What should community banks' boards be doing now?
Now that the industry is recovering, I think it's time for the boards to focus more attention on matters other than asset quality and bank liquidity. Many of the boards need to begin an inward focus on issues of corporate governance and corporate risk. I thought I would use this blog to give you my take on issues involving the Chairman of the Board, dealing with older directors, mandatory retirement, Director Emeritus, and the use of electronic board portals. There are lots of other board issues as well that will be covered in subsequent blogs, but these are the top of mind for the moment.
Who should be Chair?
Every board has a Chairman of the Board (or Chairwoman). Who gets to occupy that slot?
Is it really always reserved for the "oldest" director?
If so, ask, what does the oldest director bring to the table?
As the industry recovers, the Chairman of the Board position should evolve into much more of a leadership position. The Chairmanship should be conferred upon the recipient with significant forethought, analysis, and evaluation of the bank's needs and the recipient's ability to meet those needs.
The Chairman is no longer (or shouldn't be) a figurehead in a community bank. The Chairman should provide leadership with the community and the shareholders, and serve as a liaison to the Chief Executive Officer. If the Chief Executive Officer is also the Chairman (which is customary in approximately two-thirds of the community banks across the country), then the board needs to appoint a Lead Director to fulfill what otherwise would be an outside Chairman's role.
The Chairmanship is not just for the old guy or gal. It is for the best one.
Time for a governance transfusion?
Speaking of older directors, how do you restructure your board to get some new blood on it?
Should that new blood also be diverse?
I have had this board succession discussion with numerous community bank boards, typically in the executive session of a planning meeting.
It is really the Chairman or Lead Director's job to inquire regularly of the bank/bank holding company directors, both young and old, as to when they may retire. Often in a planning session, when I look at one of the older directors and ask, "How old are you and when do you plan to retire?", it is the first time anyone has made that inquiry.
Banks have to be proactive in dealing with our older directors.
Should we implement mandatory retirement for directors? Frankly, I am not a fan of the idea. I have been in banks where the best director was approaching mandatory retirement age and the worst director was in his mid-50s.
If the mandatory retirement age is 75 and your worst director is 55, then with mandatory retirement, you have done nothing but lock in that subpar performer for 20 years.
A poor way to address board succession issues.
The better way to address board succession is to hit it head-on, either through evaluation or some other system.
I have one client that implemented a director evaluation system for any director over 75. The evaluation was an assessment of their performance as a director, the evaluation of the mental acuity of the individual, as well as their physical well-being, requiring a doctor's certification.
If the older director was not willing to go through those evaluations or did not pass with flying colors, then the director would be moved to a Director Emeritus position.
What do departing directors leave with?
What do you do with these older directors when they finally do need to go?
Do you "bribe" them into a Director Emeritus position?
Keep paying them when they are not really directors?
Give them a lump sum?
Agree to buy their shares through a holding company redemption?
All of those are alternatives, but we have to be mindful of some of the facts of life in community banking.
Older directors often hang around community bank boards because:
â€˘ They have retired from their trade or business.
â€˘ The bank board is their social outlet.
â€˘ They may get some health insurance benefits.
â€˘ They get some cash flow.
As we begin to move directors off the board, we need to be mindful of those issues and attempt to address each of them.
Moving your board to cyberspace
One way to deal with the older directors involves the use of the "technology piece." I have had a number of banks that have indicated that "We're moving to an electronic board portal and if you're not comfortable with that, now is the time for you to get off the board."
What about electronic board portals? I have seen them in far greater use already in 2013 than in any years previously. There are a number of alternatives for board portals.
But if your bank thinks going electronic will lead to retirements, think again.
Although some directors prefer paper in their hands, most, in my experience, prefer the iPad.
With the electronic board portal, items can be put on the portal anytime during the month. The directors can review the material at their leisure.
Thus, when the directors show up at the meeting, everyone, including the Chairman or whoever is running the meeting, should assume the directors have read the material on the board portal.
The board should also use a consent agenda. The consent agenda frees up time to deal with strategic and risk issues, both of which are high priorities of the regulators these days.
I will use subsequent blogs to deal with additional board issues. This may include director resignation policies, director job descriptions, director involvement in the risk management function, director involvement in capital planning, and the like. Stay tuned.