Preparing New Directors for Community Bank Boards

Serving on a community bank’s board of directors is a big job. Bank directors are responsible for a range of tasks, including selecting and evaluating competent managers, establishing business strategies and policies, monitoring the progress of business operations and adherence to policies and procedures, and making fully informed business decisions.

This makes it critical for community banks to follow a deliberate process for onboarding directors and preparing them to meet their responsibilities. 

“In my experience, a lot of community bank directors have no idea what they’re getting into,” says Deedee Myers, CEO of DDJ Myers, a consulting firm in Phoenix, Arizona, that helps organizations cultivate a high-performing board culture. “They don’t understand their fiduciary responsibility or overall enterprise risk management.” 

The onboarding process for new community bank board members is “absolutely crucial, because it sets the [groundwork] for their board service,” says Reggie Soholt, president and CEO of $400 million-asset First State Bank in Grand Forks, North Dakota. “It helps new directors feel more confident and empowered to actively participate instead of just sitting back.”

The best way to help ensure that your board members are prepared for their responsibilities is to follow a detailed, step-by-step onboarding process. Here are five important director onboarding steps for community banks.

1. Educate them about the banking industry

Greyson Tuck, an attorney and consultant with Gerrish Smith Tuck PC in Memphis, Tennessee, says it’s not uncommon for banks to appoint directors with little, if any, banking industry experience. 

“These include accountants, attorneys, IT experts and other professions,” says Tuck, who has helped community banks onboard directors. “In these instances, banks need to get new directors up to speed about how the financial services industry operates [and how the bank makes profit].”

One lesson that Stephen Clements, president and CEO of $355 million-asset Citizens First Bank in Clinton, Iowa, has learned in his experience with onboarding directors is to not take banking industry knowledge for granted. 

“Banking is very different from other businesses, so you can’t just assume that new directors know the industry inside out,” he says. “Check in regularly with new board members and ask if they need clarity on anything, or if they need any additional resources or training.”

Soholt says his community bank conducts initial training sessions with new directors to give them an overview of the banking industry in general and First State Bank specifically. 

“Most of our directors don’t have prior experience in banking, so we explain the concepts to them, as well as our bank’s organizational structure,” he says.

First State Bank also sends new directors to the annual ICBA Bank Director Seminar (see sidebar, page 21). “This is a good opportunity for new directors to hear firsthand how experienced directors handle their position as community bank board members,” says Soholt.

“[The onboarding process] helps new directors feel more confident and empowered to actively participate instead of just sitting back.”

—Reggie Soholt, First State Bank

2. Explain how the board operates

Outlining board operations includes giving details such as when and where board meetings are held, how they’re run and what they’re meant to accomplish. 

“Explaining this to new directors will help them integrate more harmoniously into the rhythm and flow of the board meetings,” says Tuck.

Myers recommends distributing a welcome packet to new directors during onboarding, so they can hit the ground running. 

“The packet should include agendas from the past few board meetings, along with the bank’s business plan and strategic plan,” she says.

3. Review key financial metrics

Myers says it’s critical to get new directors up to speed quickly about the community bank’s key financial metrics and ratios. 

“They need to understand the bank’s balance sheet, what the key ratios are and how they support the strategic plan,” she says. Ideally, new directors should be up to speed in these areas within three to six months, she adds.

First State Bank shares information from the bank’s income statement and balance sheet with new directors. 

“This is especially important for our board members, since they’re involved in loan review,” says Soholt. “We have board members who specialize in certain areas, like agriculture [and business.]”

Clements likens this step to a funnel: “Early on, new directors need to understand fundamentals like how the bank makes money on the spread and what is the net interest margin. As they gain more experience, they can learn about the cause and effect of various operational decisions, particularly capital allocation.”

4. Explain the principles of corporate governance

Myers recommends explaining fiduciary duties to new board members early in the onboarding process. 

“They should clearly understand their fiduciary responsibility to make decisions that help drive shareholder value and safeguard the bank’s assets,” she says. “Both of these tasks are especially important today.”

Citizens First Bank prioritizes this step during the early stages of new director onboarding. 

“It’s critical that new directors understand what their fiduciary duties are,” says Clements.

5. Assign them to appropriate committees

According to Clements, Citizens First Bank assigns new directors to its risk management compliance committee, which encompasses asset liability management, IT security, compliance, policies and procedures. 

“This allows them to see the operational and regulatory side of the bank,” he says. The next step is an assignment to the director loan committee, which oversees the bank’s largest loan relationships.

“Community banks need to be intentional about assigning new board members to the right committees that support their subject matter expertise,” says Myers. 

Tuck adds, “Make sure new directors understand the interaction between committees and the board and how they work together.”

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