By Keith Hughey
, Senior Consultant
As the financial services industry becomes more competitive and institutions continue to face regulatory and economic pressures, the need for a focused, informed board of directors is critical. In this challenging environment, it is essential that every board member be fully engaged in the institution’s governance, policies and procedures, and strategic direction in order for it to be successful in fulfilling its obligations to depositors and shareholders.
Board member responsibilities begin with a commitment to be actively involved in all leadership aspects of the institution, including:
- actively participating in all board meetings;
- selecting qualified executive officers;
- providing governance on institutional policies related to safety and soundness;
- maintaining awareness and compliance with all state and federal regulations;
- assessing established business strategies; and
- serving as ambassadors for the purpose of growing the institution’s market share.
The consequences of having directors who aren’t fully engaged or who don’t have the best interest of all stakeholders in mind can negatively impact an institution’s ability to make prudent business decisions and to meet its strategic objectives. If allowed to continue, this can result in potential regulatory consequences, and in the worst cases cause the institution to fail.
What’s more, if directors don’t possess the basic knowledge required to understand the institution’s financial and accounting practices, neglect to complete their responsibilities or disregard the importance of protecting the interests of all stakeholders, they can be subject to civil monetary penalties imposed by regulators and civil liability.
While large institutions are expected to incorporate self-assessment practices into their board governance, initiating a process that establishes strong expectations for board involvement and responsible decision-making is beneficial for smaller institutions as well. This can be accomplished through the implementation of an on-going board member evaluation process.
Boards are only as strong as the weakest link
In many institutions with long-term board members and legacy policies, member evaluations often aren’t given the serious attention they deserve. And while it’s no secret that board members don’t relish the idea of evaluating their peers, when an individual board member is no longer providing value to the group, it is distracting and affects the performance of the entire body.
Unfortunately, in many cases institution and board leadership take the seemingly easy way out when it comes to removing non-contributing members by implementing a mandatory retirement age requirement or relying on the eventual retirement decision of individuals who may have lost interest or the ability to provide value. These strategies offer two very pronounced limitations to the preferred outcome of improving the quality and effectiveness of board membership.
First of all, age isn’t always an indicator of whether or not someone is an effective, contributing board member. Automatically removing a member from the board at an arbitrary age can result in the loss of relevant industry and community knowledge, along with valuable institutional support and strong leadership abilities. And relying on underperforming members to decide on their own when it’s time to leave can take years and result in the loss of opportunities to make changes that would benefit the institution, both now and in the future.
These two scenarios are often the result of a board review process that is limited to a perfunctory self-assessment – where board members are asked to rate their own proficiencies and identify areas of potential weakness. This can have little value if a director is only concerned about his or her own needs, or doesn’t want to appear at odds with the opinions of the board chair or specific committee leadership. Too often the result of this type of review only serves to fulfill a board requirement and leads to the continuation of the status quo, whether good or bad.
Peer-to-peer review allows relevant across-the-board assessment
However, by developing a peer-to-peer review system for evaluating each member’s contributions, board leadership demonstrates its commitment to maintaining quality involvement of all board members, all the time.
Anonymous peer-to-peer evaluations provide a vehicle for obtaining feedback to evaluate each person’s value as a board member. To be effective, the process should include the following elements to ensure consistent, quality input on issues that directly relate to the successful oversight of the financial institution:
- a clear, upfront establishment of process objectives, as well as criteria to be used for member evaluations;
- development of an unbiased format that provides constructive, non-personal information;
- identification of a neutral party to gather and share individual feedback; and
- consideration of how the evaluation responses will affect on-going board membership.
Once the evaluation process is complete, underperforming members can be counseled and given the opportunity to improve their performance or increase board involvement before a final recommendation is made to find a replacement.
Planning and expectations promote healthy board involvement
While the issue of dealing with underperforming board members is difficult, if a board is going to function as a unit, it is incumbent on every member to fully commit to his or her responsibilities for the duration of their board service.
The process can be eased by implementing clear expectations of membership requirements during the recruiting process and addressing institutional leadership needs on a regular basis. It is also imperative that board members are given the training and information they need to stay aware of changing market and regulatory conditions. When weaknesses or deficiencies are observed, it is the responsibility of board leadership to address the situation immediately with the individual member and discuss possible solutions.
With this process in place, every member will have a better understanding of what is required to have and maintain a seat at the board table.