How to build the board your bank needs

When Choice Bank, with its roots in North Dakota farming communities and its agricultural lending orientation, acquired Venture Bank on Sept. 15, 2018, it became a $2.05 billion-asset entity that derived most of its revenue from banking commercial businesses.

“That was a very challenging proposition to put in front of a board of directors of a well-run and successful bank,” recalls CEO Brian L. Johnson. “We need to strive for new challenges and opportunities. We thought there was more opportunity in the market, and we wanted to move toward metro areas.”

In the years leading up to the acquisition, Johnson considered how the board of Choice Bank—now with $2.2 billion in assets—in Fargo, N.D., could prepare for a new strategic direction. One change, Johnson says, was increasing the size of the board from eight to 12 members, adding two women to what had been an all-male board and seeking out directors who had been a part of Choice Bank’s transactions and had additional banking experience.

“You’ll have a better organization if you’re diligent and committed to board succession.”

—Brian L. Johnson, Choice Bank

“You’ll have a better organization if you’re diligent and committed to board succession,” he says. “That’s something that really needs to be addressed by organizations.”

Board succession is a critical issue for all community banks, but it takes on greater urgency when a bank is entering a new business line or is heavily involved in mergers and acquisitions. That’s because the original slate of directors, who may have served the bank well in the past, may no longer meet the needs of an evolving bank with a fresh set of priorities.

The good news is that board assessment tools can help a community bank evaluate the strengths—and weaknesses—of its current directors to help navigate what lies ahead. The not-so-good news is that the tools rarely turn up new concerns but instead tend to reinforce bankers’ existing impressions.

“It’s not paint by numbers,” says Peter Weinstock, a partner at Hunton Andrews Kurth LLP in Dallas. “It’s not that you do an assessment and that tells you whether you’ve got problems on the board. Everyone knows if you’ve got problems on the board. The board assessment confirms what’s already known.” That said, a thorough board assessment can help management clearly see the skills that current directors possess before embarking upon a board-rejuvenation process.

Identifying gaps

Public companies perform board assessments annually, and this is a good rule of thumb for community banks as well, says Weinstock.

Management succession planning can also serve as a template for board succession. “What good banks are doing for management succession is identifying the traits they want in each of the key positions,” Weinstock says, noting that the same strategy applies to boards. Often, community banks use matrices to make this exercise easier (see “Designing a board skills matrix,” bottom of article).

Philip K. Smith, president of Gerrish Smith Tuck in Memphis, Tenn., says, “Community banks do not just go out and look for a ‘banker’ to fill some position in their bank. They look for specific targeted individuals to fill a specific need.” Ideally, he says, the process for recruiting new board talent will start “with a written job description for the position of the director with a specific identification of what is needed and what the responsibilities of the position are.”

A written description can serve another purpose: It can communicate to directors the bank’s expectations in a clear and unmistakable way.

Michelle Bonahoom, CEO of VisionOne High Performance Group in Bloomington, Minn., notes that boards don’t always communicate expectations to their members. Naturally, such communication breakdowns make it difficult for directors to understand how they can contribute.

Bonahoom notes that board succession issues take on heightened importance in merger and acquisition situations. “Statistics show that 70 to 80 percent of all integrations fail to meet value expectations, and the two top reasons are cultural mismatch or go-to-market strategy mismatch,” she says.

Lining up a bank’s business model and strategy with its processes and people—including directors—is the best way to succeed in any growth or integration situation. “You have to make sure that new board members support the right strategy and culture,” Bonahoom says.

New skills and perspectives

For all community banks, even those not pursuing a different strategic direction or growing dramatically, new skills are sometimes needed on the board. Among the most coveted of director skill sets are cybersecurity and IT. In addition, some boards are looking for greater diversity when it comes to gender, ethnic background or even age.

“Gender diversity is the hottest topic in corporate governance right now,” Weinstock says. He notes that, for public companies, the issue is front and center, because many proxy advisory firms recommend a “no vote” for nominating committee directors who sit on all-male boards.

Weinstock believes that the push for gender diversity makes sense given that women can voice distinct viewpoints, ones that represent a large block of both employees and customers. “If 80 percent of people working in the bank are women, does it seem like we are encouraging people working for us to rise to whatever level their talents dictate if there are no women, or only one woman, on the board?” he asks.

Craig Scheef, chairman and CEO of $480 million-asset Texas Security Bank in Dallas, recognizes the importance of gender and ethnic diversity, and he is also considering how diversity of age might benefit the community bank’s board. “Having a younger person’s perspective could be very valuable,” he adds.

Johnson would also welcome “a millennial director who represents the upcoming generations.” In general, though, he emphasizes the importance of diversity of opinion, no matter the source. “I think I have a very diverse board that generates a lot of questions and discussions,” he says. “It’s challenging at times, but I like to be challenged, and I think it makes us better as an organization.”

Making a change

If an assessment finds that new skills are needed in the boardroom, community banks can pursue a number of avenues.

One option that Choice Bank chose is to grandfather in existing board members and then expand the board, looking for new directors who possess desired skills. Weinstock notes that implementing new policies, such as term or age limits, can also boost attrition, spurring a change in board composition.

Often, however, says Weinstock, an alternative approach is the more interpersonally challenging one. He suggests “dealing with the people on the board who are not performing well and moving them or replacing them with talent that the bank hopes would perform better.”

Scheef acknowledges that he isn’t an expert on having the type of tough conversation that Weinstock advocates. “But I do feel like I need to be able to do it,” he adds. Scheef once had to explain to a board member—a retired airplane pilot with “good judgment and people skills”—why he was replacing him with a large shareholder with significant accounting and chief financial officer experience.

Ideally, these conversations, Scheef says, should be “well-scripted, short and surgical, and they have to be respectful. The backdrop is a deep appreciation for the contribution the person has made and for the best interests of the organization over the long term.” He continues, “It’s always difficult to have conversations when you’ve found someone better, but you have to be able to have those adult conversations.”

Johnson is no stranger to difficult conversations. A few years ago, one of Choice Bank’s directors ran for statewide political office, a move that Johnson feared might alienate customers on the other side of the political divide.

The board, Johnson says, decided that the director’s political campaign could present a problem given today’s politically charged environment and the fact that the they didn’t want anyone to have the misconception that there were political decisions made in the boardroom. By mutual agreement, the director stepped down.

The role of good governance

By thinking through governance issues before a problem arises, community bankers can avoid some uncomfortable board succession situations.

To pave the way for future board changes, some banks keep director terms brief. At Texas Security Bank, for instance, each board member is elected to a one-year term, a system that allows for “maximum flexibility,” Scheef says.

Another way to encourage regular board openings is to institute a mandatory retirement age. Scheef says that Texas Security Bank currently has no official retirement age, but he’s mulling over the idea.

Smith cautions that a mandatory retirement age should only be instituted if it can be carried out consistently. “Many organizations default to a mandatory retirement age,” he says. “That can be an appropriate strategy provided you stick to it and do not grandfather in all of the existing directors, all members of a certain family, anyone who played on the local high school football team or some other inappropriate mechanism.”

Weinstock is skeptical about mandatory retirement ages for a different reason. His concern is that a board might lose talent from having too strict of a cutoff. “Would Berkshire Hathaway be better off with an age limit of 75 so that Warren Buffett and Charlie Munger would have retired almost two decades ago?” he asks. “There are 75-year-olds and 80-year-olds who are awesome. Do you want to say that you’ve got to go even if you’re helpful to the overall organization?”

Peter Weinstock views term and age limits as “crutches” that management uses when it can’t deal with problems directly.

More importantly, perhaps, Weinstock views term and age limits as “crutches” that management uses when it can’t deal with problems directly. A better solution, he suggests, is rotating the position of chairman of the board every two or three years to sidestep situations in which a board “doesn’t have a strong chair who is willing to have tough conversations and make tough choices.”

When it comes to designing the optimal board for a community bank, planning may well be the key to success.

Johnson analogizes establishing strong board governance practices to the type of guidance a savvy community banker provides for customers. “A lot of times, a banker’s job is to take emotion out of decisions for people and give them just the facts because people can miscalculate if they have too much emotion invested,” he says. “With directors—especially legacy directors—there’s a lot of history and emotion there. So, when you’re disciplined by having a process in place, better decisions are made.”