Frequently asked. Seldom answered.
According to the FDIC, directors' responsibilities include:
"Directors are responsible for selecting, monitoring, and evaluating competent management; establishing business strategies and policies; monitoring and assessing the progress of business operations; establishing and monitoring adherence to policies and procedures required by statute, regulation, and principles of safety and soundness; and for making business decisions on the basis of fully informed and meaningful deliberation."
So how do you, as an executive or Chair of your financial institution, construct your Board to be the most effective at the above and delivering solid shareholder returns? Over two years ago, I analyzed this same question, using top five and bottom five Return on Equity banks. I could find no correlation between professional backgrounds of board members and bank performance.
You may have read last month's Top 5 in Total Return to Shareholders post, where I searched for the best financial institutions in delivering long-term value to shareholders. The average 5-year total return for this group was 320%. Do their boards share something in common that other boards do not? See for yourself.
The average board size was 10, and the average age was 65. The average number of bankers, active or retired, was two to three. Remember that we are including the CEO, who is also on the Board.
So, what about the Bottom 5 in Total Return to Shareholders? Recall from the Top 5 post that I screened for low trading volume banks. So those with less than 1,000 shares traded per-day were removed. The average 5-year total return for the group below was -31%.
Here is the board composition of those on the unenviable Bottom 5 list.
The average board size for this group was 12, and the average age was 66. The age was not noticeably different, but the board size was 20% higher than the Top 5 banks. I'm not sure this matters because Hilltop Holdings has a whopping 20 board members, skewing this number for the other four. Absent them, the Bottom 5 board size is similar to the Top 5.
So what is it about the Top 5 that differentiates it from the Bottom 5? In terms of bankers, active or retired, this group looks no different than the Top 5.
I will say there seems to be more PE, Investment Banker, Investment Management types on the Bottom 5 boards than on the Top 5. This might be explained by the capital formation process, where a low performing bank gets equity injections and those folks go on the board. Perhaps not. Either way, having Investment-type folks on your board doesn't seem to be the secret sauce to great shareholder returns.
So, as was my take from September 2016, there is no discernable difference between number of board members, age, professions of board members in top performing financial institutions and bottom dwellers.
Then, as now, my working theory is that the best boards are ones that approve strategy and hold management accountable for achieving it, and effectively dispatch their duties as described by the FDIC above. Each board member is an ingredient in the effectiveness of the entire board. And it doesn't matter if they are in Ag Supply or are the brand manager for the Dallas Cowboys.
What are your thoughts on an effective board?