One of the most challenging aspects of maintaining a strong board is finding strong directors to serve. Most smaller banks handle this process themselves—often with uneven results—while larger banks are more likely to use the services of a search firm when they need to add or replace a director. The process should be driven by the independent directors on the board’s governance or nomination committee, and in fact, this is a listing requirement for publically traded banks that are traded on the Nasdaq or the New York Stock Exchange. At some smaller, privately held banks, the CEO still recruits new directors, although this is far from ideal, says Peter Crist, chairman of the search firm Crist|Kolder Associates and chairman of the board at Wintrust Financial Corp. in Chicago. In an interview with Bank Director Editor in Chief Jack Milligan, Crist offers his thoughts on director recruitment, including the need to look closely at the board’s composition from a demographic, experience and skills perspective when deciding to recruit a new director.
When a bank recruits a new director, who drives that process? Is it the governance committee, the CEO, the independent chairman, if there is one? Who’s in charge?
Crist: It varies. Ten years ago, it was the CEO who drove the process. Today, in a best case scenario, it’s a mutual directive from the CEO and the head of the nominating committee. The truth of the matter is, the nominating committee owns the process. But human nature being what it is, lots of nominating committees abdicate the responsibility of board recruitment if there is a strong-willed CEO. This tends to happen more often in smaller enterprises where a single person can dominate the room and the head of the nominating committee will just kind of roll over for what the CEO wants. In best case scenarios, it’s a highly-independent chairman of the nominating committee who will drive the process.
We seem to be in a period of great change in the banking industry. Are there specific skills that directors will need going forward that may not have been so important in the past?
Crist: First and foremost, technology. If you look at the types of requests that are out there for new board members, number one is technology, and that can manifest itself in a number of ways. It could be a chief information officer from another industry, or it could be someone in the consulting world who’s focused on technology. If you don’t have a person on your board who can speak the dialect and understand it and really bring the other board members along who might not understand it, then you have to get one of those people. Second is risk. There is a lot of interest in people who understand risk, understand enterprise risk management. Third, we’re seeing a lot of gender type requests, where boards are trying to balance the gender and ethnicity issues that they face. And fourth, people who are compensation experts. So we’re seeing more chief human resources officers coming on boards, and the good news is many of them are women.
How about somebody who has a greater appreciation for the demographic diversity that banks have in their customer base? Someone who understands millennials, for example.
Crist: That manifests itself in two themes that we’re seeing in the marketplace. Many boards will look for chief marketing officers who would bring to them that skill set. So think of the chief marketing officer of Target or Walmart. And the other request, which is one we are a little sensitive about, is for people who are in disruptive technology enterprises. Boards think that experience teaches people how to look at a market differently, how to think about going to a market differently—how to attack, basically. And that often means someone who’s 29 years old, which may not be the best choice for the board. They don’t have the wisdom and the experience to deal effectively with their board colleagues.
If you had to choose between experience and judgment on the one hand, or expertise in one of these specific areas, which would you pick?
Crist: The board should have a balance of both, but I lean to the former. A person who brings wisdom and judgment to the board is going to be able to assist their colleagues in getting to the right answer. But one of those colleagues should be a person who has very specific expertise in one of these critical areas. A board should have a balance of age, wisdom, experience and specific skills in areas like technology, marketing, compensation, legal and M&A.
What’s the ideal size for a board?
Why is nine better than, say, six or 12?
Crist: Six is too small. If you have too few board members you end up putting people on [too many] committees. And if you have too many, it’s hard trying to communicate with everyone effectively. Nine tends to be that goldilocks number that provides enough people to cover all of the committee assignments, but doesn’t impact you on the communication side.
How do you handle a search? How does it start, what process do you go through and how do you work with the board while you’re doing it?
Crist: We are usually called after a board has exhausted all of its resources trying to find a new director. They’ve asked all of their friends and they’ve done their own thing, but eventually realize that they’re going to have to write a check to get this done. So if they come to us and say, “We need an African-American chief marketing officer from a retailer,” that’s what we go find.
We will advise the nominating committee, if that’s who we’re working with on the board, about the difficulty of the project. What we tend to see is that when boards come to us, there’s a great specificity to what they’re looking for. We try to get them to look at this board seat in the broader context of the other people who are already serving on the board. So when they come to us with a list of specific traits they want in this new director, we try to get them to also think about other elements that might be missing on their board and take a larger perspective.
Most board projects, though, come in multiples. Most companies come to us and say, “Look, over the next three or four years we’re going to have three directors time out. And so we’re going to do a recruitment project in 2016, we’re going to do one in 2017 and we’re going to do one in 2018. And in that three-year year cycle, those three seats have to be filled by the following,” and then there’s a very long menu of items that they would like in those. That allows us great flexibility and also helps balance the board member mix.
What do you need from the client to make the recruitment process go smoothly?
Crist: First, a clear understanding of what the target is. There can be some ambiguity about the person they’re looking for, but they can’t put 10 items onto their wish list because you won’t find a person with those 10 qualifications. Second, [we need] a process that is not cumbersome. Some boards require that every prospective board member meet every current board member, which is fine, but that is going to take a year. So you can’t call in January and say, “We’ve got to do a proxy in March,” because that’s not enough time. Usually the CEO and the head of the nominating committee are the point of the spear. In other words, they are people who will see the broad list of prospects. On a particular board search they might review 50 profiles on paper, and pick 10 to have physical interviews. Then the CEO and the head of the nominating committee will choose how many of those 10, let’s say it’s 5, to take to the nominating committee and the committee will pick one. That person will then be presented to the board. Third, we need to make sure that expectations are met appropriately on both sides. It is a game of fit, and we want to make sure that company looking for the new board member is comfortable that they’re getting what they anticipated.
You said that the CEO and head of the nominating committee are the point of the spear in a director search. How much influence does the CEO have in this process?
Crist: Look, if the CEO doesn’t like their selection of a new board member, you’re just creating a problem.
So the CEO should have sort of an implicit veto power?
Crist: No, not a veto. Think about the dynamic of the CEO and the head of nominating meeting in person and coming out of that meeting and saying, “We both like that person; that person has a very high probability of getting through the gauntlet of the other meetings and getting [to] the board.” If either one of them comes out of that session and the CEO says “Hmm, not sure about that one,” or the head of nominating says, “Hmm, not sure about that one,” there’s a low probability that person’s going to make it through the gauntlet.
So it needs to be a consensus process, someone who both the CEO and the head of the nominating committee, or the nominating committee itself, both feel comfortable with.
When a new director comes on board, is there a process that should take place to make sure that that person is successfully integrated into the culture of the board and educated about the company’s issues?
Crist: The onboarding process, which is the term most use now, has gotten much better over the last 10 to 15 years. And the onboarding process is making certain that the new board member has an appreciation and understanding of the enterprise, and has extensive dialogue with his or her new colleagues. It’s the former that’s gotten so much better. Now many companies make certain that over a full day, or scattered over several days, the new board member meets one on one with the senior managers to get a full appreciation for its enterprise.