Building and Maintaining a Quality Board of Directors

Today’s regulatory environment applies increasing pressure on banks to beef up their compliance and risk management functions. In examining these functions, federal banking regulators are emphasizing the critical oversight role played by a bank’s board of directors.

All community banks should review the composition of their boards and develop strategies for recruiting and retaining quality directors and evaluating their effectiveness.

Regulatory expectations

OCC guidelines issued last fall establish risk management standards for large banks under its supervision. Although community banks aren’t required to comply with these standards, they provide valuable insight into regulators’ heightened expectations for banks of all sizes.

According to the guidelines, a bank’s board should 1) require management to establish and implement an effective risk governance framework, 2) actively oversee the bank’s risk-taking activities and 3) hold management accountable for adherence to the framework. In addition, the board should have at least two independent directors. And all directors should exercise sound, independent judgment.

The guidelines also state that banks should provide ongoing training to directors, proportionate to their knowledge and experience, on subjects such as complex products and services, significant risks, and banking laws and regulations. And boards should conduct annual self-assessments to evaluate their effectiveness.

What to look for in a director

There’s no single profile of the quintessential director. But all good bank directors share certain characteristics. According to the OCC’s Director’s Book, the principal qualities of an effective director are strength of character, an inquiring and independent mind, practical wisdom and sound judgment.

Beyond that, the strongest boards have a diversity of skills, experiences, education and views. And it’s important to ensure that your board’s composition and technical skills align with your bank’s strategies and business lines.

The Director’s Book also suggests that director candidates should possess:

• Basic knowledge of the banking industry and regulatory framework,
• A willingness to put the bank’s interests ahead of personal ones,
• A willingness to avoid conflicts of interest, and
• Knowledge of the communities the bank serves.

Additionally, candidates should, of course, have appropriate business experience and knowledge. And their willingness and ability to make the necessary time commitment is essential.

Attracting and retaining directors

There was a time when the honor of being asked to join a community bank’s board was the only incentive a prospective director needed. But in the current environment, the honor of serving is counterbalanced by concerns about the challenges of the director’s job and potential legal liability.

So how do you attract quality directors and get them to stay? Compensation, benefits and liability insurance are important, of course. But perhaps the most powerful incentive is to create a culture that allows directors to do their jobs effectively.

Among other things, you should ensure that management is transparent regarding the bank’s finances and operations, that the board is empowered to make decisions, that the board receives all the information it needs to make those decisions on a timely basis, and that management treats board members with respect, seeking their input on relevant matters.

Also important are ongoing training and educational opportunities and recognition of the directors’ contributions.

Culture matters

As directors retire or move on to other endeavors, it’s critical to replace them with a diverse group of talented business leaders. The right culture can help you recruit and retain the best people.

© 2015