The banking industry is undergoing a prolonged period of tremendous change. In fact, many experts say that constant change is the new normal. As the guiding hand and governing body, bank boards must also adapt and adjust their focus in order to lead their institutions to success in today's volatile environment, all without losing sight of their primary responsibilities. Read on for a look at how directors and boards have changed in recent years, and for perspective on what your bank's board may need to transform into in the near future.
Who's Sitting Around the Table?
Twenty or 30 years ago, the banking industry was much more straightforward than it is today, and was reasonably stable as well. That placed fewer demands on directors, in general. "As long as the board members were representative of the bank's market and were helpful in generating new business and making lending decisions they contributed to the success of the bank," said Cass Bettinger, president, Cass Bettinger and Associates. Often chosen for their community status or ongoing business with the bank, directors on historical bank boards often mirrored the bank's product mix, which facilitated their role as brand ambassadors, according to Julia Johnson, senior manager, Wipfli LLP. "However, those historical boards may not have had a thorough understanding of banking, and how banks serve as an intermediary of cash," she explained. "They put a lot of faith, confidence and trust in senior management to prudently manage the bank and ensure regulatory compliance."
Walk into a bank boardroom in 1985 and you'd find a collection of businessmen, lawyers, accountants and community leaders, individuals with backgrounds in either business or finance. New directors were often selected based on their commercial relationship with the bank, their connections to the local business community, or because they (or their family) owned a large share of the bank's stock. According to Philip K. Smith, president, Gerrish McCreary Smith Consultants and Attorneys, the director role used to be viewed as a passive one with little impact on the overall success of the institution. "Historically the makeup of the board of a successful bank was identical to the makeup of the boards of unsuccessful banks," he said. "The focus of those kinds of boards was loan approval, dividend payments and general oversight."
Walk into that same boardroom today, and you'll still find a collection of businessmen, lawyers, accountants and community leaders, but they may look very different. As with historical boards, today's directors are individuals with business acumen, and may also be representatives of large shareholders. "A good business background is helpful, and those people often end up leading discussions and have significant input," said John Knight, partner, Boardman & Clark llp. However, today's economic and regulatory environment has forced a move toward selecting directors to fill in gaps in expertise on the board, rather than business community or shareholder representation. "That has promoted much more diversity in the board in terms of gender, race, age and ethnicity," explained Smith. "Those go out the window when the question is 'what does the bank need?' rather than 'who should sit on the board?'." According to Knight, the composition of bank boards is transitioning slowly, especially at community banks. "It's quite different between community banks and regional or national banks," he said. "If I see a change, it's modest and gradual. This is not abrupt." Still, Johnson says not only is increased diversity necessary to bring in expertise, but it will also have an overall positive impact on the institution. "When you look at what needs to shift in terms of the composition of the board, we need to have more diversity on the board," she said. "While backgrounds may remain consistent, the diversity of individual experiences and perspectives contribute to the strength of the board by creating a rich and robust platform for discussion. Specifically, there will be greater representation of women and individuals of different ages on the board."
Same Board, Shifted Focus
While the individuals sitting around the table and their backgrounds are not much different, the expectations placed on them and their approach to their role has shifted dramatically. "Traditionally, the board has looked to the CEO to be the primary strategist for the organization and that their role was simply to look at the strategic plan and approve it," Bettinger explained. "The biggest single change in responsibilities for board directors is that they now must be responsible for being actively engaged in the strategic planning process and understanding what it means." According to Knight, the law regarding directors' responsibilities has not changed appreciably, but the application of it has broadened as expectations from regulators rise. "In general terms, their fiduciary duties haven't really changed," he said. "But the regulators in particular expect more of directors." Those expectations mean directors can no longer be passive sources of commercial loan contacts. "In the past, directors could serve in a more passive capacity," Johnson said. "Today, the regulatory environment doesn't allow for that."
Just as regulatory expectations for bank directors have transformed their role, so have market and economic influences. "Banks now have to be constantly reassessing their business model and changing it," said Bettinger. "The bank needs directors who have certain skillsets that will help the bank succeed in a changing marketplace." The ideal combination of skillsets will vary by institution, depending on the bank's strategic goals. "The board needs to know who the bank is and who they want to be in the future," Smith explained. "You identify new members by understanding the kind of bank you're trying to become and then reaching out to those people." For example, if the strategic plan forecasts growth through M&A activity, the board should have at least a couple directors with experience in that arena. That's why Johnson advocates not filling the board to capacity at all times. "I like to see banks that don't keep their board at full capacity, but leave a couple seats vacant as permitted by the bank's bylaws," she said. "This gives the bank flexibility to bring in new board members who have a particular expertise and/or enables the bank to create an overlap between a new director and an experienced director who may be stepping off the board." That provides the board with crucial responsiveness if a critical unmet need is identified.
With this shift away from more ceremonial boards to knowledge-based, strategic, active boards, the recruitment and training of board members is transforming as well. "It's a requirement that the board not micromanage but be much more active than historical boards," said Smith. "That changes the dynamic, even as you're recruiting people." Smith says the board must also take an active role in its own succession planning. "Directors must help recruit new board members," he said. "The board should consider itself a body independent of management and therefore participate in recruitment." The process for identifying potential successors should be familiar to the board, because it's the same one they use within the bank. "Look at the strategic plan and then do a board composition analysis, on the basis of knowledge, skills and abilities, and identify where you have gaps," said Johnson. "It's the same thing you do at the bank level. The key is to be intentional and proactive." Active recruitment also requires directors to understand and articulate why serving on the board is valuable. "In today's world, if you want somebody who's really good to come on your board, you need to have a winning value proposition for them," Bettinger explained. "You want them to feel that going on your board will be a great thing for them to do for the community and their business."
Training: Not Just for New Directors
Offering regular education and training opportunities is one of the best ways bank executives can equip their directors (and therefore their bank) for success. After all, most directors will not have built-in understanding of the banking industry, and that is an important component of their fiduciary duty. Board education and training is a highly diverse process that varies greatly from board to board. The key is that it should not be a one-and-done onboarding session. "All board members of all banks ought to have some type of minimum requirement for continuing education every year," Smith advised. Bettinger recommends specifying the education and development each individual director needs and incorporating it into a written plan. This not only provides specific training for each board member, it's more efficient, too. "You don't want to spend money to send your entire board off to training that only a quarter of them need," Bettinger explained. "It's much more cost-effective to be individualized in your director education by identifying what specific education that each director needs that's most important." Another approach, specific to the onboarding process, is to provide one-to-one guidance. "You might even assign a mentor for a period of time," Johnson suggested. "Partner a new director with a seasoned director who can respond to questions."
So, what will you see walking into a bank boardroom in 2030? "I'm already seeing more independent directors with specific expertise and experience that are relevant to the development and execution of strategy," said Bettinger. "A prime example is the crucial role that digital technologies increasingly play in developing, promoting and reinforcing winning customer value propositions; measuring and managing relationship profitability and loyalty; efficiency enhancement; and more effectively managing all categories of risk." With signs indicating that mergers and acquisitions will continue to rise, Johnson predicts the resulting larger banks will have boards focused on those unique challenges. "On the one hand, I think bank boards will need to be more savvy and more skilled in merger and acquisition activity," she said. "On the other side, as the asset size of the banks grows and regulatory pressures increase, they'll need to be increasingly more sophisticated in terms of the banking industry and the applicability of those regulations to their financial institution in order to mitigate risk and liability, to ensure safety and soundness." Increased regulatory pressure will be met with increasing pressure from technological changes, as well. "It's my opinion that it will result in more board turnover because directors will need to constantly stay on top of new threats that didn't exist before," Smith said. "The industry is changing so rapidly it will require a more engaged, nimble board with a much younger average age that is able to monitor technology." Just as we've seen over the past two decades, as the industry becomes more complex, the board will shoulder more responsibility to be informed. "The complexity of banking is much greater now than it's ever been," said Knight. "That requires more well-informed, better educated directors, just to deal with the complexity of it.
By, Amber Seitz