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?
Thank you for the thoughts (as I'm always interested in reading more about the inner workings of banks as a bank investor). You have a valid point (and a decent theory I think) about the board needing to hold management accountable. Though, one really can't measure the effectiveness of a board that well, as most decisions are made behind closed doors and don't see the light of day.ReplyDelete
As well as the board members themselves usually has some conflicting interests. As it isn't like any person off of the street can become a board member (or even get on the proxy). And if as a board member you are balancing a fair amount of compensation versus questioning the CEO or chairperson, it does seem like a number of times that board members don't speak up or hold management accountable (they go along to get along as it were). I mean, I would definitely be interested in hearing about how they do (and have asked that question once or twice at an annual meeting), but I'm not really sure as an outside, how confidence I can be in their response, even though my understanding is that they have a fiduciary responsibility, there is still some reasonableness or wiggle room in it.
There are times that I have seen boards that should have been challenging management be overly deferential.Deference should be earned. Trust but verify. But this isn't common, in my experience.
What is more common are boards getting involved in minutia, such as vendor selection, or rank and file compensation. This eats time that should be spent on reviewing exceptions to policy or discussing effectiveness of policy on safety and soundness and how management is performing compared to strategy.
Thank you for the comment!
Jeff - I'll share a dysfunctional true story. I sat in a board meeting and watched a vendor do a BOLI presentation. One board member voted against the proposal. His rationale? The vendor hand one hand that was tanned color and one that was not. He surmised the vendor spent too much time on the golf course and he did not trust people who spent more time golfing than working. This is the type of stuff that never sees the light of day, as noted by the first commenter.ReplyDelete
Great story. Eerily similar to my trust issues with speakers that wear wrap-around the head microphones.
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