As banks face an expanding array of threats and challenges, boards recognize the need to adapt their thinking. As a result, boards are increasingly taking a new approach to operational resilience.
The topic of operational resilience calls to mind internal planning efforts to address a list of everything that could go wrong: next-generation cyberattacks and data breaches, fraud, natural disasters and the economic shocks of inflation and interest rate changes. These critical issues all require careful board oversight of risk mitigation strategies.
But what about external, customer-driven disruptions? Customers now expect seamless digital banking services and omnichannel experiences. New fintech competitors are capable of providing these amenities and are grabbing market share from traditional banks. Many traditional banks aren’t keeping up. An eye-opening 95% of bank executives “believe their current outdated legacy systems and technological capabilities are unable to fully optimize their data for customer-centric growth strategies,” according to the World Retail Banking Report 2022.
These are existential challenges and they demand the same level of attention from the board as, say, cybersecurity. Bank boards should ask themselves: How can we remain relevant in this rapidly changing landscape?
Redefining Operational Resilience
As they wrestle with new challenges and demands, many board members are opening up to a new mindset and approach to operational resilience. Today, becoming an adaptable, resilient bank requires two intertwined, customer-focused objectives:
- Remaining relevant to customers by offering new services and conveniences.
- Maintaining customer trust by protecting their data and money and executing transactions securely.
This balanced approach means that operational resilience can be more broadly defined as a company’s ability to build confidence and trust in its capability to adapt to changing circumstances.
Addressing Operational Resilience
Bank boards — including their audit and risk committees — can incorporate this new approach to operational resilience into their oversight activities starting with these five steps.
1. Add value creation to the board’s mandate and mindset
Boards often focus heavily on oversight of traditional risk management and compliance: protecting value. But they also should take more responsibility for creating value and guiding bank strategies to evolve services and compete with financial services startups. Both activities contribute to increased operational resilience.
2. Embrace a customer-centric point of view
Directors should approach both value protection and value creation from a customer perspective. That means working harder to understand customer needs and consider how any decision might affect customers. During board meetings, this customer focus can shape dialogues and influence the types of questions asked, even with seemingly internally focused topics. Board members also should make every attempt to connect with customers directly — for example, inviting them to board meetings to share their perspectives.
3. Allocate more time on the agenda for operational resilience
Boards rightly prioritize risk management on their meeting agendas, but competitive risks also should be part of those conversations. And risk-focused conversations should be balanced with discussions of strategy and value creation. These topics are essential to operational resilience, which means that board agendas might need to be restructured to allocate sufficient time for each.
4. Evaluate market conditions more frequently
Boards undertaking strategic planning only once a year might not be able to adapt quickly to changing economic conditions and customer needs. A more frequent cadence of market sensing is in order. For example, one bank board performs a quarterly exercise: Directors define the five most important external events that affect the current strategy and discuss any needed adjustments at board meetings.
5. Diversify board representation
Effective, dynamic boards prioritize diversity, equity and inclusion. A more diverse board offers a better understanding of the diverse needs of its customers. Establishing more female and minority representation — as well as generational diversity to include younger demographics — boards can bring fresh, diverse perspectives to discussions on value creation and customer relevance. Board members with varied professional backgrounds, beyond finance, also can enrich strategic discussions.
Disruption Is the New Normal
Over the past several years, banks have faced wave after wave of challenges and disruptions. But imagine that every disruption is a chance to improve the organization. Organizations that can do so embrace disruption, because they know they are resilient and can improve. Moving forward, the bank leaders who adopt an evolved, customer-centric approach to operational resilience — encompassing both risk management and value creation — are most likely to thrive.