If you want an eye-opening experience, at your next bank board meeting ask your board three questions: 1) What is your bank’s long-term strategy; 2) What is the current value proposition; and 3) What are the major changes that are currently taking place in the banking industry? Chances are you will be disappointed. Your bank is not alone, as we routinely ask the above questions to bank boards during strategic planning sessions all across the country and find the answers lacking. The problem goes beyond banking, as a 2013 McKinsey study showed only 16% of public boards could satisfactorily answer the above.
A Problem by Their Own Admission
The ironic part is that management and directors likely know about the lack of knowledge and have not deemed it important enough to work on. In another McKinsey study from last year that polled major company directors and CEOs, 47% of respondents thought that the largest issue facing their company was too much emphasis on short-term planning and not enough effort devoted to strategy. A jaw-dropping 74% of the respondents cited themselves as being partially responsible for the shortcoming.
Step 1: New Thinking
Long range planning takes creativity and independent thinking. This has never been more important in banking as the industry is being challenged, and often successfully disrupted in many core areas such as payments, cash management, branch delivery, lending and financial advisory. Now, more than every success in banking depends on the ability to successfully change.
Unfortunately, diversity in thinking is rarely an attribute that is proactively chosen in a bank board member. While banks succeed in choosing board members from diverse industries, most don’t consider functional expertise. These days, risk management, governance, marketing, technology, asset-liability management and bank regulation are areas of expertise that are in much-needed demand. Making sure a board member has the capacity and fortitude to challenge the status quo is also important as almost every aspect of banking needs to be questioned. Finally, choosing a board member with substantial business experience that has worked through difficult issues and understands business cycles is helpful in moderating the ups and downs of bank asset quality cycles.
Step 2: Spend More Time on Strategy
How much time does your board spend on strategy? Take a Harvard Business School class on governance and they recommend 210 board meeting hours per year for a Fortune 1000 corporation. While that may be a lot for a bank, when you consider that a bank is equally complex as most corporations you come to the conclusion that it at least should be more than the normal 24 board meeting hours that most bank boards devote to strategy per year.
Many top performing bank boards spend four days just on field trips as they take the whole board to visit other banks, customers, conduct focus groups, see products in action or view geographical areas that might be a future point of expansion. We love the idea of bringing your board to meet with the management of non-banks in order to learn retail marketing strategies, data analytics, supply chain management (as it can be applied to credit production), channel delivery and similar disciplines that are second nature to many industries but rare in banking. We routinely bring banks together for just this purpose and can tell you the results are impressive as new ideas are generated by the dozens.
Another area of board strategy that could be strengthened is the allocation of resources. The majority of banks agree to the same amount of risk and capital to each area of the bank as the year before. This often is suboptimal as risk, return and opportunity rapidly change. In 2015, for example, with rising rates being less than a year away some banks are devoting less resources to lending areas such as multifamily housing and more towards cash management and deposits. Several banks we know saw hospitality and SBA production as growing areas back in 2011 and devoted more resources to these business lines. The outcome has been spectacular, as both areas have produced some of the highest returns in banking. Choosing customer segments, geography, products and new fee income areas should be a monthly discussion with boards. These conversations can only happen if the board has an ongoing strategic planning process in place and spends at least 10 board meeting hours per quarter just on planning.
Step 3: Track and Govern the Non-Financial Metrics
Bank boards are outstanding at focusing on financial metrics and peer comparisons, but that is only part of the story. Many banks are focusing on culture, employee health, community development, environmental concerns or risk management but fail to elevate monitoring and management to the board level. Some banks figure out proxy metrics (like employee satisfaction surveys, community hours invested, etc.) while other banks use a balanced scorecard approach that contains non-financial objectives. If an initiative like culture is important, it should have the highest level of review and management to give it the best chance of success.
Simple but Hard
Most bankers would agree with the three steps above and most all would agree that while simple in themselves they are hard to execute. Instituting these changes takes patience, experimentation and a commitment to improve. It is not easy to push directors out of their comfort zone. However, if these three steps are committed to, they can change the dynamics of your bank’s board and hopefully result in long-term value creation.
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Submitted by Chris Nichols on February 25, 2015