When and how do you show directors the door when age isn't the issue?

This blog is the second in the series on director duties, governance, and other issues related to community bank directors.

In my previous blog, I dealt, in part, with the "mature," "aged-out," "older" director. For most community bank boards, it is readily apparent when an older director has lost a step or two and needs to move to a director emeritus status. The difficulty is in how to orchestrate that with the emotions, politics, and corporate history involved.

But that's not the only such challenge.

The other side of the coin is with a director who has not aged out but still, for whatever reason, needs to leave the board.

Reasons vary. This could be a director who has a classified loan at the bank or a director who has been cited for Reg O violations by the regulators. Perhaps attendance is the problem--75% of the meetings is, after all, the minimum. Or there's the director who spends more time in his favorite vacation locale than he does in the bank's community.

You may have a director who is no longer involved in his or her active trade or business, and no longer contributing good ideas. Or  you may hit the jackpot, a director who is splashed across the front page of the local paper with his third DUI.

Each of these scenarios presents some undue risk to the bank.

Breaking the inertia and starting them towards the door

How does the board, or the chairman, move any one of these directors off the board?

One easy way to do that is through the establishment of a director resignation policy.

This is a policy that each director agrees to annually upon their reelection to the board of directors. I can provide a sample policy to anyone who wants to email me, but the policy basically provides that if the director engages in certain acts that cause risk to the bank, then that director agrees in advance that he or she will resign from the board.

These "acts" may involve some of the enumerated risks above or it may be others, including the filing of bankruptcy personally or of the director's business.

Other circumstances may not warrant a resignation.

• For example, what if a director has a loan classified at another bank? 

• What if the director's financial condition is deteriorating? 

• What if the director is paying your bank but stiffing other banks? 

• Are those justifications for the director's resignation? 

The answer to that one is, it depends on the specific circumstances.

In many of the boom-bust states, such circumstances are certainly present with community bank directors.

The best policy is to have a director resignation policy. Combine the director resignation policy with a director job description and an evaluation of the director against that job description and the board will have pretty effective tools for moving those directors who are not "aged out" off the board under appropriate circumstances.

This issue of directors engaging in acts which create additional reputational risks for the bank is generally one that needs to be dealt with by the chairman or a lead director. As noted in previous blogs, both positions are becoming much more important.

Capital planning and risk management

What about the director's role in capital planning? And risk management? 

Each of those are obligations of the board, but they are obligations at a strategic level, not an operational and tactical level.

The board sets the strategies with respect to capital and the parameters with respect to risk management. Management provides the operational and tactical pieces of each, subject to reporting back to the board.

If the board gets involved in the operational and tactical piece, management will have the "pleasure" of dealing with significant micromanagement.

Also for those of you who are national banks, OCC has recently come out with some "guidance" on capital planning as part of your long-term planning. We all know that "guidance" means the bank better do it or else, so make sure you follow that when you are going through this issue.

With respect to the director's involvement in risk management, many of your board members will not have a clue what you are talking about. There is significant education needed in this regard as well as information about appropriate implementation and strategies.

There is a lot of information out there about it, so make sure your directors get educated.

A note about the people behind the positions

The community bank director's role is still reserved for those pillars of the community who will bring business to the bank and provide wisdom and business savvy to the bank's decisions.

Hopefully, they will make some money in the process, being adequately compensated for their time. (It would be very difficult to ever argue that we compensate our community bank directors for the risk.) 

Select the best, look for diversity, and have a way to move directors off the board when they are no longer effective or provide reputational risks to the bank.