An Easy Way to Lose Sight of Critical Risks

CHICAGO — Let me ask you a question:

How does the executive team at your biggest competitor think about their future? Are they fixated on asset growth or loan quality? Gathering low-cost deposits? Improving their technology to accelerate the digital delivery of new products? Finding and training new talent?

The answers don’t need to be immediate or precise. But we tend to fixate on the issues in front of us and ignore what’s happening right outside our door, even if the latter issues are just as important.

Yet, any leader worth their weight in stock certificates will say that taking the time to dig into and learn about other businesses, even those in unrelated industries, is time well spent.

Indeed, smart executives and experienced outside directors prize efficiency, prudence and smart capital allocation in their bank’s dealings. But here’s the thing: Your biggest—and most formidable—competitors strive for the same objectives.

So when we talk about trending topics at today and tomorrow’s Bank Audit and Risk Committees Conference in Chicago, we do so with an eye not just to the internal challenges faced by your institution but on the external pressures as well.

As my team at Bank Director prepares to host 317 women and men from banks across the country this morning, let me state the obvious: Risk is no stranger to a bank’s officers or directors. Indeed, the core business of banking revolves around risk management—interest rate risk, credit risk, operational risk. To take things a step further:

Given this, few would dispute the importance of the audit committee to appraise a bank’s business practices, or of the risk committee to identify potential hazards that could imperil an institution. Banks must stay vigilant, even as they struggle to respond to the demands of the digital revolution and heightened customer expectations.

I can’t overstate the importance of audit and risk committees keeping pace with the disruptive technological transformation of the industry. That transformation is creating an emergent banking model, according to Frank Rotman, a founding partner of venture capital firm QED Investors. This new model focuses banks on increasing engagement, collecting data and offering precisely targeted solutions to their customers.

If that’s the case—given the current state of innovation, digital transformation and the re-imagination of business processes—is it any wonder that boards are struggling to focus on risk management and the bank’s internal control environment?

When was the last time the audit committee at your bank revisited the list of items that appeared on the meeting agenda or evaluated how the committee spends its time? From my vantage point, now might be an ideal time for audit committees to sharpen the focus of their institutions on the cultures they prize, the ethics they value and the processes they need to ensure compliance.

And for risk committee members, national economic uncertainty—given the political rhetoric from Washington and trade tensions with U.S. global economic partners, especially China—has to be on your radar. Many economists expect an economic recession by June 2020. Is your bank prepared for that?

Bank leadership teams must monitor technological advances, cybersecurity concerns and an ever-evolving set of customer and investor expectations. But other issues can’t be ignored either.

So as I prepare to take the stage to kick off this year’s Bank Audit and Risk Committees Conference, I encourage everyone to remember that minds are like parachutes. In the immortal words of musician Frank Zappa: “It doesn’t work if it is not open.”

I’ve spent the last 8 years engaged in board-level conversations. This is what I’ve found.

Quickly:

  • Members of a board have a duty of loyalty and also of care; at strong boards, these core responsibilities provide a foundation for five additional behaviors.

WASHINGTON, DC — This past week, I had the distinct pleasure of visiting San Antonio, Texas.  As I flew home on Thursday, I found myself reflecting on how purpose-driven companies (like the one I visited) focus on what their customers truly care about.  By extension, I spent time reflecting on how a board might best support and encourage this mindset.

As I wrote for a piece that posted on BankDirector.com yesterday morning, one of my favorite proverbs when talking about the value of high-performing teams is to go fast, go alone; to go far, go together.  Now, as my team prepares to head out to Chicago to welcome some 200 people to the Four Seasons Chicago for our annual Bank Board Training Forum, this mindset once again came front and center.

Given the financial industry’s rapid pace of change, one would be forgiven to think the best course of action would be to go fast at certain challenges.  However, at the board level, navigating an industry marked by both consolidation and emerging threats demands coordinated, strategic planning.

Since I re-joined our company in September of 2010, I’ve noticed five key elements characterize many boards at high-performing banks.  Some are specific to the individual director; others, to the team as a whole.

#1: The Board Sees Tomorrow’s Challenges as Today’s Opportunities

Despite offering similar products and services, a small number of banks consistently outperform others in the industry.  One reason: their boards realize we’re in a period of significant change, where the basic premise of “what is a bank” is under considerable scrutiny.  Rather than cower, they’ve set a clear vision for what they want to be and hold their team accountable to concepts such as efficiency, discipline and the smart allocation of capital.

#2: Each Board Member Embraces a Learner’s Mindset

Great leaders aren’t afraid to get up from their desks and explore the unknown.  Brian Moynihan, the chairman and CEO of Bank of America, recently told our Executive Editor that “reading is a bit of a shorthand for a broader type of curiosity.  The reason I attend conferences is to listen to other people, to pick up what they’re talking and thinking about… it’s about being willing to listen to people, think about what they say.  It’s about being curious and trying to learn… The minute you quit being educated formally your brain power starts to shrink unless you educate yourself informally.”

(*Spoiler alert: you can read more from Bank Director’s exclusive conversation with Moynihan in the upcoming 4th quarter issue of Bank Director magazine.)

#3: The Board Prizes Efficiency

In simplest terms, an efficiently run bank earns more money.  This allows it to write better loans, to suffer less during downturns in a credit cycle, to position it to buy less-prudent peers at a discount all while gaining economies of scale.

#4: Each Board Member Stays Disciplined

While discipline applies to many issues, those with a laser focus on building franchise value truly understand what their bank is worth now — and might be in the future.  Each independent director prizes a culture of prudence, one that applies to everything from underwriting loans to third-party relationships.

#5: The Board Adheres to a People-Products-Performance Approach

Smart boards don’t pay lip service to this mindset.  Collectively, they understand their institution needs to (a) have the right people, (b) strategically set expectations around core concepts of how the bank makes money, approaches credit, structures loans, attracts deposits and prices its products in order to (c) perform on an appropriate and repeatable level.

Looking ahead, I feel a sixth pillar could emerge for leading institutions; namely, diversity of talent.  Now, I’m not talking diversity for the sake of diversity. I’m looking at getting the best people with different backgrounds, experiences and talents into the bank’s leadership ranks.  Unfortunately, while many talk the talk on diversity, far fewer walk the walk.  For instance, a recent New York Times piece that revealed female executives generally still lack the same opportunities to move up the ranks and there are still simply fewer women in the upper management pipeline at most companies.

At Bank Director, we believe ambitious bank boards see the call for greater diversity as a true opportunity to create a competitive advantage. This aligns with Bank Director’s 2018 Compensation Survey, where 87 percent of bank CEOs, executives and directors surveyed believe a diverse board has a positive impact on the performance of the bank.  Yet, just 5 percent of CEOs above $1 billion in assets are female, 77 percent don’t have a single diverse member on their board and only 20 percent have a woman on the board.

So as we prepare to explore the strong board, strong bank concept in Chicago, I’m reminded of another adage, this one from Henry Ford.  If all you ever do is all you’ve ever done, then all you’ll ever get is all you’ve ever got…

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If you’re curious about what we’re talking about in Chicago, I encourage you to follow the conversation on social media, where we’re using #BDTrain18 to tag shared ideas on LinkedIn and Twitter.

Evaluating Board Performance

New regulations, technological innovations and a highly competitive environment that leaves little room for error have placed unprecedented demands on the time and talents of bank boards and their individual directors.  As many who support the banking space can attest, a strong board begins with a set of enlightened governance policies and procedures that center on honesty, personal integrity and accountability.

At Bank Director, we coined the phrase “strong board, strong bank” in response to the mounting pressures placed on the banking community.  Over the years, we have introduced new research projects, conferences and magazine issues to provide exceptionally timely and relevant information to a hugely influential audience.

As I prepare to head down to Florida (and the Ritz-Carlton, Amelia Island) this weekend for our annual Bank Executive & Board Compensation conference, I am anticipating conversations about potential regulatory changes and current strategic challenges related to a bank’s growth and profitability.  Alongside my colleagues Michelle King and Amanda Wages, I also expect to field questions from the audience (depicted in the image above) about how high performing corporate boards employ evaluation tools that match the talents & experiences of their board members to an organization’s strategic goals.  FWIW, I anticipate such inquiries as many consultants and attorneys encourage such assessments — and the board performance self-evaluation tool we designed & offer to banks has earned a strong reputation for providing an independent review of a board’s effectiveness.

To be sure, the banking industry seems to be doing well based on a variety of measures — profitability is high, credit quality is much improved and tangible capital ratios are stronger than ever. However, such financial measures don’t necessarily reflect the challenges facing many banks and their boards.  So in advance of our annual event, I asked our research team to roll up the results from twenty-two bank boards — all randomly selected — that completed a performance survey this year.

While tempting to look at individual board results and draw conclusions, anonymously lumping this group together allows some interesting patterns to emerge given more then 200 individual responses:

  • 50% recognize a need for more diversity on the board;
  • 55% say they need more expertise/knowledge in technology on the board, and 44% indicate a need for more training on IT issues;
  • 51% are dissatisfied with some aspect of the bank’s succession plan, for the CEO and/or the board; and
  • 56% are certain they have the M&A experience to meet the bank’s growth goals (44% say no or are unsure).

While these four points caught my eye, I asked our Director of Research, Emily McCormick, what stands out to her. In her words:

“Many boards lack a consensus on their succession plan, meaning that they’re often not on the same page regarding the depth of that plan. That, to me, is a red flag.”

Anecdotally, many bank CEOs — and board members — that I’ve talked with in person know they need new skills, particularly in technology, and recognize a need for diversity. But as we find, few want to add additional board members.  A fact to keep in mind next week as we explore how to build and support the best teams based on the strategies and tactics being used by successful companies today.

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We designed our Bank Service offerings to help board members and senior executives develop strategies to help their bank grow, while demonstrating excellence in corporate governance that shareholders and customers deserve and today’s regulators demand.  To learn more, click here.

This Week in Pictures – New Orleans

It has been said that the best acquisition a bank can make is of a new customer.  But let’s face it: for most banks, organic growth is hard. For those wanting to grow revenue, deposits, brand, market size and market share, we hosted a “Growth” conference at the Ritz-Carlton in New Orleans earlier this week.  Below, some pictures from our time in the Crescent City along with links to organic growth & FinTech-specific content.

By Al Dominick // @aldominick

Clearly, there has been an enormous shift in asset concentration and customer loyalty during the past two decades. Today, the ten biggest banks in the U.S. have more assets than all of the other institutions combined.  Concurrently, major consumer brands such as Apple and Google have emerged as significant non-bank competitors.  As such, we designed this year’s Bank Board Growth & Innovation Conference around the concept of building sustainable franchise value.

To stay both relevant and competitive, I believe that building a culture of disciplined growth that encourages creativity and risk taking is essential. For a bank’s CEO, executive team and board, this requires a combination of knowledge, skill and courage – things we designed this conference, a complement to our annual Acquire or Be Acquired Conference, to provide.  Behind the scenes, our team works hard to deliver a “Four Seasons”-level of service — and I am especially proud of how everyone navigated the weather challenges that hit the city on Monday.  It was great to arrive to so many smiling faces!

For those curious about the topics and trends covered at the event, you can up on what was covered by clicking on:

In addition, take a look at what our editor, Jack Milligan, has shared on his blog, The Bank Spot.  And since its Friday, I’ll take the liberty of closing with laissez les bons temps rouler!

Valuing the Bank

San Francisco, CA

Today’s post is something of a “public service announcement.”  As we approach the dog days of summer, a sneak peek at an exclusive event for bank CEOs, CFOs, Chairmen, Presidents and members of the board taking place at the Ritz-Carlton in San Francisco this October.

 

To learn more about the program, visit BankDirector.com or click here to register.