March 29, 2004
Talking bank board blues | Eight signs that your community bank's board is ineffective — and what to do about it
By August A. Oliveira
Vice president and relationship manager for northern New England
Bankers' Bank Northeast, Glastonbury, Conn.
The corporate scandals of the past two years have certainly put boards of directors in the spotlight, and, for the most part, the picture that has emerged is a negative one. Enron, HealthSouth, Tyco and Adelphia are among the businesses that have become synonymous with the failure of corporate responsibility.
While these are high-profile companies, such examples should give pause to directors and employees who work for any corporations guided by a board, as well as the customers of such businesses. From Fortune 500 companies to community banks, there are lessons to be learned. Decisions should not be made in a vacuum. Boards do matter ˆ and they can and do make a difference.
For Maine's community banks, like the ones near my home in Scarborough, the stakes are just as high. Community banks play a critical role in the cities and towns they serve. Shareholders, bank employees, customers and the community as a whole are affected by the decisions made by the boards of local banks.
During my 30 years with the federal Office of the Comptroller of the Currency, which regulates national banks, I had the opportunity to interact with numerous community bank boards. In most cases, I encountered dedicated, hard-working and capable directors who provided the necessary vision and direction while simultaneously maintaining fiduciary responsibilities to govern the overall operation of their banks. In well-run institutions, the board's responsibilities are clearly defined, the directors work collegially with one another and the president, and each director brings a particular expertise that contributes to the bank's overall performance.
When banks face difficulties, the problems can be traced, in many cases, to the directors who collectively were unable to take the required actions to steer the ship in the right direction. What are some of the characteristics of ineffective boards? Here are some critical signs that suggest a board may not be functioning as it should.
The board with a dominating member. A board of directors should be a collection of individuals who bring their specialized talents and expertise and make decisions in the best interest of the bank. Ideally, every person at the table has an equal say in the issues at hand.
Some boards, however, lack this open exchange of ideas. It takes only one strong-willed personality to change the dynamics. In many cases, this person, through his or her personality and longevity with the organization, functions ˆ either officially or unofficially ˆ as the board chair. All decisions go through this person. This individual sets the agenda, dominates discussions and makes all key decisions.
Needless to say, this is an unhealthy situation. The bank becomes beholden to one individual, and the talents of all the directors are wasted. The old saying that several minds are better than one has a lot of merit.
The board with a dominating president. Like our federal government, community banks should have a system of checks and balances between the board and the president. The president should bring important decisions before the board for discussion. All sides of an issue should be discussed and a vote should be taken. When the directors feel subservient to the president, the balance is lost. A board of directors that does its job will not allow the president to dominate.
The board with a chair and president who are one. Having one person serve as both board chair and bank president can work if the individual keeps an open mind and allows a free-flowing exchange of ideas and information. Such an arrangement, however, can create an environment that is counterproductive. I have seen situations in which, over time, the chairman/president hand-picks all new directors, and eventually ends up with a "rubber stamp" board.
The board buried in details. The board should provide vision and strategic direction through the establishment of broad goals and objectives. It's the board's responsibility to hire senior executives who manage the daily activities of the bank and take the necessary actions to achieve established goals and objectives. The board works with senior management to create the policies and operating procedures that are implemented by bank officers and managers. The board should not manage the bank's day-to-day operations. When a board gets bogged down in detail, bigger picture issues are neglected.
The board adrift. What are the board's responsibilities? What is expected of a board member? Where's the agenda? What are the corporate values? If a director has to ask these questions, the board lacks direction. All boards should consider developing a one-page written list of corporate governances that spell out organizational values and expectations. Each director should be required to review and sign the corporate governances annually.
Defining the roles and responsibilities of the board and each director is also highly recommended. A director orientation and education program should also be developed to set the tone for the board. All banks should require training for new board members; on an annual basis, existing directors should seek out seminars and forums that broaden their knowledge base and their understanding of banking.
The OCC's Directors Book provides practical guidance to help bank directors make sure that their bank remains healthy and able to compete in a rapidly changing industry. It provides fundamental principles of good banking practices that all directors and bankers should follow. This book should be a must-read for every director of a community bank, and it should be reviewed periodically.
The board out of sync with the times. Growth is good, but it must be managed. Rapid growth brings many changes, and a community bank that grows significantly over a short period of time needs to rethink the way it conducts business. Such situations often arise when banks merge or acquire several branches, which significantly increase the bank's size, modes of operation and complexity. For example, a board that reviews every loan may be acceptable for a small bank, but it's impractical and inefficient when that small bank grows. In such a situation, a loan committee should be established to review larger, unsecured loans. This eases the burden on the board.
Boards must recognize when the environment has changed, and then adapt to these new realities.
The board out of touch. While boards shouldn't get bogged down in the details, neither should they be the last to know about problems within the bank. Board members shouldn't be in the bank on a regular basis, but they should stay in touch with senior officers and other bank employees so they will have a sense of what is going on there. Sitting on committees is an excellent way for board members to learn about their bank while contributing in a meaningful way.
Select board members should also consider sitting in on loan discussions and key meetings with bank examiners and outside auditors so they will learn about existing disciplines and be aware of key issues and problems that could impact their bank. "I didn't know" is no excuse for a board, and is no defense in the event of legal action. Remember, directors can be held personally liable for decisions that violate banking laws.
The board that lacks an understanding of risk management. Most board members are not bankers. That's one of their strengths. While directors should not be expected to comprehend the finer points of banking regulations and bank operations, they must understand the major risks that could impact their bank.
Whether a director runs a small business, is a lawyer, physician, accountant or a retired individual with years of knowledge and experience, he or she must have a general understanding of the following key banking risks: credit, interest rate, liquidity, price, transaction, compliance, strategic and reputation risk. After all, one of the principal responsibilities of a director is to embrace risk management. Directors must become adept at monitoring risk activities through board committees and well-developed management reports. To manage risk effectively, the board should establish risk tolerances with policies that set standards and parameters for the nature and level of risk the bank is willing to assume.
Clearly, it's not easy to serve as a bank director. Banking has become a complex business. There's a lot to learn, the time commitment can be substantial and the liability can be significant. Because most community bank boards are comprised of between five and eight directors, there's no place to hide. Every vote counts and the decisions have real-world implications.
Yet serving as a director of a community bank can be a rewarding experience. Without question, sitting on a board is an opportunity to make a difference and contribute to a stronger, more effective organization. A board that collectively is active and vibrant and provides vision and direction is critical to the organization's long-term viability and success. Such boards insure their banks will continue to play a critical and influential role in the communities they serve.
Bankers' Bank Northeast, Glastonbury, Conn.
The corporate scandals of the past two years have certainly put boards of directors in the spotlight, and, for the most part, the picture that has emerged is a negative one. Enron, HealthSouth, Tyco and Adelphia are among the businesses that have become synonymous with the failure of corporate responsibility.
While these are high-profile companies, such examples should give pause to directors and employees who work for any corporations guided by a board, as well as the customers of such businesses. From Fortune 500 companies to community banks, there are lessons to be learned. Decisions should not be made in a vacuum. Boards do matter ˆ and they can and do make a difference.
For Maine's community banks, like the ones near my home in Scarborough, the stakes are just as high. Community banks play a critical role in the cities and towns they serve. Shareholders, bank employees, customers and the community as a whole are affected by the decisions made by the boards of local banks.
During my 30 years with the federal Office of the Comptroller of the Currency, which regulates national banks, I had the opportunity to interact with numerous community bank boards. In most cases, I encountered dedicated, hard-working and capable directors who provided the necessary vision and direction while simultaneously maintaining fiduciary responsibilities to govern the overall operation of their banks. In well-run institutions, the board's responsibilities are clearly defined, the directors work collegially with one another and the president, and each director brings a particular expertise that contributes to the bank's overall performance.
When banks face difficulties, the problems can be traced, in many cases, to the directors who collectively were unable to take the required actions to steer the ship in the right direction. What are some of the characteristics of ineffective boards? Here are some critical signs that suggest a board may not be functioning as it should.
The board with a dominating member. A board of directors should be a collection of individuals who bring their specialized talents and expertise and make decisions in the best interest of the bank. Ideally, every person at the table has an equal say in the issues at hand.
Some boards, however, lack this open exchange of ideas. It takes only one strong-willed personality to change the dynamics. In many cases, this person, through his or her personality and longevity with the organization, functions ˆ either officially or unofficially ˆ as the board chair. All decisions go through this person. This individual sets the agenda, dominates discussions and makes all key decisions.
Needless to say, this is an unhealthy situation. The bank becomes beholden to one individual, and the talents of all the directors are wasted. The old saying that several minds are better than one has a lot of merit.
The board with a dominating president. Like our federal government, community banks should have a system of checks and balances between the board and the president. The president should bring important decisions before the board for discussion. All sides of an issue should be discussed and a vote should be taken. When the directors feel subservient to the president, the balance is lost. A board of directors that does its job will not allow the president to dominate.
The board with a chair and president who are one. Having one person serve as both board chair and bank president can work if the individual keeps an open mind and allows a free-flowing exchange of ideas and information. Such an arrangement, however, can create an environment that is counterproductive. I have seen situations in which, over time, the chairman/president hand-picks all new directors, and eventually ends up with a "rubber stamp" board.
The board buried in details. The board should provide vision and strategic direction through the establishment of broad goals and objectives. It's the board's responsibility to hire senior executives who manage the daily activities of the bank and take the necessary actions to achieve established goals and objectives. The board works with senior management to create the policies and operating procedures that are implemented by bank officers and managers. The board should not manage the bank's day-to-day operations. When a board gets bogged down in detail, bigger picture issues are neglected.
The board adrift. What are the board's responsibilities? What is expected of a board member? Where's the agenda? What are the corporate values? If a director has to ask these questions, the board lacks direction. All boards should consider developing a one-page written list of corporate governances that spell out organizational values and expectations. Each director should be required to review and sign the corporate governances annually.
Defining the roles and responsibilities of the board and each director is also highly recommended. A director orientation and education program should also be developed to set the tone for the board. All banks should require training for new board members; on an annual basis, existing directors should seek out seminars and forums that broaden their knowledge base and their understanding of banking.
The OCC's Directors Book provides practical guidance to help bank directors make sure that their bank remains healthy and able to compete in a rapidly changing industry. It provides fundamental principles of good banking practices that all directors and bankers should follow. This book should be a must-read for every director of a community bank, and it should be reviewed periodically.
The board out of sync with the times. Growth is good, but it must be managed. Rapid growth brings many changes, and a community bank that grows significantly over a short period of time needs to rethink the way it conducts business. Such situations often arise when banks merge or acquire several branches, which significantly increase the bank's size, modes of operation and complexity. For example, a board that reviews every loan may be acceptable for a small bank, but it's impractical and inefficient when that small bank grows. In such a situation, a loan committee should be established to review larger, unsecured loans. This eases the burden on the board.
Boards must recognize when the environment has changed, and then adapt to these new realities.
The board out of touch. While boards shouldn't get bogged down in the details, neither should they be the last to know about problems within the bank. Board members shouldn't be in the bank on a regular basis, but they should stay in touch with senior officers and other bank employees so they will have a sense of what is going on there. Sitting on committees is an excellent way for board members to learn about their bank while contributing in a meaningful way.
Select board members should also consider sitting in on loan discussions and key meetings with bank examiners and outside auditors so they will learn about existing disciplines and be aware of key issues and problems that could impact their bank. "I didn't know" is no excuse for a board, and is no defense in the event of legal action. Remember, directors can be held personally liable for decisions that violate banking laws.
The board that lacks an understanding of risk management. Most board members are not bankers. That's one of their strengths. While directors should not be expected to comprehend the finer points of banking regulations and bank operations, they must understand the major risks that could impact their bank.
Whether a director runs a small business, is a lawyer, physician, accountant or a retired individual with years of knowledge and experience, he or she must have a general understanding of the following key banking risks: credit, interest rate, liquidity, price, transaction, compliance, strategic and reputation risk. After all, one of the principal responsibilities of a director is to embrace risk management. Directors must become adept at monitoring risk activities through board committees and well-developed management reports. To manage risk effectively, the board should establish risk tolerances with policies that set standards and parameters for the nature and level of risk the bank is willing to assume.
Clearly, it's not easy to serve as a bank director. Banking has become a complex business. There's a lot to learn, the time commitment can be substantial and the liability can be significant. Because most community bank boards are comprised of between five and eight directors, there's no place to hide. Every vote counts and the decisions have real-world implications.
Yet serving as a director of a community bank can be a rewarding experience. Without question, sitting on a board is an opportunity to make a difference and contribute to a stronger, more effective organization. A board that collectively is active and vibrant and provides vision and direction is critical to the organization's long-term viability and success. Such boards insure their banks will continue to play a critical and influential role in the communities they serve.
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