Chief Investment Officer
Hot Topics in the Boardroom
Conversations at our forums are brutally candid, and cover a wide range of topics. Through these conversations, I continuously am made aware of the many issues facing bank board members today.
Governance is a huge topic of conversation both within the boardroom and outside it, especially after the financial crisis. Now that we have all settled into the new regulatory environment, and some are even hopeful for moderate relief, what are the top-of-mind issues for bank directors?
Dealing with technology.
Technology is among the top topics on any board agenda these days. Disruption technologies had enormous impact on entire industries such as hospitality (Airbnb) and transportation (Uber, Lyft). Banking is no exception, but none of us is quite sure how to handle technological innovation on a community bank budget, or where to innovate, or how to economically serve customers who do not want self-service and technological solutions.
In addition, cybersecurity underlies any digital involvement, which is a huge source of concern to all.
Imagine being a director at Blackberry as the iPhone and other smart phones were introduced and started conquering the world. How does a director react to such a sweeping change, rendering your world, value proposition and way of doing business obsolete almost overnight? Or Blockbuster board? Or any major hotel chain? These issues are clearly in the board domain, since they are at the core of any company’s strategy, and yet most of us, board and management alike, are ill-equipped to contemplate such disruption and adequately prepare for it.
As the bar for effective board membership has been raised, not all directors are performing up to par. Many directors are rising to the occasion, intensifying their questions, and reading the voluminous materials before every board and committee meeting. Boardroom conversations then rise to more strategic levels, with shorter management presentations and more time for interaction with management on key strategic topics.
Unfortunately, not all directors are engaged. A recent PwC survey said that nearly half of all directors surveyed (these weren’t just bank directors, by the way) felt at least one of their colleagues should leave the board due to lack of performance.
The first and foremost director responsibility is to select the company’s CEO. A quick second is how to pay the CEO in such a way as to enhance shareholder value, align CEO and shareholder interests and appropriately reward for performance. The PwC survey I referred to, as well as others I’ve seen, show board conviction that their current executive pay plans “promote long-term shareholder value and achieve appropriate long-term compensation levels”. At the same time, many directors across industries believe their CEOs are overpaid and the income gap between the CEO and the lowest paid employee of the company is too wide.
Throw into the mix ISS and the confusion increases exponentially. Both board and management are now required to hire their own compensation consultant and get attestations from the Chief risk Officer that the bank’s compensation systems do not promote excessive risk-taking on the part of any employees. Say-On-Pay is another issue that ISS and others feel strongly about.
Executive compensation isn’t easy to address. If at-risk compensation is high – which is idea for a reward-for-performance philosophy – the gap between the CEO and the lowest-paid employee will widen. At the same time, the CEO is doing their job – creating shareholder value – and they get paid fairly for it. The goal of aligning compensation with shareholder value conflicts with the goal of income equalization, which leaves directors wanting for the optimal solution to this insolvable quandary.
I have never met a director who isn’t a proponent of diversity, and yet boardrooms do not reflect that conviction. This is understandable, considering the availability of qualified directors across race, gender and other dimensions, but is still unacceptable.
Numerous studies have shown that diversity promotes better decision making. I strongly agree with this assertion, especially if you define diversity as different viewpoints, different upbringing and different backgrounds. Much like we look for directors with more IT background these days, given the growing importance of technology in our business, so should we look for directors that offer differing viewpoints and bring different backgrounds to the boardroom (while, importantly, maintaining strong cultural alignment with your company’s culture).
Diversity is important for all teams, because it allows for more diligent vetting of ideas from different vantage points. The boardroom is no different.
The struggle to find qualified directors across many spectrums is meaningful. Not enough people want to be bank directors in the first place, considering the regulatory and other risks associated with our business. Nevertheless, it is incumbent upon all of us to seek, nurture and promote qualified individuals across the human spectrum to positions of authority, and the boardroom is no exception.
Handling shareholder engagement.
Shareholders are becoming increasingly active across the board, and banking is no exception. During the financial crisis, many professional investors took the opportunity to become major investors in struggling banks, and they are now looking for the returns on their investment. Boards are divided as to how to handle activist shareholders, as are managements and investors. There is no clear answer as to how to handle activist shareholders. Much depends on the company’s mission and strategy, as well as the will to fight and intestinal fortitude.
Regardless to your position, directors should be prepared to handle activist shareholders and engage in candid discussions on the topic. A key question is, should directors be engaged with shareholders at all? Opinions vary widely on this topic, and directors of each bank should develop consensus around their answer to this key question.
Handling demands on directors.
Bank directors are having a hard time keeping up with the regulatory requirements of the job. It seems as if expectations for director involvement continue to grow at an ever-accelerating pace, requiring directors to approve policies and data points that might be handled below the board level.
Wisdom from Bruce Claflin:
Bruce published an article in the NACD Directorship publication which includes ten principles I’d like to quote.
A strong CEO and executive team practically ensures the company’s success.
A great CEO cannot be a bad director.
Avoid presentations in the boardroom and embrace conversations.
Listen to outliers; while they are often wrong, they aren’t always wrong.
Good enough is not good enough. All directors and executives must make a meaningful contribution to the enterprise.
It’s OK to ask dumb questions; directors are often not the subject matter experts.
Offload compliance to committees, and focus the board meetings on strategy (this is my favorite piece of advice).
Invite quality outsiders to meetings (analysts, successful executives from other industries).
Get to know the CEO and executive team outside the boardroom and formal meetings.
Engage with employees where appropriate, and with management present
8. The regulatory view.The regulators are our partners and we should learn from them more about the industry and our bank. Our meetings with them need not be adversarial but just the opposite. After all, we have an important shared goal – keep our company safe and sound.
In a recent visit to the OCC I learned that the current structural priorities for the organization are:
AMEN TO THAT!
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