3 Considerations for Your Next Strategic Planning Session

Written by

Modernizing a bank’s technology has the potential to improve efficiency, reduce errors and free up resources for further investment. Still, with all those benefits, many banks are still woefully behind where they need to be to compete in today’s digital environment.

According to Cornerstone Advisors’ What’s Going On In Banking 2022 research, just 11% of banks will have launched a digital transformation strategy by the end of 2022. So what’s the holdup? For one thing, transformation is hamstrung by the industry structure that has evolved with banking vendors. Stories of missed deadlines, releases with dingbat issues, integrations that stop working and too few knowledgeable professionals to assist in system implementation and support are commonplace.

A large part of a bank’s future depends on how it hires and develops technical talent, manages fintech partnerships and scrutinizes and optimizes its technology contracts. Here are three key truths for bank officers and directors to consider in advance of their next strategic planning session:

1. There is no university diploma that can be obtained for many areas of the bank.
Our research finds that 63% of financial institution executives cited the ability to attract qualified talent as a top concern this year — up dramatically from just 19% in 2021. But even in the face of an industry shift to digital-first delivery and a need to better automate processes and leverage strong data intelligence, most banks have neither invested enough, nor sufficiently developed, their IT team for the next decade.

Every financial institution has a unique combination of line of business processes, regulatory challenges, and vendors and systems; the  expertise to manage these areas can only be developed internally. Identifying existing skill sets across the organization will be critical, as will providing education and training to employees to help the organization grow.

A good place for directors and executives to start is by developing a clear and comprehensive list of the jobs, skills and knowledge the bank needs to develop across four key areas of the bank: payments, commercial credit, digital marketing and data analytics.

2. Financial institutions and fintechs are on different sides of table.
Over the past decade, there have been profound changes in the relationship between financial technology and financial institutions. “Banking as usual” no longer exists; as much as banks and fintechs want to work at the same table together, they have very different needs, different areas of dissatisfaction with the relationship and are sitting on different sides of that table.

A fintech can create viable software or a platform for the bank to build upon, but the bank needs to have the internal talent to leverage it (see No. 1). A culture of disciplined execution and accountability that ensures the fintech solution will be deployed in a high performance, referenceable way will go a long away in strengthening the partnership.

3. Training and system utilization reviews need to find their way into vendor contracts.
When it comes to software solutions, banks are looking at multimillion-dollar contracts and allocating tens of thousands of dollars in training on top of that. This is not the time to be penny-wise and pound-foolish.

Every organization needs to build a tightly integrated “change team” that can extend, integrate, lightly customize and monitor a growing stack of new, primarily cloud-based, platform solutions. For CFOs and the finance department, this means a punctuated investment in the raw talent to make the bank more self-sufficient from a tech perspective (see No. 1 and 2 above).

One way to launch this effort is with an inventory for executive management that details how many users have gone through which modules of training. This tool can be vitally important, involves only minor add-on costs and can and should be embedded in every vendor contract.

Many financial institutions subject themselves to unfavorable technology contract terms by entering negotiations with too little knowledge of market pricing, letting contracts auto-renew and failing to prioritize contracts that need the most attention. If managed properly, vendor contracts represent a huge opportunity for savings.

The Nuts and Bolts on Executive Sessions

Written by

A board’s success can depend on the strength of the independent directors. But as boards become more centralized around the CEO’s carefully choreographed meetings, there’s greater potential for kabuki-style processes, with all decisions eventually funneling through one member of management. Executive sessions may be instrumental to the strength of independent directors and should be a part of the board’s meeting schedule.

Most boards believe they hold management accountable. Nearly three-in-four (74%) of the directors, chairs and chief executives surveyed by Bank Director in 2021 said their board had several directors willing to ask difficult, challenging questions. Another 72% felt free to exercise their own independent judgement if they disagreed with a board decision. Yet, in Bank Director’s 2022 Governance Best Practices Survey a year later, 24% believe that holding management accountable would improve the governance process.  

Executive sessions can be a powerful tool in the toolbox for independent directors to hold management accountable and allow room for directors to gain a stronger understanding of certain concepts before coming to a decision. 

“Whoever is chairman controls the agenda,” says James McAlpin Jr., a partner at the law firm Bryan Cave Leighton Paisner LLP, which has sponsored Bank Director’s annual Governance Best Practices Survey. Sometimes, the CEO retains the chair title and directs the agenda. Sometimes, an independent director retains the chair title. Boards have to decide which model works best for them, while ensuring independent directors have a voice. Executive sessions help ensure that directors can discuss scenarios when the chairs “may not raise the matters themselves,” he adds.

By addressing such topics in open forums, directors can determine if they’re viewing certain issues as other members do or if there’s a lack of cohesion on strategies. Discrepancies in opinions or doubts on a strategy may not come to the surface if the issue isn’t brought up during the normal process of a board meeting. 

Executive sessions occur when a group of directors call for time to discuss an item or topic, without the presence of specific individuals. There’s no hard-fast rule, although they generally involve independent directors without the presence of executives. This typically would exclude the CEO, if he or she sits on the board. But it could include a group of directors that do not participate in a certain committee, for instance, but who can provide broader input. Or it could include the CEO but exclude everyone else in the room who doesn’t sit on the board. 

Since executive sessions aren’t transcribed, they allow for a free flow of conversation. This gives the directors a chance to express their feelings on certain topics, bring up concerns or even ask questions of a sensitive nature. While it may seem as if such sessions would be awkward to call, since the CEO or other executives may wonder why such conversation needs to take place, there’s a tactic to counteract this potential. 

“It’s recommended to have them on regularly scheduled basis,” says Charles Elson, the founding director of the Weinberg Center for Corporate Governance at the University of Delaware. By building them into the agenda, he adds, they don’t become an unusual, uncomfortable situation since everyone knows when potential leadership issues will be discussed. Among directors and CEOs surveyed by Bank Director in 2021, 38% said the board held an executive session at the end of every board meeting, while 16% held them quarterly and 24% called one whenever independent directors wanted one.

For companies listed on the New York Stock Exchange (NYSE) or Nasdaq, it’s less of a social concern and more of a proper practice. Both exchanges require companies to incorporate executive sessions of the independent directors on a regular basis. Nasdaq defines that as at least twice a year (if not more), while the NYSE leaves the definition more open-ended. Such executive sessions provide an outlet for directors at community and private banks as well, serving as a valuable way to address concerns without worrying about hurting others’ feelings or working relationships.

Historically, executive sessions have been a tool of senates and parliaments, but they began to make their way to the boardroom at a greater rate in the mid-1990s. Directors needed a way to speak on certain topics off the record; this resulted in having small meetings with one or two directors over lunch or on the way to the parking lot. Instead, executive sessions formalize these conversations, encouraging directors to speak as a group. This can not only lead to a greater awareness of a certain type of thinking among directors but can also provide stronger conclusions, questions and coordinated insights for management or the board at large.

“It’s not so much hiding [issues] but addressing them in an appropriate way,” says Chip MacDonald, a financial services lawyer at the law firm Jones Day. “Whether it’s a committee function or whole board function, if you have full-time employees or officers on the board, you may want to exclude them.”

McAlpin, who works with boards at community and family banks, has often suggested that a board move to executive session when discussing certain topics that require more room for debate or discussion. 

“They provide particularly strong value when there’s an issue that’s difficult to discuss in front of the CEO or chair,” he says. “It’s better to have the discussion than not and if you do it on a regular basis, it provides open time for people to just share notes.”

The areas of discussion that are addressed during a session can run the gamut, from strategy, managerial issues, regulatory concerns or an investigation. The reason for the session will determine the people that may be present during the conversation.

The discussions are off the record, but this isn’t meant to imply that there’s nefarious conversations happening. In some cases, it might provide an open forum for direction on a new strategy. Or it may even allow for “due process,” says MacDonald. 

For instance, say there’s an accusation made against a certain member of the management team. While it’s important to scrutinize, a board may not want to make it publicly known until they have a chance to investigate the impropriety. Why? First, the board has to make sure that the accusation has validity before divulging it in a board meeting transcription. Second, the board must ensure it has a plan in place to address the issue. The closed-door executive session provides room for directors to plan.

But executive sessions also offer a way to address regular aspects of the oversight role. For instance, when discussing pay potential of top executives, the compensation committee will meet without any executives around to determine pay. This will be presented to the full board. If directors want to discuss the committee’s findings without offending certain individuals on the board — like the CEO — then an executive session would be prudent in such cases. 

The same tools can address potential strategies presented to the board. Or, in the case of a regulatory concern, the directors may want to discuss with fewer people so they have a clear understanding of the problem before coming to a decision. 

For an executive session to take place, there’s no specific quorum required, and there are no rules around whether executives should stay or go. In some organizations, a specific independent director runs all executive sessions; in others, any director can call one at any time. In both cases, the directors that seek an executive session or the director that handles executive sessions — often a lead independent director — can determine who stays and who goes. 

There’s also no requirement that the directors inform the CEO, or anyone else not in on the conversation, about what occurred during the session. But experts advise that it’s often good practice to have one director speak with the CEO after the conversation to provide a high-level recap of the talk. This doesn’t need to occur — and probably shouldn’t if directly addressing CEO wrongdoing. The regular communication with a CEO, however, can ease the potential of imaginations running wild. 

“It’s probably never a comfortable moment,” says McAlpin. “They may always wonder what is discussed in the room; best practice, have the lead outside director give an overview of what was discussed.”

The session cannot come to a decision that’s final or binding. Instead, it may provide a game plan in addressing an issue with the full board. Once the game plan is set, the directors can bring it to the full board for a vote. 

Executive sessions ensure that the directors’ game plan has the input of everyone involved. With that insight, then the board can operate with a full and robust voice. Failing to do so, would “be a breach of duty,” says MacDonald.