Assembling the Right Board

A board’s strategic plan should include an evaluation of whether the board’s composition positions the bank to achieve its long-term goals, says Jim McAlpin of Bryan Cave LLP. In this age of increased competitive pressure and heightened regulatory demands, bank directors must be more engaged and skilled than in the past. Banks should invest more in training for new and current directors, and plan ahead to attract the expertise they need on the board.

How should boards determine whether they have the right members in place?
There is a general understanding that a bank’s shareholders benefit from a strong, engaged board. As a result of the economic downturn, it has been even more clear that bank CEOs benefit from an engaged board that works with the CEO to set performance expectations and oversee the growth and development of the bank. To move towards that goal, the board should evaluate its own strength and performance. In my experience, not enough community bank boards engage in an analysis of their own strengths and weaknesses. Boards can start with a self-evaluation, which rates each director in key areas. The board chairman can then have a discussion with each director about his or her performance. Alternatively, the board can evaluate itself as whole. The process of such an evaluation can start a dialogue about how the board’s composition should be strengthened to meet strategic goals.

What attributes should boards seek in a new member?
After evaluating the skills your board currently has, examine where the board needs to improve. Look at key committees and competencies among board members. Ask whether the next generation of leadership is present on the board, and if the board contains adequate expertise in areas such as compliance and technology. Next, what are the demographics of the board? Look at age, gender, race and business background. For community banks, it’s important for the board to reflect the community, so the board can serve as a conduit to management on the changing needs of the community from a business perspective. Look at the board demographics and determine how they might be favorably improved. Many CEOs and board members believe that good directors are hard to find, but there are still highly qualified individuals willing to serve on bank boards.

What are the skills that directors need today, whether driven by regulations or the changing business climate?
As banks grow towards and beyond $1 billion in assets, regulators are increasingly looking for one or more directors with backgrounds in compliance. Clearly technology is having a huge impact on the banking industry. In my view, boards don’t need someone with information technology expertise so much as directors who are conscious of the needs and demands within the community for technology enhancements at the bank. Board members can help identify what technology-driven capabilities would be well received by customers, and which are must-haves within the business community.

How can a financial institution successfully get new board members up to speed?
A new director will most likely not be from the banking industry. It often takes a year or two for a new board member to become comfortable with banking terminology and familiar enough with regulatory expectations. When new directors come on board, it is often overlooked that they need to become familiar with the language of banking. I have a client, a bank chairman, who came up with a four-page listing of common terms and phrases used in the industry and the boardroom as a cheat sheet for new board members. I think that’s a great idea. The best boards put members through initial training. That time and expense is worthwhile, and shortens the learning curve for a new director. All directors can benefit from frequent educational sessions to have a better understanding of the industry and expectations of their role as board members.

Do bank boards need to focus more on director succession?
Most boards do a pretty good job planning for the next CEO, but give very little thought to board succession. Since many boards have staggered terms, the nominating committee can weigh in on whether standing directors should be nominated, or whether it is time to bring on new board talent. There are many obstacles to changing the composition of a board which has become less effective, and some of the greatest obstacles are the challenges of having difficult conversations with some board members. However, if you look at the most successful, growing banks in the industry, you will find strong, dynamic boards of directors.