Over the past several years we have seen the regulatory agencies become much more focused on board oversight and performance. This is a natural point of focus for regulators in a time of crisis in the banking industry. The fiduciary and oversight obligations of members of boards of directors are well established, and there is a road map in the corporate records for following the actions and deliberations of a board. I would suggest, however, that a board of directors could receive a gold star for the quality of its minute records and its adherence to the established principles of corporate governance, and yet fall well short of being an effective working group.
This is the third in a series of articles of best practices for bank boards. (Parts 1 and 2 can be found here and here, respectively.) Over the past several decades my partners and I have worked with hundreds of bank boards. Regardless of the size of the entity we have noticed a number of common characteristics and practices of the most effective boards of directors. This series of articles describes ten of those best practices. The first two articles in the series focused on the best practices of selecting good board members, adopting a meaningful agenda, providing the board with the most useful information, encouraging board participation, and making the committees work. In this article I will discuss three additional best practices – meeting in executive session, making use of a nominating committee and director assessments, and participating in the examination process.
Best Practice No. 6 – Meet in Executive Session
It is not uncommon for the most passionate and meaningful discussion among board members to occur in the parking lot of the bank following a board meeting. Much more time is spent in these parking lot sessions discussing a possible sale of the bank and the compensation and performance of the bank CEO than ever takes place in the board room. The most effective boards of directors move these conversations to the board room by means of executive sessions. Whether monthly or quarterly, the independent (i.e., non-management) directors meet in executive session and set their own agenda for those meetings.
I have found that CEOs who welcome and facilitate such executive sessions never regret doing so. Executive sessions provide a structured forum for the independent directors to meet as a group and speak freely regarding matters of interest and concern to them. Many positive ideas and discussions can result from these sessions. If the CEO is also chairman of the board, a “lead director” can chair the executive sessions. A best practice is for the chairman or lead director to meet with the CEO following an executive session and report on the substance of the matters discussed.
Best Practice No. 7 – Make Use of a Nominating Committee and Director Assessments
No director has a “right” to sit on a board. Members of the most effective boards of directors have an active desire to serve the bank, which is evidenced by a high level of engagement, preparation and participation. There should be a transition from the typical practice of automatically re-nominating existing board members to a process of conducting annual director assessments coupled with a nominating committee for director elections.
The CEO should not be involved with either director assessments or the nominating committee – these are board functions and should be managed by the board under the direction of the chairman or the lead director. Annual director assessments could initially be done by means of self-assessments, coupled with a one on one meeting between each director and the chairman. These one on one meetings can serve as the basis for discussion of the director’s enthusiasm for and participation in the activities of the board.
The process of implementing an active nominating committee and annual director evaluation process is also about risk management going forward. In these times of continued economic uncertainty and increased regulatory scrutiny it is important that banks have active and engaged directors.
Best Practice No. 8 – Actively Participate in the Examination Process
Members of the board should be involved in the regulatory examination process. The regulators really do want and expect the board to be involved in and understand the issues which the regulators believe may be facing the bank. Involvement of the entire board or key members of the board from the first management meeting with the examiners to the exit meeting is tangible evidence that the board is actively engaged in oversight of the bank. It can also be beneficial for members of the board to hear the concerns of the regulators directly, and to observe management’s interaction with the examiners.
I recently attended an exit meeting with bank management following conclusion of an exam. Several of the bank’s directors were present because they wanted to get a preview of the exam findings on asset quality. During the exit meeting the lead examiner raised concern about a risk management issue of potentially significant magnitude. The issue clearly took the bank’s CEO by surprise, but the presence at the meeting of the board’s chairman had a calming effect. The chairman looked across the table at the lead examiner and said in a convincing tone, “We will fix this immediately.” The issue was then quickly resolved, and the final examination report commented favorably on that action. The end result may well have been the same without the presence of board members at the exit meeting, but I believe their presence was very helpful and reflected well on the bank.
This is the third in a series of articles by Jim McAlpin on Best Practices for Bank Boards. It was originally published on BankDirector.com. Look for more “best practices” in an upcoming post.