Bank Board Letter — December 2015
THE BOARD OF THE FUTURE: THE BANKING INDUSTRY IS CHANGING; IS YOUR BOARD UP TO THE CHALLENGE?
Litz Van Dyke

Think about how banking has changed in the past decade. Industry consolidation has resulted in fewer but larger community banks. An increased regulatory burden translates into higher costs and more complexity. A slew of non-bank competitors are aggressively targeting your customers.

To survive in this dynamic environment, it’s imperative that community banks take a long, hard look at the current business model and be willing to make necessary changes. Success requires a forward-thinking perspective in which new ideas are discussed and vetted.

Your board of directors plays an important role in the success of your bank, but your board may not be equipped to deal with changing industry dynamics. Historically, boards were made up of local business leaders chosen for their ability to promote the bank. The board’s focus was tactical; today, the board needs to focus on long-term strategy and increasing shareholder value. Rather than focus on business development, board members should focus on governance and strategy.

In addition, your board members likely share many of the same life experiences and perspectives. If you look around your boardroom and see a roomful of white males over the age of 50, your board probably lacks the diversity to explore new ideas.

If you hope to survive in this shifting environment, you’ll need to become intentional with the makeup of your board rather than take a more haphazard ‘good old boy’ approach that selects members based solely on who they know.

For example, retired bankers are commonly selected as board members. Although familiarity with the industry can be a plus, these bankers may view banking through a lens that is outdated by five or 10 years. Additionally, small business owners are often tapped as board members for their positions as centers of influence in their community. However, a small business owner who is in the weeds of the day-to-day running of his or her business may or may not have the acumen and experience to think strategically at the level needed in the board room of today’s banking organizations.

Banking is changing, and your board makeup needs to change as well. Here are some thoughts on how to build a board of directors that can lead your bank into the future:

  1. PERFORM A SKILLS GAP ANALYSIS

To get board members with the right skills and expertise, first determine the optimal set of skills you need to support your bank’s strategy and address the challenges of a constantly evolving and more complex industry.

Next, inventory the skills of your current board members. There are a variety of free skill assessment tools you can download and use as a template for creating your own customized skills matrix.

Lastly, perform a gap analysis to identify the skills new board members should possess or the education that your current board members may need to enhance their skills.

During the assessment phase, look at the demographics of your board as well. You’ll want to build a board not only with diversity of skills and experiences, but diversity of gender, age and ethnicity as well.

  1. RECRUIT OUTSIDE YOUR COMFORT ZONE Now comes the difficult part: Recruiting board members with the skills and diversity you need. With increased liability and a lack of status, candidates may decline your request to join the board so you’ll need a deep bench. To build a database of potential board members, be prepared to look outside your local community.

Identify the skills of each potential member and weight the importance of each skill. For example, if your board already includes two CPAs, you may give less weight to a prospect’s finance skills. If your bank is transitioning from a retail to a commercial focus, you may more heavily weight skill in leading companies through change.

Weighting skills by importance will allow you to select board members who will best support your strategy rather than defaulting to selecting members you like or have a personal relationship with.

That said, chemistry between board members and executive management is critical. A candidate who possesses the required skills but who is argumentative or uncooperative is rarely a wise choice.

Sourcing potential board members Ð particularly if you are looking for diversity Ð is challenging. Networking to diverse groups won’t happen by accident. Think creatively about connecting with people beyond your members’ standard networks. Universities can be a good source of potential candidates. Ask a law firm for the names of several clients who may be a good fit.

Some banks effectively use an advisory board as a source for potential board members. The advisory board does not have fiduciary responsibilities but supports the bank’s business development efforts and interacts with bank executives and board members, allowing you to vet them before inviting them to join the board.

  1. HOLD THE BOARD ACCOUNTABLE

Gone are the days when board membership was seen as an easy resume builder or status symbol. There is no free lunch: Today’s board members must pull their weight and be held accountable.

Accountability requires an effective evaluation process and a culture of candor. Ask board members to complete an annual review of each other’s performance and ensure the evaluation process has integrity. If members use a rating scale of 1 to 5 and everyone receives a 5 in every assessment category, it is likely that your process lacks integrity.

Board members should feel empowered to hold each other accountable, even between annual reviews. A chairman with strong leadership skills can help create a culture of honest feedback.

Board members are now held liable for their actions Ð and ignorance is no defense in the eyes of the law. Require board members to complete continuing education on topics such as cybersecurity, anti-money laundering and the Bank Secrecy Act, and risk management. Online courses that allow you to track compliance are available through a variety of sources including Bank Director’s Desktop, a free series from the Federal Reserve.

THE BOARD OF THE FUTURE

Building a board for the future requires intention. Rather than extending an invitation to a narrow, default network of potential members, identify the skills you need and recruit board members with those skills. Expand your recruiting efforts into new avenues to attract a more diverse board that will bring different perspectives and insights to the bank, perhaps challenging the sacred cows that have been in place for decades.

Finally, hold those board members accountable for fulfilling their responsibilities.

Five years from now, when you look around your boardroom, hopefully you will see a room of eight to 15 board members with a wide range of skills and backgrounds who engage in conversations and actions that drive the bank’s strategic vision forward.

Litz Van Dyke is a principal and practice director at CCG Catalyst, www.ccg-catalyst.com.

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