Research Report: Fortifying Boards for the Future

Good corporate governance requires, among many other things, a strong sense of balance.

How do you bring in new perspectives while also sticking to your core values? How does the board balance responsibilities among committees? What’s the right balance between discussion about the fundamentals of banking, versus key trends and emerging issues?

There’s an inherent tension between the introduction of new ideas or practices and standard operatingprocedures. We explore these challenges in Bank Director’s 2022 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP. But tension isn’t necessarily a bad thing.

The survey polled 234 directors, chairs and chief executives at U.S. banks with less than $100 billion in assets during February and March 2022. Half of respondents hailed from banks with $1 billion to $10 billion of assets. Just 9% represent a bank above the $10 billion mark. Half were independent directors.

We divide the analysis into five modules in this report: board culture, evaluating performance, building knowledge, committee structure and environmental, social and governance oversight in the boardroom. Jim McAlpin, a partner at the Bryan Cave law firm in Atlanta and leader of the firm’s banking governance practice, advised us on the survey questions and shared his expertise in examining the results.

We also sought the insights of three independent bank directors: Samuel Combs III, a director and chair of the board’s governance committee at $2.8 billion First Fidelity Bancorp in Oklahoma City; Sally Steele, lead director with $15.6 billion Community Bank System in DeWitt, New York; and Maryann Goebel, the compensation and governance chair at $11 billion Seacoast Banking Corp. of Florida, which is based in Stuart, Florida. They weighed in on a range of governance practices and ideas, from the division of audit and risk responsibilities to board performance assessments.

The proportion of survey respondents representing boards that conduct an annual performance assessment rose slightly from the previous year’s survey, to 47%. Their responses indicate that many boards leverage evaluations as an opportunity to give and receive valuable feedback — rather than as an excuse to handle a problem director.

Forty-seven percent of respondents describe their board’s culture as strong, while another 45% rank it as “generally good,” so the 30% whose board doesn’t conduct performance assessments may believe that their board’s culture and practices are solid. Or in other words, why fix something that isn’t broken? However, there’s always room for improvement.

Combs and Steele both attest that performance evaluations, when conducted by a third party to minimize bias and ensure anonymity, can be a useful tool for measuring the board’s engagement.

Training and assessment practices vary from board to board, but directors also identify some consistent knowledge gaps in this year’s results. Survey respondents view cybersecurity, digital banking and e-commerce, and technology as the primary areas where their boards need more training and education. And respondents are equally split on whether their board would benefit from a technology committee, if it doesn’t already have one.

And while directors certainly do not want to be mandated into diversifying their ranks, in anonymous comments some respondents express a desire to get new blood into the boardroom and detail the obstacles to recruiting new talent.

“Our community bank wants local community leaders to serve on our board who reflect our community,” writes one respondent. “Most local for[-] profit and not-for-profit boards are working to increase their board diversity, and there are limited numbers of qualified candidates to serve.”

To read more about these critical board issues, read the white paper.

To view the results of the survey, click here.

Building a Better Nominating/Governance Committee

Boards could be missing out on valuable opportunities to better leverage their nominating/governance committees. 

There’s broad agreement on the responsibilities that many nominating/governance committees are tasked with, according to the directors and CEOs responding to Bank Director’s 2022 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP. Half of the survey participants serve on this committee. But the results also suggest there are areas that these committees may be overlooking. 

As chair of the governance committee at $2.8 billion First Fidelity Bancorp in Oklahoma City, Samuel Combs III views the committee’s overarching duty as being responsible for the board’s broader framework and committee infrastructure. He says, “We try to determine if we are balanced in what we’re covering and in our allocation of resources, board members’ time [and] assignments to certain committees.” 

First Fidelity’s governance committee typically meets three to four weeks ahead of the board meeting to develop the agenda, often working closely with the CEO to do so, Combs says. Devoting this advanced time to craft the agenda means that the board can devote sufficient time later to discussing important strategic issues. 

The survey’s respondents report that their boards’ nominating/governance committees are generally responsible for identifying and evaluating possible board candidates (92%), recommending directors for nomination (89%), and developing qualifications and criteria for board membership (81%). 

Far fewer respondents say their governance committee is responsible for making recommendations to improve the board (57%) or reviewing the CEO’s performance (40%). 

While the suggestion is unlikely to come from the chief executive, a bank’s CEO could benefit from regular reviews by the nominating/governance committee, says Jim McAlpin, a partner at Bryan Cave and leader of the firm’s banking practice group. Reviewing the CEO’s performance gives the board a chance to talk about what’s working and what could be improved, separate from compensation discussions. 

“The only review he or she [typically] gets is whether the compensation remains the same,” says McAlpin, who also serves as chair of the nominating/governance committee at a $300 million bank located in the Northeast. “Beyond compensation, there’s very rarely feedback to the CEO.” 

Almost half (47%) of the survey respondents say their board goes through regular evaluations. Among those, 60% say the nominating/governance committee chair or the committee as a whole leads that process. That tracks with the roughly half (53%) who name reviewing directors’ performance as a responsibility of the nominating/governance committee. 

First Fidelity’s board alternates board evaluations with peer evaluations every other year, but Combs stresses a holistic approach to those. “Not only do you evaluate, but you spend time reviewing it with the group,” he says. “And then with each independent board member, if necessary. And we usually give them the option of having that conversation with myself and the CEO, post-evaluation.” 

McAlpin suggests another exercise that nominating/governance committees could consider: Make it a regular practice — say every 2 or 3 years — to locate and review every committee’s charter. It can be useful to regularly review each committee’s scope of responsibilities and also provides an opportunity to update those responsibilities when needed. 

“Does it list all of the things the committee does or should be doing? And secondly, does it list things that the committee is not doing?” McAlpin says. “It’s a fairly basic thing, but important in corporate hygiene.”

Forty-five percent task the governance/nominating committee with determining whether the board should add new committees. In the case of First Fidelity, the governance committee discussed how to handle oversight of cybersecurity issues and whether it would benefit from a designated cybersecurity committee. The governance committee ultimately assigned that responsibility largely to its audit committee, with some support from its technology committee. 

Nominating/governance committees should also stay apprised of emerging issues and trends, like intensifying competition for talent and increased focus on environmental, social and governance issues. Those may ultimately help governance committees better assess the skills and expertise needed on the board, which about three-quarters of respondents identify as a key duty of the governance committee. 

“It’s good for nominating and governance committees to be forward thinking, to be thinking about the composition of the board, to be thinking about the skill sets of the board, the diversity of the board,” says McAlpin. 

Many boards may assign primary responsibility for talent-related issues to their compensation committee, but Combs argues that it should also concern the governance committee, especially in the tough, post-Covid recruiting landscape. “Talent acquisition, talent retention, talent management should have always been at this level, in my opinion,” Combs says. “These emerging trends should lead you to how you position yourself with your board talent, as well as your staffing talent.” 

The Promise and the Peril of Director Term Limits

Bank boards seeking to refresh their membership may be tempted to consider term limits, but the blunt approach carries several downsides that they will need to address.

Term limit policies are one way that boards can navigate crucial, but sensitive, topics like board refreshment. They place a ceiling on a director’s tenure to force regular vacancies. Bringing on new members is essential for banks that have a skills or experience gap at the board level, or for banks that need to transform strategy in the future with the help of different directors. However, it can be awkward to implement such a policy. There are other tools that boards can use to deliver feedback and ascertain a director’s interest in continued service.

The average age of financial sector independent directors in the S&P 500 index was 64.1 years, according to the 2021 U.S. Spencer Stuart Board Index. The average tenure was 8.3 years. The longest tenured board in the financial sector was 16 years.

“I believe that any small bank under $1 billion in assets should adopt provisions to provide for term limits of perhaps 10 years for outside directors,” wrote one respondent in Bank Director’s 2022 Governance Best Practices Survey.

The idea has some fans in the banking industry. The board of directors at New York-based, $121 billion Signature Bank, which is known for its innovative business lines, adopted limits in 2018. The policy limits non-employee directors to 12 years cumulatively. The change came after discussions over several meetings about the need for refreshment as the board revisited its policies, says Scott Shay, chairman of the board and cofounder of the bank. Some directors were hesitant about the change — and what it might mean for their time on the board.

“In all candor, people had mixed views on it. But we kept talking about it,” he says. “And as the world is evolving and changing, [the question was: ‘How do] we get new insights and fresh blood onto the board over some period?’”

Ultimately, he says the directors were able to prioritize the bank’s needs and agree to the policy change. Since adopting the term limits, the board added three new independent directors who are all younger than directors serving before the change, according to the bank’s 2022 proxy statement. Two are women and one is Asian. Their skills and experience include international business, corporate governance, government and business heads, among others.

And the policy seems to complement the bank’s other corporate governance policies and practices: a classified board, a rigorous onboarding procedure, annual director performance assessments and thoughtful recruitment. Altogether, these policies ensure board continuity, offer a way to assess individual and board performance and create a pool of qualified prospects to fill regular vacancies.

Signature’s classified board staggers director turnover. Additionally, the board a few years ago extended the expiring term of its then-lead independent director by one year; that move means only two directors leave the board whenever they hit their term limits.

Shay says he didn’t want a completely new board that needed a new education every few years. “We wanted to keep it to a maximum of a turnover of two at a time,” he says.

To support the regularly occurring vacancies, Signature’s recruitment approach begins with identifying a class of potential directors well in advance of turnover and slowly whittling down the candidates based on interest, commitment and individual interviews with the nominating and governance committee members. And as a new outside director prepares to join the board, Signature puts them through “an almost exhausting onboarding process” to introduce them to various aspects of the bank and its business — which starts a month before the director’s first meeting.

But term limits, along with policies like mandatory retirement ages, can be a blunt corporate governance tool to manage refreshment. There are a number of other tools that boards could use to govern, improve and refresh their membership.

“I personally think term limits have no value at all,” says James J. McAlpin Jr., a partner at Bryan Cave Leighton Paisner LLP.

He says that term limits may prematurely remove a productive director because they’re long tenured, and potentially replace them with someone who may be less engaged and constructive. He also dislikes when boards make exceptions for directors whose terms are expiring.

In lieu of term limits, he argues that banks should opt for board and peer evaluations that allow directors to reflect on their engagement and capacity to serve on the board. Regular evaluation can also help the nominating and governance committee create succession plans for committee chairs who are near the end of their board service.

Perhaps one reason why community banks are interested in term limits is because so few conduct assessments. Only 30% of respondents to Bank Director’s 2022 Governance Best Practices Survey, which published May 16, said they didn’t conduct performance assessments at any interval — many of those responses were at banks with less than $1 billion in assets. And 51% of respondents don’t perform peer evaluations and haven’t considered that exercise.

For McAlpin, a board that regularly evaluates itself — staffed by directors who are honest about their service capacity and the needs of the bank — doesn’t need bright-line rules around tenure to manage refreshment.

“It’s hard to articulate a reason why you need term limits in this day and age,” he says, “as opposed to just self-policing self-governance by the board.”

2022 Governance Best Practices Survey: Culture & Composition

Even the strongest corporate boards benefit from a regular infusion of fresh ideas.

Culture, composition and governance practices — all of these are critical elements for boards to fulfill their oversight role, support management, and maintain the bank’s vision, mission and values. The results of the 2022 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP, suggest that while most directors and CEOs believe their board’s culture is generally solid, they also see room for improvement in certain areas.

Specifically, the majority (54%) say their boardroom culture would benefit from adding new directors who could broaden the board’s perspective. In comments, some expressed a desire to get more tech expertise, greater diversity and younger directors into the boardroom. Others cited a need to retire ineffective directors or cut out micromanagement.

Bringing new perspectives, skills and backgrounds to the table can help boards tackle a host of rapidly evolving challenges, from cybersecurity to environmental or social risks.

Culture can be hard to define, and the survey finds varying opinions about the attributes of a strong board culture. Forty-five percent point to alignment around common goals and 42% value engagement with management on the performance of the bank. Just 30% favor an independent mindset as an important attribute of board culture, something that can be derived through cultivating diverse perspectives in the boardroom.

A majority believe gender, racial and ethnic diversity can improve the board’s performance, similar to previous surveys. Yet, 58% claim it’s difficult to attract suitable board candidates representing diverse racial and ethnic backgrounds.

That’s not necessarily for lack of trying, however. When asked to explain why they find it hard to attract diverse board candidates, many respondents state that they have a limited pool of candidates in their markets or personal networks. But that’s changing as the U.S. population grows more diverse.

“We have a very non-diverse community, although it is changing,” writes one respondent. “I believe the difficulty will lessen with time.”

Key Findings

ESG Oversight
A vast majority – 82% – believe that measuring and understanding where banks stand on environmental, social and governance issues is important for at least some financial institutions, but there’s little uniformity when it comes to how boards address ESG. Nearly half – 45% – say their board does not discuss or oversee ESG at all. Forty-four percent say their board and management team has developed or has been working to develop an ESG strategy for their bank.

Training Mandates Vary
Forty-nine percent indicate that all directors must meet a minimum training requirement; 36% say training is encouraged but not required of members. Just over half of respondents say their board has an effective onboarding process in place for new directors. However, 27% say their board lacks an onboarding process and 13% say their current onboarding process is ineffective.

Knowledge Gaps
Respondents identify cybersecurity, digital banking and commerce, and technology as the top areas where their boards need more knowledge and training. Forty-three percent also believe they could use more education about ESG issues.

Board Evaluations
Almost half, or 47%, of respondents conduct board evaluations annually; another 23% assess their board’s performance, but not on a yearly basis. Of those that performed assessments, 58% say they then created an action plan to address gaps identified in those evaluations.

Assessing Peer Performance
Few boards take advantage of peer-to-peer evaluations, with 51% revealing that their board does not use this tool, nor have they discussed it. Of the 29% of respondents whose bank has conducted a peer evaluation, 83% use the exercise to inform conversations with individual directors about their performance.

Committee Structure
An overwhelming majority of respondents say their board had enough directors to staff all its committees, but 16% say that would no longer be the case if they added more committees. Nearly all respondents say their committees are provided adequate resources to carry out their jobs. The survey reveals continued variation in risk governance practices, with 54% managing audit and risk oversight within separate committees. In boardrooms where there isn’t a technology committee, half believe their organization would benefit from one.

To view the high-level findings, click here.

Bank Services members can access a deeper exploration of the survey results. Members can click here to view the complete results, broken out by asset category and other relevant attributes. If you want to find out how your bank can gain access to this exclusive report, contact bankservices@bankdirector.com.

2022 Governance Best Practices Survey: Complete Results

Bank Director’s 2022 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner, surveyed 234 independent directors, chairs and chief executives of U.S. banks below $100 billion in assets, with the majority of respondents representing regional and community banks. Members of the Bank Services program now have exclusive access to the full results of the survey, including breakouts by asset category.

The survey regularly explores the fundamentals of board performance, and this year examines board culture, committee structure, and how ESG is governed in the boardroom, along with practices such as evaluations and training that help boards improve their performance. The survey was conducted in February and March 2022.

Click here to view the complete results.

Key Findings

ESG Oversight
A vast majority – 82% – believe that measuring and understanding where banks stand on environmental, social and governance issues is important for at least some financial institutions, but there’s little uniformity when it comes to how boards address ESG. Nearly half – 45% – say their board does not discuss or oversee ESG at all. Forty-three percent say their board and management team has been working to develop an ESG strategy and defined goals for their bank.

Training Mandates Vary
Forty-nine percent indicate that all directors must meet a minimum training requirement; 36% say training is encouraged but not required of members. Just over half of respondents say their board has an effective onboarding process in place for new directors. However, 27% say their board lacks an onboarding process and 13% say their current onboarding process is ineffective.

Knowledge Gaps
Respondents identify cybersecurity, digital banking and commerce, and technology as the top areas where their boards need more knowledge and training. Forty-three percent also believe they could use more education about ESG issues.

Board Evaluations
Almost half, or 47%, of respondents conduct board evaluations annually; another 23% assess their board’s performance, but not on a yearly basis. Of those that performed assessments, 58% say they then created an action plan to address gaps identified in those evaluations.

Assessing Peer Performance
Few boards take advantage of peer-to-peer evaluations, with 51% revealing that their board does not use this tool, nor have they discussed it. Of the 29% of respondents whose bank has conducted a peer evaluation, 83% use the exercise to inform conversations with individual directors about their performance.

Committee Structure
An overwhelming majority of respondents said their board had enough directors to staff all its committees, but 16% say that would no longer be the case if they added more committees. Nearly all respondents said their committees are provided adequate resources to carry out their jobs. The survey reveals continued variation in risk governance practices, with 54% managing audit and risk oversight within separate committees. In boardrooms where there isn’t a technology committee, half believe their organization would benefit from one.

Should More Community Banks Be B Corporations?

Banks face a highly competitive landscape filled with thousands of other banks, credit unions and financial technology companies. Could proving your values be a powerful way to differentiate your institution in such an environment? A 2021 Edelman survey found that 61% of consumers will advocate for brands they trust, and 86% expect them to “act beyond their product or business,” wrote Richard Edelman, CEO of the global communications firm. “[B]rands will need to operate at the intersection of culture, purpose and society.”

Sunrise Banks, a $1.9 billion community development financial institution (CDFI) based in St. Paul, Minnesota, aspires to be “the most innovative bank empowering financial wellness,” says Bryan Toft, its chief revenue officer. That mission “attracts customers [who] really care about those values,” he says. “Passionate employees are attracted to it as well, who work hard and want to make a difference because of that mission, as opposed to a paycheck.” In addition to its community bank footprint around St. Paul, Sunrise also offers a banking-as-a-service platform, choosing partner fintechs through a “social filter” that considers how those companies align with its mission.

Toft views this as a competitive advantage, not one that detracts from profitability. Sunrise Banks’ quarterly return on assets averaged 1.22% from March 2018 through Sept. 30, 2021. Performance during this period was fueled by commercial loan growth, new fintech relationships and fee income through the Paycheck Protection Program.

Certifying as a B corporation, Toft says, was a natural fit for the bank. These businesses are redefining what it means to run a successful enterprise, according to B Lab, which certifies B corporations. B Lab likens its certification to Fair Trade USA’s standard for coffee, providing a way to assess and verify a company’s social and environmental impact. The nonprofit has certified more than 4,600 companies worldwide and 1,691 B corporations in the U.S., including ice cream manufacturer Ben & Jerry’s and clothing retailer Patagonia. Eleven of these B corporations are U.S. banks. Becoming a B corporation doesn’t guarantee higher profits; few reported an ROA on par with Sunrise as of third quarter 2021.

B corporations must score a minimum 80 points on B Lab’s “B Impact Assessment,” a tool the nonprofit developed to “measure, manage, and improve a company’s positive impact performance” in the following areas:

  • Governance, including mission, ethics and transparency.
  • Workers, including health, wellness and safety, and career development.
  • Community, including economic impact, civic engagement and diversity, equity and inclusion.
  • Environment, including the company’s impact on air, water, land and biodiversity.
  • And customers, including products and services as well as data privacy and security.

“We have to look at all aspects of our business,” says Toft. The assessment features 200 questions, he says, and explores questions such as, “What percent of your employees are paid a living wage? How do you support diversity, equity and inclusion? What are some of the things that you measure in terms of environmental impact? … How do you know [that] your products make an impact positively in your customers’ lives?”

The assessment is free and can help a company benchmark its performance in the examined areas.

While the assessment is free to use, certification isn’t. The annual fee charged by B Lab to verify B corporation status ranges from $1,000 to $50,000 or more, based on the company’s revenue. In addition to the initial assessment, B Lab selects a subset of questions for additional documentation, and assessed companies must meet B Lab’s risk standards. And B corporations are legally required to consider all stakeholders; opting to become a public benefit corporation — a legal structure available in most states where a company commits to creating a positive social impact — offers a way to fulfill this requirement.

For $2.5 billion Mascoma Bank, the multi-stakeholder approach aligns with its mutual bank charter. “Our governance does not require us to give primacy to shareholders, because the community is primarily the shareholder,” says Clay Adams, CEO of the Lebanon, New Hampshire-based bank. “We measure ourselves versus peers. How do we maximize profitability but also maximize stakeholder results?”

B Corporation companies must recertify every three years, says Adams, a process he compares to a “kinder, gentler version of a regulatory exam.” Average scores range from 40 to 100 out of 200 possible points, according to B Lab. (The score for each bank appears in the below table.) And companies demonstrate different strengths; both Sunrise and Mascoma scored in the top 5% globally in the governance category in 2021.

Toft and Adams both believe that B corporation values align with community banking values, with customers and employees seeking to do business with banks that do good in their communities.

“Where [customers] put their money matters” to them, says Toft. “A lot of banks do great things in their communities, and this is a way to have a third party verify that. … A lot of banks probably could be certified as B corps, because inherently what they do is all about the mission in their respective community.”

B Corporation Banks

Bank Name/Location Asset Size (000s) Return on Assets (ROA) 9/30/2021 B Corp Start Date B Impact Score
Beneficial State Bank
Oakland, CA
$1,496,354 1.21% 9/17/2012 158.9
Virginia Community Capital (VCC Bank)
Richmond, VA
$235,502 1.14% 5/14/2012 149.3
City First Bank, N.A.
Washington, DC
$1,061,371 -0.20% 4/17/2017 146.8
Sunrise Banks
St. Paul, MN
$1,882,632 1.16% 6/23/2009 144.2
Spring Bank
Bronx, NY
$336,177 1.42% 4/13/2016 136.2
Southern Bancorp Bank
Arkadelphia, AR
$1,967,438 1.00% 9/9/2019 122.3
Amalgamated Bank
New York, NY
$6,866,385 0.77% 1/11/2017 115.1
Mascoma Bank
Lebanon, NH
$2,546,655 0.88% 6/28/2017 114.9
Brattleboro Savings & Loan
Brattleboro, VT
$304,363 0.51% 12/18/2018 96.7
Androscoggin Savings Bank
Lewiston, ME
$1,371,816 0.57% 1/26/2021 91.1
Piscataqua Savings Bank
Portsmouth, NH
$338,598 0.43% 5/16/2019 81.1

Source: B Lab, Federal Deposit Insurance Corp.

The B Impact score reflects the most recent score received by the bank in B Lab’s B Impact Assessment; a company can receive a maximum of 200 points. On average, companies score between 40 and 100 points; a minimum of 80 is required to be certified as a B corporation.

ESG Factors Come to Play in M&A

As investors increase their focus on environmental, social and governance matters — otherwise known as ESG — the acronym is also making waves when it comes to M&A due diligence, according to Bank Director’s 2022 Bank M&A Survey, sponsored by Crowe LLP. But while the ESG acronym may be a newer one to the industry, many of the issues under the broad ESG umbrella are familiar to bankers.

Numerous areas fall under ESG. These include climate risk, energy and water use, and green-focused products and investments (environmental); organizational diversity, and employee and community engagement (social); and board composition and independence, shareholder rights, and ethics and compliance (governance). Cybersecurity and data privacy are also key elements, sometimes classified as social and sometimes as governance.

A typical bank M&A announcement tends to mention cultural alignment, and many ESG elements — particularly under the social and governance umbrellas — are strongly informed by an entity’s culture. Culture frequently comes up in the annual survey; this year, 64% of responding directors and executives identify a complementary culture as a top-five attribute in a seller. When asked about assessing the strategic fit of a target, 89% of respondents overall say they’d evaluate cultural alignment.

“Anytime you talk about an acquisition from the acquirer’s perspective, culture’s a big concern,” says Patrick Vernon, a senior manager at Crowe. “Culture [and] social and governance [factors] go hand in hand.”

For the acquirer, these considerations include cultural fit, employee integration and appropriate compensation to retain talent. For example, a seller where lenders work only on commission might not be a good fit for a buyer that where commission pay may be lower or nonexistent. Understanding those elements often calls for a qualitative assessment.

“If it’s a public company, I’d want to look at the human capital management disclosure in the 10K,” says Gayle Appelbaum, a partner in the regional and community banking consulting practice at McLagan. “What are some of the highlights, features, programs, results [and] areas for focus that the seller has been involved in?”

Effective Nov. 9, 2020, the Securities and Exchange Commission requires companies to disclose “any human capital measures or objectives that the registrant focuses on in managing the business,” which would include attracting, developing and retaining talent. The SEC didn’t provide further specific guidance, and an analysis conducted by the law firm Gibson Dunn finds a lack of uniformity in disclosures by S&P 500 companies. Most of these firms include diversity & inclusion statements in the disclosure, but fewer provide hard metrics about the company’s efforts. Most disclose talent development efforts, and more than half provide general statements around recruiting and retaining talent. Less than half disclose employee engagement efforts.

Human capital management disclosures can yield clues about the quality of talent as well as their expectations around compensation, benefits and development. Can the acquiring bank effectively support the acquired employees? Can the acquirer adopt some attributes from the seller to better manage talent in their own organization?

Companies that value diversity, equity and inclusion (DE&I) may also look at the target’s progress in these areas. Bank Director’s 2021 Compensation Survey, conducted earlier this year, found 37% of respondents reporting that their banks focused more on DE&I initiatives in 2020 compared to 2019. However, 42% lack a formal program — especially banks below $1 billion in assets. Those that do track progress primarily focus on the percentage of women and minorities at different levels of the organization.

Daniela Arias, a senior audit manager at Crowe, leads the firm’s ESG services in the U.S. and has been consulting banks on these issues; she also works with private equity firms. She’s increasingly seeing ESG considered in due diligence, along with operational and financial matters. That includes DE&I. “What policies are there in place for diversity?” she says. “What are they doing to track the data of who’s making it to leadership? Do they have development programs in place to help move the needle on diversity?”

Governance —including board composition and practices — is also critically important, says Appelbaum. “Are there problems?” she asks. Is governance strong at the target? What are the weaknesses? For sellers, she suggests asking, “Do you want to align with a company that doesn’t do things well?”

Compliance gaps can help acquirers identify red flags in a target, adds Arias. “If an organization does not have the critical, basic compliance issues down, that is already indicative that there are so many other areas that are not being thought about.”

Vernon points out that there are still a lot of unknowns in the ESG space, especially relative to examining climate risk. “It’s been a lot of wait and see,” says Vernon. “We’re not quite sure, from a regulatory standpoint, what requirements are actually going to be there in the banking space.”

Acquisitions can add strength to an organization, from new business lines and markets to talent. From an ESG perspective, the post-deal bank could emerge stronger. “For some, combining two organizations enhances the ESG picture,” says Appelbaum. One organization may have strengths when it comes to data security; the other may have a great training program.

While ESG won’t drive the selection of a target, an acquirer should understand the progress the seller has made — and whether there will be any issues. Appelbaum recommends starting with the target’s ESG policy and determining whether it’s aligned with the buyer. Also, look for feedback the seller has received from large investors and other stakeholders on ESG. “What’s been done to make headway with those institutional investors?” she says.

Arias helps companies consider their ESG roadmap, identifying where they are and where they want to go. “There are so many existing processes [and] operations that are ESG-related and … need to be brought together into one cohesive structure,” she says. Companies need to understand where they’re strong on ESG and where they need to improve. Once they have that picture, they can then ask, “Where do we need to be for organizations of our size within our industry?”

The banking industry may be in the early stages on ESG, but a strong program could become a competitive advantage. “From a seller’s perspective, in my opinion, the best way to execute a good deal and get that good price is to figure out what your competitive advantage is,” says Vernon. A seller could also be swayed by an acquirer with a strong ESG reputation that will have a positive impact on the seller’s community and employees. “On a go-forward basis, you could have a competitive advantage in ESG,” he adds.

And Arias advises that banks shouldn’t focus on specific metrics.  “Presenting your value from an ESG perspective is not about hitting the metrics,” she says. “It’s about showing progress, transparency, showing where you are, where you intend to go, and what are the steps that you’re going to take to get there.”

For a primer on getting started with ESG, view the video “Starting Your ESG Journey,” part of the Online Training Series. You may also consider reading “ESG: Walk Before You Run” for more considerations on where to start, or “Why ESG Will Include Consumer Metrics” to explore why your ESG program should include customer financial health. For questions boards should consider asking about climate change, read “The Topic That’s Missing From Strategic Discussions” and “Confronting Climate Change” from the third quarter 2021 issue of Bank Director magazine.

Bank Director’s 2022 Bank M&A Survey, sponsored by Crowe LLP, surveyed 229 independent directors, CEOs, CFOs and other senior executives of U.S. banks below $600 billion in assets to understand current growth strategies, particularly M&A. The survey was conducted in September 2021.

Bank Director’s 2021 Compensation Survey, sponsored by Newcleus Compensation Advisors, surveyed 282 independent directors, chief executive officers, human resources officers and other senior executives of U.S. banks below $50 billion in assets to understand talent trends, cultural shifts, CEO performance and pay, and director compensation. The survey was conducted in March and April 2021.

Bank Director’s 2021 Risk Survey, sponsored by Moss Adams LLP, received responses from 188 independent directors, chief executive officers, chief risk officers and other senior executives of U.S. banks below $50 billion in assets. The survey was conducted in January 2021, and focuses on the key risks facing the industry today and how banks will emerge from the pandemic environment.

Laying Down a Foundation for Bank Boards Through Assessment, Alignment

There are few things in life that remain unchanged for their entirety, and that is certainly true of corporate boards of directors. A board’s ability to plan ahead for retirements, unexpected departures and shifts in business scale is imperative in maintaining a successful franchise.

As the cornerstone of leadership, the board’s composition plays a critical role in a corporation’s performance. In the banking sector, the board’s commitment encompasses the shareholders, to whom it has a fiduciary obligation, and to its management team, for which it has oversight responsibility. The board’s collective experience and knowledge of its members provides tremendous value, empowering the trajectory of the bank’s strategy.

But without the proper strategies in place, even the most robust board rooms are vulnerable to unexpected changes in the industry. An estimated 50% of all boards are operating without a strong succession plan. The absence of sufficient forethought poses incredible risk to a bank’s present and future stability. In contrast, establishing a foundation for preparedness through a board assessment process can help ensure the board is aligned to the strategic direction of the bank, and is prepared to address an ever-evolving business landscape.

The ideal board assessment approach allows for a standardized, yet customizable process. With careful attention to the uniqueness of every institution, the right steps will allow directors to examine their board’s strategic alignment to the functional and industry expertise needed to support the bank’s growth. A thorough assessment generates a “road map” of future director needs, along with updated governance framework. The assessment process can be led by the governance committee, the lead independent director, the chairman or a third-party firm. Here is the process we recommend:

Intake Session
Having conversations with board stakeholders that are focused on the bank’s long-term vision and short-term objectives will shape the strategy of the organization. This should also take into account the unique culture of the bank’s management team, coupled with any shareholder dynamics that can help guide the framework output and objectives.

Board Assessment
Develop a list of director questions and conduct one-on-one interviews with each director. Some categories of questions to ask include director professional background, contributions and engagement, director aspiration and a deep dive on director profile and skills. We also recommend developing a skills matrix as an effective tool to assess directors.

Future Board Framework
A healthy director composition analysis requires that the board compiling a thorough report that includes the findings of the board interviews and member assessments. . Directors should have candid discussions about the skills and expertise the board needs to fill identified gaps and needed changes. Directors should revisit all governance elements such as terms and limits, size of board, committee structures, election process and succession issues, among others. We recommend that bank directors develop a final three-year board framework plan to implement the identified changes.

Refreshment
Boards should follow this plan to refresh overall board governance, implementing new processes over time as to not dispute important social and cultural matters. Boards should also use a director refreshment plan to bring on new directors that fill experience and skills gaps identified as part of the board assessment process.

Often, a third-party firm is brought in to lead the overall assessment and refreshment process, working closely with the chairman or the board’s governance and nominating committee. Given the complexities of crafting and gauging a board’s optimal composition, a firm can be helpful with managing that assessment process from beginning to end. Additionally, a third party can help recruit a strategic director with the needed industry and functional expertise, with the added benefit of bringing forward a more diverse candidate pool to consider.

Strong bank boards continue to adapt to strategic objectives and maximize shareholder returns. Time and time again, companies that thrive consistently focus on going deeper with corporate board best practices. For emerging institutions, going through the assessment process for the first time is typically challenging; this process inherently implies impending change. Boards that regularly engage in director assessment and revisit their overall governance framework tend to produce better shareholder returns. Is your board focused on how to elevate the oversight function for the organization?

Can Boards Be a Technology Resource for Their Bank?

Just 29% of chief executives, and 17% of chief information and chief technology officers, say they rely on members of their board for information about technology’s impact on their institution, according to Bank Director’s 2021 Technology Survey. But what if a bank could leverage their board as a resource on this issue, helping to connect the dots between technology and its overall strategy?

Coastal Financial Corp., based in Everett, Washington, has brought on board members over the past three years with experience working in and supporting the digital sector: Sadhana Akella-Mishra, chief risk officer at the core provider Finxact; Stephan Klee, chief financial officer at the venture capital firm Portage Ventures and former CFO of Zenbanx, a fintech acquired by SoFi in 2017; Rilla Delorier, a retired bank executive who until last year led digital transformation at Umpqua Bank; and Pamela Unger, a certified public accountant who created software to support her work with venture capital firms. That deep bench of technology expertise helps the bank evolve, according to CEO Eric Sprink, by better understanding opportunities and risks. The board can even help $2 billion Coastal identify and bring on staff.

“The board has always been entrepreneurial at its basis, and some of the core values that we developed as a board were, be flexible, be unbankey and live in the gray — and those are [our] board values,” Sprink says. “We’ve really worked hard to continually ask people to join our board that continue that evolution and entrepreneurial spirit with some specialty that they bring.”

Bank Director’s recent Technology Survey finds that roughly half of bank boards discuss technology at every board meeting; another 30% make sure it’s a quarterly agenda item. That’s been the picture for several years in our survey, given technology’s importance in an increasingly digital economy.

But for many community bank boards, the expertise reflected in the boardroom hasn’t caught up to today’s reality — just 49% of board members and executives representing a bank smaller than $10 billion in assets report that their board has a director with a background or expertise in technology. And these skills are even rarer for discrete areas affecting bank strategies and operations, from cybersecurity (25% say they have such an expert on their board) to digital transformation (20%) and data analytics (16%).

Bank boards would benefit greatly from this expertise — and many of them know it, says J. Scott Petty, a partner at the executive search firm Chartwell Partners. “When I interview boards and we go through an assessment process, it’s always the No. 1 thing they talk about,” he says. “There’s no one there [who] can really understand what their head of technology is talking about. So, whatever they say, they go, ‘OK, well, you’re the tech expert.’”

In Bank Director’s 2021 Governance Best Practices Survey conducted earlier this year, board members identify their two most vital functions: holding management accountable for achieving strategic goals in a safe and sound manner, and meeting the board’s fiduciary responsibilities to shareholders.

If board members can’t pose a credible challenge to management when it comes to discussions on technology — asking pointed questions about a rising budget item for the majority of banks, as our recent research finds — then they can’t effectively fulfill their two most important duties. And boards also will find themselves unable to contribute to the bank’s strategy in the way they could or should.

Directors with technology expertise can help boards provide effective oversight and link technology and strategy, says Petty. “That’s the No. 1 [thing] — that fiduciary responsibility to really understand how the bank [aligns] its business strategy with its technology strategy.”

Petty shares a comprehensive list that identifies how technology expertise in the boardroom can contribute to the board’s oversight and strategic functions. These include:

  • Linking technology to the overall business strategy
  • Asking incisive questions of the bank’s CIO and/or CTO, and holding them accountable for goals, deadlines and budgets
  • Providing effective oversight of information security as well as Bank Secrecy Act/anti-money laundering (BSA/AML) compliance
  • Offering input and guidance on the bank’s technology initiatives
  • Giving feedback on innovation, customer experience and acquisition, product development, digital integration, cross-selling opportunities and similar areas

Asking pointed questions and deliberating about these technology matters isn’t just a fiduciary responsibility — it makes banks better, points out Jeff Marsico, president of The Kafafian Group, a consulting firm. Technology use by the industry isn’t new, he notes, but community bank boardrooms are typically composed of older members who will be inherently less tapped into what’s going on in the digital banking space. As a result, “they don’t have enough base knowledge to be challenging to management and therefore management knows, ‘I’m not going to be particularly challenged here,’” Marsico says. “[Boards] need somebody with enough knowledge to be able to challenge management — because then management gets better.”

Marsico sees flaws in most boards’ often-informal nomination processes. Performance evaluations, he notes, aren’t adequately used by the industry to identify gaps in board composition, and board members are often reticent to leave. Bank Director’s governance research backs this up, finding that roughly half of boards representing banks between $1 billion and $10 billion in assets conduct an annual performance assessment; that drops to 23% of boards below $1 billion in assets. Fewer than 20% overall use that assessment to modify the board’s composition.

Finding technology skill sets may challenge community bank boards, but Petty recommends a few ways that nominating committees can expand their search. Banks aren’t alone in the digital evolution, which affects practically every sector of the economy. With that in mind, he suggests looking at other industries for prospective board members. “Take an industry-agnostic look to find technology experts from organizations that are larger than the current institution,” Petty says.

Colleges, universities or vocational schools may also provide a resource to tap into technology expertise. “They typically are also at the forefront of talking about digitization across industries,” Petty adds.

While boardrooms should benefit from recruiting members with expertise for the digital age, that doesn’t excuse directors from enhancing their own understanding of the topic.

The 2021 Technology Survey finds board members highly reliant on bank executives and staff (87%) for information about the technologies that could affect their institution — right behind articles and publications (96%) as directors’ top resources.

While input from the bank’s executive team is critical, it’s important that directors leverage their own backgrounds, in addition to taking advantage of ongoing training and informational resources, to ask the right questions of these executives.

Marsico recommends that boards focus on strategy in every board meeting, with regular quarterly updates on the bank’s progress on executing the strategy. Other sessions should provide opportunities to educate board members on what’s going on in the banking environment — and should include external points of view. These could include technology vendors or representatives from the various associations serving the banking community. Petty suggests bringing in a former technology executive of another, larger bank who could brief members on what they’re seeing in the marketplace.

[Boards] can get an outsider’s perspective that breathes fresh air into what is the possible — because I don’t think they know what is the possible,” says Marsico.

Petty also points to increasing interest in forming board-level technology committees. Bank Director’s 2021 Compensation Survey, conducted earlier this year, found that 23% of banks use such a committee.

“Even the smaller banks will have a technology committee, because it’s such a major focus for any institution to drive the digitization of how they go to market, how they leverage the digital experience for the customer, how they leverage the digital product offerings, [and] how they use digital to acquire new customers and onboard new customers,” says Petty.

To understand the responsibilities of the technology committee, access our Board Structure Guideline on that topic. Recent Bank Director research reports examine “The Road Ahead for Digital Banking” and “Meeting Customer Demand for Bitcoin.” Bank Director’s membership program includes a board assessment tool and access to the FinXTech Connect platform, which helps bank leaders identify potential technology providers and solutions.

Bank Director’s 2021 Technology Survey, sponsored by CDW, surveyed more than 100 independent directors, CEOs, COOs and senior technology executives of U.S. banks below $100 billion in assets to understand how these institutions leverage technology in response to the competitive landscape. The survey was conducted in June and July 2021.

Bank Director’s 2021 Compensation Survey, sponsored by Newcleus Compensation Advisors, surveyed 282 independent directors, chief executive officers, human resources officers and other senior executives of U.S. banks below $50 billion in assets to understand talent trends, cultural shifts, CEO performance and pay, and director compensation. The survey was conducted in March and April 2021.

Bank Director’s 2021 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP, surveyed 217 independent directors, chairs and chief executives of U.S. banks below $50 billion in assets. The survey was conducted in February and March 2021, and explores the fundamentals of board performance, including strategic planning, working with the management team and enhancing the board’s composition.

ESG Disclosure on the Horizon for Financial Institutions

Over the last several years, investors, regulators and other stakeholders have sought an increase of environmental, social and governance (ESG) disclosures by public companies.

The U.S. Securities and Exchange Commission (SEC) has taken a cautious approach to developing uniform ESG disclosure requirements, but made a series of public statements and took preliminary steps this year indicating that it may soon enhance its climate-related disclosure requirements for all public companies, including financial institutions. To that end, the SEC’s spring 2021 agenda included four ESG-related rulemakings in the proposed rule stage, noting October 2021 for a climate-related disclosure proposed rule. The SEC is also sifting through an array of comments on its March 15 solicitation of input on how the Commission should fashion new climate disclosure requirements.

Recent speeches by Chair Gary Gensler and Commissioners Allison Herren Lee and Elad Roisman highlight some of the key elements of disclosure likely under consideration by the staff, as well as their personal priorities in this area. Commissioner Lee has asserted that the SEC has full rulemaking authority to require any disclosures in the public interest and for the protection of investors. She noted that an issue also having a social or political concern or component does not foreclose its materiality. Commissioner Lee has also commented on the disclosure of gender and diversity data and on boards’ roles in considering ESG matters.

Commissioner Roisman has noted that standardized ESG disclosures are very difficult to craft and that some ESG data is inherently imprecise, relies on continually evolving assumptions and can be calculated in multiple different ways. Commissioner Roisman has advocated for the SEC to tailor disclosure requirements, and phase in and extend the implementation period for ESG disclosures. Meanwhile, Chair Gensler has also asked the SEC staff to look at potential requirements for registrants that have made forward-looking climate commitments, the factors that should underlie the claims of funds marketing themselves as “sustainable, green, or ‘ESG’” and fund-naming conventions, and enhancements to transparency to improve diversity and inclusion practices within the asset management industry.

Significance for Financial Institutions
In the financial services industry, the risks associated with climate change encompass more than merely operational risk. They can include physical risk, transition risk, enterprise risk, regulatory risk, internal control risk and valuation risk. Financial institutions will need to consider how their climate risk disclosures harmonize with their enterprise risk management, internal controls and valuation methodologies. Further, they will need to have internal controls around the gathering of such valuation inputs, data and assumptions. Financial institutions therefore should consider how changes to the ESG disclosure requirements affect, and are consistent with, other aspects of their overall corporate governance.

Likewise, financial institutions should also consider how human capital disclosures align with enterprise risk management. Registrants will not only need to ensure that the collection of quantitative diversity data results in accurate disclosure, but also how diversity disclosures might affect reputational risk and whether any corporate governance changes may be needed to mitigate those concerns.

We recommend that financial institutions consider the following:

  • Expect to include a risk factor addressing climate change risks, and for the robustness and scope of that risk factor to increase.
  • Consider disclosing how to achieve goals set by public pledges, as well as whether the mechanisms to measure progress against such goals are in place.
  • Expect ESG disclosure requirements to become more prescriptive and for quantitative ESG disclosures to become more sophisticated. Prepare to identify the appropriate sources of information in a manner subject to customary internal controls.
  • Establish a strong corporate governance framework to evaluate ESG risks throughout your organization, including how your board will engage with such risks.
  • Incorporate ESG disclosures into disclosure controls and procedures.
  • Consider whether and how to align executive compensation with relevant ESG metrics and other strategic goals.