Finding harmony amid board discord

Open communication, transparency keys to preventing board rifts from becoming gulfs.

By Walt Williams

A responsive and productive board of directors can be one of a bank’s most valuable assets, but a board consumed by infighting or obsessed with micromanaging multiple aspects of the business can lead to rifts that only grow wider over time. Bridging those divides requires open communication, a process for self-evaluation and an understanding among board members of the dividing line between governance and management, according to those with first-hand experience of either serving on boards or working with them.

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Division among board members or the board and management team rarely leads to the downfall of a bank, but it can bring unwelcome regulatory scrutiny and, in some cases, expensive litigation. A common form of stress comes from members who step outside of their governance roles to try to manage various operations at the bank. Discord also can come from personality clashes among board members or staff, or external factors such as regulatory scrutiny that put pressure on everyone involved. And the problems are only multiplied if the parties involved have never taken the time to develop relationships or seek clarity about their responsibilities.

“Having a relationship with boards is not something that most executives, as they move up in any organization, are really trained for,” says one current bank board member who asked not to be named so he could speak candidly. “And it’s not what they were rewarded for. But once you get the job or are about to get the job, you need to recognize that working with a board is a key part of your performance. You need to have relationships with those board members.”

At the same time, board directors need to understand their role within the organization, he adds. “What they’re there to do is to monitor, view and change policies that are then executed by the executives. They should be sure they’re getting the reports they need. They need to be sure they’re reviewing the reports they receive and that there is a full and fair discussion in board meetings. But at that point, you have to rely on management to do it further, because as a board member, you’re part-time.”

Board maturity

In the realm of board governance, the term “governance maturity” is typically defined as a measurement of a board’s effectiveness based on factors such as board member experience and competency. Tom Petro, a former bank CEO who has served on multiple boards, finds it is a helpful concept in identifying common sources of stress between board directors and boards and their management teams.

“There are two common sources of friction,” Petro says. “One is when the board is stuck at a lower level of maturity and is being challenged to step up their game.” One example would be a new CEO or board member who comes from a background of working with a board with more maturity and is pushing the new board in that direction “because they have different expectations of what good governance looks like,” he explains.

Another stress point is that most boards have difficulty parting ways with underperforming board members, Petro says. Perhaps the problem members don’t understand the business or their contributions at board meetings are off point.

“It’s simply because the principle of collegiality comes up against the demand for competence, and collegiality will win unless governance processes are working at a high level,” he says. “And so the board will tolerate somebody that’s underperforming and that doesn’t help the management team at all.”

Either way, bank executives have a key role to play in alleviating strain. They can start by simply ensuring that the board receives all the necessary information and data to make informed decisions. “A lot of times if there’s a conflict in the boardroom, it’s because somebody isn’t getting what they think they need, or is not understanding what they’re getting as addressing the itch that they have,” he says.

Bank executives also need to educate board members on complex issues facing the banking industry, such as regulation. “It’s important that executives keep an unbiased and objective point of view, not trying to steer the board one way or another because boards will feel it,” Petro says. “If they feel sort of that bit in their mouth and management team sort of leading them this way, boards don’t like that.”

Open channels

George Hermann, executive chairman and former CEO of Windsor Federal, a mutual bank headquartered in Connecticut, says he enjoyed a good relationship with his board. However, that level of mutual trust was something Hermann had to work to build when he first joined the bank 12 years ago.

“The communication between the staff and the board was not that good, and it led to what everybody would jokingly call ‘parking lot meetings’: Meet in a parking lot and talk about what wasn’t right after the board meeting,” he says.

The solution for Hermann was establishing lines of communication so that parking lot meetings became unnecessary. As CEO, he met with the board chairman every week, with the bank adopting a policy of regularly updating board members on new developments and managerial decisions. “From the CEO perspective, I tried to keep the board informed on things that were going on, and not necessarily in situations where we asking for their approval,” he says. “But if something happened between board meetings, I always made sure we sent out communications and they understood what was going on and how we acted in what we did.”

Hermann also instituted board evaluations where members were asked questions such as: Do you believe you are getting the appropriate information? Do you feel you have enough time to decide on substantive issues? Is there a good balance between the board’s responsibilities and management’s responsibilities?

“Again, it just fostered good communication,” Hermann says. “Boards are frustrated with management sometimes, and I guarantee [management]probably gets frustrated with boards sometimes, but I think things can be resolved and worked through.”

Seeking help

Communication was also key for Rheo Brouillard, who was CEO of Saving Institute Bank and Trust in Massachusetts before its acquisition by Berkshire Bank in 2019. That communication starts with the CEO and board chair—if they are separate positions—but also extends to other senior staff, he said. If a bank board has a finance committee, those members should be interacting with the CFO, just as a technology committee should be interacting with the chief technology officer.

“Hopefully build your board in such a way that you have knowledgeable people on the various committees, relative to that committee’s work so that they understand what they’re getting told,” Brouillard says. “They’re not going to get buffaloed by a CEO or CFO or CIO because they have a fairly good understanding of the language that’s being spoken.”

Still, any stress that arises with the board should be handled by the CEO, Brouillard says, “whether it’s putting a couple of people in the room together or working one-on-one with another board member—whatever the situation requires. But I don’t think it’s good to have a senior officer other than the CEO trying to deal with a stressful situation.”

That’s not to say banks can’t turn to outside help. Gary Hemmer, board chairman of First National Bank of Waterloo in Illinois, said his institution turned to turn an outside facilitator when the institution’s board turned to the stressful task of drafting a strategic plan.

“They did a very good job of going around and getting all board members to express their views: What are the key issues that they as a board member feel are important for the organization,” Hemmer says. “And then by consensus, they were able to get them all to agree that, strategically, this is the direction we want to go. It may not be three or four issues that you identified, but hopefully, we’re all in agreement going forward.”

Board training is another key component for reducing the potential for conflict, Hemmer says. First National has used board training programs offered by the Illinois Bankers Association, American Bankers Association and other organizations to learn about topics such as committee structure and the role of boards at a bank.

No surprises

Transparency should be the keyword for executives when working with boards, says James McAlpin, an Atlanta-based partner at the law firm Bryan Cave Leighton Paisner. Board members need to feel that information isn’t being withheld in the board reports they’re receiving from management. At the same time, those same members need to pay attention to the types of information contained in those reports, the presentation of those materials and the degree to which there are peer-to-peer comparisons with other institutions.

“I would over-disclose to a board just to make sure that they had a sense of what was going on, and then explain it to them,” McAlpin says. “Most people on a board are not bankers, so you need to put it in context.”

When there is a rift between a board and management team, it often involves a crisis of confidence or anger on the part of board members over something that has occurred, McAlpin says. “Communication, again, is important. Just talking through the issue, identifying what it is making the board members uncomfortable and how that can be addressed (and) what additional information would be helpful for them to achieve their goals.”

Board members should also keep the lines of communication open with their peers. McAlpin suggests regular executive sessions where boards can have discussions without the management team in the room.

“I’m a great believer that board should meet in executive session on a fairly regular basis,” he says. “I don’t think it needs to be every month but I would do it every quarter. And then there should be a reporting out after that by the lead director or subdirector to the CEO of the bank on the topics discussed, not what was discussed. That to me is a very healthy thing—sometimes it just doesn’t happen enough.”

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