The first time I sat on a bank board was in 1984, and I remember the board packet being around 50 to 60 pages. I recently saw a board packet for a bank that was over 600 pages, and on top of that was another 300 pages for the holding company. Considering that most banks have monthly board meetings, it’s like having to read War and Peace or Moby Dick each month.
People like to say that these monstrous board packets are really for the regulators, and while it might be largely true, it’s not entirely true. The true purpose is to help the board provide proper oversight, and even if regulators never saw the monthly board packets, directors still need to know what’s going on at the bank. And as regulations keep multiplying, so must board packets keep getting bigger to show directors that the bank is, in fact, complying with all the new rules and regulations.
One issue is how much of these 500 to 1,000 pages a director should read. I’ve never conducted a survey, but I’m pretty certain that very few directors read the whole thing. The truth is that each board member picks and chooses what he or she thinks are the most important pages to read. This might not be ideal, but I think it’s realistic.
What about the beginning of the board packet, which often contains the minutes of the previous meeting? I’ve always believed that the minutes are a director’s one best defense against being accused of negligence in a possible Federal Deposit Insurance Corp. (FDIC) lawsuit. I have heard many people over the years say, “You’re never going to get in trouble if the minutes show you asking questions, challenging management, and generally being a prudent overseer of the bank and the risk it takes.” I accepted this as truth, but I’m not certain anymore. I know someone who was on the board of a $12 billion asset California thrift that failed in 2008. The thrift had done loads of option adjustable rate mortgages, teaser rates and all, and this one director kept questioning the wisdom of these loans. It got to the point that the chairman/CEO found his skepticism so irritating that he tried to get him off the board.
With this director’s questions and doubts about the lending strategy splashed all over the board minutes, I’m sure he felt immune from any problems when the thrift failed. Apparently, none of this mattered. He was named with everyone else in the FDIC lawsuit, and seven years later, when he tried to start a new bank, he was told his application wouldn’t be approved because he was on the board of a failed thrift.
Regardless of how big board packets have gotten, it’s important that directors get them as much in advance as possible. What I really don’t get are those banks where the directors get the board packet the day they show up for the board meeting. I know two such banks. The owner of one of the banks is also the chairman, and the other directors don’t own any stock, so maybe they feel as if they have no real power. What I’d wonder about, though, is what happens if things fall apart. If either bank were to fail, I suspect it would come out that directors didn’t get their packets in advance. And I suspect that would be deemed unsafe and unsound in any FDIC lawsuit.
Is there anything to be done about this monthly tidal wave of pages to read? Aside from asking to receive board packets a few days in advance, a table of contents could help. That way, a director could know exactly where to go to choose those areas he really wants to read in depth. A second idea is executive summaries for each section. Another solution is for a board to pick a different topic each month to put greater emphasis on. If the board members knew that this month there would be an emphasis on, say, mortgage lending, they could read the pages covering that topic in depth before the meeting. Over the course of a year, they might read those parts of the packet they otherwise might not read.
A third possible solution is to have one page at the front with 20-30 of the most important ratios. They could be shown for the current month as well as the previous 12 months so that directors could easily spot trends and see where things might be deteriorating. Each metric could also have a maximum or minimum, and if any of them are exceeded, they could be highlighted in red. That way, even a director who didn’t read the other 499 ages could read this one page and see where the bank had serious problems that needed to be discussed. It shouldn’t be hard to figure out what those key ratios should be. Capital ratios and levels of non-performing loans would be two of the most important, and obvious, ones. A side benefit to this key metrics page is that it would make it impossible for management to steer the board away from difficult issues. Instead of the bad news being buried in the third paragraph on page 423, it would be right there, a bright red flag on page 1.
I will say that we’ve made great progress in going electronic. The days of lugging around thick binders seems mostly a thing of the past. But electronic board packets don’t make the packet shorter. Quite the opposite. It just makes it easier to put loads of information in there because there is less paper to photocopy.
Reading a 1,000-page board packet will never be as enjoyable as, say, reading Moby Dick or War and Peace. But we all do the best we can, reading as much as we have time for, skimming some parts and probably skipping some sections entirely. And with some of the improvements suggested here, perhaps it can work even better.