increased scrutiny from investors, customers, regulators, communities and even employees. CEOs need to appreciate the pressures facing directors (even for privately held and mutual institutions), and respect the ongoing challenges facing the board.

Technology Savvy, Including Evolving Channels
Technology in banking has moved from the back office to the front lines. Understanding how the rapidly shifting technological landscape is impacting the industry—and how to respond in real time—has become a vital ingredient for ongoing success.

A New Perspective on Risk Management
In the good old days, risk meant credit, fraud or simple liability for slip-and-fall accidents. Nowadays, this category has broadened to include cybersecurity, counterparty risk, compliance issues, legal challenges and more. Being able to identify and triage the bank’s risk factors is more important than ever.

Marketing and Social Media Knowledge
As mentioned, technology has become a front-line channel for growth. The integration of social media with technology has changed how many banks must go to market, build brand awareness, drive engagement and respond to customer needs. CEOs need to be plugged into these shifts, even if they are not active themselves on social media.

Exposure to Fee-Based Lines of Business
Given the decline in interest margins, boosting fee revenue appears to be on almost every bank’s strategic planning agenda. Even for banks with a low percentage of fee-driven revenue, CEOs need to explore alternative ways to grow the top line.

Transaction and Integration Experience
Many banks that never previously considered a transaction are now exploring all options, including acquisitions, mergers of equals, branch sales and purchases and fee business acquisitions. Exposure to the transactional arena has become more critical, as has the ability to successfully integrate post-transaction. Otherwise, the value derived from “doing a deal” may not be achieved.

Strategic Planning Skills
Everyone seems to have a plan, but how real and achievable is it? A CEO’s ability to craft a meaningful path forward and drive the plan’s execution has become a differentiator for successful banks.

There is no perfect template of skills which will guarantee success, particularly in the pressure-filled and constantly evolving banking industry. However, finding a CEO with a foundation grounded in these ten industry skills will increase your bank’s odds of surviving and thriving.

Sorting Necessary from Noise: How to Focus Your Board’s Time


Director liability has expanded dramatically over the last decade. As pressures on bank boards intensify, their time has become constrained. How can board members protect themselves while building value for their institution? We can win if we play offense; below are 11 focal points for bank boards.

Focus on value creation. Few banks connect executive compensation and return for shareholders. Too many boards accept mediocre performance by executives, who should be enriched for growing tangible book value per share (TBVS), earnings per share (EPS) and franchise value, not the bank’s asset size.

Understand what drives value. An institution’s stock price is driven by multiples of TBVS and EPS, which reflect the market’s perception of the risk profile of the bank. By looking to build value for investors, boards can put in place the proper strategies to achieve their goals, and manage the risk, governance and regulatory environments.

Implement an enterprise risk management program (ERM). An ERM program does more than satisfy regulatory guidelines to establish an internal risk assessment program. The process also aligns the interests of different stakeholders, and improves the bank’s culture by instilling risk management responsibility, accountability and authority throughout the entire organization. It can boost the institution’s ability to raise new capital at higher multiples, fix liquidity and increase earnings. Finally, ERM enhances the strategic planning process by analyzing clearly delineated paths with the associated risk and rewards of each.

Stay educated. Board members have a limited time to stay up-to-date on the issues impacting the banking industry. Custom bank education, using the bank’s data, provides the most flexibility for directors. Topics should include emerging issues, economic developments, capital markets trends and regulatory pressures, as well as each topic’s direct impact to the directors’ institution.

Adopt governing principles. Prevent corporate drift by setting concrete principles which prevail above strategy or tactical solutions. Some examples are to achieve a specified CAMELS rating, eliminate regulatory orders, only consider a sale if market multiples reach a pre-determined level, or to set specific compounded annual return of TBVS over the next 3 years.

Validate corporate infrastructure. An ineffective corporate structure could mean that more regulatory agencies are examining your institution than necessary. Boards should discuss the value of their holding company, registering their stock, the appropriateness of the bank’s charter and target capital composition at least annually.

Commit to talent management. Many senior managers will retire over the next few years, but a proper talent management program encompasses more than succession planning. An annual management review helps the organization prepare for the future, but a robust program further enables banks to attract, retain and motivate employees.

Control the balance sheet. Between 2004 and 2007, the last rate rise, interest expense at depository institutions tripled. While models are necessary to understand the risk, the only way to turn this into a strategic advantage is to conduct price sensitivity analysis, customer retention analysis and customer loyalty studies.

Streamline corporate governance. The board’s primary responsibilities include setting the strategic direction for the bank, creating and updating policies, and establishing a feedback monitoring system for progress. Though conceptually simple, a typical director’s time is strained. Time spent on board matters can be streamlined by centralizing information under one system, using consent agendas, spreading policy approval dates, utilizing video technology, educating the board using bank specific data, and appropriately scheduling committee meetings.

Perform customer segmentation. Historically, banks have analyzed growth opportunities by assessing geographic boundaries. Today, institutions must now know and sell to their customers by identifying target customer profiles, developing products to profitably serve those customers, analyzing where those customers live, understanding how they communicate and building delivery channels specific to those customers.

Have a capital market plan. What is the institution worth on a trading and takeout basis? Who can we buy? Who would want to buy the bank and why? Should the institution consider stock repurchases or higher dividends? Regardless of size, every institution needs to ask itself these questions, and memorialize the discussion in an integrated capital markets plan.

What Makes a Great Bank CEO


strategic-vision-7-27-15.png“I think as a company, if you can get those two things right—having a clear direction on what you are trying to do and bringing in great people who can execute on the stuff—then you can do pretty well.”

That pearl of wisdom comes from a 30–something chief executive officer who has helped launch a social media revolution in this country. Maybe you’ve heard of him–Mark Zuckerberg, one of the founders of Facebook. For all his precociousness, I think that Zuckerberg has identified two of the most essential traits of an effective CEO—the ability to lay out a strategic vision for the company, and then bring in talented people who can make that vision a reality. I’ve been thinking about this recently because I believe that over the next 10 years, we’re going to see a big demographic shift among the ranks of bank CEOs as the last of the baby boomers give way to younger generations including, possibly, some millennials. And the coming decade could turn out to be very interesting.

There are certain characteristics or skills that I think all CEOs, in the banking industry as elsewhere, need to have. They absolutely need to be excellent leaders, with the kind of people skills that enable them to work through others, rather than trying to accomplish everything themselves. And the larger the company, the more important it is that they know how to empower their employees. CEOs also need to have strong communication skills, both with their employees and their customers. They obviously need to be good bankers, which over the past several years has meant being good lenders. Some have become good deal makers since banking is still a consolidating industry. They also need the kind of collaborative skills that will enable them to work with an engaged board of directors, which has the potential of making them better in their jobs. And at smaller banks, the CEO needs to be well connected to their community because that’s where the business comes from.

I tend to think of these traits and skills as table stakes for effective bank CEOs. But each generation of CEOs seems to face a different kind of challenge, which calls on their adaptive capabilities. Anyone who has been in the job for the last 10 years had to deal with the challenge of the 2008–2009 financial crisis, which required many banks to work through a pile of bad loans, raise capital and adjust to a greatly increased level of regulation. Each generation of bank CEOs seem to face a different set of challenges, and I don’t expect it to be any different for the next group.

They will need a much more sophisticated understanding of technology, not just in the traditional sense of core processors, ATMs and teller platform systems, but in the larger context of how mobile and digital technology are beginning to change the delivery of consumer and small business banking products and services. And one of their biggest challenges will be to manage the transition from a distribution system that is branch–centric to one that is much more reliant on digital and mobile going forward. This is one of those trends where it might be hard to perfectly time your bank’s migration from brick–and–mortar to digital and mobile, but you don’t want to be too far out in front or too far behind.

This next generation of CEOs will also have to prepare for the emergence of millennials, both as customers and as employees. Be sure to check the July issue of Bank Director digital magazine for a fascinating cover story on the challenges of managing millennial employees, who are now entering the workforce in meaningful numbers. Millennials are also a driving force behind widespread consumer preference for alternative channels like digital and mobile, and as a group they probably have less loyalty to the concept of a traditional bank than their Gen X older siblings or baby boomer parents. Each year they will account for an increasing percentage of the industry’s customer base, and they want to be banked differently.

Unfortunately, the next generation of bankers will also have to become experts at managing the regulatory agencies that supervise their bank. Previous generations have had to worry about regulatory compliance as well, but today’s overseers play much more of an activist role and expect to have an open dialogue with the CEO and the board about any significant action or event that impacts the bank. The CEO—who is the focal point for any communication with the regulators—must be able to manage that relationship in a positive and constructive way.

The Link Between Board Diversity and Smart Business


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

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

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

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

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

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

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

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

Four Ways Board Members Can Avoid Personal Liability


9-24-14-Dinsmore.pngOn top of everything else bank board members must think about these days, they must also consider and avoid their own exposure to personal liability for actions taken (or not taken) in connection with their board duties. What can you do to avoid personal liability?

  1. Good corporate governance is the first line of defense for a board of directors. With today’s demanding regulatory climate, bank boards are being held more accountable than ever. Directors need to go back to the basics. Understanding the duties of care and loyalty are the foundation of corporate governance and properly documenting actions taken at the board meetings provides evidence that directors exercised their fiduciary duties.

    Beyond this, regulators are asking, “Was the board informed?” and “Did the board approve this?” The key to avoiding personal liability is to stay informed of important decisions by management. There are legal protections in most states for boards that make judgments in the course of business. The board can show it exercised business judgment by documenting the decision-making process with full disclosure, including any discussions fully disclosed in the minutes. Each individual director is obligated to speak up and challenge management.

  2. Engaged independent, outside directors can strengthen a board’s exercise of its fiduciary duties. Though most Federal Deposit Insurance Corp. lawsuits against bank directors have come out of bank failures, with the creation of the Consumer Financial Protection Bureau and the increasing role of shareholder activists, we may see heightened scrutiny on boards with an eye towards damages should the bank sell, falter, or fail. Engaged, independent directors have an important role to play in protecting the board. They should hold regular executive sessions without management, and these sessions also should be documented. In keeping with this concept, it is effective for the board to name a lead independent director who will guide executive sessions and secure the minutes. The lead outside director should also communicate with management.
  3. A knowledgeable director is a good director. Having an appropriately educated board is good for the bank, good for the individual director, and looked on favorably by the regulators. Directors would be wise to undertake risk management education, with content appropriate for the size and scope of the bank. The test applied by the regulators is whether the board is knowledgeable enough to understand the risks attendant to the bank’s operations and product lines (existing and planned), and to challenge management’s analysis of such risks and the proposed action plans to mitigate or take advantage of them. This is not to suggest that directors need to be experts in, for example, designing a capital or liquidity stress test model, but directors are expected to understand management’s analysis of the output in order to effectively guide the bank’s decision-making process.

    A best practice is to develop and adopt a director education policy/program that includes, at a minimum, the following:

    • general description of subject matter expected to be covered and updated annually;
    • number of hours/days of education expected for the year;
      acceptable forms of education—external, internal, self-study, trade association seminars, etc.
    • who pays the cost (including travel);
    • whether attendance/completion will be included in annual director evaluations; and
    • assignment of responsibility for documenting, monitoring and reporting on compliance with the policy.
  4. Paying attention to and engaging with your regulators will reduce your risk of serving on a bank board. A bank director’s primary responsibilities vis-a-vis the bank’s regulators are:

    • to review and understand regulatory reports and other correspondence from the regulator;
    • to formulate corrective action to address issues/deficiencies identified in regulatory reports;
    • to assign responsibility to appropriate bank management or staff for implementation of corrective action;
    • to monitor and manage the progress of corrective action to its timely and effective completion; and
    • to maintain an open line of communication with the bank’s examiner in charge and others within the regulatory agency, as appropriate.

These responsibilities apply whether your bank is well managed, highly profitable, and well capitalized or subject to a formal enforcement action. If your bank finds itself in the latter category, the risk of personal liability is significantly higher. The federal regulatory agencies have little patience for boards that do not take seriously their responsibility to “fix the problems” and are quick to threaten and impose civil money penalties where timely, effective and complete corrective action is not taken. Timely and open communication with the regulators is also important, especially where corrective action deadlines will not be met. Regulators are human too, and like most of us, they hate bad news surprises.

Bank board members need to keep personal liability top of mind. These four practices may not be complete safe harbors, but they will go a long way to helping protect personal assets.

Part I: Best Practices of Bank Boards


good-board.jpgToday’s banking industry is constantly being buffeted by waves of financial, regulatory and operational challenges. The increased regulatory burden and related costs impact every financial institution in both the approach to doing business and the expense of doing business. The industry is in transition, with no clear path forward. As a result, there has never been a greater need for well functioning, informed and courageous boards of directors of banks and bank holding companies. There has also never been a more important time for board members to keep in mind that their responsibilities can be boiled down into one simple goal: the creation of sustainable long-term value for shareholders.

Achieving long-term value for shareholders may seem an elusive goal in the current environment. On more than one occasion, bank board members have commented to me that they feel they are now working for the benefit of the regulators. However, as with any time of turmoil and change, the challenges we now face will pass. As bank boards look for ways to strengthen their institutions, they should not overlook the opportunity to strengthen themselves as a group. One way of doing that is to adopt the practices of the most effective boards of directors.

Over the past several decades my partners and I have attended hundreds of bank board meetings, for institutions ranging in size from under $100 million in assets to well over $10 billion. Regardless of the size of the entity, we have noticed a number of common characteristics and practices of the most effective boards of directors. This is the first in a series of articles which will describe the 10 best practices we have observed among highly effective boards of directors. In this article I focus on two fundamental best practices – selecting good board members and adopting a meaningful agenda for the board meetings.

Best Practice No. 1 – Select Good Board Members

Some of the most challenging and distracting issues a board can face are those related to its own members. These issues typically arise in connection with conflicts of interest between board members and the banks they serve, or when board members experience financial stress. They can also arise when there are personality clashes in the boardroom or when one or more board members seek to dominate the conversation. The best time to avoid such issues is during the selection process for new directors. Compromise and wishful thinking in the selection of directors will almost always dilute the effectiveness of the board as a whole. Key characteristics of good directors include:

  • Independence – being free of conflicts.
  • Time to devote to the job – including time to gain knowledge of the industry, to prepare for board meetings and to participate in committees.
  • Attention – being fully engaged and proactive as a board member.
  • Courage – having a willingness to deal with tough issues.
  • Curiosity -possessing an intellectual curiosity about the bank, the financial services industry and the trends impacting both.

A group of good, solid and dependable board members is, in my experience, preferable to a big-hitter, all-star line-up of directors. A board is most effective when it acts as a group, with a culture in which all members can voice their opinions, and in which probing, and sometimes difficult questions can be asked. Dominant personalities and board cultures in which constructive debate never occurs have contributed to the demise of many banks in the current downturn. Careful selection of new board members, keeping in mind the strengths and weaknesses of the other members of the board, is well worth the time and effort involved.

Best Practice No. 2 – Adopt a Meaningful Agenda

Take the time to review, revise and update your board agenda. I’m aware of several banks that are using the same approach to board meetings and the same agenda as 30 years ago. The absence of any objection from board members may only mean that they are drifting off to sleep during the half-hour-long financial presentation. Board members greatly appreciate a shift to a more efficient and effective agenda, with a focus on committee reports and presentation of only meaningful information about the condition and operations of the bank .This can free up substantial time for the board to focus on the overall direction and progress of the bank. 

Most directors only visit the bank once or twice a month, which makes a full understanding of the bank’s plans and status very difficult. There needs to be an educational element in board meetings. Most directors have an ongoing need, and desire, for growth and development in their understanding of the banking industry. With such education, directors can become more effective in their recognition and understanding of the risks to be monitored, as well as the factors that most influence a bank’s strength and performance.

Board packages should be delivered well in advance of each meeting in order to provide the directors with adequate time to prepare. Committee chairs should be prepared to give concise but informative reports at the meeting. Financial and operational presentations by management should focus on telling the board members what time it is, not how the watch was built. This approach can result in more interesting and informative board meetings and will likely result in greater interaction and contribution by the board members.

Links to the other 3 parts in this series

Originally published on October 25, 2011.

Digital Directors: A Powerful Boardroom Addition


3-21-13_Russell_Reynolds.pngDigital transformation—the confluence of social, mobile, cloud computing and data analytics—is dramatically changing the banking business. As electronic transactions become the norm and customer expectations shift accordingly, banks are fundamentally rethinking both their products and services and their marketing strategies.

Because digital transformation affects the evolution of the entire institution, there is an increasingly recognized need within the banking industry for the board to provide oversight and counsel to the CEO regarding digital strategy and the development of digital talent across the C suite. But this addition to board responsibilities means that the board itself must have a certain critical mass of digital capability and experience.

Nominating committees have begun to respond by adding “digital directors”—executives who have either management or board experience at a company where digital contributes a large portion of revenue, where digital channels are crucial enablers of business or where the company is regarded as a digital transformation leader in its industry.

But as powerful an asset as adding a digital director can be, doing so successfully requires forethought and planning. The following can serve as a checklist of questions and issues the nominating committee should consider.

Know Where the Bank is on its Digital Trajectory

Some banks are building out their basic mobile strategy, while others have infrastructure already in place and are now leveraging analytics to incentivize usage and engage and retain customers. Still others may be looking to extend their network of partnerships. The specific digital issues the institution is facing now and over the next several years will help determine the type of digital experience most needed on the board.

Understand the Varieties

While one can speak broadly of “digital directors,” the term actually encompasses three distinct types: The first type of digital leaders comes from “disruptor” companies—the social, mobile, cloud computing, data analytics and other firms that are actually driving the changes at a root level.  The second type of digital director comes from “transformer” companies outside the realm of technology that are examples in their industry of successful digital transformation. (The retail, transportation and consumer packaged goods industries are good sources.) The third type of executive comes from either disruptor or transformer companies, but approaches digital less from a strategic than a technological perspective, typically as chief technical officer or chief technology officer. Each type of digital director will have his or her own perspective on the process of digital transformation.

Show Commitment

Expect that any potential digital director will regard an offer of a board seat with a level of healthy skepticism. He or she will have to be persuaded that the CEO has truly embraced digital change, rather than merely responding to pressure from the shareholders or the board.

While a commitment to digital transformation will mean different things at different banks, it will generally include having already begun to build a digital management team to lead efforts in mobile, digital payments and digital marketing. After all, the role of the digital director is to advise on digital strategy—and this presupposes that there is a basic digital capability already in place. No digital director will sign on if he or she is expected to drive the digital transformation process.

One Isn’t Enough

Just as no digital director wants the responsibility of building digital capability from the ground up, he or she will not want to be the one to whom all faces turn when a digital issue comes up. Think of digital expertise like financial expertise: Even outside of the financial services industry, the well-composed board will include several financial experts, representing various perspectives and experiences, to ensure the best possible collective thinking about a critical function. Similarly, bank boards should aim to have at least two or three digital directors around the table.

Don’t Just Transform the Bank

The bank cannot undergo a digital transformation without the board doing so as well. Use tablets to access board documents, as well as online collaboration tools. Spend more time out of the boardroom seeing and trying new technologies first-hand.

But if adding digital technologies will nudge boardroom culture, the addition of digital directors will have a far greater impact, given their likely expectations for high levels of directness and transparency. The challenge here is to add directors who bring disruptive experience without being disruptive themselves. This can particularly be an issue for digital directors who have not served on a public company board before, or on a board outside of the digital realm. Mentoring from a senior board member can be helpful here. But it would be a mistake to expect to smooth the edges completely. Nor should one want to: As more digital directors take their place in the boardroom, it is likely that they will make a positive impact on board culture in ways that cannot now be foreseen.