The Link Between Board Diversity and Smart Business

board-of-directors.pngOur time is one of rapid technological and social change. The baby boom generation is giving way to a more diverse, technology-focused population of bank customers. In conjunction with the lingering effects of the Great Recession, these changes have worked to disrupt what had been a relatively stable formula for a successful community bank.

Corporate America has looked to improve diversity in the boardroom as a step towards bringing companies closer to their customers. However, even among the largest corporations, diversity in the boardroom is still aspirational. As of 2014, men still compose nearly 82 percent of all directors of S&P 500 companies, and approximately 80 percent of all S&P 500 directors are white. By point of comparison, these figures roughly correspond to the percentages of women and minorities currently serving in Congress. Large financial institutions tend to do a bit better, with Wells Fargo, Bank of America and Citigroup all exceeding 20 percent female board membership as of 2014.

However, among community banks, studies indicate that female board participation continues to lag. Although women currently hold 52 percent of all U.S. professional-level jobs and make 89 percent of all consumer decisions, they composed only 9 percent of all bank directors in 2014. Also of interest, studies by several prominent consulting groups indicate that companies with significant female representation on boards and in senior management positions tend to have stronger financial performance.

In light of these studies, new regulations mandating the formulation of diversity policies are understandable. The Securities and Exchange Commission instituted mandatory statements of diversity policy for publicly traded companies in recent years. This initiative has also been echoed in a recent policy statement from the Federal Reserve that focuses on a company’s “organizational commitment to diversity, workforce and employment practices…and practices to promote transparency of organizational diversity and inclusion.” These initiatives are meant to promote a corporate culture that allows for what is known as “effective challenge.” Demonstrating effective challenge, which includes the company’s ability to avoid group-think and to include new voices in critical debates, is a cornerstone of the federal bank regulators’ risk management model. In the eyes of these regulators, a more inclusive and diverse board is more likely to create effective challenge, improving the institution’s governance and operation.

As a result, board diversity goes to the heart of effective corporate governance—does the board have the skill set and perspective needed to keep pace with a rapidly changing economy? Are directors asking the right questions of management and their advisors? And do directors have access to the appropriate information to make good decisions for the institution’s shareholders? Incorporating fresh voices and skills into the boardroom can shore up weaknesses and allow the board to better represent the institution’s customers.

But increased diversity on a bank board goes beyond just gender and racial diversity. It also includes greater range in the age of the directors and inclusion of skill sets, such as technology expertise, that are necessary in understanding risk in today’s business environment. Here are some ways to consider diversity in your organization:

  • Start with the strategic plan. Is your institution contemplating remaining an independent institution for the foreseeable future or is it looking to sell in the near term? The answer to that question will likely be a key driver of how and when to incorporate new voices into the boardroom.
  • Reassess your market. The pace of demographic change is increasing. Failing to have a strong handle on who lives and works in your market area can result in lost opportunities. These shifts can drive organic growth and new product offerings in your market or signal a need to expand your footprint.
  • Reach out to current and potential customers.  Board composition is a strong signal as to which customers the bank seeks to serve. Is your board a help or a hindrance in reaching out to the customers targeted by your strategic plan?

Evaluating board diversity should not focus only on numbers or quotas, but rather on whether the board has the human resources it needs to reflect its community and to provide the perspective necessary to manage the bank profitably into the future. On this basis, tapping into a deepening pool of diverse director candidates as part of an effort to build a more transparent and inclusive corporate culture is just smart business. 

Committees Can Foster Innovation: Here’s How

innovation-7-3-15.pngBoston-based Eastern Bank Corp. has quickly ramped up its ability to invest in and deliver innovative products and services. The $9.7 billion asset mutual holding company started changing its culture in 2014, through the creation of its innovation lab. In June, the bank began using voice biometrics in its call center, so customers now can access accounts using just the sound of their voice.

This year, Eastern dedicated $4 million to research & development—1 percent of its annual revenue, says Bob Rivers, Eastern’s president. The additional investment meant that Eastern’s board needed to increase its involvement and oversight, so Eastern created an innovation advisory committee to guide and support the bank’s innovation investment. The committee is staffed by four board members and four members of Eastern’s management team, and meets quarterly to discuss innovation within the company. “It’s really to give the board visibility and oversight with respect to that investment and focus,” says Rivers.

Financial institutions today are increasingly reliant on technology and the delivery of innovative products and services to drive organic growth. Boards must be ready and willing to engage in discussions on innovation and technology. An advisory board can be a great way to drive innovative thinking, but the board may instead focus on innovation within a board-level committee.

Innovation comes from diverse perspectives, ages, experiences and cultures—not just from individuals with a technology background, says Edward Stautberg, managing director at PartnerCom, a New York-based board advisory firm that helps corporations create advisory boards. Advisory boards have their benefits. They can be comprised of businessmen who may not be a good fit for the board but may have the right expertise to advise the bank, and directors and executives can take their input with a grain of salt. Food and beverage conglomerate PepsiCo Inc.’s ethnic advisory boards are tasked to create products for the company’s diverse worldwide customer base. According to Stautberg, one of these boards came up with the idea to add chili and lime flavors to some product lines, such as Lay’s potato chips and Doritos tortilla chips. “That was a direct result of a diversity in thinking,” he says. Digital advisory boards are a growing trend for Fortune 500 companies such as Target Corp. and General Electric Co., reports The Wall Street Journal.

But banks can choose to focus on innovation in a board-level committee, which sends a message throughout the organization that the board is truly dedicated to the issue. “It shows that you’re actively discussing innovation at the board level and that it is something that the board is engaged on,” says Stautberg.

Huntington Bancshares Inc., the $68 billion asset bank holding company headquartered in Columbus, Ohio, founded its board-level technology committee in 2014. Among the many technology-related duties listed in its charter, the committee oversees whether the bank has the technology in place to push innovation, and monitors innovation trends that impact Huntington’s strategic plan. Peter Kight chairs the committee, which he says was created to address two of the board’s biggest concerns: Cybersecurity and digital delivery. “A financial services [company] is an information based business, and information is digital today, which means our business is a digital services business,” he says. “Are we going to be able to innovate fast enough to be able to be one of the survivors, and in fact one of the winners?”

At its most recent board meeting, Huntington’s technology committee brought in a venture capitalist who focuses on financial technology. The discussion provided the board with direction about which startup companies they might want to work with, and helped identify threats in the financial technology marketplace. Trends in digital lending were also discussed.

The technology committee isn’t staffed with technology experts. While Kight has a background in financial technology—he was the founder and chief executive officer of CheckFree, and after its 2007 acquisition by technology services provider FiServ, he served on FiServ’s board for five years—he doesn’t believe a technology background is necessary. “Who’s really driven to want to learn in this space?” says Kight. “What we need are people who understand the need to look for this innovation and drive it within our culture and to drive it within our strategy, both in management and at the board.”

Huntington doesn’t lack for board members committed to innovation. Finding four board members to staff the bank’s technology committee wasn’t a challenge, because every board member wanted to join. Not only did the focus sound “cool,” Kight says, but the board believes innovation is critical to the success of the company. 

“If we keep thinking like bankers, in five years, we won’t be bankers, because banking isn’t going to be done in the same way,” says Kight. “We absolutely cannot continue to run the bank the way we have run it in the past, which means we have to, at a strategic level, drive for innovation.”

Using Strategic Planning to Drive Value

strategic-planning-6-15-15.pngIt is certainly no secret to banking professionals and bank board members that the banking landscape has changed significantly following the financial crisis of 2008. Banks of all sizes now face radically altered economic and regulatory realities. To survive and, more importantly, thrive in this new environment requires banks and bank boards to be more proactive than ever before.

An important—perhaps the most important—element to proactivity is strategic planning. In our business, we run across banks of all shapes and sizes. I’ve spent years as a regulator and now an investment banker visiting with and observing the “haves” and the “have-nots” in our industry—and the associated outcomes associated with each type. If there was one element of bank oversight I could improve tomorrow, it would be the strategic planning process. We often tell bank boards of clients and prospective clients, “Whatever you are doing, do it on purpose.” In other words, have a plan.

Sometimes we are greeted with skepticism: We’ve all heard a variation of the old saw that no battle plan survives contact with the enemy. And that may well be true—but Dwight Eisenhower, no slouch at preparing and executing battle plans, reminds us that plans may be useless, but “planning is indispensable.” In other words, the process of systematically evaluating the challenges and opportunities facing your organization as it seeks to accomplish a set of defined goals is always worthwhile. It teases out differences in approach, sets the tone on corporate culture, and outlines benchmarks against which progress can be measured.

There are many benefits to instituting a planning process at your bank, but perhaps the most important is that the regulators expect it. The Office of the Comptroller of the Currency and the Federal Reserve endorse it. The Fed’s own examination manual stresses the importance of “designing, implementing and supporting an effective strategic plan.”  But we all know there is the “spirit” of the regulatory guidance and the “letter.” You can certainly go through the motions to ensure you have a document that passes muster with your regulator—but in my experience effective organizations do much more than this.

Far more than a perfunctory regulatory expectation, an effective strategic plan ensures continuity between the board and the management team on key matters of setting strategic goals, the process by which progress will be measured, the talent needed to achieve the goals, the challenges the organization currently faces, and planning for contingencies (or known unknowns). Done right, a good strategic plan is the backbone around which an organization can evaluate managerial effectiveness, design compensation structure, orchestrate team building and hiring decisions, ensure infrastructure is in place well in advance of each phase of growth, execute on plans to enter or exit lines of business, and position itself to take advantage of unexpected opportunities and challenges.

Having a common mindset on these matters will enhance organizational effectiveness and avoid crippling delay when presented with new and unexpected developments. As a regulator during the financial crisis, I was amazed that, in the stretch of a single morning’s phone conversations, I would visit with executives in both severely crippled organizations as well as strong banks methodically plotting how to seize on the opportunities presented by the downturn to expand, grow and strengthen their companies. One group was in harm’s way and the other was positioned to succeed. Often, the difference came down to planning, or the lack thereof.

Another benefit of planning is to position the organization for the future. A well developed strategy along with a track record of delivering on strategic promises can position an organization nicely for more advanced stages of growth. A community bank considering institutional investors, in anticipation of well thought out expansion or a public stock offering, for example, will benefit from a disciplined and thoughtful planning process. The track record presents a benchmark against which investors can evaluate management and board performance. The bank can anticipate questions investors may ask when a robust and performance-based discussion is already part of the bank’s internal dialogue.

Finally, a strategic plan can help the bank avoid foreseeable bad outcomes. Strategic plans don’t protect the bank from all harm. But the planning process can identify employees, customers, or lines of business out of step with the organization’s carefully considered tolerances for risk. It can help companies avoid needless and unproductive spats with regulators (over the failure to plan, for example) and tense conversations with restless investors, whose first question is often: What is the plan? Good execution can establish a track record which will serve the organization well in considering mergers or acquisitions — and it can drive greater value when it comes time to sell.

Clear–eyed and realistic self-assessment, plus robust planning and benchmarking, should be elevated to a much higher prominence in the company than a simple checked box on a regulatory form. Done right, it can result in an enhanced and more disciplined corporate culture, ensuring the organization is positioned to grow responsibly and drive shareholder value.

Assembling the Right Board

A board’s strategic plan should include an evaluation of whether the board’s composition positions the bank to achieve its long-term goals, says Jim McAlpin of Bryan Cave LLP. In this age of increased competitive pressure and heightened regulatory demands, bank directors must be more engaged and skilled than in the past. Banks should invest more in training for new and current directors, and plan ahead to attract the expertise they need on the board.

How should boards determine whether they have the right members in place?
There is a general understanding that a bank’s shareholders benefit from a strong, engaged board. As a result of the economic downturn, it has been even more clear that bank CEOs benefit from an engaged board that works with the CEO to set performance expectations and oversee the growth and development of the bank. To move towards that goal, the board should evaluate its own strength and performance. In my experience, not enough community bank boards engage in an analysis of their own strengths and weaknesses. Boards can start with a self-evaluation, which rates each director in key areas. The board chairman can then have a discussion with each director about his or her performance. Alternatively, the board can evaluate itself as whole. The process of such an evaluation can start a dialogue about how the board’s composition should be strengthened to meet strategic goals.

What attributes should boards seek in a new member?
After evaluating the skills your board currently has, examine where the board needs to improve. Look at key committees and competencies among board members. Ask whether the next generation of leadership is present on the board, and if the board contains adequate expertise in areas such as compliance and technology. Next, what are the demographics of the board? Look at age, gender, race and business background. For community banks, it’s important for the board to reflect the community, so the board can serve as a conduit to management on the changing needs of the community from a business perspective. Look at the board demographics and determine how they might be favorably improved. Many CEOs and board members believe that good directors are hard to find, but there are still highly qualified individuals willing to serve on bank boards.

What are the skills that directors need today, whether driven by regulations or the changing business climate?
As banks grow towards and beyond $1 billion in assets, regulators are increasingly looking for one or more directors with backgrounds in compliance. Clearly technology is having a huge impact on the banking industry. In my view, boards don’t need someone with information technology expertise so much as directors who are conscious of the needs and demands within the community for technology enhancements at the bank. Board members can help identify what technology-driven capabilities would be well received by customers, and which are must-haves within the business community.

How can a financial institution successfully get new board members up to speed?
A new director will most likely not be from the banking industry. It often takes a year or two for a new board member to become comfortable with banking terminology and familiar enough with regulatory expectations. When new directors come on board, it is often overlooked that they need to become familiar with the language of banking. I have a client, a bank chairman, who came up with a four-page listing of common terms and phrases used in the industry and the boardroom as a cheat sheet for new board members. I think that’s a great idea. The best boards put members through initial training. That time and expense is worthwhile, and shortens the learning curve for a new director. All directors can benefit from frequent educational sessions to have a better understanding of the industry and expectations of their role as board members.

Do bank boards need to focus more on director succession?
Most boards do a pretty good job planning for the next CEO, but give very little thought to board succession. Since many boards have staggered terms, the nominating committee can weigh in on whether standing directors should be nominated, or whether it is time to bring on new board talent. There are many obstacles to changing the composition of a board which has become less effective, and some of the greatest obstacles are the challenges of having difficult conversations with some board members. However, if you look at the most successful, growing banks in the industry, you will find strong, dynamic boards of directors.