Monday, September 05, 2016

Board Composition: What Does the Best Bank Board Look Like?

In April 2016, Delaware Place Bank in Chicago was placed under a Consent Order (CO). One article within the order read as follows:

"the Bank shall retain an independent third party acceptable to the Regional Director of the FDIC’s Chicago Regional Office (“Regional Director”) and the Division, who will develop a written analysis and assessment of the Bank’s management needs (“Management Study”) to evaluate the management of the Bank."

This is a common article and my firm performs several of these annually. The CO went on to say:

"As of the effective date of this ORDER, the board of directors shall increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all of the Bank’s activities, consistent with the role and expertise commonly expected for directors of banks of comparable size."

In the same article, the CO compelled the bank to elect an additional director with banking experience. And there lies the rub. By including this provision, the unwritten assumption was that appointing a director with banking experience will make this bank more safe and sound.

Will it? Is there evidence that proves it is so?

What makes an effective banking board? Is there one recipe?

We are often asked this question, either formally (through a Management Study or Board evaluation engagement) or informally, And the answer is, it depends.

It depends on the bank's strategy, geography, risk parameters, and personalities of existing board members. I have seen banks with former regulators on the board fail, and banks with farmers on their board thrive. I do not think there is one answer for all.

To further my point, I evaluated publicly traded, SEC registered banking companies between $500 million to $3 billion in total assets. I searched for the best, and not so much, ROE banks based on their five-year average ROEs. I excluded banks that had negative ROEs, recently converted during that five years from the mutual form (which elevates their "E"), or had standard deviations greater than 4 from their five-year ROE. In other words, they were consistently good, or consistently bad.

Then I reviewed their board composition. The top six results are as follows.

How does this differ from the bottom six? See their board composition below.

There were retired bankers in three of the six top performing banks. Wait! There were retired bankers in three of the six bottom performers. CPAs, another common piece of expertise desired on a high performing board, were on all six bottom performing banks. CPAs were only on two of the six top performing banks (assuming the CFO was a CPA, which was not mentioned in their bio). Attorneys were on four of six top and bottom performing bank boards.

The prize for most board billable hours goes to Robert Gaughen Jr., and Randy Black, CEOs of Hingham Institute for Savings and Citizens Financial Services, respectively, for having the most attorneys on their board. Perhaps the answer is not only have an attorney on the board, but lots of them.

There were no former regulators on the boards of the above banks. At least they wouldn't admit to it in their bio.

The point of this review is that there is no one answer as to what makes a good functioning board. In my experience, a board that maintains management accountability for business performance and ensures management operates within the risk guidelines established by the board and commemorated in bank policy, is a good performing board. It doesn't matter if that board includes a baker or candle stick maker.

What do you think makes a high performing bank board?

~ Jeff

P.S. I received an e-mail from a banker asking me the insider ownership of the above banks. So here you go! The bottom performing banks have a greater level of insider ownership. And from eye balling it, the bottom performing banks have a greater level of institutional ownership too.

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