Is Your Board Suitably Engaged?

I was in a board meeting the other day for one of my community bank clients. The president of the bank, let’s call him Hank, had just finished giving a presentation to the directors about a new product that the bank was considering rolling out. When the president finished giving his presentation, the chairman leaned back in his chair, locked his hands behind his head and declared: “Well, that was a very nice presentation Hank. Frankly, if it is good enough for Hank, it is good enough for me.”

Suffice it to say that this vignette does not depict a highly functioning board of directors. Sadly, however, it is not uncommon to hear similar conversations in boardrooms across the country, particularly in smaller community banks. It is this type of deferential attitude that can result in regulatory fallout for directors and the institutions they serve. Most lawsuits brought by the Federal Deposit Insurance Corp. in the wake of a bank failure are brought on the basis of the board being “asleep at the switch.” This article will provide a couple of helpful tips that you should consider implementing to make sure that your board remains suitably engaged to oversee the bank’s management and create maximum value for the institution’s shareholders.

• Your board should reflect the make-up of the bank’s customer base and the communities it serves. A diverse group of directors representing the predominant industry groups in your bank’s markets will ensure that your board has the appropriate expertise and understanding of the unique issues facing the bank and its customers. This will help you ask the right questions and accurately evaluate the risks presented by customers and other issues the bank faces.
• Choose a strong, but thoughtful chairman. Oftentimes, a board can be dominated by the individual running the meetings and decisions of the board largely reflect the thinking of the chairman. While it is important to select a chairman who is not afraid to make decisions, that person should also be open and thoughtful to differing opinions and should not discourage robust discussion of the issues. To this end, it is often a good idea to bifurcate the role of chairman from the CEO of the institution. An independent chairman can maintain an objective perspective and not develop tunnel vision, which can often result from being “too close” to the issues.
• Maintain board visibility during regulatory examinations. One thing that bank examiners like to see is that the board’s engagement extends beyond the boardroom itself.  It is a good idea to have representatives from the board of directors stop in to see the examiners once or twice during the examination process. It can be as casual as simply checking in to make sure everything is going alright, or to answer any questions that have arisen during the exam that have not yet been adequately addressed by bank personnel. Examiners are often impressed when board members take an active interest in the examination process and engage with the examiners other than during the meeting to present the results of the exam.
• Don’t let your meetings get hijacked by one issue. It is very easy for one issue to dominate a board meeting, particularly an issue that a number of the directors are passionate about. It is critical to maintain a manageable agenda and to have appropriate leadership to be able to stay on task during meetings. Otherwise, one of two things can happen: (i) other equally important issues can be given short shrift and hasty decisions can be made, or (ii) meetings can drag on for hours and directors can become more interested in their other obligations than in the business at hand. If it appears that a more robust discussion on an issue is warranted than the allotted time would permit, the chairman should table the issue for the next meeting (or a special meeting if time is of the essence), in order to make sure that appropriate consideration is given to all agenda items.

The items covered in this article only scratch the surface of how to keep your board suitably engaged. The important take-away, however, is that a failure to adequately run the board could result in significant harm to the institution and personal liability for the directors. The board of directors of an insured financial institution is the gatekeeper of the institution and should actively and meaningfully participate in overseeing and directing the operations of the institution.