Much has been written about the challenges facing today’s community bankers, including ongoing asset quality issues, shifting capital requirements, cutthroat competition for customers, rapid developments in technology, and an endless onslaught of new rules and regulations. Notwithstanding these challenges, many banks have “turned the corner” and see opportunity on the horizon. What distinguishes the banks that are improving (and perhaps even excelling) from those that continue to struggle? In many instances, we believe the difference can be traced to the boardroom. This article summarizes common characteristics we have observed from those banks that are thriving, partially as a result of their board’s involvement, guidance and strategic direction.
Take a step back: A board’s primary objectives are to represent the shareholders’ interest, provide oversight of management, and provide direction, support and guidance to management. Those boards that excel at these objectives often are comprised of people with different backgrounds, experiences and perspectives. Consider the following:
- While your bank undoubtedly has business owners on its board, are their experiences really diverse? Do your directors’ business experiences include a mix of manufacturers, retailers, real estate investors, professionals, and, perhaps most importantly, current or former bankers or other people familiar with running businesses which are heavily regulated?
- Is the bank doing a good job of rotating talent on its board? Many boards we deal with have been comprised of the same directors for 15 years or more. How do you ensure that fresh perspectives and viewpoints are being contributed if you don’t rotate people into (and out of) board service? Should you consider including a mandatory retirement age in your bylaws?
- Does your board act independently when necessary and are your outside directors willing to ask the right questions of management? The best boards we encounter are capable of “pushing” management, yet stop short of micromanaging. In order to fulfill this role, directors need to be willing to invest the time to become (and remain) knowledgeable about the inner workings of the bank.
We think successful banks should be focused on these questions and should be continually looking for ways to attract, retain and cultivate talented directors who desire to take an active role in the oversight of management and the strategic direction of the bank.
Can your directors converse knowingly about the operations of the bank without management present? Often, the answer is no. It should be noted that outside directors are not expected to know every line item and operational aspect of the bank. However, they should be sufficiently knowledgeable about the bank and its operations to speak with regulators, shareholders or the bank’s outside advisors about the bank’s primary challenges and opportunities without relying on management. If directors are not conversant in the bank’s operations, how can they be expected to provide independent oversight or meaningful support and guidance to management, which increasingly is what regulators expect? Yet, many community banks still resist the notion of having their outside directors even become involved in “operating” details or matters that may be perceived as “micro-management.”
In addition to the use of standard “board packets” and presentations, there are several things directors can do to improve their performance:
- Attend periodic bank director training. This can be done internally, by bringing in a third party to conduct a half-day session with the directors. It can also be done through one of many trade groups and vendors that offer director conferences.
- Have bank employees from different business lines make periodic presentations to the board. This allows the directors to hear from the “front line” people what’s happening in the bank. It also allows the employees to establish a level of familiarity and comfort with the directors.
- Network with other bank directors. This can be done formally through trade groups and conferences, or informally through a variety of other networking opportunities. By reaching out to other directors, your board will be able to gauge its performance.
Most banks have several “standing” committees. These committees meet regularly and have very clear, ongoing objectives. In our experience, banks performing at better than peer levels often make better use of their committees by divvying up responsibility for the numerous challenges and opportunities facing the bank. There are many areas that deserve (or require) in-depth, time-consuming commitments from the directors, yet don’t necessarily require full board participation on a regular basis. Examples include:
- Technology — IT remains a primary area of risk for fraud and a large, ongoing expense item for most community banks.
- Capital Planning — It is becoming increasingly important to have a written plan describing how the bank will preserve, deploy, and, when necessary, raise capital and deal with the challenges presented by BASEL III.
- Marketing — Successful banks often have directors who are actively engaged as “ambassadors” for the bank in the bank’s marketplace. Tasking two or three directors with staying up to speed on the bank’s marketing efforts will ensure a more coordinated effort between staff, management and directors.
- Strategic Initiatives — If your bank is considering a deal, be it a branch sale, loan sale or merger, or if you are searching for a new executive, there will be a substantial time commitment required from the board. To ensure that the board can move quickly on a proposal, we recommend that a special committee comprised of two or three outside and management directors be formed, who will work to identify, negotiate and evaluate transactions and then make formal recommendations to the full board.
- Compliance — Much like IT, compliance continues to be a primary area of risk for community banks and will continue to be in the foreseeable future and needs sufficient attention at the board level.
- “Ad Hoc” committees of several directors to respond to regulatory enforcement actions have been formed by many of our clients.
Conflicts of Interest
There are many situations where bank directors inadvertently find themselves or affiliated companies in a conflict situation with the bank. In addition to the numerous regulations governing transactions between the bank and its directors, banks should consider procedures to ensure transactions with directors are fair to all parties involved. Best practices include:
- Adopting self-imposed “blackout periods” where directors cannot trade shares of the bank’s stock if they possess information which is not available to other shareholders and may be material to a person’s investment decision. Even if you’re not a publicly-traded company, there is still significant risk related to insider trading.
- Having a majority of the disinterested directors approve any transaction between the bank and a fellow director, including the bank’s purchase/redemption of shares from a director, and the price being paid. The “interested” director may not be counted for the quorum, should not participate in the board discussion, and should not vote. The minutes should reflect this. Make sure any such transactions are on arms-length terms and document why the board feels they are in the best interest of the bank and its shareholders.
- Adopt and periodically review a Conflict of Interest Policy.
As banking becomes more complex and competitive, it is going to become more important (and difficult) to assemble and maintain a “best in class” board of directors. At the same time, we believe the quality of a bank’s board of directors will be a key factor in distinguishing those banks that excel in the next decade from those that merely survive. n
John Reichert is a member of the Financial Institutions Practice Group at Godfrey & Kahn S.C. in Milwaukee.