Governance Survey Results: Directors Sound Off on Diversity, Performance

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SURVEY.pngU.S. banks have made modest progress on improving the diversity of their boards of directors, but more work needs to be done, based on the results of Bank Director’s 2020 Governance Best Practices Survey.

Sponsored by Bryan Cave Leighton Paisner, the survey was conducted in February and March of this year and included the perspectives of 159 independent directors, chairmen and CEOs of U.S. banks under $50 billion in assets.

Thirty-nine percent of the survey participants say their boards have several diverse directors, based on gender or ethnic and racial backgrounds. Thirty percent have one of two diverse directors but hope to recruit more. Thirteen percent indicate they have one or two diverse directors and believe that is sufficient, while another 13% say they have no such directors and would like to recruit some. And 5% say they have no diverse directors and aren’t seeking to add those attributes.

“What I say to boards is to look at your communities,” says James McAlpin Jr., a partner at Bryan Cave and leader of the firm’s banking practice group. “Many communities in the United States have undergone fundamental demographic change over the last 15 years.” Included in this demographic evolution is an increase in the number of women and minority business owners. “Then look around your board table,” he continues. “I think it’s really important for the board to reflect the bank’s demographic customer base.”

There is a solid body of academic research that diverse boards make better decisions, resulting in stronger financial performance. But not all of the survey’s respondents are on board with that assessment. While 52% agree that diversity improves a board’s performance, 40% believe it does to an extent but the impact is overrated, and 8% do not believe that diversity improves performance.

The survey also finds that a significant number of participants report a lack of engagement by some members of their board, with 39% saying that some or few of their directors are actively engaged during board and committee meetings.

Not unsurprising perhaps, the survey found that a significant number — 42% — report having at least one or two underperforming directors.

McAlpin suggests that engagement and performance issues “need to be addressed through board evaluation and feedback to those directors.” Unfortunately, less than half of the survey participants say their boards perform some type of periodic performance review, and just 31% include individual director assessments in that process.

Other Survey Results Include

  • Fifty-eight percent of the respondents serve on board where the chair is an independent director. On boards where the CEO is also the chair, only 55% have a lead independent director.
  • The median length of board service for the participants is 12 years; 76% are over the age of 60.
  • Eighty-four percent identify as white and 78% as male. Just 1% are Black and 1% are Hispanic.

Click HERE to view the full survey results.

For a further analysis of the findings that examines process, independence, composition, oversight and refreshment, access “How Bank Boards Manage Their Business” HERE.

Talking Too Much About Board Diversity

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A backlash has emerged in response to diversity and inclusion initiatives.

In the past several years, activists, institutional investors and some companies — including banks — have advocated for increased diversity and inclusion on their boards and throughout their firms. These groups believe that a diversity of race, gender, age and opinion is good for business and, ultimately, for shareholders.

But two recent studies draw attention to a burgeoning backlash to these efforts. Whether from message fatigue or concern about the board’s focus, companies may need to be mindful about the promotion and communication of their D&I efforts.

Director support to increase gender and racial diversity in the boardroom fell for the first time since 2013 in PwC’s 2019 governance survey. Thirty-eight percent of directors said gender diversity was very important in 2019, down from 46% in 2018. Those who said racial and ethnic diversity was very important fell to 26%, down from 34% the year prior.

Directors seem to be fatiguing of these messages, says Paula Loop, leader of PwC’s Governance Insights Center, who adds she was surprised at the recent trend.

“The way that we rationalized it is that it appears that directors have heard the message and they’re trying to acknowledge that,” she says.

Respondents to PwC’s survey acknowledged that diversity has added value to their discussions and decisions, Loop says, and that it increasingly makes sense from a business perspective. This finding is supported more broadly: Bank Director’s 2018 Compensation Survey found that 87% of respondents “personally believe” that board diversity, either through age, race or gender, has a positive impact on the bank’s performance.

“We have to remember, especially when you’re thinking about boards, they … don’t move necessary as quickly as one might think,” Loop says. “I feel like we’re in an evolution — but there’s been a lot in the last couple of years.”

Interestingly, PwC observed different responses to the survey based on the gender of respondents. A higher percentage of female directors reported that gender and racial/ethnic diversity on the board was “very important.” Male directors were less inclined to report seeing evidence of the benefits of diversity, and more than half agreed that diversity efforts “are driven by political correctness.”

Male directors were three times as likely as a female director to assert that investors “devote too much attention” to both gender and racial/ethnic diversity. Overall, 63% of directors believe investors are too focused on gender diversity, up from 35% in 2018; 58% report the same when it comes to racial/ethnic diversity, up from 33%.

The different responses along gender lines demonstrates why diversity matters, Loop says. The report shows that gender-diverse slate of directors do have a “different emphasis or different way of thinking.”

“It validates why it’s good to have a diverse group of people in a room when you have a conversation about an important issue,” she says.

But even if a bank makes headway on increasing the gender diversity on its board, there is still another group to think about: shareholders. A recent study found that companies that appoint women to the board experience a decline in their share price for two years after the appointment. The study looked at more than 1,600 U.S. companies between 1998 and 2011.

“Investors seem to be penalizing, rather than rewarding, companies that strive to be more inclusive,” wrote INSEAD researchers Isabelle Solal and Kaisa Snellman in a November 2019 Harvard Business Review article about their study.

“What we think is happening is that investors believe that firms who choose to appoint women are firms who care more about diversity than about maximizing shareholder value,” writes Solal, a postdoctoral research fellow at the Stone Centre for the Study of Wealth Inequality at INSEAD, in an email interview.

In subsequent research, they found that investors view appointments of female directors with a company’s “diversity motivation.” The association is “not that surprising,” she writes, given that “almost all” press releases feature the gender of the appointee when that person is a woman, and will often include other references to diversity.

“Gender is never mentioned when the director is a man,” she writes.

Solal says that companies should still appoint women to their boards, especially given that the shareholder skepticism dissipates in two years. But companies should be mindful that overemphasizing a director’s gender or diversity may be unhelpful, and instead highlight the “skills and qualifications of their candidates, regardless of their gender.”

Board Governance For The New Year

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Business conditions, financial markets and competitive landscapes are always changing. But perhaps there is no arena of business undergoing a more significant transformation at the moment than corporate governance.

Whether driven by activists investors, regulators, institutional shareholders, governance gadflies or best practices, corporate governance is in the crosshairs for many organizations today. And in the banking sector — where some in Washington have placed a bullseye on the industry’s back — an enhanced focus on governance is the order of the day.

Bank boards today would be well served to pay close attention to three important aspects of governance: board composition, size and director age and tenure. When left to their own devices, too often inertia will set in, causing boards to ignore needed enhancements to corporate governance and boardroom performance. Even in the private company and mutual space, there is room for improvement and incorporation of best practices if a bank wants to continue to remain strong and independent.

Some governance advocates adopt a certain viewpoint that downplays an institution’s history. “If you were building the board for your bank today at its current size, how many of the existing directors would you select for the board?” the viewpoint goes. This obviously ignores historical contributions and the context that took the bank to its current state.  However, as the old saying goes: “What got you here often won’t get you there.”

For many institutions — particularly those that have grown significantly through acquisition — the size of the board has become unwieldy. Oftentimes, executives doled out seats to get a deal done; in some extreme cases, boards now have 16, 18, 20 — or more — directors.

While this allows for ample staffing of committees, pragmatically there may be too many voices to hear before the board can make decisions. At the same time, banks with only six or seven  directors may not be able to adequately staff board committees, and perhaps operate as a “committee of the whole” in some cases.  Often times, this low number of directors implies a high level of insularity.

Research from sources including both Bank Director and the National Association of Corporate Directors suggests that the average board size is between 10 and 11 directors, including the CEO. Furthermore, the CEO is now typically the sole inside director, unless the CEO transition plan is underway and a president has been named as heir apparent to the CEO role (similar to KeyCorp’s September 2019 succession announcement). Too many or too few directors can impede a board’s effectiveness, and 75% of public boards have between nine and 12 directors.

Board composition, of course, speaks to the diversity seated around the board table. Whether you accept the prevailing sentiment or not, there is ample evidence that boards with more diverse perspectives perform better. In order to garner more diverse viewpoints, the board needs to be less homogenous (read: “not full of largely middle-aged white men”) and more representative of the communities served and employee demographics of today and tomorrow. And let’s not forget about age diversity, which helps to bring the perspectives of younger generations (read: “vital future customers and employees”) into the boardroom. One real world example: How would you feel if your bank lost a sizable municipal deposit relationship because a local ordinance required a diverse board in order to do business with an institution? It can happen.

Lastly, many boards are aging. The average public director today is 63 — roughly two years older than a decade ago. And as directors age and begin to see the potential end of their board service, a number of community bank boards have responded by raised their mandatory retirement age and prolonging the inevitable. Yet with rising tenure and aging boards, how can an institution bring on next-level board talent to ensure continued strong performance and good governance, without becoming unnecessarily large? Boards need to stay strong and hold to their longstanding age and tenure policies, or establish a tenure or retirement limit, in order to allow for a healthy refresh for the demands ahead.

High-performing companies typically have high-performing boards. It is rare to see an institution with strong performance accompanied by a weak or poorly governed board. Boards that take the time to thoughtfully optimize their size, composition and refreshment practices will likely improve the bank’s performance — and the odds of continued independence.