Just 29% of chief executives, and 17% of chief information and chief technology officers, say they rely on members of their board for information about technology’s impact on their institution, according to Bank Director’s 2021 Technology Survey. But what if a bank could leverage their board as a resource on this issue, helping to connect the dots between technology and its overall strategy?
Coastal Financial Corp., based in Everett, Washington, has brought on board members over the past three years with experience working in and supporting the digital sector: Sadhana Akella-Mishra, chief risk officer at the core provider Finxact; Stephan Klee, chief financial officer at the venture capital firm Portage Ventures and former CFO of Zenbanx, a fintech acquired by SoFi in 2017; Rilla Delorier, a retired bank executive who until last year led digital transformation at Umpqua Bank; and Pamela Unger, a certified public accountant who created software to support her work with venture capital firms. That deep bench of technology expertise helps the bank evolve, according to CEO Eric Sprink, by better understanding opportunities and risks. The board can even help $2 billion Coastal identify and bring on staff.
“The board has always been entrepreneurial at its basis, and some of the core values that we developed as a board were, be flexible, be unbankey and live in the gray — and those are [our] board values,” Sprink says. “We’ve really worked hard to continually ask people to join our board that continue that evolution and entrepreneurial spirit with some specialty that they bring.”
Bank Director’s recent Technology Survey finds that roughly half of bank boards discuss technology at every board meeting; another 30% make sure it’s a quarterly agenda item. That’s been the picture for several years in our survey, given technology’s importance in an increasingly digital economy.
But for many community bank boards, the expertise reflected in the boardroom hasn’t caught up to today’s reality — just 49% of board members and executives representing a bank smaller than $10 billion in assets report that their board has a director with a background or expertise in technology. And these skills are even rarer for discrete areas affecting bank strategies and operations, from cybersecurity (25% say they have such an expert on their board) to digital transformation (20%) and data analytics (16%).
Bank boards would benefit greatly from this expertise — and many of them know it, says J. Scott Petty, a partner at the executive search firm Chartwell Partners. “When I interview boards and we go through an assessment process, it’s always the No. 1 thing they talk about,” he says. “There’s no one there [who] can really understand what their head of technology is talking about. So, whatever they say, they go, ‘OK, well, you’re the tech expert.’”
In Bank Director’s 2021 Governance Best Practices Survey conducted earlier this year, board members identify their two most vital functions: holding management accountable for achieving strategic goals in a safe and sound manner, and meeting the board’s fiduciary responsibilities to shareholders.
If board members can’t pose a credible challenge to management when it comes to discussions on technology — asking pointed questions about a rising budget item for the majority of banks, as our recent research finds — then they can’t effectively fulfill their two most important duties. And boards also will find themselves unable to contribute to the bank’s strategy in the way they could or should.
Directors with technology expertise can help boards provide effective oversight and link technology and strategy, says Petty. “That’s the No. 1 [thing] — that fiduciary responsibility to really understand how the bank [aligns] its business strategy with its technology strategy.”
Petty shares a comprehensive list that identifies how technology expertise in the boardroom can contribute to the board’s oversight and strategic functions. These include:
- Linking technology to the overall business strategy
- Asking incisive questions of the bank’s CIO and/or CTO, and holding them accountable for goals, deadlines and budgets
- Providing effective oversight of information security as well as Bank Secrecy Act/anti-money laundering (BSA/AML) compliance
- Offering input and guidance on the bank’s technology initiatives
- Giving feedback on innovation, customer experience and acquisition, product development, digital integration, cross-selling opportunities and similar areas
Asking pointed questions and deliberating about these technology matters isn’t just a fiduciary responsibility — it makes banks better, points out Jeff Marsico, president of The Kafafian Group, a consulting firm. Technology use by the industry isn’t new, he notes, but community bank boardrooms are typically composed of older members who will be inherently less tapped into what’s going on in the digital banking space. As a result, “they don’t have enough base knowledge to be challenging to management and therefore management knows, ‘I’m not going to be particularly challenged here,’” Marsico says. “[Boards] need somebody with enough knowledge to be able to challenge management — because then management gets better.”
Marsico sees flaws in most boards’ often-informal nomination processes. Performance evaluations, he notes, aren’t adequately used by the industry to identify gaps in board composition, and board members are often reticent to leave. Bank Director’s governance research backs this up, finding that roughly half of boards representing banks between $1 billion and $10 billion in assets conduct an annual performance assessment; that drops to 23% of boards below $1 billion in assets. Fewer than 20% overall use that assessment to modify the board’s composition.
Finding technology skill sets may challenge community bank boards, but Petty recommends a few ways that nominating committees can expand their search. Banks aren’t alone in the digital evolution, which affects practically every sector of the economy. With that in mind, he suggests looking at other industries for prospective board members. “Take an industry-agnostic look to find technology experts from organizations that are larger than the current institution,” Petty says.
Colleges, universities or vocational schools may also provide a resource to tap into technology expertise. “They typically are also at the forefront of talking about digitization across industries,” Petty adds.
While boardrooms should benefit from recruiting members with expertise for the digital age, that doesn’t excuse directors from enhancing their own understanding of the topic.
The 2021 Technology Survey finds board members highly reliant on bank executives and staff (87%) for information about the technologies that could affect their institution — right behind articles and publications (96%) as directors’ top resources.
While input from the bank’s executive team is critical, it’s important that directors leverage their own backgrounds, in addition to taking advantage of ongoing training and informational resources, to ask the right questions of these executives.
Marsico recommends that boards focus on strategy in every board meeting, with regular quarterly updates on the bank’s progress on executing the strategy. Other sessions should provide opportunities to educate board members on what’s going on in the banking environment — and should include external points of view. These could include technology vendors or representatives from the various associations serving the banking community. Petty suggests bringing in a former technology executive of another, larger bank who could brief members on what they’re seeing in the marketplace.
“[Boards] can get an outsider’s perspective that breathes fresh air into what is the possible — because I don’t think they know what is the possible,” says Marsico.
Petty also points to increasing interest in forming board-level technology committees. Bank Director’s 2021 Compensation Survey, conducted earlier this year, found that 23% of banks use such a committee.
“Even the smaller banks will have a technology committee, because it’s such a major focus for any institution to drive the digitization of how they go to market, how they leverage the digital experience for the customer, how they leverage the digital product offerings, [and] how they use digital to acquire new customers and onboard new customers,” says Petty.
To understand the responsibilities of the technology committee, access our Board Structure Guideline on that topic. Recent Bank Director research reports examine “The Road Ahead for Digital Banking” and “Meeting Customer Demand for Bitcoin.” Bank Director’s membership program includes a board assessment tool and access to the FinXTech Connect platform, which helps bank leaders identify potential technology providers and solutions.
Bank Director’s 2021 Technology Survey, sponsored by CDW, surveyed more than 100 independent directors, CEOs, COOs and senior technology executives of U.S. banks below $100 billion in assets to understand how these institutions leverage technology in response to the competitive landscape. The survey was conducted in June and July 2021.
Bank Director’s 2021 Compensation Survey, sponsored by Newcleus Compensation Advisors, surveyed 282 independent directors, chief executive officers, human resources officers and other senior executives of U.S. banks below $50 billion in assets to understand talent trends, cultural shifts, CEO performance and pay, and director compensation. The survey was conducted in March and April 2021.
Bank Director’s 2021 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP, surveyed 217 independent directors, chairs and chief executives of U.S. banks below $50 billion in assets. The survey was conducted in February and March 2021, and explores the fundamentals of board performance, including strategic planning, working with the management team and enhancing the board’s composition.