Time for boardroom change?

I have had the opportunity to meet with a number of community bank boards lately on the issue of board succession. Succession is a process with fun aspects, and other aspects that aren’t quite so much fun.

Inviting in “new blood”

Part of this discussion, of course, involves the type and characteristics of new directors to add to the board. That is the fun part of the discussion.

If the analysis is thorough, the group will often identify a need for new directors to have many of the following characteristics:

• Technology knowledge or expertise

• Integrity

• Good reputation

• Involved in the community

• Geographically appropriate

• Expertise in a bank niche (e.g., farming, small business, etc.)

• Business referral prospects

Frankly, finding new directors and convincing them to agree to come on the board is the easy part, even with the Great Recession and resulting lawsuits against directors still etched into most of our memories.

I always tell new directors that their potential liability is a manageable risk. Having sat on a bank board myself in the past and having sued directors in the past, I feel like I have a unique perspective on this.

So getting directors on the board is not as difficult as you might think; most potential community bank board members still view it as an honor (though not a very lucrative one). You just have to have the right processes in place to fill vacancies as they come up.

Advisory boards: Your bank’s “farm team”

One mechanism for populating the board is to start with an advisory board. Advisory board members serve primarily as a “farm team” for the real board. It allows the current directors to get to know the advisory members and to determine which, if any of them, would be good board candidates.

Advisory boards come in all shapes and sizes, but the most effective ones I have seen are very small (less than five members) and have term limits of a couple of years so you do not have to go through the process of throwing off advisory board members.

If your community bank decides to establish an advisory board primarily for “farm team” purposes, then make sure there is a senior executive officer in charge of the “care and feeding” of advisory board members. Otherwise, the whole advisory board system will become a negative instead of a positive as it withers on the vine.

The “not so much fun” part

Having said all that, this blog is really not about getting new directors on the board so much as it is about making room on the board for new blood.

In other words, how do we get existing, more-mature (or less- capable) directors off the board?

In the perfect world (where none of us live), the easiest way is having a strong chairman who is willing to have the “hard conversation” with the director who needs to leave the board—no matter what the age.

There are other ways to move directors off the board as well:

1. Mandatory retirement

As those of you who have followed my blog know, I am not a big fan of this method. I view it as something you do when you cannot have the “hard conversation.” That said, mandatory retirement, if enforced, will definitely open up board seats.

However, selective enforcement—i.e., inapplicable to individuals with the right last name or the right number of shares—really makes mandatory retirement a very poor way to get folks off the board.

Mandatory retirement may also have the opposite effect. If you have a younger director who is not performing, then that director typically views mandatory retirement as a license to stay on and continue to perform the way he or she is until the mandatory retirement age.

As a result, you may have a 50-year old director who is an idiot that is going to stay on until the mandatory retirement age of 75.

2. Board evaluations

One other mechanism to enforce turnover in your board is to begin to implement board evaluations. Board evaluations are a best practice in any event, but they also cause the individual board members to begin to recognize their deficiencies as board members.

The evaluations can be structured to allow the other board members to conduct a peer-to-peer evaluation, which can send a message to those non-performing board members to either shape up or ship out.

I am beginning to see more boards utilize board evaluations as a best practice. This is not as necessarily as a means to eliminate directors, although it likely has that impact.

3. Voluntary termination

Lastly, you can also get directors off the board by just having them voluntarily terminate their service.

However, I have found in community banking over the last 40 years that does not happen very often.

One reason is that no one (except me, during a planning session) ever asks board members how long they intend to continue to serve. Although it is a pretty simple question, it is a difficult question for people in the bank to ask because it comes with an implication that the recipient of the question needs to get off the board.

As the outsider, I have had some surprising answers, most of which are in the category of “I am planning not to be reelected at the next annual shareholders meeting.”

4. The emeritus board or seat

At this point, I’ll note that for those directors who need to give up their seat but still offer some expertise or other benefit to the board as a whole, the Director Emeritus position is the perfect slot.

The post can be designed any way the bank wants to, but typically the emeritus position is occupied by a non-voting individual who still gets to come to the meetings; provide his or her input and corporate knowledge; and in some cases, even get paid or get paid a portion of what he or she would typically get paid as a director—all without associated director liability.

For your more mature directors, the Director Emeritus position is usually a pretty good deal. It lets them stay involved, yet eliminates any liability so they do not have to worry about that for their estate.

Weighing your options

In summary, there are a number of ways to create turnover on your board.

1. The hard conversation.

2. Mandatory retirement.

3. Evaluate them off.

4. Wait for them to expire (literally).

In any event, it is easy to get new community bank board members on the board and more difficult to get them off due to the emotion and history involved. That scenario we all need to work on.

My recommendation: The best practice is for the Chairman or Lead Director to be able to have the hard conversation with the outside director who needs to move on.