Is Your Board Prepared for the Future?

Beset by myriad forms of disruption, financial institution boards sometimes must focus on urgent tactical moves. But if they do so at the expense of strategic thinking, there may be a high price to pay.

In the face of changing demographics, new consumer preferences, a tight job market, complex regulations, and a changing tax code, “it’s critical to provide directors with education on a wide variety of topics,” according to Nicholas Hahn, CPA, director of Risk Advisory Services with RSM US, LLP. “But it is also important to give them the tools they need to be successful and to allow them to think more strategically than tactically.”

Many “boards of directors jumped ‘into the weeds’ relative to credit risk as we were entering and weathering the Great Recession,” Hahn said. “While this tactical view was likely warranted at the time, it definitely pulled their focus from more strategic initiatives that could have positively influenced bank performance as the industry exited and began recovery from the Great Recession.” 

“The level of expectation relative to directors’ knowledge and understanding of lending and deposit regulatory compliance and BSA/AML has increased substantially over the last few years,” Hahn said. “Vendor management has followed a similar path.”

The pressure is on for directors to be knowledgeable about these substantial changes while not losing sight of the bank’s mission.

John Knight, a partner with Boardman & Clark, LLP, identified changes in technology, cyber security threats and the protection of customer data, and the appropriate oversight of vendors as some of the recent issues demanding attention from directors. “Also very important for director understanding,” he said, “is the matter of strategic choices for banks, particularly in the current merger and acquisition environment.”

Prioritize Strategy

“Strategic thinking from a board is vital,” agreed David Bue, senior manager, with Strategic Advisory Services at Wipfli, LLP. “These are unprecedented times—customer demographics are changing, public perceptions are changing, the competitive landscape is changing. Board governance needs to change as well.”

Even bank leaders who once prided themselves on being adaptable may suddenly feel lost in the disrupted environment. “It’s tough to grasp the reality that people don’t need to come to a bank anymore,” Bue said. “Banks often have board members who do not understand the pace of change happening in the industry,” he said. Yet they need to be asking: “Who is our next generation of customers? And why are they going to choose us?”

“Board members who have millennial children have an easier time grasping the new reality,” Bue said. But all need to prepare for a future that little resembles the past. “I don’t think they hear enough about the challenges to adopt sustainable revenue strategies.”

It’s impossible to overstate the importance of strategic planning to attract customers in a rapidly changing industry. Changes are largely driven by technology, according to Bue. Neither customer service nor bank locations primarily drive change today. “More than ever before, banks must learn to serve their customers when, where and how they want to be served.”

Bue noted, “We’re losing nearly one community bank every day in the United States now. It’s unreal how quickly independent bank consolidation is happening.” As of June 30, 2017, there were 5,787 banks remaining, compared to about 8,700 a decade ago. There are 212 banks headquartered in Wisconsin now, compared to 354 in 2000 and 302 in 2005.

Consolidation is due to the aging of executives, capital shortfalls, increased fatigue at the board and executive level, and the uncertainties of the community banking model going forward, according to Bue.

Rural areas often face the biggest challenges. While some big city banks are profitably growing their branches, many of the smallest community banks are struggling, Bue said. “Some rural banks that were once worth two times book would now be lucky to get book value.

“Customers today aren’t as reliant on bricks and mortar facilities,” he said. Years ago, everyone had to go to a bank. There were no ATMs, phone or online banking. “This change is commodity and technology driven,” Bue explained. “It’s increasingly difficult to differentiate between institutions.”

Such disruption comes at a time when “a lot of bankers are getting older, and leadership teams are getting older and don’t have teams under them,” Bue said. Finding successors for management, bank ownership, and the board of directors is a significant challenge for many organizations.

“Fifteen years ago, succession planning was important for risk management; today, with the challenges of technology and the break-even point going up every year, growing profitably is really important,” Bue said. “Management’s role is to execute the plan that the board owns and creates,” he added. Fifteen years ago, “a strategic plan could be on auto pilot,” but that’s no longer effective today.

Fitting into the New Reality

New era strategic planning should address how the bank is going to fit into this new environment. The plan should prioritize “playing offense” as a method to go out to build relationships with customers and prospects. Managers cannot wait for Millennials to come into the bank, according to Bue. “You have to have a workforce that’s really hungry for building relationships outside of the bank.”

Cutting-edge banks “build their front room (the growth engine) as their primary focus,” he added, “while their back room provides the operational efficiencies, credit discipline, and compliance expertise for the organization to run smoothly.”

“When I meet with boards, I try to impress on them the reality of how quickly things are changing,” Bue said. “Although community banking remains an excellent business for those that can adopt new-era profitable growth strategies, if you can’t figure out what your competitive advantage will be, it’s time to consider selling the bank while you can, with value for ownership. Ultimately [the directors’] role is to be good stewards for the owners.”

If identifying a competitive advantage is not possible, “we should be asking when is a good time to sell or looking for someone to merge with,” Bue said.

A strategic plan does no good sitting on a shelf. Ideally, the board is highly engaged in the process. “When the board is deeply involved in a comprehensive planning process, then they own it,” Bue said, “and they can incorporate progress into their regular scheduled board meetings.”

Bue observed that an increasing number of community bank boards today consist of outside directors who contribute diversity and expertise. He recommended they establish a good committee structure, so that much of the work can be done outside of regular board meetings, which can then focus on strategic initiatives. Having an executive or compensation committee is key, to evaluate the CEO and ensure that compensation is tied to strategic goals and risk management.

Evaluating and Elevating Board Performance

Evaluating board members can also be tied to these issues, as well as to the performance of the bank. “

Another factor is a director’s attendance, as well as participation in discussions at the board meetings. Knight said, “One of the better indicators I have found is whether a director asks good questions in board discussions.”

Hahn takes a broad view of director performance. Beyond net income, ROA, or ROE, “many institutions are starting to take a more holistic view of director performance.” This “balanced scorecard” incorporates additional elements like the results of regulatory examinations or employee and community engagement.

To assist the board in elevating its performance, Hahn stated, “Ultimately, each bank needs to understand their mission, core values and strategic plan, which should drive development of the individual metrics on the balanced scorecard.”

Banks should provide directors training on focused topics like compliance, but “it’s equally important for the directors to have a strong understanding of many of the other facets of the bank’s business,” Hahn said. “At the end of the day, it is up to the directors to determine their level of engagement, but it is important to [enable] them to think more strategically.”

The success of the board is inseparable from the success of the entire bank team, according to Knight. 

Bue noted that both WBA and FDIC offer excellent training opportunities for both new and seasoned board members. Mentoring and individualized training can help produce a resounding “Yes!” in response to the vital question, “Is your board prepared for the future?”

Green is a freelance writer for the Wisconsin Bankers Association.

RSM US, LLP is a WBA Bronze Associate Member.

Boardman & Clark, LLP is a WBA Gold Associate Member.

Wipfli, LLP is a WBA Silver Associate Member.