You Could Get Sued

Welcome to a bank board. This is an exciting time to be serving. Oh, and do you have a director’s liability insurance policy, in case you’re sued?

Serving on a bank board can be a rewarding experience: think about the service you’re doing for your community, the connections you’re making and the businesses you’re learning about. It can also be quite frightening. Directors can and do get sued — especially public company directors.

The liability of serving on a bank board can be so intimidating that many banks offer directors’ and officers’ liability insurance to help attract qualified members to their boards. Board members can face civil and criminal liability for their service. (D&O insurance typically doesn’t cover criminal liability, but you probably don’t need to worry. Criminal liability usually involves activities such as falsifying bank statements, committing fraud or accepting fees or favors in return for special treatment, such as lower rates, which I’m sure you’re not planning to do.)

The pay isn’t great either. While the directors serving on the largest banks in the nation certainly get paid in the six figures, Bank Director’s 2022 Compensation Survey, sponsored by Newcleus Compensation Advisors, proves that’s not the norm. The median fee per board meeting in 2021 was $1,000, with a $30,000 annual cash retainer and $20,292 in equity compensation.

Plus, the responsibilities are numerous. If I were to run you through the 126-page “Director’s Book” published by the Office of the Comptroller of the Currency for national banks, it would be impossible to sum up the duties of the board in an elevator pitch of 30 seconds or less. Indeed, this list of duties and responsibilities seems to expand with every crisis or change in the economy. 

Next week’s in-person Bank Board Training Forum, which begins with the Bank Director Certification Workshop on Sunday, Sept. 11, will delve into many of aspects of the roles and responsibilities of bank boards. Jack Milligan, editor-at-large for Bank Director, will lead the workshop. His article 2017 that examines the task of serving on a bank board is relevant today.

Regulators and stakeholders demand an increasing amount of attention and supervision from bank directors. But the overall responsibilities are the same: 

  • Set clear, aligned and consistent direction regarding the firm’s strategy and risk tolerance.
  • Actively manage information flow and board discussions.
  • Hold senior management accountable.
  • Support the independence and stature of independent risk management and internal audit.
  • Maintain a capable board composition and governance structure.

In the end, the task seems like a lot for a part-time job. But the rewards of such service are many. You get to steward a ship that’s instrumental to the success of your communities, providing fuel for its economic engine. The rewards of such service are a job well done. Serving on a bank board isn’t the perfect fit for everyone, but everyone who does should be proud.

The Most Important Aspect of Third-Party Risk Management

Third-party risk management, or TPRM, is a perpetual hot topic in banking and financial services.

Banks are outsourcing and using third parties for a range of products, services and activities as the financial services landscape becomes more digital and distributed. A common refrain among regulators is that “you can outsource the activity, but you can’t outsource the responsibility.” Banks can engage third parties to do what they can’t or don’t want to do, but are still on the hook as if they were providing the product or service directly. This continues to be a common area of focus for examiners and has been identified as an area for potential enforcement actions in the future.

Given the continuing intense focus on third party activities and oversight, one word comes to mind as the most critical component of TPRM compliance: structure. Structure is critical in the development of a TPRM program, including each of its component parts.

Why is it so critical? Structure promotes consistency. Consistency supports compliance. Compliance mitigates risk and liability.

Banks with a consistent approach to TPRM conduct risk assessments more easily, plan for third party engagements, complete comprehensive due diligence, adequately document the relationship in a written agreement and monitor the relationship on an ongoing basis. Consistency, through structure, ultimately promotes compliance.

Structure will become increasingly important in TPRM compliance, given that the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency issued proposed interagency guidance on TPRM last summer. While the guidance has not been finalized as of this publication, the concepts and substantive components have been in play for some time; indeed, they are based largely on the OCC’s 2013 guidance and FAQs on the topic.

Generally, the proposed guidance contemplates a “framework based on sound risk management principles for banking organizations to consider in developing risk management practices for all stages in the life cycle of third-party relationships.” Like other areas of risk management, this framework should be tailored based on the risks involved and the size and complexity of the banking organization. Fortunately, interagency guidance will enhance the consistency of the regulatory examination of TPRM compliance across banks of all sizes and charter-types.

The proposed guidance outlines the general TPRM “life cycle” and identifies a number of principles for each of the following stages: planning, due diligence and third-party selection, contract negotiation, ongoing monitoring and termination. The first three stages of this TPRM life cycle benefit the most from a structured approach. These three stages have more stated principles and expectations outlined by the banking agencies, which can be broken down effectively through a properly structured TPRM program.

So, when looking at improvements to any TPRM program, I suggest bank executives and boards start with structure. Going forward, they should consider the structure of the overall program, the structure of each of the stages of the life cycle outlined by the banking agencies and the structure of compliance function as it relates to TPRM. An effective strategy includes implementing a tailored structure at each stage. If executives can accomplished that, they can streamline compliance and make it more consistent throughout the program. Structure provides certainty as to internal roles and responsibilities, and promotes a consistent approach to working with third parties.

Five Key Steps to Integration Success


When it comes to the completion of a merger or acquisition, whether you view the glass as half full or half empty will likely depend on your planned approach to integration. After all, there’s no shortage of statistics on the failure rate of mergers and acquisitions due to post-deal integration issues. And it’s easy to see why. The challenge of integrating the people, processes and technology of two organizations into one is a daunting exercise whose success depends on a variety of factors, many of which can be subtle, yet complex.

Still, such challenges are not deterring bankers from the pursuit. Through November of 2015, there were 306 M&A banking deals. With the December numbers not yet available, we would expect the total for 2015 to be about the same as the total for 2014. And, according to recent KPMG community banking survey, nearly two-thirds of the 100 bank executives surveyed anticipate being involved in a merger or acquisition as either buyer or seller during the next year. Moreover, one out of three of those community bank executives foresee integrating information technology systems as the most difficult integration challenge, followed closely by talent management.

While such challenges are undeniable, directors must play a key role in helping management achieve positive results. These five key steps can help directors guide management in driving a successful integration.

Step 1: Set the Tone at the Top
Prior to signing the deal, establish a set of goals that cascade a vision of the deal into high-level, practical operating objectives for the combined organization. Directors should review and provide input in these operating objectives to ensure they align with the bank’s overall strategy, risk appetite and the strategic rationale for the deal. With a strong set of operating objectives in place, executives can develop guiding principles which clearly define the key fundamentals that stakeholders should follow as they begin the planning phase of the integration.

Step 2: Assess the Integration Plan and Roadmap
An integration plan and roadmap needs to be established early in the deal lifecycle. Anchor the plan with a well-understood methodology and a clear, high-level and continuously monitored timeline that identifies key activities and milestones throughout the course of the integration. Develop an integration playbook that details the governance structure, scope of the work streams and activities in addition to well defined roles and responsibilities. Directors must fully understand the integration plan so they can provide valuable feedback, effectively challenge timelines, and have the requisite knowledge to determine if there is a prudent methodology for each phase of the integration. Key disclosures about the transaction should be reviewed to ensure communications to regulators and shareholders set realistic expectations for closing the deal, converting customers, and capturing synergies.

Step 3: Effectively Challenge and Monitor Synergy Targets
Operating cost and revenue efficiencies are identified as part of the deal model, factored into the valuation, and play a critical role in determining the potential success of a merger. Executive management should establish synergy targets at the line-of-business level to promote accountability. Directors should foster effective challenge of expected synergies and provide oversight of the process for establishing the baseline and tracking performance against targets over the course of the integration.

Step 4: Promote Senior Leadership Involvement and Strong Governance Oversight
The program structure and governance oversight is established during the initial planning phase to control the integration program and drive effective decision making. Executive management should identify an “integration leadership team’’ with sufficient decision-making authority and a combination of merger and operating experience to effectively identify risks, resolve issues and integrate the business. Directors should examine the team’s experience, track progress against goals, and closely monitor key risks to assess management’s ability to execute the integration activities.

Step 5: Evaluate Customer and Employee Impacts and Communication Plans
The objective of customer and employee experience programs is to take a proactive approach to help ensure that significant impacts are identified, analyzed and managed with the goal of minimizing attrition. Integrated and effective communication plans are established to address concerns of customer and employee groups to reduce uncertainty, rumors and resistance to change. Directors should scrutinize customer and employee impacts in an attempt to ensure management has an effective mitigation plan for negative impacts through communication, training and target operating model design. Planning for employee retention should include the identification of critical talent to mitigate risks to the integration while ensuring business continuity.

By taking these five steps, directors can provide management with the guidance and support needed for a successful integration.

Best Practices for Your Compensation Committee


11-13-13-Meridian.pngCompensation committees today face increased responsibilities, time commitments and risks. The Dodd Frank- Act, the Securities and Exchange Commission (SEC) and the stock exchanges are mandating new governance standards and disclosure rules. Bank regulators, shareholders and their advisory firms (e.g. Institutional Shareholder Services, Glass Lewis) create pressures to conform to their requirements, which often conflict. As external pressures continue to evolve, compensation committees need to address more complex issues and change their practices to ensure proper oversight.

Committee Governance

Establishing appropriate governance structures is critical to enabling compensation committees to make effective decisions in this complex environment. The SEC recently approved new independence requirements for compensation committees listed on NASDAQ and NYSE. In consideration of these requirements and other trends, below is a list of some best practices related to compensation committee governance. A compensation committee should have:

  • Composition comprised solely of independent board members, willing to encourage discussion, debate and challenge the status quo.
  • A charter that provides clear definition of authority and meets new SEC requirements.
  • Clear definition of its authority to manage compensation risk.
  • An annual calendar defining activities/actions to be taken throughout the year.
  • Oversight that includes CEO and top executives.
  • Agendas and meeting materials sent well in advance of meeting with clearly define topics for review, discussion and approval.
  • A two-review process for major decisions (e.g. one meeting to review materials and discuss; second meeting to approve).
  • Executive sessions without management at every meeting.
  • Annual self-assessments of the committee’s performance.
  • Annual assessments of independent advisors.
  • Ongoing director/committee education (through advisors, conferences).

Compensation Program Design

Compensation program designs and practices are changing as a result of the increased influence of bank regulators, shareholders and advisory firms such as ISS and Glass Lewis. Best practice compensation programs should:

  • Align and drive the bank’s strategic goals and business plans.
  • Reflect the bank’s unique compensation philosophy and guiding principles.
  • Provide a balance of or between:
    • Performance measures (e.g. return, operational, shareholder).
    • Fixed and variable/performance based programs.
    • Short and long-term performance.
    • Cash and equity-based compensation.
    • Bank, division and individual performance.
    • Formula versus discretion.
    • Absolute and relative performance.
  • Include a mechanism for risk-adjusted compensation. (Approaches vary but might reflect inclusion of risk metrics in the incentive plan, such as risk-adjusted returns, or deferral of incentive pay.)
  • Embrace meaningful stock ownership for executives and board members through ownership guidelines, holding requirements, payment in stock and outside purchases.
  • Include a clawback policy (which may need to be revised as rules are finalized implementing the Dodd Frank Act).

Compensation committees today need to conduct more rigorous analyses and testing to ensure total compensation programs are effectively meeting objectives and complying with today’s requirements and best practices. Some examples of good analyses include:

  • Compensation history and tally sheet of executives’ total compensation.
  • Pro forma illustration of the range of potential total compensation resulting from a variety of performance results.
  • Realizable pay analysis (total compensation likely to be paid based on performance).
  • Updates on progress toward annual and long-term performance goals.
  • CEO and executive performance and pay relative to peer group.
  • Current stock ownership and progress toward ownership guidelines.
  • Value of retention tools (e.g. stock awards, Supplemental Executive Retirement Plans).
  • Annual review of compensation risk assessment.
  • The ratio of CEO pay to median employee pay (this is required by the Dodd-Frank Act with an estimated implementation in the year 2015).

All of these analyses can provide helpful perspective for committees when designing programs and making pay decisions.

Communication and Disclosure

Communication with shareholders and regulators is more critical than ever, as both groups are seeking to determine if compensation programs align with their expectations. Best practices include the following:

  • Enhance your compensation disclosure and analysis on your proxy statement with an executive summary to tell your story and communicate to shareholders the objectives of your pay program and the resulting pay-performance relationship.
  • Understand the influence and perspectives of shareholder advisory groups (e.g. ISS, Glass Lewis) but don’t try to emulate them. Their policies evolve and their analysis is a one-size-fits-all approach.
  • Provide clear documentation of your incentive plans and be prepared for the formal documentation that will result as required by Section 956 of the Dodd Frank Act.
  • Engage in ongoing communication with shareholders; not just during annual say-on-pay voting.

These checklists provide a starting point for assessing the effectiveness of governance practices and could help a compensation committee review their own practices and see what they would like to change.