The financial services industry is undergoing a period of unprecedented change, both in scope and in speed. Bank directors must have the knowledge and capability to adapt and lead their institution in this environment. If they don't, it could mean lost opportunities for growth, or worse, missteps resulting in losses for the bank and its shareholders.
"The degree of change has been dramatic and it isn't slowing down," said Ed Depenbrok, principal of dbrok group, LLC. "The world around us is changing very rapidly and we need to understand that." In order to thrive in this environment, bank management and directors must not only discuss and agree upon the challenges they're facing but also purposefully design and equip the board to navigate today's challenges. That requires recognizing the broader scope of knowledge required of today's bank directors, determining how to address new risks, and identifying the key experience and expertise needed on your particular board.
In order to fulfill their fiduciary responsibilities today, bank directors must be more knowledgeable than in the past; the scope of information required for effective oversight has expanded. "The work volume and details directors are expected to address are intensifying with each exam cycle," said Mike Stoetzel, principal - financial institutions at CliftonLarsonAllen LLP. Technology is one of the foremost areas where the landscape has changed for banks, and few directors are pre-equipped with the expertise required. "Very few directors today have the depth of technology understanding I think you need," said Geri R. Forehand, CPCM, president and CEO of Forehand Strategy Group LLC. "It's not that directors aren't already knowledgeable. It's that the change that is occurring is very fast-paced." And that change isn't confined to technology, he stressed. Human capital management is another aspect of banking where the breadth of required knowledge is broader than it used to be; there are more generations concurrently in the workforce and the differences between them are wider.
These more robust requirements could lead to higher turnover rates on bank boards as the demands on directors' time increase along with the need for additional training/development. "It wouldn't surprise me to see more turnover in bank boards going forward because of the pace of change in the industry," said Depenbrok. "Communities and markets are changing, so you'll get new blood into boards more often than we have in the past."
The key to minimizing pressure from the need for expanded director expertise is to recognize the minimum requisite understanding for each subject and turn to outside third parties for assistance beyond that mark. "You can't expect the board to be experts, especially with technology, but they should know enough to know what they don't know," said Jeffrey C. Gerrish, chairman of the board of Gerrish Smith Tuck Consultants and Attorneys. David Braden, manager - financial institutions at CliftonLarsonAllen LLP, expressed a similar perspective, saying bank directors "must have the confidence to know what they do not know and ask for help from management or third parties to assist them in filling the gaps and fulfilling their fiduciary responsibilities as board members." Ultimately, directors need to have a solid-enough knowledgebase to ask the questions needed to fully comprehend and address the risks their institution faces. "One of the primary responsibilities of a board member is to ask questions," said Depenbrok.
Change requires adaptation. The board of directors must be equipped to understand and assess the risks associated with new strategies, services, and products the bank may pursue. But when it comes to innovation, should the board push their institution toward the cutting edge or encourage an abundance of caution? It seems like a difficult question to answer. "The board of directors must be open to change and provide a voice to where the community's needs are changing," said Depenbrok, "but they must also be concerned for the shareholder and the risk that the organization is taking."
Ultimately, the board's responsibility is to set the strategic direction for the institution and ensure no undue risks are taken in the pursuit of that strategy. "The board's role is to provide direction," Forehand explained. Because that direction is driven by where the bank is headed and what it has the capability to achieve, Forehand recommends the board focus on direction-setting, rather than establishing a stance of being pro-change or risk-adverse. "Rather than isolate adaptation or caution, it is more important for the board to provide direction," he emphasized.
However, boards must be careful not to dismiss changes or new risks without properly assessing their potential. Despite the many new opportunities present in today's industry—especially in the area of technology—most consumers still view banks as cautious, or even irrelevant. "Community banks are already well-established as the bedrock of their communities, which leads everyone to assume constancy and caution," said Braden. "However, the rapidly changing environment requires the board to encourage adaptation to survive as an independent community bank." He suggests making the topic of change a standing agenda item for meetings, and that the board must discuss whether they will be reactive or proactive in dealing with specific opportunities identified by management.
While boards should not drive change, they must be open to it in order to fulfill their duties. "The regulators expect the board to be a credible challenge to management on every issue, so although most boards don't drive adaptation, especially with regard to technology, the board should be able to adapt and change after assessing risk," Gerrish explained. "Their role is not to stand in the way of change."
In order to build a board of directors capable of leading the institution in today's environment, management, together with the current directors, must identify the right experience, expertise, and team for their institution's needs. The most critical component—right experience—is the "people" element: the character and background of each individual directorial candidate. "Regardless of their experience and expertise, directors need to be dedicated to providing three things: their time, their honesty and high character, and their willingness to be fully engaged in meetings," said Braden. "With those characteristics, a board member will be able to learn what is necessary to execute their fiduciary responsibilities at a high level even in today's rapidly changing environment."
"No amount of training or specialized experience can help if a director is not dedicated and engaged," Stoetzel added. In addition to that dedication, the board must also have the right mix of backgrounds represented in order to truly serve the needs of both its community and shareholders. "It's absolutely critical with the changing banking environment that a bank board be diverse," said Depenbrok. "It needs to be diverse in skills and experience and also in its perspectives in the community and the market the bank serves, as well as in gender, age, and background."
Finding individuals with the ideal character and background can be challenging, so it is critical that the bank use a specified process for succession management and director onboarding. "Just as management succession is critical these days, board succession is also critical," said Forehand. "If you don't have succession planning at the board level, I think you're making a mistake." Onboarding should be formalized as part of the recruiting process, as well. "Historically, it was a process of sitting in the board room for a year or two and absorbing the knowledge," Forehand explained. "We can't wait two years for directors to learn through osmosis anymore. They need to be educated up front so they can contribute."
Identifying the right expertise means definitively listing the specific skillsets and knowledge required on the bank's board; not every director will need all of them, but the board should not have large gaps in critical areas. "It's about training them to have enough knowledge to recognize issues where they need help," Gerrish said. "It's tough to train directors for a specific area of the bank that they're not already familiar with, so if you identify a serious hole, you'll probably need to recruit." If turnover on the board is low, the need for training is high. "Training will give you a certain level of knowledge," said Braden. "Enough to know where you need to know more. Once you know what you don't know, you bring in outside experience to help you fulfill your responsibilities." Gerrish recommends bringing in that outside help as soon as possible, especially if it's regarding a new venture for the bank. "If it's outside what you typically do, bring in expertise early on," he said. That could be entering a new market, building a branch, making an acquisition, etc. No board will ever be equipped with expertise in all of those areas, so outside help is essential. "Even the most dedicated board member may never obtain the level of specialized expertise needed," said Stoetzel. Outsourcing to third parties allows the directors to "focus on being involved with setting the scope, reviewing the results, and setting the expectations for corrective actions, if any." Braden agreed. "Frankly, a board can be more nimble using the expertise of third parties to address rapid changes," he said.
Putting It All Together
The best way to build a nimble board is to make sure the individuals you recruit have the personality and expertise to fulfill their fiduciary duties with confidence. "The best type of board is a credible challenge to management and deals with forward-looking risk and strategic issues," said Gerrish. "When you recruit new directors, see if they're the type of people who will make those shifts." After building a board with these capabilities, know where you'll need to turn to outside expertise for specialized assistance. Hiring a third party is often less expensive in the long run than training and re-training directors, and it also allows your directors to focus on their strengths. "In this constantly changing environment for banks there's a lot of transition," said Stoetzel. "Boards and businesses can keep up with that by spending more resources to bring in outside expertise to maximize what they can do."
Seitz is WBA operations manager and senior writer.
CliftonLarsonAllen LLP is a WBA Bronze Associate Member.
dbrok Group, LLC is a WBA Associate Member.