The banking industry today is operating in an environment that few could have anticipated, yet requires an increasingly complex mix of banking skills, leadership capabilities and interpersonal qualities in its leaders. Having spent time recently speaking with hundreds of bank CEOs, board members and senior executives, the requirements for success as a bank leader today have crystalized. Each letter below represents a vital element that bank CEOs and potential CEOs must understand or possess:
B is for balance sheet: Today’s bank leaders must understand the risks inherent in the current interest rate environment, whether due to potential funding mismatches or the risks from declining securities values in a rising rate environment.
A stands for asset quality: Bank leaders must remain vigilant regarding credit quality. There’s still no quicker way for a bank to falter than to suffer from a spate of bad loans. Regulators continue to focus on credit culture, policies and procedures as well.
N is for non-interest income: Everyone wants more, but how do we actually grow revenues? Increasing fees on customers always carries some potential fallout. And building lines of business such as wealth management, insurance or other products involves a significant up-front investment and a long-term return. There are few easy answers here.
K represents capital: As everyone knows, this is the most critical ingredient that banks need today to survive and drive growth, whether organic or transactional. A lack of ample capital not only constrains strategic plans, but too often invites a call from your regulator.
The L stands for leadership: While great leadership remains an obvious prerequisite for success, the demands on bank leaders today are more strenuous and complex than at any time since the Great Depression. Many bank boards struggle with the challenges of succession and developing that vital next generation. In addition, the mantle of leadership should extend much further into the organization than just the CEO’s office or C-Suite executives for an organization to truly succeed. While the CEO sets the tone, everyone should lead by example in their daily interactions with customers and colleagues.
E stands for emotional intelligence: This is the critical aspect of leadership in which you see your bank’s leaders communicating effectively, leading from the front rather than the rear, and following a “servant leader” mindset. The emotionally intelligent leader knows that the bank’s success is not about them, but rather the people on their team. When the team is successful, the leader succeeds as well.
A represents authenticity: One of our favorite leadership attributes, authenticity occurs in the leader who means what she says, and does what she says she will do. It’s the ability to create “follower-ship” through actions and a genuine approach to dealing with a bank’s varying constituents.
D is for digital savvy: Today’s community banks need an approach to the digital world that is timely, relevant and real. Whether you like it or not, the technologies that are revolutionizing banking today are not just impacting the industry’s back office, but have become a vital channel for growth. Banks must play offense here, not defense.
E represents the employee: Bank CEOs and directors regularly praise their employees for good work and great service. While these qualities are the foundation upon which our institutions are built, they are simply not enough anymore. If your bank is going to win against the competition, it must have the absolute strongest cadre of bankers possible—from the executive team to front line lenders and managers, to the employees behind the scenes. Next to capital, employees who can execute your plan are the only remaining differentiator in banking today.
R, of course, stands for regulatory: In the current climate, the ability of bank leaders to forge a constructive working relationship with their regulators is vital. Banks that take a combative tone with their examiners usually end up on the wrong side of their exam. While the regulatory climate may have overreached, it is what it is. High-performing bank leaders figure out how to operate successfully under this dynamic, and forge positive regulatory partnerships.
As Billy Beale, CEO of Richmond, Virginia-based Union First Market Bank stated recently at the Bank Director Acquire or be Acquired conference: “Banking is not complicated, but it has gotten awfully complex.” Today’s bank leader needs a plethora of banking skills, leadership competencies and personal attributes to be successful. Anything less than a full suite of these talents may not only impact your bank’s ability to win, but could ultimately put the institution itself at risk.
Filmed during Bank Director’s 2013 Bank Executive and Board Compensation conference in Chicago in early November. A panel of CEOs at top performing banks discuss how their companies develop executives, attract leadership and approach compensation in today’s highly competitive and economically challenging world.
Video Length: 55 minutes
About the Speakers:
Leon J. Holschbach, President & CEO, Midland States Bancorp, Inc. Leon Holschbach is the president & CEO of Midland States Bancorp, Inc. Prior to joining Midland, Mr. Holschbach held the positions of region market president, community bank group at AMCORE Bank, N.A., president and chief executive officer of AMCORE Bank North Central N.A. and president of Citizen’s State Bank in Clinton, Wisconsin.
Ron Samuels, Chairman & CEO, Avenue Bank Ron Samuels is the chairman & CEO at Avenue Bank. He is an experienced leader, executive and marketer and has been a banker in Nashville, TN for 40 years. Mr. Samuels was a founder in 2007 of Avenue Bank, which today has assets of more than $725 million. Mr. Samuels is recognized as one of Nashville’s most visible and engaged community leaders, having concluded his term as chairman of the Nashville Chamber of Commerce in July 2010, along with service on many other boards and committees in the arenas of economic development, professional sports, education and more.
Frank Sorrentino III, Chairman & CEO, ConnectOne Bank Frank Sorrentino is the chairman & CEO of ConnectOne Bank. He is responsible for its business development plan, serves as the community liaison, sits on the loan committee and serves as the bank’s spokesperson. Mr. Sorrentino has been instrumental in developing the bank’s branch and expansion strategy and oversees all marketing activities.
Everybody in banking knows this by now. Banks have been hit with an onslaught of new regulations right when low interest rates are continuing to erode profitability. But what will happen in 2013? Experts who will speak at Bank Director’s upcoming April Bank Chairman/CEO Peer Exchange say what they think boards will be dealing with next year.
“What is the top strategic challenge facing bank CEOs, chairmen and their boards in 2013?”
The greatest challenge to CEOs, chairmen and their boards will be how to generate acceptable returns to shareholders in the face of ever-growing compliance concerns and a continued sluggish economy with high unemployment and historically low interest rates. Without an administration change, 2013 promises to continue increasing and more stringent banking supervision and additional regulation, including consumer compliance initiatives and aggressive enforcement from the Consumer Financial Protection Bureau and new capital requirements from Basel III. This will not only impact decisions on day-to-day operations and planning but also shape thinking on mergers and acquisitions activity and the raising of capital. Specifically, if new capital rules are adopted, boards will need to explore the availability of capital, and whether capital can be raised at satisfactory pricing levels.
— Scott Brown, Kilpatrick Townsend & Stockton LLP
Talent. There is a shifting environment of constant change that is the new normal for how all businesses operate. Pressure is intensifying—from regulators to creative innovators who are bucking the traditional banking models trying to influence change. Bottom line, CEOs need to have the right talent in place to lead effectively—not only to confront the current challenges, but to create an organization with a connected culture to be the bank of the future.
— David Boehmer, Heidrick & Struggles
The top challenge is that banks cannot earn their cost of capital in today’s environment. The combination of higher capital requirements, margin pressure due to extraordinarily low rates, slow economic growth and cost pressures associated with regulation translates into inadequate returns for shareholders. A CEO’s job is to outperform peers in this environment while making investors realize that these challenges will not last forever. In the event that a bank can’t operate more effectively than its peers, it is the CEO’s responsibility to his/her board to face that reality and proactively explore exit opportunities.
— Ben A. Plotkin,Stifel, Nicolaus & Company and Stifel Financial Corporation
Notwithstanding the difficult business climate and the continuing economic challenges facing the banking industry today, the regulatory burden is the top strategic challenge facing bank management and boards today. While the reelection of Obama results in some certainty that the barrage of new regulations will continue, there continues to be considerable uncertainty. For example, what will the creation of the CFPB mean for community banks not directly regulated by the CFPB? What will happen with Basell III? Regulatory costs are also a significant factor when considering the optimal asset size to best leverage today’s cost of doing business.
— Gary Bronstein, Kilpatrick Townsend & Stockton LLP
The price for peace of mind has gone up and nowhere is that more evident than the compensation levels for chief risk officers (CROs). If you are a large or medium-size regional bank looking to hire a new chief risk officer, you should expect to pay up to $1 million in annual compensation and potentially more depending on the size of the institution or the skills and experience needed. Demand for this talent has risen but there is a premium to pay and compensation has in many cases doubled compared to a few years ago.
Why has the price risen so sharply of late? This has become a role that can make or break a bank’s relationship with its board, shareholders and regulators. The CRO has become significantly more active in determining a bank’s strategic direction and the shape of its asset portfolio, as well as continuing to monitor traditional risk functions. The skills sought today in a top CRO are broader than they have been historically, slimming the pool of available talent significantly. Additionally, the career risk for an individual stepping into the CRO role is extremely high, making the roles themselves less attractive. CROs are increasingly blamed for a bank failure and many former CROs are now either out of the market altogether or have changed career paths, moving into consulting or joining a regulator.
This white paper examines the skills and backgrounds needed for a chief risk officer and poses four questions boards should be asking.
The principals in our firm have completed over five hundred board projects, in our experience the answer to who should sit on your board is, in every case… it depends. Every search is unique.
Who Should Be On Your Board – Determine Your Needs
There are a myriad of factors that determine who should serve on your board. The composition and culture of your current board are important factors. Similarly, the nature of your company is a variable in determining who should serve on your board:
Your current board of directors, in some of its composition, is reflective of what the company was, or aspired to be, in years past. Your company’s profile is just a snapshot of what the company is today. Therefore, importantly, where is the company headed? What are the most important objectives to be achieved? In other words, what is your corporate strategy? The answers to these questions need to be understood in determining who will be the most valuable director(s) for your board. The person or people who should serve on your board are born from your strategy.
When you overlay your corporate strategy with an assessment of the toolkits of each director on your board and consider your company’s profile, you can create a matrix. The matrix illustrates the competencies you need to acquire to enable your board to guide your company toward its strategic goals. Add to this sensitivity to the board’s culture and you will see who should be on your board.
Who Should Be On Your Board – Universal Elements
Every company’s board competency matrix will be different, but there are a few common components that are found on most well-built boards:
Diversity: This is stating the obvious, but a variety of perspectives is an important component for all boards.
Operators: Among the members of every board should be one or two current CEOs or COOs, who will provide the board with an operator’s perspective and often act as a sounding board to the company’s CEO.
Financial Acumen: This is a broad skill set, ranging from accounting and audit skills to treasury, financing, and M&A experience. We have not worked with a client yet who has said, “We have too many board members with financial savvy.”
Industry Knowledge: An independent director with deep experience in the company’s industry will augment management’s expertise, can serve to educate other directors on the industry, and can provide an informed board level evaluation of industry specific items.
Customer Knowledge: Board members with significant knowledge of major customer categories provide valuable insight in board discussions.
Regulatory / Compliance: Knowledge of regulatory issues facing a company may be critical. The same holds true for risk.
Technology: Every business relies on technology. Having a director who can evaluate the impact of technology on the company, make strategic recommendations and communicate effectively with other members is always valuable.
International: This may not apply to all companies, but to those it does, it is a major concern. Boards are clamoring for directors who not only have a global perspective, but boots-on-the-ground international experience running a business, particularly in the BRIC countries.
Committee Composition: Members should have relevant domain knowledge. (e.g. People on the compensation or audit committee have to understand the material).
Who Should Be On Your Board – Personality Traits of Great Directors
The depth of experience, level of success, and amount of talent a director has is irrelevant if it cannot be effectively utilized. Individuals should be intellectually and emotionally strong enough to actively participate and offer positive critical review, yet modest and mature enough to recognize their appropriate role as a board member and the need for partnership with their fellow board members and company management. They should be analytical and able to constructively evaluate a strategy, acquisition, and business plan. The candidate should be forward thinking and strategic, yet pragmatic and operationally savvy, with a passion for building true shareholder value. The personality/chemistry must be a fit. Honesty, openness, and high ethical standards are mandatory. It is important that a potential board member be prepared to be an active and engaged director, and willing to make a long-term commitment to the company.
Who Should Be On Your Board – Get The Leadership Right
Roles on the board are not created equal. There are four leadership roles that every board must have: non-executive chair / lead director, audit committee chair, compensation committee chair, and nominating & governance committee chair. Get these roles right and it will translate directly into shareholder value.
1) Non-Executive Chairman / Lead Director
Shareholders have always entrusted the board to carry out its fiduciary responsibilities, but in our contemporary business environment, regardless of the title given to the role (non-executive chair, lead director, presiding director…), it is essential for effective corporate governance that the board of directors have a non-management director as the recognized leader of the board, not the CEO. Dividing the duties of the leader of the company (the CEO) and the leader of the board acknowledges the new and increased responsibilities of both positions. It also creates checks and balances between management and the board, and is meant to be a deliberate expression of independence to shareholders and the market.
The clearest distinction between the two roles is, simply, the non-executive chairman / lead director runs the board, not the company (that is the domain of the CEO). In running the board, the non-executive chairman / lead director has a wide range of responsibilities, which can vary from company to company, but in almost all cases he/she:
presides at all meetings of the board and the shareholders, ensuring that all issues on the agenda are efficiently attended to and that each director contributes to their full potential.
establishes, in consultation with the CEO, an agenda for each meeting of the board.
leads a critical evaluation of the board as well as of management, its practices and its adherence to the board-approved strategic plan and its objectives.
facilitates an open flow of information between management and the Board.
The non-executive chairman / lead director role is a delicate role requiring a respected executive with broad business acumen, who is a strong communicator with evident interpersonal skills, and someone who has refined leadership ability (capable of focusing the board and building consensus). This role is not for someone who has an ambition to run the company. Non-executive chairman / lead directors should be complementary and compatible with the CEO (not seen as a rival); if their chemistry is poor, the function of the board suffers and ultimately, so does the company. Optimal candidates are capable of facilitating positive dialog on diverse subjects, and act as a buffer on behalf of the CEO and senior management, so that the board is not intrusive. The non-executive chairman / lead directors must have ethical standards beyond reproach, a passion for the role, and must take personal pride in the level of quality in the boardroom.
2) Audit Committee Chairman
Given the heavy responsibility and continued intense spotlight on the audit committee, this is a key role to fill for the success of the board and the company. An outstanding audit committee chair instills a greater sense of confidence in the company at the board, management, and investor levels, and likely individually impacts shareholder value. This role requires an extremely well qualified financial expert, preferably with independent director experience and the time to commit to this role. Optimal candidates would typically be retired executives who have been CEOs (with strong financial skills), public company CFOs, or broadly experienced audit partners.
3) Compensation Committee Chairman
The intense examination of executive compensation has also thrust compensation committees into the spotlight and has made its chairmanship a very important responsibility. This role requires a background with executive compensation matters and current knowledge of compensation issues and trends. Preferably, this person would also have prior public company board experience. Optimal candidates for this role would typically be a long-tenured CEO, an experienced compensation committee member, or another executive with significant executive compensation experience (e.g.: chief human resources officer).
4) Nominating / Governance Committee Chairman
Charged with leading the committee responsible for shaping the company’s corporate governance, evaluating the performance of the board and its directors, and recommending new directors for the board, the nominating/governance committee chairman is a critical role in today’s climate. Directors in this role need to have a deep knowledge of corporate governance and be committed to keeping up with its trends and best practices.
Who Should Be On Your Board
There are common components of all well-built boards, beginning with getting the leadership roles filled correctly. But who should be on your board is truly unique to each company. Through an assessment of the competencies on your current board, along with your company’s profile, viewed in comparison to the vision of your company going forward, and an appreciation of your board’s culture, a clear picture should emerge.