Best Practices for Onboarding New Directors


governance-9-12-19.pngJoining a bank board can be a bewildering experience for some new directors. There’s a lot to learn, including new, confusing abbreviations and financial metrics specific to the banking industry. But with the right approach, bank boards and nominating/governance committees can make the experience easier.

Onboarding new directors and more quickly acclimating them to the world of depository institutions is essential to ensuring banks have a functioning board that is prepared to navigate an increasingly changing and complex environment. It can also reduce potential liability for the bank by ensuring its members are educated and knowledgeable, and that no one personality or viewpoint dominates the boardroom.

Banking differs from other industries because of its business model, funding base, regulatory oversights and jargon. Directors without existing knowledge of the industry may need one to two years before becoming fully contributing members who can understand the most important issues facing the bank, as well as the common parlance.

Proactive boards leverage the chairperson to create an onboarding process that is comprehensive without being overwhelming, and tailor it to suit their institution’s particular needs, as well as the skill sets of newly recruited board members. The chair can work with members of the nominating/governance committee and executives like the chief financial officer to create a specific onboarding program and identify what pertinent information will best serve their new colleague.

Bank Director has compiled the following checklist to help strengthen your bank’s onboarding program.

1. Help new directors understand their role on the board.
New directors often come in with a background in business or accounting, skills that are useful in a bank boardroom. But business success in one industry may not readily translate to banking, given the unique aspects of its business model, regulations and even vocabulary associated with financial institutions. New directors can access insights on “The Role of the Board” through Bank Director’s Online Training Series.

Banks are uniquely regulated and insured. Directors should be able to appreciate the role they serve in their oversight of the bank, as well as the role regulators have in keeping the bank safe and sound, and ensuring prudent access to credit.

2. Provide an overview of the banking industry.
Directors often aren’t bankers and will need to be acquainted with the business of banking broadly.

With this overview will come the distinctive terms and acronyms that a new director may hear tossed around a boardroom. Boards should either create or provide a glossary with definitions and acronyms of terms, including the principal regulators and common financial metrics.

Click HERE to access Bank Director’s Banking Terms Glossary.

3. Provide an overview of your bank’s business model and strategy.
Directors will need to understand the bank’s products, including how it funds itself, what sort of loans it makes and to whom, as well as other services the bank provides for a fee. They will also need to learn about the bank’s credit culture, capital regime and its approach to risk management, including loan loss reserving.

4. Create a reading list.
There are a number of internal and external resources that new board members can access as they become acclimated to the ins and outs of bank governance. Internally, they should have access to recent examination reports, call reports, and quarterly and annual filings, if they exist. They should also access external resources, like Bank Director’s Online Training Series, the Federal Reserve Bank of Kansas City’s 2016 publication, “Basics for Bank Directors,” and “The Director’s Book,” published by the Officer of the Comptroller of the Currency.

Additionally, they should keep up-to-date with the industry through bank-specific publications, such as Bank Director’s newsletter and magazine.

5. Schedule one-on-one meetings with the management team.
A new board member will need to understand who they are working with and the important roles those individuals play in running a successful bank. Their onboarding should include meetings with the management team, especially the CFO for a discussion about the financial metrics, risk measurement and health of the bank. It may also be prudent to schedule a meeting with other executives who oversee risk management at the bank.

6. Schedule one-on-one meetings with members of the board and key consultants.
New directors should sit down with the heads of board committees to understand the various oversight functions the board fulfills. The bank may also want to reach out to the firms it works with, including its accounting, law and consulting firms, to chat about their roles and relationship with the company.

7. Emphasize continuing education.
Boards should convey to new members that they expect continued education and growth in the role. One way to achieve this is through conference attendance, which can provide intensive and specialized education, as well as a community of directors from banks in other geographic areas that new members can learn from. Direct new board members to events hosted by your state banking association, if available, or sign them up for annual conferences like Bank Director’s Bank Board Training Forum.

Look for conferences that offer information calibrated to a director’s understanding, starting with basic or introductory instruction suited for new directors. The conferences should also facilitate discussion among directors, so that they can learn from each other. As a director grows in the role, the board can seek out more specialized training.

Successful onboarding should help new directors acclimate to the world of banking and become a productive member of the board. Boards should expect their directors to become comfortable enough that they go beyond thoughtful listening and ask intelligent questions that reinforce the bank’s strategy and its risk management.

What Makes Activist Investors Go After Banks


activism-11-6-17.pngShareholders of public companies pushing to nominate activists in the boardroom are becoming more common. Boards of directors aren’t necessarily keen on the idea, although it’s becoming frequent enough that attitudes among board directors are becoming more accepting as they become accustomed to it.

Proxy Access Is Changing Relationships Between Directors and Shareholders
Board directors and shareholders clearly have different motives and perspectives about the demographics of board seats, especially when it comes to their views on proxy access.

Some of the larger public companies use a proxy access system. Companies that use the proxy access system typically have a governance committee or nominating committee that recruits and vets board candidates to fill the slots of board directors whose terms have ended. The board secretary prepares a proxy card with a listing of board director nominees and mails it out to the shareholders. Most share classes offer shareholders one vote per share. Shareholders can then vote for candidates on the slate by proxy or in person at the annual shareholder’s meeting, or write in a candidate of their own choosing. Activist shareholders and large shareholders favor the proxy access system because directors represent their interests and proxy access gives them a strong say in the choice of board directors.

The proxy access system is not as popular with directors as it is with investors. Board directors assess the expertise, talents, diversity and independence of boards when forming the voting slate. Nominating committees feel that they know what the board needs to help the company progress, so they should be able to select the nominees with little or no interference from shareholders.

Activism May Potentially Disrupt the Integrity of Corporate Governance
As activism begins to invade boardrooms, many are questioning other longstanding principles of good corporate governance and whether they still have meaning in today’s financial arena. For example, directors have typically had board terms that are staggered. The reason for this is to maintain some sense of tenure, history and experience on the board. In today’s climate, groups of formidable investors believe that directors should be elected every year. This approach gives shareholders the right to clean house when profit margins are lagging.

In recent decades, it has been common for directors to serve on multiple boards. Changes in the financial industry call into question whether directors who sit on many boards can truly meet the time constraints to effectively strategize and comply with the growing set of regulations. Weak boards create a climate that is ripe for activists to gain control. Large companies are prime targets for activists when they have large boards with weak skill sets and overly long-term appointments.

Procter & Gamble Is the Largest Company to Face a Proxy Fight
Procter & Gamble is one such large company that is facing the possible intrusion of an activist shareholder. Nelson Peltz is the CEO and founder of Trian Fund Management. With 3.3 billion P&G shares, Trian is one of Procter & Gamble’s largest shareholders. Trian has been dissatisfied with Procter & Gamble’s repeated poor returns. Their solution is to nominate and elect Nelson Peltz to the board of directors. As Peltz has a reputation for being a billionaire activist, the P&G board is justifiably concerned.

Trian cites many reasons for putting an activist on the board. In addition to disappointing shareholder returns, Procter & Gamble’s market share is deteriorating, and while they’ve cut some costs, the cost of bureaucracy is excessive.
Trian says that the culture of Procter & Gamble’s board is highly resistant to change, so it’s no surprise that the pressure is making them uneasy. Trian shareholders have given the board chances to improve results in the past, but their strategies have been unsuccessful. Now, Trian is insisting on the addition of a financially motivated, independent director, and they’ve chosen Peltz. Trian shareholders are not being completely unreasonable. They are offering to reappoint whichever director loses his or her board seat, once Peltz gets appointed.

Defending Against Activists
No board is exempt from the risk of a proxy fight, especially when earnings reports are not showing good results. The best defense against activism is to work at keeping performance metrics high. Companies experiencing a downturn for any reason would do well to spend time on researching which activists may have their eyes on a board seat. Knowing who is interested in joining the board will help directors anticipate what the activist wants to change and have some plans in place if a proxy fight looks imminent.

Succeeding With Your Succession Plan


succession--12-2-15.pngOne of the areas of corporate governance that is receiving increasing focus by regulators and investors is succession planning. Succession planning is important at the board and management level and is especially challenging for community banks that do not normally have the bench strength to choose from a wide talent pool. Often the principal challenge is to incentivize potential successors to remain in a subordinate position while at the same time transitioning a CEO to retirement.

Integration of the Succession Plan
Corporate governance documents should be reviewed and revised if necessary to identify the appropriate members of the board that will adopt and administer succession guidelines. This is typically the governance committee or the compensation committee. The guidelines should be reviewed by counsel to assure that they do not create unintended expectations or rights that are not consistent with exiting plans and contracts. Employment contracts should be revised to clarify the obligation of senior executives to ensure succession development of identified officers.

It is not uncommon that a specific duty to cooperate and implement the succession of a subordinate according to an agreed upon schedule be made part of the contract. Position descriptions should support and facilitate an evaluation of the candidates’ potential for advancement. Further, term provisions should be revised to contemplate expected retirement dates. Short-term bonus plans are a particularly useful method to incentivize cooperation in the development of subordinate executives. A key metric in determining performance of a senior executive should be his or her skills in mentoring and developing subordinates.

Retaining the Next Generation of Bank Leaders
While the mentoring relationship is key, it is often the case that senior executives who are considered the likely successor for the next level, be it CEO, COO or CFO, are lured away by competitors who can offer more immediate advancement. This is sometimes due to the ambition and impatience of the junior executive but also the resistance of the incumbent. There are a number of legal arrangements that can reduce the risk of this occurring. In general, once a designated successor is identified, that person should be granted unvested stock or cash which will vest fully upon their promotion. This is a critical stage as the CEO and board must work closely together to ensure the candidate is prepared to carry the full responsibility of the senior executive. This could take several years and involves familiarizing the candidate with key customers, regulators and the board.

In the event the candidate is not promoted but an outside candidate is chosen, a succession plan agreement would cause a significant portion of the unvested benefits to vest and the candidate would have a window to determine if he or she would remain with the bank. This should have the effect of causing most candidates to resist any capricious impulses to forego the final laps on the succession track and make it more expensive for competitors to raid key talent. It is also the fair thing to do, as the candidate is not guaranteed that he or she will succeed to the desired position but is being asked to remain loyal and forego outside opportunities at the point in the career path where he or she is most attractive to outside companies. It also should allay any fears concerning the risk that an 11th hour outside candidate will be chosen.

Transitioning Retirement of the Senior Executive
For every CEO who has dragged his or her feet in agreeing to a retirement date, there are boards who refuse to accept the planned retirement date given by the CEO. This is human nature, but good corporate governance demands that specific provisions be put in place that counteract this tendency.

While the succession plan if properly administered should groom a successor who at the proper time is ready to replace the incumbent CEO, there need to be specific provisions that ensure that the incumbent is incentivized to facilitate the transition at that time. It is not unusual to execute a transition and retirement agreement with the CEO. The agreement would amend existing agreements and plans to include, among other things, accelerated cash and stock benefits, a lump sum payout of remaining salary, contract benefits and describe a transitional role for the CEO. It could continue health and welfare benefits. This would be in addition to any retirement benefits.

Conclusion
Succession planning is often neglected until it becomes a serious issue because of a sudden departure of a executive. Boards must work harder to ensure that the bank has a dynamic succession plan in place to meet the competitive challenges of the future.

Compensation and Governance Committees: Sharing the Hot Seat in 2016


hot-seat-11-19-15.pngThe compensation committee has been on the hot seat for several years. Outrage regarding executive pay and its perceived role in the financial crisis has put the spotlight on the board members who serve on this committee. Say-on-pay, the non-binding shareholder vote on executive compensation practices, was one of the first new Securities and Exchange Commission (SEC) requirements implemented as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010. Since that time, public companies have responded to shareholder feedback and changed compensation programs and policies to garner support from shareholders and advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis & Co. In recent years, only 2 percent of public companies have “failed” their say-on-pay vote. The significant majority of public companies (approximately 75 percent of Russell 3000 companies) received shareholder support of 90 percent or greater during the 2015 proxy season. Today, companies with less than 90 percent should increase their shareholder outreach, as a dip below that level is often an indicator of emerging concerns.

Compensation committees can’t sit back and relax on these results. The SEC’s proposed rule for pay versus performance disclosure (published in April) and the final rule for the CEO pay ratio (published in August) will further intensify the focus on executive pay and require compensation committees to dedicate much more time and energy to evaluate and explain their pay decisions in light of these new disclosures. Fortunately, implementation of the CEO pay ratio is delayed until the 2018 proxy season while the SEC has not yet adopted final rules for the pay versus performance disclosure (as of September). It is hard to predict what influence these additional disclosures will have on shareholders’ say-on-pay votes. What is clear is that boards will need to monitor these and other pending Dodd-Frank Act rules (i.e. mandatory clawback, disclosure on hedging policies, incentive risk management) in the coming year.  

In the meantime, however, boards may face increased shareholder scrutiny in key governance areas.

Proxy access, the ability of significant shareholders to nominate board members on the company’s proxy ballot, achieved momentum in 2015 when New York City Comptroller Scott Singer submitted proxy access proposals at 75 public companies as part of his 2015 Boardroom Accountability Project. We expect proxy access proposals will remain a focus among activist shareholders during the 2016 proxy season. Dissatisfaction with executive compensation and board governance are often the reasons cited by shareholders seeking proxy access.

Institutional shareholders and governance groups have also started to focus on board independence, tenure and diversity. Institutional investors such as Vanguard and State Street Global Advisors consider director tenure as part of their voting process and ISS includes director tenure as part of their governance review process. This could lead to a push for term and/or age limits for directors in the near future. While many companies use retirement age policies as a means to force board refreshment, it is unclear if that will be enough. Boards would be wise to start reviewing their board composition and succession processes in light of their specific business strategies but also in consideration of these emerging governance and shareholder perspectives.

The intense scrutiny by investors and proxy advisors of public companies’ compensation and governance practices shows no signs of abating. Bank boards will need to develop their philosophies, programs and policies with an acknowledgement of emerging regulations and perspectives. Board composition and processes such as member education, evaluation, nomination and independence will gain focus. Executive pay levels and performance alignment will continue to be scrutinized based on new disclosures mandated by Dodd-Frank. The spotlight on pay and governance is not winding down, but rather widening and both the compensation and governance committees will need to spend more time addressing these issues in the years to come.

Banks Grapple With Succession Planning


succession-planning-11-18-15.pngLike other banks, U.S. Bancorp has an emergency succession plan for its CEO and other critical jobs at the senior executive level. Jennie Carlson, executive vice president for human resources, prefers to call it the “win the lottery” plan, rather than the “got hit by a bus” plan. It just sounds better. The plan identifies who could take over temporarily if something happened to that executive.

The Minneapolis-based $416 billion asset company, whose subsidiary is U.S. Bank, also has a long-term succession plan, where potential successors for the CEO suite are developed internally and where their responsibilities are progressively increased over time as their skills and abilities are assessed by current CEO Richard Davis and the board. Banking is not rocket science. But the soft skills are hard to teach, Carlson said at Bank Director’s Bank Executive and Board Compensation Conference last week in Chicago. “What we can’t teach is intellectual curiosity, balanced risk management, loyalty and commitment,’’ she said. “That’s what we’re looking for in successor candidates.”

This process is exactly what the bank used when it hired Davis. He had been a line of business manager, and was steadily promoted to a series of bigger jobs at the organization. Succession planning is a transparent process for U.S. Bancorp. Although Carlson said she doesn’t want to encourage a horse race, the candidates know they are in the running for the CEO job, and that they are being given increased opportunities and responsibilities as they learn about the job, the board, and other parts of the company that they aren’t familiar with. The bank prefers to hire from a list of internal candidates, although it does keep track of external possibilities, she said.

Another bank that prefers to hire for the C-suite internally is $2.2 billion asset Souderton-based Univest Corp. of Pennsylvania. CEO Bill Aichele said during a panel discussion at the conference that he retired last year after a lengthy succession plan. The chief financial officer become the new CEO after several years of planning and promoting him. Another individual who was in the running to succeed Aichele was not chosen after 22 years with Univest. He subsequently left the company. “The board made the tough decision based on the skills sets and the ability to succeed me and lead the company,’’ Aichele said. He said the bank continues to work proactively to train and promote internally for the top leadership roles. One employee is getting his executive management courses at a local college paid for by the bank, at a cost of $15,000. Good succession planning, he said, takes careful planning “and yes, a big investment in education.”

Regulators have the greatest interest in a bank’s emergency succession plan, said Don Norman, a partner at Chicago law firm Barack Ferrazzano. “This is about keeping the doors open,’’ he said. Banks should create a document listing three to five critical positions, with candidates for each one. But he has seen one bank come up with a list of 40 positions and potential emergency candidates for each one, and there is no reason why you shouldn’t come up with a list based on your own needs. Banks should consider questions of potential candidates: What are their skill sets? Do they have the ability to immediately step in?

You may not have the same candidates in an emergency plan as in a long-term plan. During an emergency, you might have to use a retired CEO, for example, which is not the candidate for your long-term succession plan. For longer term plans, what’s your action list or timeline? How will this process tie into management development programs? Who owns the process? Normally, the governance committee works with the CEO to develop candidates. How often should your plan be updated? What are the pay considerations? Contracts will need to be signed to incentivize your candidates to stay with your company, perhaps with stock that vests over time.

Banks may eventually find that younger generations have different needs when it comes to succession planning. Carlson expects millennials to change the process from previous generations. (Millennials are the 80 million or so people in their late teens to early 30s.) She says they generally want to know their potential career paths and what they should do to further their career goals. Hiring managers will have to be clear and explicit with this next generation. “Baby boomers were willing to have unspoken promises,’’ she said. “Millennials aren’t going to do that.”

For more on succession planning, see “Getting Succession Planning Right” in the June Talent issue of Bank Director digital magazine, available as an app for your tablet or phone at no charge. 

Succession at the Top: Lessons Learned from CEO Transitions


10-11-13-Kaplan.pngThere is no more vital decision for a bank and its board of directors than choosing who leads the organization. Yet leadership succession represents a growing challenge, as banks too often lack sufficient executive depth or proper succession planning. In the worst cases, banks with both weak succession and performance issues may even be encouraged to find a merger partner.

Having conducted more than fifty CEO/succession search assignments, we have clearly seen that superior talent really does make a difference, especially for banks intending to remain long-term survivors. From those accumulated client experiences, we have identified the following seven lessons learned from CEO transitions:

Lesson #1: Succession Really Does Matter!
It is imperative that boards exercise their fiduciary and governance responsibilities, and grapple with the challenges of leadership succession. The continuity of leadership promotes continuity of strategy, and both regulators and governance activists are more focused than ever on succession. There is also a growing body of information which affirms that a lack of planned orderly succession can have a significant impact on the value of the company.

Lesson #2: Identify the Obstacles to Succession Planning.
Who is the stumbling block to planning for the bank’s future leadership? Is it the CEO who refuses to accept that he/she will not live forever, or are there directors who do not want to raise this issue with their friend the CEO? The board has a responsibility to tackle succession no matter how awkward it may be, so have these conversations early and often.

Lesson #3: The Succession Process Is as Important as the Outcome.
A robust, thoughtful and thorough succession process adds huge credibility to the board and the bank, regardless of whether your successor comes from within or outside of the bank. Take the time up front to ensure the alignment of your organization’s strategic plan with the ideal profile of your next CEO. The board can’t spend too much time getting to know its future leader.

Lesson #4: You Really Can Do It! Develop Your Own Methodology and Timeline.
Each succession situation and timeline is different, so there is no definitive template to follow. That being said, I would suggest boards begin efforts no less than 30 to 36 months before a potential transition of leadership. It is also very helpful to formally anoint a succession committee of the board (note: this is not a search committee) to take ownership of this process and manage the many critical elements along the path. That makes the succession effort more manageable and provides for accountability.

Lesson #5: It Is Critical to Handle Potential Internal Contenders Well.
Ideally, your succession planning process will promote the development of several internal contenders, and it is important to manage their expectations from the beginning. Handling internal contenders well has a significant impact on how they feel about the company, and how they see their future in the organization. Position the entire exercise as a developmental opportunity, and provide constructive feedback and specific recommendations for folks who are not selected for advancement.

Lesson #6: The Building Blocks of Talent Development Make a Big Difference Over Time.
Nearly all of the data on succession reinforces the idea that well developed internal successors perform better than outside hires. Thus, efforts to groom high potential candidates for more senior roles should be ongoing. Create a personal development plan for each individual with upside potential. Help them develop stronger and more varied technical skills, as well as more training in soft skills. Whatever talent development efforts you initiate, they will make your business stronger and aid the retention of your rising stars.

Lesson #7: Avoiding the Challenges of Succession May Have a Huge Downside.
Research from FTI Consulting shows that 43 percent of CEO transitions are unplanned. The bank’s value can be impacted by unexpected leadership changes, and such changes can make the bank more likely to sell out.

Institutions that we have seen survive and thrive over a lengthy time horizon have benefitted from the successful execution of strategy, which flows from a continuity of leadership. Bank boards of directors and incumbent CEOs must recognize this imperative, and regularly focus on succession and talent at the top of their agendas.