Few factors determine a corporate board’s effectiveness more than its composition, and yet many banks take a slapdash approach to the recruitment of new directors.
Even really good banks are guilty of this. When I asked the independent chairman of a bank that regularly scores well on our annual Bank Performance Scorecard, a performance ranking of the 300 largest publicly owned banks in the country, what his board’s process was for recruiting new directors, he said it really didn’t have one. The board had recruited two new directors recently, including one who was added following an acquisition, but the chairman didn’t want to hold up his board as a model for director refreshment.
Part of the problem is that director succession is not taken seriously enough at many banks, so when a vacancy does occur the board doesn’t have a tested process in place. That sets off a “who do we know” scramble that is reactive rather than proactive.
“Historically, the way most community banks have found directors is through the CEO and possibly through some directors, and it’s in a personal context,” says James J. McAlpin Jr., an Atlanta-based partner at Bryan Cave Leighton Paisner and head of the firm’s banking practice. “It’s people in the community who are known to the CEO or key board members and who seem to be qualified to serve on the board, have an interest in serving on the board. What I see changing — not dramatically, but gradually — is a sense, particularly for [small community banks] that want to become larger, that they need to go outside of their circle of friends to find individuals with skillsets that are needed or attributes that are needed.”
I think an emerging best practice for bank boards is to perform a periodic board needs assessment to determine whether the skills and experience of the bank’s current directors supports its strategic plan, particularly if that plan calls for major changes like expansion into new lending categories or geographies, or a decision to go public. This assessment essentially summarizes the skills and experience of all your directors, grouping them into categories. Smaller banks often find that they are overweighted in certain categories – CPAs and attorneys come to mind – while underweighted in categories like technology, and female and minority directors.
“It’s really a process of who can bring either expertise or business to the bank,” says Donald Musso, president of FinPro, a consulting firm in Gladstone, New Jersey, that often handles director searches for its bank clients. “And I think it’s a combination of the two that we’re seeing people look for.”
Musso cites the example of a client bank in northern New Hampshire. “This organization has been very rural, and two or three of the board members are now living in Florida, and they’ve come to the conclusion that they can’t make it work,” he says. “[These directors] can’t come up in the middle of winter for meetings, and they can’t do the meetings digitally because it’s not the same.” FinPro put together a strategic plan for the bank that calls for it to expand into new markets south of its current location, and Musso will search for new directors in those markets who can not only replace the Florida-based members but help the bank with business development. “We’re looking for people who are really well connected in those marketplaces, who can introduce us to the right business owners and the right political leaders to get quickly accepted,” Musso explains. “We know that folks from northern New Hampshire don’t have any contacts down there.”
Once you know the kind of director you want to fill a vacancy or expand the board, how do you find them? McAlpin says that board chairs (or whoever that task has been delegated to, like the governance committee) often reach out to trusted advisors for suggestions and referrals. “They’ll talk to their attorneys, their accountants, bank consultants they may know … and other bankers,” he says.
McAlpin also suggests that boards actively research their communities for good director candidates. If the chief executive officer or board chair only recruit from within their personal universe of known people, they are by definition restricting the pool of likely candidates.
“What I’ve suggested to people is if you really are looking for skill sets, mount some kind of proactive search within your market,” says McAlpin. “Have someone at the bank do some research on who’s heading up the local manufacturing plant for an automotive manufacturer. Is that a woman? Is that an African American? Who are the people making a splash in the community? So, it’s still word of mouth, but it’s a wider circle of word of mouth. That’s how I’m seeing it work.”
Musso tries to cast a wide net when fishing for board candidates. He agrees with McAlpin that boards should thoroughly research their communities when conducting their own director search. “We don’t use a search firm; we call folks directly,” he says. “So we can look up female CPAs pretty quickly. We can get lists of minority-owned businesses pretty quickly. A lot of that stuff is readily available data from Dun & Bradstreet and other sources.” Musso has found that local accounting firms that handle audits for area businesses are another good referral source. “They’ve been a huge, huge help in finding people and bringing names to the table,” he says.
And when he conducts a search, Musso is often looking for someone who can help the bank accomplish a strategic objective. “We’re constantly seeking spheres of influence,” he explains. “We want to know who is most connected to a given strategic thrust we have in the bank. That’s the ideal person. When we find them, we want to get them on the board as quickly as we can.”
Other recruiting suggestions include financial technology companies, which Musso says offer a pool of potential director candidates who can help banks manage the digital transformation process, as well as former directors who left their boards after their banks were acquired. And while they generally have a different mission, people serving on nonprofit boards are another pool of potential candidates.
These recruiting tips all tend to be reactive in nature; they are things you can do after a vacancy opens up on your board. A more proactive approach would be to establish an advisory board of local business and community leaders to not only advise the bank on important issues, but also to scout them as possible directors for the bank board.
“Particularly if your bank is in multiple geographic locations, just set up some advisory boards,” McAlpin says. “You get local business people together and buy them lunch or dinner. They get the opportunity to interact with each other, and they can talk about their business, and then you learn from them about what it is they think is important to the bank or what the bank can be doing for the community. You also get the opportunity to assess these people in terms of potential future board members.”
While smaller community banks often do their own board recruiting, larger banks often retain an experienced search firm to help them fill board vacancies. “When we’re engaged by a board to conduct a director search, they often are … engaging us to go out and find a very specific level of expertise,” says J. Scott Petty, a Dallas-based partner who leads the financial services practice at the executive recruiting firm Chartwell Partners. “Or they’re looking for somebody that’s both bringing the expertise we’re looking for and diversity.”
The process from that point on is pretty straightforward, Petty says. He will develop a “position description” based on what the bank is looking for in a prospective candidate. “In that position description, it would be a description of the bank; it would be a description of the qualifications of the background that we’re looking for. And it would also outline if they’re a public bank and their meeting dates for the board.”
Petty says that at the beginning of any engagement, it’s important that he and the board get to know each other. “We would get together face to face to talk about their need and through that process, they would need to get comfortable with me as their ambassador in the marketplace doing the recruiting,” he says. “And that comes by just getting to know me professionally, understanding the experience that I bring to the table, understanding some of the assignments that we’ve worked on before where we’ve had success and then getting to know me a bit personally. Again, they’d have to get comfortable with me representing them and that I understand their culture. And in that process, they would need to see how I feed back the information that I’m receiving from them to give them comfort that I’m the best person to go out and execute this process for them.”