ESG Principles at Work in Diversifying Governance

Before environmental, social, and governance (ESG) matters became commercially and culturally significant, the lack of diversity and inclusion within governance structures was noted by stakeholders but not scrutinized.

The shifting tides now means that organizations lacking diversity in their corporate leadership could be potentially subjected to shareholder lawsuits, increased regulation and directives by state laws, investment bank requirements, and potential industry edicts.

Board and management diversity is undoubtedly a high-priority issue in the banking and financial services sectors. Numerous reports establish minority groups have historically been denied access to capital, which is mirrored by the lack of minority representation on the boards of financial institutions.

Some progress has been made. For example, for the first time in its 107-year history, white men held fewer than half of the board seats at the Federal Reserve’s 12 regional outposts. This was part of an intentional effort, as Fed leaders believe a more representative body of leaders will better understand economic conditions and make better policy decisions. However, further analysis reflects such diversity predominantly among the two-thirds of directors who are not bankers, while the experienced banking directors are mainly white males.

Board Diversity Lawsuits
The current pending shareholder suits have been primarily filed by the same group of firms and targeted many companies listed by a recent Newsweek article as not having a Black director. None of these suits involve financial institutions, but it is not hard to foresee such cases coming in the future. The lawsuits generally assert that the defendants breached their fiduciary duties and made false or misleading public statements regarding a company’s commitment to diversity. The Courts have summarily dismissed at least two suits, but a legal victory may not even be the goal in some cases.

Recently, Google’s parent settled its #MeToo derivative litigation and agreed to create a $310 million diversity, equity, and inclusion fund to support global diversity and inclusion initiatives within Google over the next ten years. The fund will also support various ESG programs outside Google focused on the digital and technology industries.

Regulatory, Industry, and Shareholder Efforts
Federal and state regulatory efforts preceded these recent lawsuits. The U.S. Securities and Exchange Commission has issued compliance interpretations advising companies on the disclosure of diversity characteristics upon which they rely when nominating board members and is expected to push more disclosure in the future. Additionally, the U.S. House of Representatives considered a bill in November 2019 requiring issuers of securities to disclose the racial, ethnic, and gender composition of their boards of directors and executive officers and any plans to promote such diversity.

These efforts will likely filter into boardrooms and may spur additional board regulation at the state level. In 2019, California became the first state to require headquartered public companies to have a minimum number of female directors or face sanctions, increasing 2021. In June 2020, New York began requiring companies to report how many of their directors are women. As other states follow California’s lead regarding board composition, we can expect more claims to be filed across the country.

At the industry level, the Nasdaq stock exchange filed a proposal with the SEC to adopt regulations that would require most listed companies to elect at least one woman director and one director from an underrepresented minority or who identify as LGBTQ+. If adopted, the tiered requirements would force non-compliant companies to disclose such failures in the company’s annual meeting proxy statement or on its website.

In the private sector, institutional investors, such as BlackRock and Vanguard Group, have encouraged companies to pursue ESG goals and disclose their boards’ racial diversity, using proxy votes to advance such efforts. Separately, Institutional Shareholder Services and some non-profit organizations have either encouraged companies to disclose their diversity efforts or signed challenges and pledges to increase the diversity on their boards. Goldman Sachs Group has made clear it will only assist companies to go public if they have at least one diverse board member.

Concrete Plans Can Decrease Director Risk
Successful institutions know their diversity commitment cannot be rhetorical and is measured by the number of their diverse board and management leaders. As pending lawsuits and legislation leverage diversity statements to form the basis of liability or regulatory culpability, financial institutions should ensure that their actions fully support their diversity proclamations. Among other things, boards should:

  • Take the lead from public and private efforts and review and, if necessary, reform board composition to open or create seats for diverse directors.
  • When recruiting new board members, identify and prioritize salient diversity characteristics; if necessary, utilize a diversity-focused search consultant to ensure a diverse pool of candidates.
  • Develop a quantifiable plan for diversity issues by reviewing and augmenting governance guidelines, board committee efforts, and executive compensation criteria.
  • Create and promote diversity and inclusion goals and incorporate training at the board and management levels.
  • Require quarterly board reporting on diversity and inclusion programs to reveal trends and progress towards stated goals.

As companies express their commitment to the board and C-level diversity and other ESG efforts, they should create and follow concrete plans with defined goals and meticulously measure their progress.

2021 Governance Best Practices Survey Results: Who’s Driving Bank Strategy?

The best banks balance short-term thinking with long-term strategy.

“Long-term performance is always our paramount objective,” Bank OZK Chair and CEO George Gleason told Bank Director at its recent Inspired by Acquire or Be Acquired virtual event. The $27 billion bank topped Bank Director’s 2021 RankingBanking study. “If short-term results suffer because of our focus on long-term objectives, then that’s just part of it.”

Strategic discipline starts with a bank’s leadership team — and the board should play an important role in developing the strategy and monitoring its execution. But that’s not always the case, according to the results of the 2021 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP.

The survey explores the board’s approach to strategic planning, as well as governance practices, board composition and the relationship between executives and the board. The results find that most boards don’t drive strategic planning at their institutions: Just 20% say the board drives this process and collaborates with management to develop the strategic plan. Most — 56% — say their board establishes the risk appetite but relies on management to develop the strategy.

The vast majority believe their strategic planning process is effective. But of the 11% who believe their process to be ineffective, some express regret over the lack of input from their board. One respondent believes their bank’s strategic plan to be “too in the weeds,” while another holds the opposite concern. “It flies at 30,000 feet for [the] most part,” says one independent chair. “[We] need to get a little closer to the ground with metrics and clear paths for management to build.”

Most — 84% — reviewed their strategic plan during the pandemic, but few shortened the time horizon of their strategy. This may seem surprising, given previous indicators that Covid-19 accelerated bank strategy in some areas, particularly around the implementation of digital technology. Perhaps this indicates that, for most bank leadership teams, balancing short-term results and long-term strategy remains top of mind.

Key Findings

Strategic Review
Three-quarters of respondents say their board reviews the strategic plan annually. Roughly two-thirds bring in an outside advisor or consultant to assist in developing the strategic plan — but not generally every year.

Board Responsibilities
When asked to identify the board’s most important functions, the majority of respondents point to holding management accountable for achieving goals in a safe and sound manner (61%) and meeting its fiduciary responsibilities to shareholders (60%). Just 34% say that setting strategy is a key board responsibility.

Competitive Pressures
Respondents say that pressure on net interest margins (52%), the ability to grow organically in their markets (44%) and meeting customer demands for digital options (37%) threaten the long-term viability of their bank.

Interacting With Management
The vast majority of independent directors, chairs and lead directors believe they’re getting the right level of information from bank executives. Almost all interact at least quarterly with the bank’s CEO (98%), CFO (94%) and chief risk officer (85%).

Credible Challenge
Three-quarters say their board has several directors willing to ask tough questions when warranted; 92% find their management team receptive to feedback.

Needle Moving on Board Diversity
Almost 60% believe that fostering diversity in the boardroom improves corporate performance. Thirty-nine percent have three or more board members who bring diverse characteristics to the board, based on gender, race or ethnicity.

Assessing Performance
Less than half conduct an annual evaluation of their board’s performance, which most use to assess the effectiveness of the board as a whole (84%), improve governance processes (60%), identify training needs for the board (59%) or assess committee performance (58%).

To view the full results of the survey, click here.

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 to Fix Banking’s Diversity Pipeline Problem

In less than a year, First Financial Bankshares has promoted three women to regional leadership positions, giving women at the Abilene, Texas-based bank a total of four out of 17 such leadership positions within the organization. While First Financial is not the only bank that is working hard to move women into the ranks of senior management, it is unusual to see three women promoted in such a short space of time.

“The public loves to see women and minorities promoted,” says F. Scott Dueser, chairman and CEO at the $10.9 billion asset bank. “When I put something out on a woman promotion or a minority promotion, just on social media, it goes a lot further and a lot more people look at it, which tells me a lot. I judge what I put out on social media by how many clicks I get on it, how many likes I get on it, and those will always get the most, which I think is really cool.”

Women account for a large majority of the banking workforce — but only a small percentage of them advance to a senior management position, let alone the CEO spot. And those who do make it to the C-suite are often in staff positions like human resources, marketing, communications or general counsel. An analysis by the consulting firm DDI found that women hold 21% of executive positions; of them, 63% have P&L responsibility, compared to 81% of male executives. Managing a business unit with P&L responsibility is a well-worn path to senior management.

If one were to think of career progression as a pipeline, then it clearly becomes clogged for women at some point. Men and women enter the industry in roughly equal numbers, but early in their careers many women are either diverted to one of the aforementioned staff positions, or they leave the industry altogether.

Explanations for this phenomenon vary. It’s true that some women choose to leave the workforce in their twenties and thirties, when their careers are just starting to take off, to start a family. But many women choose to do both, so it’s not as if the pipeline is devoid of promotable candidates.

“This is a gross generalization, but by and large they’re not getting the same opportunities” as men, says Jennifer Docherty, associate general counsel and managing director at Piper Sandler & Co., and co-founder of Bank on Women, a nonprofit organization dedicated to educating the community banking industry on the importance of adding qualified women to the board and C-suite.

If you look at anyone who’s successful, men and women, particularly in the banking space, at some point they have had P&L responsibilities,” Docherty says. “They have come up on the revenue side of the business, or the commercial lending side of the business, as opposed to a lot of women who are steered more toward HR, retail — things that are considered more soft skills, [though] still essential. Historically speaking, the senior ranks have been filled by people who have come up on the lending side, or [have had] some P&L responsibilities, and generally men are steered into those roles early on.”

Docherty says that men and women graduate from college and enter finance in roughly equal numbers. “But at the first promotion, you see a huge drop off,” she says. “Generally speaking, this is early on in their careers, before anyone is contemplating [starting a family], and men are steered toward one side, and women are steered toward the other. You start to see this breakage very early on in careers.”

Why exactly this occurs is difficult to pin down, although it may reflect a bias that Docherty says was once very explicit in many American corporations, but has become less explicit if no less prevalent in an age of political correctness. The bias — which Docherty says used to be expressed quite openly — was that companies were reluctant to hire women of childbearing age on the assumption that most of them would be in the workforce for only a short period of time before leaving to start a family. “Nobody would say that [today], but I know absolutely that perspective still exists — that men are going to be more focused when they have kids, and women are going to be less focused,” she says.

Another challenge facing women who are trying to build a career in banking that leads to the C-suite is a lack of sponsorship. “You won’t talk to anybody who has been successful in business without them telling you about someone who has been pivotal in their careers,” she says. “Sponsorship is different [from] mentorship. [A sponsor is] somebody who brings you to a meeting and says, ‘This is somebody you should trust,’ and then defers to that person in meetings, puts them in front of the right audience and gives them an opportunity to really shine.”

A woman who understands the struggles that women can face in banking is Maria Tedesco, the president of $19.6 billion Atlantic Union Bankshares in Richmond, Virginia. After Tedesco graduated from college, she applied to several commercial lending programs at banks in her native Boston. She was turned down for all of them. Later in her career, Tedesco joined the senior management team at a bank that had one other female member. And there were times when the men in that group would play golf or go out for drinks, and not invite them. “It’s not that I really wanted to play golf or have drinks with them, but they were doing this bonding and relationship building,” she says. “And you know how important that is. You get to know somebody from very different angles.”

These experiences can help build trust and strengthen the working relationship, and women sometimes miss out on those opportunities in male-dominated leadership teams. Tedesco says she made a pact of sorts with the other female executive that “we were going to support each other and give each other feedback. And it became a lifeline for her and a lifeline for me. That support is very rare to get peer-to-peer. And I think that helped shape [me] as an executive more than anything. And she would say the same thing. Early on we figured that, ‘Hey, we’ve got to help each other if nobody else is going to help us, and provide that coaching and feedback that is so critical.’”

Women alone can’t fix the C-suite diversity problem if enough men in male-dominated executive teams don’t champion their cause with the same earnestness they display for promising young male executives. But certainly there is an opportunity for senior female executives to sponsor younger women in their organizations, and it’s a role that Tedesco has assumed at Atlantic Union with the Women’s Inclusion Network, which she started after joining the bank in September 2018. The goal is to create opportunities for employees to leverage each other to grow professionally and personally, and is aligned with a broader diversity, equity and inclusion effort within the bank. Tedesco believes that she has advice to share, and she can serve as a mentor to other women inside and outside the company.

Tedesco understands how important it is for younger female executives to see other women in the C-suite. “They want to see that and say, ‘Oh wow, I see someone who looks like me that has succeeded, so I can succeed, too.’”

There are now four female regional leaders at First Financial who can inspire other women within the bank. Three of the women are regional presidents, while a fourth is a regional CEO. The titles vary depending on the size of the region.

Each regional president or CEO runs a substantial business, with a community board and responsibility for producing loans and deposits. While some activities are centralized in Abilene, like asset/liability management, technology and various shared services, these regional leaders are essentially running a small community bank. Each of them was a senior commercial or mortgage lender early in their career, and two of them joined First Financial through an acquisition. “Each of the women that we promoted weren’t promoted just to put a woman in the position,” says Dueser. “They were promoted because they deserved it, and they were the best person for the job.”

Dueser believes that the best way to get more women into senior management is to train them early on an equal footing with men. First Financial has its own management training program, known as the FFIN University — such training programs are a rarity these days for a regional bank — and the two regional presidents who grew up in the bank are graduates.

Dueser was also instrumental in launching the Excellence in Banking program at his alma mater, Texas Tech University, which is run by a former First Financial banker. “One of the things we’re focused on is women and minorities, trying to get them into the program. Things like that will help. All banks are really working on this, bringing in more women and minorities.” Shortly after the program started, Dueser says he took a group of people from Texas Tech to New York to visit with some of the big banks there.

“The one thing that every one of the banks said was, and this is why I know that banks are very dedicated [hiring] to women and minorities, ‘If you can bring us women and minorities from this program, we will hire them.’ And they are.”

How America’s Newest Adults are Changing Banking

Believe it or not, Generation Z is already dipping their toes into the banking world. Are banks ready?

With the oldest Gen Z members reaching their mid-20s, America’s newest adults are starting to generate their own forms of income, graduate from college, budget for large financial decisions and even learn the basics of money management from their favorite TikTok creators. Banks must prepare for this mass generational shift in wealth and personal financing.

For years, financial institutions have adjusted their core offerings to accommodate millennials’ financial preferences and patterns in spending behavior. These 73-million-strong tech-savvy adults have become the most populous generation in U.S. history, surpassing baby boomers.

Entering the job market during the Great Recession, which forced millennials to make more risk-averse spending decisions. With the exception of outstanding student loans, many avoid debt and prioritize spending on life experiences over material possessions to avoid regretting financial decisions down the line.

Millennials are now the largest driver of net new loan demand, according to Morgan Stanley loan forecasts and historical household information. This lending “sweet spot” falls between the ages of 25 and 40, and could persist for to a decade. But seemingly unbeknownst to the majority of banks, Gen Z is nearing — and entering — their early 20s.

It is time for banks to update their reality: America’s youngest adults – Gen Z – are about to age into that lending sweet spot. Combined, millennials and Gen Z will reach the largest generational demographic in the country: 140 million adults whose loyalty to existing financial institutions is very much in flux. This wealth shift will undoubtedly be the impetus for an industry-wise reimaging of consumer banking and lending.

Reports from Morgan Stanley’s population forecasts suggest that Gen Z will comprise of the most populous American generation ever by 2034, with an estimated peak of 78 million. By that time, this generation of “kids” are expected to have increased their aggregated borrowing levels, eventually accounting for a third of all consumer debt in the U.S.

Still thinking of them as kids? It’s understandable, but they could set the tone for how the entire banking industry evolves in the coming years — including your company. When it comes to generational and demographic shifts, there is no recipe for success, especially in banking. However, the tools needed to survive are readily available for the banks that are willing to seize them.

At a bare minimum, banks will need to redesign their legacy systems and offerings by adding digital enhancements, similar to the industry-wide digitization brought on by millennials in recent years. Though the behavioral characteristics of millennials and Gen Z overlap, don’t make the mistake of thinking that they are the same teams playing the same game.

Some Gen Zers are given a smartphone before they are even the age of 10, according to The Harris Poll. Furthermore, those children are allowed to create their own social media accounts by the age of 13, oftentimes earlier. During these formative years, Gen Z kids begin to develop their own personalities, live their own lives and form digital relationships with people, communities and brands alike.

Why does this matter? Because banks have relegated themselves to the adult world, where you must be 18 or older to open your own account. They are losing out on the most influential years of America’s youngest adults — when they begin to associate with their favorite brands and subsequently spend money to engage with them.

The same digitized offerings that banks have spent years formulating for millennials are simply not going to cut it for Gen Z. Banks will need to redefine the concept of “traditional” banking and create a “neo-normal” standard if they have any hopes of engaging this massively influential generation of young Americans. Don’t simply market differently to them. It’s time to shift the strategy – design differently for them.

Gen Z isn’t just about TikTok dance challenges and viral memes. Most of them were seeking answers to their curiosities via search engines around the same age we were reading “Curious George.” This generation is the most diverse and well educated to date, and they are very keen on being treated like adults — especially when it comes to managing their personal finances. How does your bank plan to greet them?

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.”

Four Essential Governance Practices

Bank Director’s 2020 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner, focused on how bank boards manage their business, including their composition, independence and oversight. The analysis also digs into some key best practices, which Bryan Cave Partner James McAlpin Jr. explores further in this video.

  • Meeting Frequency
  • Appointing a Lead Director
  • Building Diversity
  • Assessing the Board

How One Woman Inspires Others

Women are still underrepresented in the senior management ranks of many U.S. banks, and other women are quick to notice — and celebrate — when one of their own is elevated to a top position.

A perfect example of this dynamic is Maria Tedesco, the president of $19.9 billion Atlantic Union Bankshares in Richmond, Virginia. Tedesco joined the bank in September 2018 from BMO Harris Bank in Chicago, where she had been chief operating officer of its retail operation. Tedesco, who I interviewed via Zoom in October, says she came to Atlantic Union in part to work with CEO John Asbury, but also because she saw a customer-first culture that is missing at most large banks.

“What I found here at [Atlantic] Union is that the culture of [the] customer is woven into the fabric of the company, and that really attracted me,” says Tedesco. “I’ve had wonderful experiences at other banks, but I think the larger the bank the [more] they get away from the customer. And I missed being closer to the customer.”

When Atlantic Union Bank adopted its current name in May 2019 and launched a branding campaign (it had been named Union Bank & Trust previously), Tedesco and Asbury did a television ad together to promote the new name. After that, Tedesco says, “I was stopped all the time in stores to the point that I had to start getting dressed up just to go to the CVS [drug store] because people would stop me and say, ‘Oh, you’re my president.’ And I’d say, ‘What? No, I don’t think I’m president yet. You might have me mixed up with somebody else.’ But they’d say, ‘No, I’m a customer of Atlantic Union, and I love you.’ When did you ever hear anybody say they love their bank?”

Asbury, who took over as CEO at Atlantic Union in October 2016, initially decided not to hire a president when the board of directors first raised the issue, preferring to immerse himself in the bank’s operations. But not long after Atlantic Union acquired Richmond-based Xenith Bankshares in May 2017, which took the bank just past the $10 billion regulatory threshold where oversight becomes more rigorous and caps are placed on banks’ debit card interchange fees, Asbury decided he needed a strong No. 2 executive to help manage the bank.

Asbury first hired the late John Stallings Jr., previously the division president and CEO for SunTrust Banks in Virginia, but an illness soon forced him to step down. (Sadly, Stallings passed away in early November.) Convinced he now needed someone in the president’s role, Asbury says he pressed Stallings if he knew someone who could replace him. “I said to John, ‘Do you have any ideas?’ And he said, ‘I know of a fabulous leader, I’ve known her for 20 years, she’s in Chicago. I doubt she would do it, but we’ve got to talk to her. Her name is Maria Tedesco.’ I said, Maria — I’ve known her for a decade.”

Tedesco and Asbury had gotten to know each other a little through their involvement in the Consumer Bankers Association, and their careers had been on similar tracks, but they had never worked with each other. It took a while to convince her to leave Chicago for Richmond. Tedesco had spent the better part of her career working at big banks — before BMO Harris she held senior retail and business banking positions at Santander Bank and Citizens Financial Group — and this experience was important to Asbury as he pursues a strategy of growing Atlantic Union into a dominant regional bank.

Tedesco is responsible for overseeing all of Atlantic Union’s major business lines, as well as various enterprise-wide functions like marketing. Approximately 75% of the company’s employees report up through her.

Asbury says Tedesco has already made a significant impact on Atlantic Union.

“Maria is one of the best leaders I have ever worked with, and she is a force,” he says. “She’s very genuine. She’s very sincere. She has a tremendous breadth of experience. And she has been able to make an impact on this company that none of us could have made in a much larger organization. I’m so grateful that she’s here.”

Tedesco agrees that her position within the company is important to other women at Atlantic Union. “Absolutely,” she says. “Women have made so many advances in this industry, but it’s not good enough.” But I also sensed a certain ambivalence in Tedesco’s perspective that may be common to senior female executives generally: Is their elevated position viewed as having been earned on merit, or is there a perception that they were promoted specifically because they are a woman?

“I didn’t realize how important it was, but I heard from a number of our women in the company who said to me, ‘I’m so proud we have a woman as president,’” Tedesco says. “At first that struck me as odd. I said, ‘Well, what’s the difference? It doesn’t matter that I’m a woman. It’s about my capabilities.’”

During the interview process prior to joining the company, Tedesco says she was asked to talk about what it’s like to work in the banking industry as a woman. “It was frustrating, but I have come to realize that I have that responsibility, and it is one of my passions,” she says. Tedesco says she has begun an initiative within Atlantic Union called the “Women’s Inclusion Network” which creates opportunities for employees to leverage each other to grow personally and professionally, and is aligned with a broader diversity, equity and inclusion effort within the company. “I think I have advice and guidance and mentorship that I can provide other women inside and outside the company,” she says.

Tedesco credits Asbury with being a strong advocate for DEI efforts in the bank. “It’s who he is,” she says. “It’s an organic part of John. His support was incredibly important to me. He empowered me, and I went off running. That has helped other women.”

Asbury says that while Tedesco was not hired because of her gender, he didn’t expect her gender to invoke the reaction that it did. “When you know Maria, you know she’s here because she’s Maria, not because she’s a woman,” he says. “I can honestly say that the most skilled, most qualified person for the job was Maria, who happens to be a woman. But at the same time, I underestimated the impact that a female president would have.”

Five of Atlantic Union’s 14-member senior management team today are women. “That’s very different from when I got here,” he says. And that representation — particularly with a woman as the bank’s second most powerful executive — makes it easier to recruit other women to the bank.

“Don’t underestimate the multiplier effect that will happen if you can get women executives at the top of the house,” Asbury says. “That more than anything else is going to accelerate your ability to attract others. It really has a powerful effect.”

Asbury says that having a significant number of women in senior executive positions is “not just a perception issue. I get a lot of feedback that we’re a very contemporary or progressive leadership team. I think we are. Not just because we have so many women, but because I think we’re a ‘modern’ leadership team. That’s probably the best word to describe it.”

A Guide to Getting CEO Transitions Right in 2020 and Beyond

Banks need to get CEO transitions right to provide continuity in leadership and successful execution of key priorities.

As the world evolves, so do the factors that banks must consider when turnover occurs in the CEO role. Here are some key items we’ve come across that bank boards should consider in the event of a CEO transition today.

Identifying a Successor

Banks should prepare for CEO transitions well in advance through ongoing succession planning. Capable successors can come from within or outside of the organization. Whether looking for a new CEO internally or externally, banks need to identify leaders that have the skills to lead the bank now and into the future.

Diversity in leadership:
Considering a diverse slate of candidates is crucial, so that the bank can benefit from different perspectives that come with diversity. This may be challenging in the banking industry, given the current composition of executive teams. The U.S. House Committee on Financial Services published a diversity and inclusion report in 2020 that found that executive teams at large U.S. banks are mostly white and male. CAP found that women only represent 30% of the executive team, on average, at 18 large U.S. banks.

Building a diverse talent pipeline takes time; however, it is critical to effective long-term succession planning. Citigroup recently announced that Jane Fraser, who currently serves as the head of Citi’s consumer bank, would serve as its next CEO, making her the first female CEO of a top 10 U.S. bank. As banks focus more on diversity and inclusion initiatives, we expect this to be a key tenet of succession plans.

Digital expertise:
The banking industry continues to evolve to focus more on digital channels and technology. The Covid-19 pandemic has placed greater emphasis on remote services, which furthered this evolution. As technology becomes more deeply integrated in the banking industry, banks will need to evaluate their strategies and determine how they fit into this new landscape. With increased focus on technology, banks must also keep up with leading cybersecurity practices to provide consumers with the best protection. Succession plans will need to prioritize the skills and foresight required to lead the organization through this digital transformation.

Environmental, Social and Governance (ESG) strategy:
Investors are increasingly focused on the ESG priorities and the potential impact on long-term value creation at banks. One area of focus is human capital management, and the ability to attract and retain the key talent that will help banks be leaders in their markets. CEO succession should consider candidates’ views on these evolving priorities.

Paying the Incoming and Outgoing CEOs

Incoming CEO:
The incoming CEO’s pay is driven by level of experience, whether the CEO was an internal or external hire, the former CEO’s compensation, market compensation and the bank’s compensation philosophy. In many cases, it is more expensive to hire a CEO externally. Companies often pay external hires at or above the market median, and may have to negotiate sign-on awards to recruit them. Companies generally pay internally promoted CEOs below market at first and move them to market median over two or three years based on their performance.

Outgoing CEO:
In some situations, the outgoing CEO may stay on as executive chair or senior advisor to help provide continuity during the transition. In this scenario, pay practices vary based on the expected length of time that the chair or senior advisor role will exist. It’s often lower than the amount the individual received as CEO, but likely includes salary and annual bonus opportunity and, in some cases, may include long-term incentives.

Retaining Key Executives

CEO transitions may have ripple effects throughout the bank’s executive team. Executives who were passed over for the top job may pose a retention risk. These executives may have deep institutional knowledge that will help the new CEO and are critical to the future success of the company. Boards may recognize these executives by expanding their roles or granting retention awards. These approaches can enhance engagement, mitigate retention risk and promote a smooth leadership transition.

As competition remains strong in the banking industry, it is more important than ever to have a seamless CEO transition. Unsuccessful CEO transitions are a distraction from a bank’s strategic objectives and harm performance. Boards will be better positioned if they have a strong succession plan to help them identify CEO candidates with the skills needed to grow and transform the bank, and if they effectively use compensation programs to attract and retain these candidates and the teams that support them.

Compensation, Talent Challenges Abound in Pandemic Environment

The coronavirus pandemic has not altered the toughest hiring and talent challenges that banks face; it has accelerated them.

These range from finding and hiring the right people to compensating them meaningfully to succession planning. Day Three of Bank Director’s 2020 BankBEYOND experience explores all of these topics and more through the lens of investing in and cultivating talent.

Institutions looking to thrive, not merely survive, in an environment with low loan demand and heightened credit risk need talented, diverse people with essential competencies. But skills in information security, technology, lending and risk have been getting harder to find and retain, according to more than 70% of directors, CEOs, human resources officers and other senior executives responding to Bank Director’s 2020 Compensation Survey this spring.

On top of that, the remote environment that many are still operating under has made it harder to interview and onboard these individuals. And managing employees working outside the office may require a different approach than managing them on-site. There are a handful of other timely challenges, pandemic or not, that banks must be prepared to encounter.

Compensation Challenges
The pandemic has also compound challenging trends in hiring and compensation that banks already face. Headcount and associated compensation costs are one of a bank’s biggest variable expenses; in a tough earnings environment, it is more important than ever that they control that while still crafting pay that rewards prudent performance. Executives and boards may also need to contend with incentive compensation plans containing metrics or parameters that are no longer relevant or realistic, and how to message and reward employees for performance in this uncertain environment.

Retaining, Hiring Employees
Banks must recruit and retain younger and diverse employees who fit within the organization’s culture. Half of respondents to our survey indicated that it’s difficult to attract and retain entry-level employees; 30% cited recruiting younger talent as a top-three challenge this year, compared to 21% in 2017.

But banks and many other companies may encounter another trend: parents, especially women, leaving the workforce. Child-rearing responsibilities and distance-learning complications have forced working parents without effective support systems to prioritize between their children and their career. More than 800,000 women left the job market in September, making up the bulk of the 1.1 million people who opted out. Those departures were responsible for driving most of the declines in the unemployment rate that month.

Diversity & Inclusion
Fewer women working at banks means less gender diversity — which is an area where many banks already struggle. That could be in part due to the fact many banks haven’t prioritized measuring that and other diversity and inclusion metrics like race, ethnicity or status of disability or military service.

In Bank Director’s 2020 Governance Best Practices Survey, almost half of directors expressed skepticism that diversity on the board has a positive effect on corporate performance. Perhaps it’s not surprising that in our Compensation Survey, 42% of respondents say they don’t have a formal D&I program.

To access the 2020 BankBEYOND recordings, click here to register.