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Refreshing Your Board
The bar is being raised on numerous regulatory fronts. One of the key areas where regulators want to see more is at the board level. This creates major issues for many banks. Regulatory pressures for greater board accountability and involvement result in blurring the lines between executive management and board oversight. These lines haven’t been too sharp for years, and today they are getting blurred, even crossed, all too often.
How does one achieve good governance in today’s demanding board room? The first step is to gradually refresh your board, bringing fresh faces and new perspectives to the board room. This is easier said than done. Long term directors take it very personally when asked to resign or not stand up for reelection when their term expires. Plus, while some may not add too much value, they do contribute to a collegial and peaceful atmosphere which outsiders who do not know the organization might not be able to achieve.
The ISS, the watchdog for good board governance, complicates the situation further. While their requirements are not bank-specific, they certainly impact all public companies who are looking for institutional investors, which generally includes all public banks. Their recommendations for term limits, independence and other elements are often impossible to implement with the current director suite.
Below are some thoughts on how to bridge the gap between your current board and the one that will create more value for your management, shareholders, and regulators alike.
Adopt a process for regular director evaluations. The first step toward refreshing the board is assessing the current membership. Unfortunately, most board assessment processes available today are ineffective for many reasons. A strong assessment model involves a limited, simple and clear set of questions that should be answered for each director. The reason such a process is so important is because it depersonalizes the issue. The key to effective board succession planning is starting with the shareholders and how their needs are best served. The process should go beyond individual director evaluations. Those are telling, but insufficient. A good board should incorporate a diverse range of expertise and experiences to ensure that the necessary knowledge resides in the room. All reach, but lack industry expertise, specific technology knowledge or line-of-business familiarity (such as wealth management, for example). You may find yourself with a board that is comprised of many great directors, but is too one-dimensional for today’s demanding environment.
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