Today’s banking environment calls for a new approach to board education, director involvement, and strategic planning. Banking regulators are understandably serious about director involvement in all areas of bank management, including cybersecurity and technology – areas where directors have seldom been deeply involved.
Today, bank and credit union board members must be prepared to meet regulators to discuss everything including risk governance, disaster recovery, digital technology and information security. For directors to be prepared for such interviews, they must be knowledgeable about all business lines to effectively discharge their duties.
Much of the basics are covered in the 110-page, “The Director’s Book: Role of Directors for National Banks and Federal Savings Associations,” published by the Office of the Comptroller of the Currency. But, there are still several key matters for banks and credit unions to focus on in improving board education, participation, and ultimately, the performance of your financial institution.
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Time to Upgrade your Strategic Planning Process
When was the last time your board was deeply involved in your strategic planning process? Most financial institution board members have never been in a planning meeting that delves deeply into operations and technology matters, let alone lending, deposits and customer delivery channels.
Board involvement in the details of strategic planning is as necessary for operations as it continues to be for lending, investments and management succession. And, technology is no longer solely a back office consideration. It is the primary way that a significant portion of your customers and member conduct business with your organization, presenting significant opportunities to dramatically lower costs.
The starting point is to ensure your board is doing what the regulators expect. Strategic planning is a prudent business practice that should be embraced for the value it can deliver. Any plan developed with such a mindset will no doubt be suitable for the regulators – and you can use guidelines provided by the regulators to ensure no foundational stone is left unturned (additional resources provided below).
Your plan should create a vision for the future – broad at 5 to 10 years, more focused for the first 3 to 5 years – that will guide management in executing the plan. To fully provide such guidance, the board needs to understand the current state of the industry, including financial environments, technology challenges, and local economic conditions.
They must also grasp the current state of your institution, including financial performance, technology infrastructure, and market competitiveness. Working through each of these areas, using the following pillars, generally brings to light significant strategic and tactical opportunities around which your plan can be developed:
- Retail Banking Strategy
- Commercial Banking Strategy
- Physical Plant and Delivery Channels
- Virtual Delivery Channels
- Financial Goals
- Management Goals
- Technology Infrastructure
Traditionally, strategic planning sessions dwell on transaction opportunities, such as preparing the institution to sell, or to acquire, or on carefully detailed financial forecasts. While it is helpful to discuss and plan for such opportunities, too much focus here can divert attention from the need to improve the organizations’s operations and profitability day by day.
Some general guidance to management about how to handle M&A inquiries, or whether to look for such opportunities, is usually sufficient. Financials are generally covered in detail at each board meeting, so again, no need to dwell on such matters beyond setting and reviewing goals.
Your organization’s strategic plan, properly done, is the primary tool the board can use to oversee the operations of your bank.
Board Composition and Succession Planning
Board makeup is becoming increasingly important. Banks and credit unions must seek out directors with skill sets that will significantly contribute to oversight and management of the organization.
Ideally, there are mandatory retirement guidelines already in place. If not, it is time to address that (under the Management Goals pillar, above.) However, most financial institutions should not wait on retirement to upgrade board members.
To build an understanding of the increasingly complex issues and opportunities facing financial institutions today, there may be the need to expand membership in order to bring diversity of demographics, expertise and perspectives to the board. The diversity may include expanded race and gender, new technology, marketing and innovation skills and even recruiting credentials that will help find talent needed across the organization.
Succession planning is also critical for any organization – at all levels. For the board, a mandatory retirement age is a good way to ensure some level of turnover of the board. Fresh faces and fresh ideas are important for any organization.
Planning for succession must work to accommodate not only an aging directorate, but perhaps directors who wish to retire early, and even cases where a particular board member is no longer fit for service. Dealing with such matters at a policy level can significantly improve your ability to manage a real-life situation when it occurs.
The board must also direct management succession planning across the organization, and insist on solid planning down to the department level. No organization should be limited in its ability to continue operations, by a lack of preparation for staffing changes.
In addition, many organizations have “concentrations of knowledge” whereby select employees have an unhealthy command of operational knowledge that has not been disseminated through cross training. All of these matters fall into to appropriate succession planning, whereby all managers are actively training their replacements, and seeing to improve overall knowledge in their departments via cross-training.
Board Engagement Throughout the Organization
Board members are best served when they are exposed to all operational areas of the organization. The board needs sub-committees to handle matters such as lending, compensation, and audit. Rotation of duties among various committees will strengthen the quality of the board, and improve decision making.
Periodic rotation of board members within committees gives all board members a better understanding of the risks and opportunities within different areas of the organization. In addition, banks and credit unions should consider outside directors that can provide additional skill sets and expertise to the organization.
Depending on the size and complexity of the organization, there may be several management committees that would benefit from board involvement, including marketing, treasury management, distribution/delivery and new product development/innovation. As board members are added with well defined expertise, involvement in such committees will strengthen the board’s knowledge and oversight abilities.
Board discussions at each meeting are far more effective when everyone has at least a baseline understanding of the key business units of the organization. Management will benefit from more director involvement, as well.
Banking is far more complex than in the past. Matters such as cybersecurity are not momentary issues to deal with, like a drought or a downturn in the business cycle. Instead, cybersecurity, digital transformation and other new trends are considerations that are here to stay (as is social media, remote delivery channels, and niche businesses).
Board must strive to continually educate themselves about all matters related to the current state of the financial industry. And management must assist in this educational process.
Board Members as Business Development Officers
Board members are chosen for a variety of reasons, ranging from stock ownership to business acumen to community involvement and status. These reasons make a typical bank or credit union board member a great business development champion for your organization.
Historically, banks have not leveraged the board in this manner, but board members are usually more than willing to help. Usually, these board members are also customers of your organization, and thus it is natural for them to provide testimonials as to why they bank with you.
Make sure they are aware of your products and services, and give them insights into your marketing campaigns so they will know what products you are promoting currently, and are prepared to engage with prospects. When you hold business development meetings, include your directors, to allow them to engage with customers and prospects as you strive to add more business.
In many cases, it is plans we have, and execution we lack. This is no doubt the most important, and the most difficult, part of the strategic planning effort. After the plan is done, and all have agreed on the key items, it is time to implement the plan.
Establishing what actions are required to implement the plan, who will be responsible, and how the board will be held accountable must occur. Including departmental management in the planning process is one key to a successful implementation.
It is critical to charter a committee to begin work on prioritizing and implementing action plans that will result in a better bank. Until time lines are set, and names identified as being accountable, it is difficult to make real progress on implementing the items the strategic planning process has identified as being important to an organization’s growth.
- “The Director’s Book: Role of Directors for National Banks and Federal Savings Associations,” – Office of the Comptroller of the Currency
- “Basics for Bank Directors” – Federal Reserve Bank of Kansas City
- “The Role of the Board of Directors in Promoting Effective Governance and Safety and Soundness for Large U.S. Banking Organizations” – The ClearingHouse
Trent Fleming serves as a trusted advisor to executives on matters of strategy, management, and technology. He frequently contributes articles to industry publications, speaks to state and national organizations, and serves on the faculty of graduate banking schools at the University of Wisconsin and Penn State University. Trent has a website and personal blog and can be reached via email at [email protected].