Sunday, November 03, 2019

Improve Bank Boards Through A Disciplined Nomination Process

"Rigorous, peer-reviewed studies suggest that companies do not perform better when they have women on the board. Nor do they perform worse." ~ Katherine Klein, University of Pennsylvania

Do you know how difficult my life might become for the above quote? Just yesterday I received a newsletter from a highly regarded executive recruiting firm that said "publicly traded companies with a diverse board of directors generate higher return on investment (ROI) than those that aren't as diverse."

Klein, who did this analysis in 2017, disagrees and says that most citations of gender diversity being either highly correlated or even a causation to better performance are performed by consulting firms and/or information providers... i.e. they are not peer reviewed. And correlation to high performance is not statistically significant.

We're Already Here

That is not the politically correct thing to say. Jill Pursell from my firm wrote a thoughtful newsletter on the subject regarding new and pending legislation compelling gender diversity. We are already deep in this rabbit hole.

So let's make the best of it.

I have observed that the best functioning boards are not dominated by one or two voices, that operate at the level of what a board should operate at, and challenge each other and management. Perhaps I would add community contacts to the list for a community bank board. But I don't think the list speaks to race or gender specifically. 

Larry Fink, CEO of BlackRock, said this of board diversity: "Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset. They are less likely to succumb to groupthink or miss new threats to a company's business model. And they are better able to identify opportunities that promote long-term growth." Larry's funds are invested in virtually all publicly traded banks. And this is his thinking. 

And it's pretty close to my own thinking regarding reducing the likelihood of groupthink. I have a friend, let's call her Jane. I would guess that Jane and I think similarly about 99% of the time. We are each other's mind doppelganger. I don't think it would be helpful having her and me on a bank board because our backgrounds and world view are too similar. How would we challenge each other? Who was it that said if two people think alike, one of them is unnecessary? 

Back to Fink's thinking. One key challenge I have observed that prevents boards from achieving the level of diversity that he speaks of, and achieving "best functioning board" attributes that I mentioned above, is our nominating process. Most new board members are nominated through a board Governance and Nominating Committee. 

And how they come up with prospects is ad hoc, in my experience. As in, "hey, we need a CPA on the board. Jeff, know anyone? Yeah, I golf with my accountant. Let's see if he's interested." This has led to boards that suffer from groupthink, and lack diversity, in my opinion. To support the point, look at the accompanying picture of me and my friends at a Penn State hockey game. 

Creating A Board That Avoids Groupthink

So let's fix it. Let's be more disciplined in the nominating process. Here is what I suggest...

1.  Do an annual assessment of board needs that includes professional backgrounds, experience strata, customer demographics, and geography. 

2. Use third parties to identify prospects that best fit board needs. This could be chambers of commerce, associations, community organizations (such as Rotary), or even recruiting firms. The key here is you want to develop a diversity of thought, challenging dialogue, at the right level (the level the board should operate at). Do not be limited, or even driven, by who other board members know. That elevates the risk of groupthink, exactly what we are trying to avoid.

3. Get rid of age limits. Wouldn't it be terrible to kick off the 70 year old, thoughtful, and community connected board member for the younger person that barely speaks and opens their board package on board day? Listen to David Baris, CEO of the American Association of Bank Directors, on my firm's podcast regarding this subject. 

4. Perform individual board member assessments that includes the ability to bring in diverse views. CalPers, California's pension fund, estimates that board members get too cozy with one another after 12 years of service. To mitigate this threat, create a fair and disciplined assessment process that gives high scores for bringing diverse views. 

Assigning quotas so bank boards appoint by race and gender does not necessarily deliver the "best functioning board" that I described above. However, implementing the above four suggestions will likely result in a more diverse board. There have been more women than men college graduates since the 1980's. A random walk through Chicago's O'Hare airport shows that there is an increasing diversity of professionals pulling their roller boards. And as our markets become more ethnically diverse, so will our boards if we want our board to better reflect our communities. The end result should be a board that does not suffer groupthink and delivers more positive outcomes.

Any other suggestions on what a "best functioning board" is, and how to achieve it?

~ Jeff

No comments:

Post a Comment