Key Considerations for Building Successful Bank Boards

By Phil Hall

Significant regulatory compliance changes and shifting customer demographics are fueling a new approach to choosing the right people to sit on a bank’s board. Building a successful board for the new environment requires careful attention to onboarding and ensuring board members offer the right blend of skills, personality traits, backgrounds and tenure, say industry sources.

Thanks, but…

Not so long ago, being asked to serve on a bank board was considered to be one of the highest tributes that a business executive could receive—especially at community banks, where prominence in the local business community is paramount.

“People used to think that a board position was a position of honor and status,” observes Litz Van Dyke, principal and senior consultant at CCG Catalyst Consulting Group, headquartered in Phoenix. “Now, not everyone is lining up to take on that responsibility. We see and hear banks are having trouble attracting board members. It is tougher and tougher out there to find the right professionals.”

Why are so many people shying away from what was once a desired appointment? The aftermath of the 2008 financial crisis brought about a new degree of federal and state oversight of banks. Though community banks were not the cause of the crisis, they and their boards have felt the effect. Onerous new requirements and risks have turned what used to be a seat of great privilege into a potential hot seat for banks that may face compliance problems.

“Now, it is more risk- and time-intensive to be on a board,” says Susan O’Donnell, partner at Meridian Compensation Partners in Newton, Mass. “The risk alone is driving away a lot of good candidates.”

Brian Murphy, president and CEO of Warwick, R.I.-based Home Loan Investment Bank, learned that the hard way. When the bank sought to bring a highly regarded candidate to the board, a major obstacle arose.

“She was an attorney who we thought highly of,” he recalls. “But she could not get the approval of her partnership.”

For those who agree to join a board, the complexity of responsibilities facing today’s bank directors requires that a great deal of time and patience be extended to bringing new directors up to speed on their new duties.

“It involves a fair amount of effort in the education process, especially with the increase in regulatory requirements,” says Jay Goldstein, president of the Valley Green Bank division of Souderton, Pa.-based Univest Bank and Trust Co. “From both a security and compliance standpoint, we have a comprehensive program for educating board members.”

And once they are up to speed, directors have to slice away time from their schedules to attend board meetings. Deborah A. Cole, president and CEO of Nashville-based Citizens Savings Bank & Trust Co., states that her bank’s new directors are informed well in advance that their time will be needed.

“We have a monthly board meeting, so that is a commitment for three hours,” she says. “And each member serves on individual committees. These committees meet monthly, though some are quarterly, and that’s an additional one to one-and-a-half hours per meeting.”

A poor record of board meeting attendance will ultimately create problems for the bank.

“Regulators don’t want to see a 17-member board where there are four or five members who are not regularly attending,” says Van Dyke.

The right stuff

A director does not exist as a standalone entity, but rather as a member of a corporate ensemble where each person has specific talents that would help the bank achieve its goals.

“We are always trying to identify individuals who provide business skills,” says Goldstein. “We are looking for skills that otherwise don’t exist on our board.”

“The past was more about who knew who,” says O’Donnell about recruiting directors. “Now, banks need to sit back and think about the skills and expertise that is needed for the board. It is important to map out what is needed and plug in a director with the skills and the capacity to fill the gaps.”

Finding the right people who will enhance a board takes time, of course, and at Home Loan Bank, a separate advisory committee exists to review and recommend individuals to fill board vacancies.

“We feel this is a good way to find talent and build up potential candidates,” says Murphy.

The wrong stuff

Having the right background and skills is clearly important, but having the right personality is another matter.

“You need to have someone who can deal well with conflict and collaboration,” advises Lisa H. Cannell, CEO of Talent and Strategies Solutions LLC in Charlottesville, Va. “Someone who will not shy away from discipline and difficult issues and is willing to listen to conflicting needs of others. Some directors might have relationships before they were on the board, but that doesn’t mean they had worked together every day.”

While the idea of bringing in a director who is rich with bold new ideas may seem appealing, this could easily create problems—especially if diplomacy and tact are not among the new director’s stronger points.

“When you bring in new blood, different thinking happens naturally—and that will bring in new perspectives,” says O’Donnell. “But any time you try a shake up, it seems that an outside thinker with a different perspective can be somewhat challenging at times, especially when they try to question the status quo and existing perspectives. I’ve seen it work and not work.”

Van Dyke warns that boards where differences cannot be ironed out run the risk of creating a new wave of problems.

“In my belief, a dysfunctional board is one of the most difficult obstacles to overcome,” he says. “If you have different agendas and lack of unity, it will derail the organization.”

The pursuit of diversity

Another pressing matter in creating the board of tomorrow is establishing a line-up of directors that is more reflective of the texture of wider societal changes.

“It is important to have more women, more minorities, more geographic diversity,” says Cannell. “That’s who the bank customers will be, if they are not already. Diversity helps with marketing and going into emerging markets.”

But Trey Maust, co-president and CEO of Lewis & Clark Bank in Oregon City, Ore., warns that diversity must be more than mere demographic window dressing.

“I don’t like diversity for diversity’s sake,” he said. “But if it provides a broad spectrum of perspectives, then it is desirable.”

Maust adds that one aspect of diversity that needs to be considered is the prospect of bringing younger people to the board.

“Those in the next generation will need to take on corporate governance roles,” he says. “It is definitely the case with Generation X, which is half the size of the boomer generation. And Generation Y will be the predominant client base in the next 10 to 20 years.”

“More and more younger talent is now having middle and upper management or executive responsibility,” says Cannell. “One of the first things they look at [when considering a job at a bank]are the photos of the board. That tells them how diverse the organization is.”

Yet, Cannell wonders if the emphasis on youth creates a new problem.

“It is very common for boards to have a retirement age of 70,” she says. “I believe that is a cop out. You can’t tell me if you had 
Warren Buffett on your board that you’d have wanted him to leave 
10 years ago.”

Too long on the board?

The question of age diversity is especially appropriate when one considers that many of today’s boards have a surplus number of older directors who stayed around thanks to policies that enable them to serve into their 70s.

“We see an aging population,” says O’Donnell. “More people on boards are nearing retirement—and this will be a key driver over next decade. There is also a lot more pressure from shareholders about the age and tenure of board members—it is not uncommon for board members serving 15 to 30 years. At what point do shareholders question where individuals on boards are too entrenched?”

Cannell adds that too many banks are unwilling to change the rules that keep a director in place for an extended period of time—especially when the director is not contributing fully to the board.

“Instead of addressing the issue head on and having an amicable parting, they wait until the board member reaches 70,” she says. “This clogs up the board seat and does not allow the best talent on the board.”

At Home Loan Bank, Murphy notes that directors serve one-year terms that are reviewed and, when applicable, renewed annually. “There is a problem: You can get too comfortable,” Murphy says.

But O’Donnell worries that short-term directorships create another headache.

“Cycling in and out every couple of years can be pretty disruptive,” she says. “It takes a lot of time for a director to build up skills.”

Phil Hall is a contributor to the ABA Banking Journal.